NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 proprietary merchandise directly to consumers through various platforms including (i) television home shopping programming broadcast on the HSN television networks and other direct-response television marketing; (ii) catalogs, consisting primarily of the Cornerstone portfolio of leading print catalogs which includes, Ballard Designs, Frontgate, Garnet Hill, Grandin Road, and Improvements; (iii) websites, which consist primarily of HSN.com, joymangano.com and the five branded websites operated by Cornerstone; (iv) mobile devices; (v) retail and outlet stores; and (vi) wholesale distribution of certain proprietary products to other retailers. HSNi’s television home shopping business, related digital sales, outlet stores and wholesale distribution are referred to herein as “HSN” and all catalog operations, including related digital sales and stores, are collectively referred to herein as “Cornerstone.” Chasing Fireflies and TravelSmith, two of the apparel brands in the Cornerstone portfolio, were sold in September 2016. See Note 20 for further discussion.
HSN offerings primarily consist of jewelry, fashion (apparel & accessories), beauty & health (including beauty, wellness and fitness), and home & other (including home, electronics, culinary and other). Merchandise offered by Cornerstone primarily consists of home furnishings (including indoor/outdoor furniture, home décor, tabletop, textiles 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 ("IAC"). The spin-off from IAC ("Spin-off") occurred August 20, 2008 and in connection with the Spin-off, HSNi's shares began trading on the NASDAQ Global Select Market under the symbol “HSNI.”
The consolidated financial statements include the accounts of HSN, Inc. and its subsidiaries. Intercompany accounts and transactions have been eliminated.
Recent Accounting Developments
Recently Adopted Accounting Standard Updates
In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs ("ASU 2015-03"). ASU 2015-03 simplifies the presentation of debt issuance costs by requiring debt issuance costs to be presented as a deduction from the corresponding debt liability. The new standard is limited to the presentation of debt issuance costs and does not affect their recognition and measurement. ASU 2015-03 is effective for periods beginning after December 15, 2015, including interim periods within that annual period. HSNi retrospectively adopted ASU 2015-03 in the first quarter of 2016 resulting in the reclassification of its debt issuance costs from "Other non-current assets" to a deduction from "Long-term debt, less current maturities and net of unamortized deferred financing costs" in the consolidated balance sheets. See Note 7 for additional information regarding the deferred issuance costs.
In April 2015, the FASB issued ASU No. 2015-05, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement ("ASU 2015-05"), which provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If the arrangement does not include a software license, the customer should account for a cloud computing arrangement as a service contract. HSNi prospectively adopted ASU 2015-05 on January 1, 2016 and applies this guidance to all arrangements entered into or materially modified after the effective date.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) ("ASU 2016-15"). The standard is intended to reduce the diversity in practice around how certain transactions are classified within the statement of cash flows. ASU 2016-15 is effective for HSNi beginning in fiscal 2019. Early adoption is permitted with retrospective application. HSNi adopted ASU 2016-15 retrospectively in the fourth quarter of 2016. Adoption of this guidance did not have a material impact on HSNi's financial statements or disclosures.
Accounting Standard Updates Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"). ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that revenue is recognized when a customer obtains control of a good or service. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the good or service. Additionally, ASU 2014-09 will disallow the capitalization of direct-response advertising costs which will impact the timing of recognition of Cornerstone's catalog production and distribution costs. In July 2015, the FASB approved a one-year deferral of the effective date of ASU 2014-09. This standard will now become effective for HSNi in the first quarter of 2018. Early adoption is permitted in the first quarter of 2017.
In 2015, HSNi established an implementation team (“team”) to assess the overall impact the adoption of ASU 2014-09 will have on its consolidated financial statements, processes, systems and controls. The team is in the process of developing its conclusions and assessing the impact of several aspects of the standard including principal versus agent considerations, identification of performance obligations and the determination of when control of goods transfers to the company’s customers. HSNi will adopt ASU 2014-09 on January 1, 2018. HSNi is still evaluating the accounting, transition method and disclosure requirements.
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory (Topic 330) ("ASU 2015-11"). The amendments, which apply to inventory that is measured using any method other than the last-in, first-out (LIFO) or retail inventory method, require that entities measure inventory at the lower of cost or net realizable value. ASU 2015-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016 and should be applied on a prospective basis; however, early adoption is permitted. HSNi will adopt ASU 2015-11 on January 1, 2017. HSNi does not expect ASU 2015-11 to have a material impact to its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases ("ASU 2016-02"). ASU 2016-02 requires lessees to reflect most leases on their balance sheet as assets and obligations. The effective date for the standard is for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. The standard is to be applied on a modified retrospective method. HSNi is currently assessing the timing of adoption of ASU 2016-02 and the impact it will have on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718) ("ASU 2016-09"). This standard makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. The effective date for the standard is for interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted. HSNi will adopt ASU 2016-09 on January 1, 2017. HSNi has elected to continue estimating forfeitures each period rather than record them as they occur. Additionally, ASU 2016-09 could cause volatility in HSNi's future effective tax rates and diluted earnings per share due to the tax effects related to share-based payments being recorded to the statement of operations. The volatility in future periods will depend on HSNi's stock price when the awards vest and/or are exercised.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350) ("ASU 2017-04"). ASU 2017-04 simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. ASU No. 2017-04 is effective for HSNi in the first quarter of 2020, with early adoption permitted on or after January 1, 2017, and is to be applied on a prospective basis. The adoption of the provisions of ASU No. 2017-04 would not materially impact HSNi's consolidated financial position or results of operations unless the first step of the annual goodwill impairment test fails.
Fiscal Year
HSNi’s consolidated financial results are reported on a calendar year basis ending on December 31. HSN’s reporting period is the same as HSNi. Cornerstone has a 4-4-5 week accounting cycle with the fiscal year ending on the Saturday on or immediately preceding December 31. Cornerstone’s 2016 fiscal year included 53 weeks while
2015
and
2014
each included 52 weeks.
Reclassifications
Reclassifications were made to prior period amounts to conform to the current year's presentation. Changes included the reclassification of certain operating expenses in the consolidated statement of operations to conform to the current year's presentation and deferred financing costs in the consolidated balance sheets due to the implementation of ASU 2015-3.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue primarily consists of merchandise sales and is reduced by incentive discounts and sales returns to arrive at net sales. Revenue is recorded when delivery to the customer has occurred. Delivery is considered to have occurred when the customer takes title and assumes the risks and rewards of ownership, which is on the date of shipment. HSNi's sales policy allows customers to return merchandise for a full refund or exchange, subject to pre-established time restrictions. Allowances for returned merchandise and other adjustments (including reimbursed shipping and handling costs) are provided based upon past experience. Actual returns of product sales have not materially varied from estimates in any of the periods presented. HSNi's estimated return rates were
15.3%
,
15.9%
, and
16.3%
in
2016
,
2015
, and
2014
, respectively. Sales taxes collected are not included in revenue.
HSN issues customer credits primarily for products returned outside of HSN’s normal return policy. Revenues from these credits are recognized when (1) redeemed by the customer, or (2) it is determined that it is not probable the Company has an obligation to escheat the value of the unredeemed credit to relevant jurisdictions and the likelihood of the credit being redeemed by the customer is remote (“breakage”). During the year ended December 31, 2014, the Company recognized
$5.0 million
of revenue for customer credit breakage. This was the first period during which the Company recognized customer credit breakage and, therefore, it included breakage income related to customer credits issued since inception of this program. Customer credit breakage recognized for the years ended December 31, 2016 and 2015 were
$2.3 million
and
$0.5 million
, respectively. Customer credit breakage is estimated based upon an analysis of actual historical redemption patterns and is included in "Net sales" in the accompanying consolidated statements of operations.
Shipping and Handling Fees and Costs
Shipping and handling fees billed to customers are recorded as revenue. The costs associated with shipping goods to customers are recorded as cost of sales.
Cash and Cash Equivalents
Cash and cash equivalents include cash and money market instruments with an original maturity of three months or less when purchased and are stated at cost.
Accounts Receivable
Accounts receivable are principally comprised of amounts due from customers and credit card companies, net of an allowance for doubtful accounts. HSNi accepts most credit and select debit cards. HSN provides extended payment terms to its qualified customers known as Flexpay. Revenue is recorded when delivery to the customer has occurred, at which time HSN collects the first payment, sales tax and all shipping and handling fees. Subsequent collections are due from customers in
30
-day increments, payable automatically upon authorization of the customer’s method of payment. HSN offers Flexpay programs ranging from
two
to
six
interest-free monthly payments. Flexpay receivables consist of outstanding balances owed by customers, less a reserve for uncollectible balances.
The balance of accounts receivable, net of allowances, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
Flexpay and other customer-related
|
|
$
|
281,780
|
|
|
$
|
260,197
|
|
Credit card companies
|
|
27,101
|
|
|
19,248
|
|
Other
|
|
26,124
|
|
|
27,130
|
|
Accounts receivable, net
|
|
$
|
335,005
|
|
|
$
|
306,575
|
|
|
|
|
|
|
Accounts receivable outstanding longer than the contractual payment terms are considered past due. HSNi determines its allowance by considering a number of factors, including the length of time accounts receivable are past due, HSNi’s previous loss history and the condition of the general economy. HSNi writes off accounts receivable when they are deemed uncollectible.
Inventories
Inventories, which primarily consist of finished goods, are valued at the lower of cost or market, with the cost being determined based upon the first-in, first-out method. Cost includes inbound freight and duties and, in the case of HSN, certain allocable costs, including certain warehouse costs. Inventories include approximately
$7.2 million
and
$6.9 million
of these allocable general and administrative overhead costs at December 31,
2016
and
2015
, respectively, and approximately
$25.7 million
,
$25.2 million
, and
$24.0 million
of such costs were included in the accompanying consolidated statements of operations for the years ended December 31,
2016
,
2015
and
2014
, respectively. Market is determined on the basis of net realizable value, giving consideration to obsolescence and other factors.
Property and Equipment
Property and equipment, including significant improvements, are recorded at cost. Repairs and maintenance and any gains or losses on dispositions are included in the consolidated statement of operations.
Depreciation is recorded on a straight-line basis to allocate the cost of depreciable assets to operations over the shorter of the estimated service life or lease period.
|
|
|
Asset Category
|
Depreciation Period
|
Computer and broadcast equipment and capitalized software
|
3 to 20 Years
|
Buildings, leasehold improvements and land improvements
|
3 to 40 Years
|
Furniture and other equipment
|
2 to 30 Years
|
HSNi capitalizes certain qualified costs incurred in connection with the development of internal use software. Capitalization of internal use software costs begins when the preliminary project stage is completed; management with the relevant authority authorizes and commits to the funding of the software project; and it is probable that the project will be completed and the software will be used to perform the function intended. Capitalized internal use software is amortized on a straight-line basis over the estimated useful life of the software. Capitalized software costs, net of accumulated amortization, totaled
$36.3 million
and
$32.8 million
at December 31,
2016
and
2015
, respectively, and are included in “Property and equipment, net” in the accompanying consolidated balance sheets. Amortization expense related to the capitalized software costs was
$19.2 million
,
$18.9 million
and
$18.3 million
for the years ended December 31,
2016
,
2015
and
2014
, respectively, and is included in "Depreciation and amortization" expense in the accompanying consolidated statements of operations.
Goodwill and Indefinite-Lived Intangible Assets
Goodwill acquired in business combinations is assigned to the reporting units that are expected to benefit from the combination as of the acquisition date. Goodwill and indefinite-lived intangible assets, primarily trade names and trademarks, are assessed annually for impairment as of October 1 or upon the occurrence of certain events or substantive changes in circumstances. See Note 3 for a further discussion on goodwill and indefinite-lived intangible assets.
Long-Lived Assets and Intangible Assets with Definite Lives
Long-lived assets, including property and equipment and intangible assets with definite lives, are tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the carrying amount is deemed to not be recoverable, an impairment loss is recorded as the amount by which the carrying amount of the long-lived asset exceeds its fair value. Amortization of definite-lived intangible assets is generally recorded on a straight-line or accelerated basis over their estimated lives.
Cable and Satellite Distribution Fees
Cable and satellite distribution fees relate to fees paid in connection with cable and satellite contracts for carriage of HSN’s programming. Fees that are paid upfront for annual contracts are included in "Prepaid expenses and other current assets" in the accompanying consolidated balance sheets and are amortized on a straight-line basis over the terms of the respective contracts. Unpaid fees are accrued and included in the line item “Accrued expenses and other current liabilities” in the accompanying consolidated balance sheets. Cable and satellite distribution fees and amortization are included in “Selling and marketing" expense in the accompanying consolidated statements of operations.
Advertising
Advertising costs include catalog production and distribution costs. Advertising costs are expensed in the period incurred, except for Cornerstone’s direct costs of producing and distributing its catalogs, which are capitalized. These capitalized costs are amortized over the expected future revenue stream, which is generally three months from the date catalogs are mailed. Such capitalized costs totaled
$16.5 million
and
$19.1 million
as of December 31,
2016
and
2015
, respectively, and are included in “Prepaid expenses and other current assets” in the accompanying consolidated balance sheets. Of these amounts,
$10.5 million
and
$15.2 million
as of December 31,
2016
and
2015
, respectively, related to catalogs that had not yet been mailed. Advertising expense was
$272.9 million
,
$288.5 million
, and
$279.6 million
for the years ended December 31,
2016
,
2015
and
2014
, respectively, and were included in "Selling and marketing" expense in the accompanying consolidated statements of operations.
Income Taxes
HSNi accounts for income taxes under the liability method, and deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided on deferred tax assets if it is determined that it is more likely than not that the deferred tax asset will not be realized. HSNi records interest and penalties on potential tax contingencies as a component of income tax expense and records interest net of any applicable related income tax benefit.
HSNi recognizes liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on its technical merits. The second step is to measure the tax benefit as the largest amount which is more than
50%
likely of being realized upon ultimate settlement.
Stock-Based Compensation
HSNi recognizes compensation expense for stock-based awards, reduced for estimated forfeitures, on a straight-line basis over the requisite service period for awards with service conditions and on a graded-vested basis for awards with market or performance conditions. Tax benefits resulting from tax deductions in excess of the stock-based compensation expense recognized in the consolidated statements of cash flows are reported as a component of financing cash flows. HSNi issues new shares to satisfy equity vestings and exercises. See Note 11 for a further description of our stock compensation plans.
Earnings Per Share
HSNi computes basic earnings per share by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the treasury stock method.
Derivative Instruments
HSNi uses derivatives in the management of interest rate risk with respect to interest expense on variable rate debt. Such instruments are not held or used for trading purposes. HSNi is party to interest rate swap agreements with major financial institutions that fix the variable benchmark component (LIBOR) of HSNi's interest rate on a portion of its variable-rate debt. See Note 8 for further discussion of derivative instruments.
Share Repurchases
Shares repurchased pursuant to HSNi's share repurchase program are immediately retired upon purchase. Repurchased common stock is reflected as a reduction of shareholders' equity. HSNi's accounting policy related to its share repurchases is to reduce its common stock based on the par value of the shares and to reduce its capital surplus for the excess of the repurchase price over the par value. Since inception of its share repurchase program in September 2011, HSNi has had an accumulated deficit balance; therefore, the excess over the par value has been applied to additional paid-in capital. Once HSNi has retained earnings, the excess will be charged entirely to retained earnings.
Private Label Credit Card
HSN's credit card program offers eligible customers a private label credit card. All cardholders receive certain rewards and benefits which are designed to recognize and promote client loyalty. HSN designs, executes and administers marketing programs to promote usage of the card to current and potential customers. These marketing programs are funded largely by the sponsoring bank. HSN also saves on interchange fees that it would incur if its customers used third-party cards. Purchases
made through the private label credit card represented
36%
,
34%
and
31%
of HSN's sales in
2016
,
2015
and
2014
, respectively. Certain brands in the Cornerstone portfolio also offer their customers private label credit cards with purchases representing approximately
4%
of Cornerstone's sales in
2016
and less than
1%
in 2015.
In November 2013, HSN extended its agreement with the sponsoring bank through 2020. As with the original agreement, HSN received an upfront signing bonus from the sponsoring bank which is being amortized over the term of the agreement and also receives ongoing payments for new accounts activated as well as a share of net sales collected by the sponsoring bank. For the years ended December 31,
2016
,
2015
and
2014
, HSN recognized approximately
$16.9 million
,
$16.9 million
, and
$16.5 million
, respectively, of income from the sponsoring bank that was used to offset credit card fees included in costs of goods sold.
Accounting Estimates
HSNi prepares its financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”). These principles require management to make certain estimates and assumptions during the preparation of its consolidated financial statements. 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.
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 assets; the impairment of intangible assets; the annual expected effective tax rate; the determination of deferred income taxes, including related valuation allowances; the accrual for actual, pending or threatened litigation, claims and assessments; the breakage of customer credits; and assumptions related to the determination of stock-based compensation and contingent consideration related to acquisitions.
Certain Risks and Concentrations
HSNi’s business is subject to certain risks and concentrations including dependence on third-party technology providers and shipping companies, exposure to risks associated with online commerce security, consumer credit risk and credit card fraud. HSNi also depends on third-party service providers for processing certain fulfillment services.
NOTE 3—INTANGIBLE ASSETS AND GOODWILL
HSNi assesses the impairment of goodwill and indefinite-lived identifiable intangible assets, principally trademarks and trade names, at least annually during the fourth quarter and whenever events or circumstances indicate that the carrying value may not be fully recoverable. In performing this review, HSNi has the option of performing a qualitative assessment to determine whether it is more likely than not that the fair values of the reporting unit and/or indefinite-lived intangible assets are less than the carrying values. If HSNi determines that it is not more likely that the fair value is less than its carrying value, then the goodwill and/or the indefinite-lived intangible assets are deemed to be not impaired and no further testing is required until the next annual test date (or sooner if conditions or events before that date raise concerns of potential impairment in the business). If HSNi determines that it is more likely than not that the fair value is less than its carrying value, then the quantitative goodwill and/or indefinite-lived intangible asset impairment tests (as discussed below) must be completed.
If necessary, HSNi performs a quantitative assessment of the fair values of its goodwill and intangible assets. If it is determined that the implied fair value of goodwill and/or indefinite-lived intangible assets is less than the carrying amount, an impairment charge, equal to the excess, is recorded. The implied fair value of goodwill is determined in the same manner as in a business combination. The estimated fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the estimated fair value of the reporting unit was the purchase price paid. The fair value of the reporting unit is determined by using a discounted cash flow analysis with consideration of an equity analysis based on the trading value of its common stock. The discounted cash flow analysis indicates the fair value of the reporting units based on the present value of the cash flows expected to be generated in the future. The equity analysis is based on the trading value of its common stock as of the valuation date or the average stock price over a range of dates prior to the valuation date, plus an estimated control premium. HSNi utilizes a relief from royalty method to assess the fair values of its trademarks and trade names.
In assessing fair value, HSNi considers, among other indicators, differences between estimated and actual cash flows and revenue streams; changes in the related discount, royalty and terminal growth rate; and the relationship between the trading price of its common stock and its per-share book value. Determining fair value requires the exercise of significant judgments.
These factors used in the determination of fair value are sensitive to, among other things, changes in the retail consumer market and the general economy.
Intangible Assets
Intangible assets with indefinite lives relate principally to trade names and trademarks. Definite-lived intangible assets consist primarily of patents which are amortized on a straight-line basis over their term. When definite-lived intangible assets are sold or expire, the cost of the asset and the related accumulated amortization are eliminated and any gain or loss is recognized at such time.
The total balance of HSNi's intangible assets, net, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
Intangible assets with indefinite lives
|
|
$
|
253,449
|
|
|
$
|
255,148
|
|
Intangible assets with definite lives, net
|
|
174
|
|
|
120
|
|
Total intangible assets, net
|
|
$
|
253,623
|
|
|
$
|
255,268
|
|
During the third quarter of 2015, as a result of declines in operating performances at certain Cornerstone brands, HSNi performed a quantitative assessment of certain intangible assets and concluded a fair value adjustment was necessary. An impairment charge of
$5.0 million
was recorded related to its acquisition of Chasing Fireflies. During the fourth quarter of 2015, in connection with its annual assessment of impairment, HSNi performed qualitative and quantitative assessments of its intangible assets and wrote off the remaining identified intangible assets of Chasing Fireflies. An impairment charge of
$1.7 million
was recorded in the fourth quarter of 2015. The impairment charges were recorded within the Cornerstone segment and are included in "Loss on sale of businesses and asset impairments" expense in the accompanying consolidated statements of operations.
Amortization expense for the definite-lived intangible assets was not material for all periods presented.
Goodwill
The following tables present the balance of goodwill by reporting unit, including changes in the carrying amount of goodwill, for the years ended December 31,
2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Balance as of January 1, 2016
|
|
Accumulated Impairment
|
|
Net Balance as of January 1, 2016
|
|
Additions
|
|
Impairment
|
|
Net Balance as of December 31, 2016
|
HSN
|
|
$
|
2,391,594
|
|
|
$
|
(2,391,594
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Cornerstone
|
|
502,464
|
|
|
(492,606
|
)
|
|
9,858
|
|
|
—
|
|
|
—
|
|
|
9,858
|
|
Total
|
|
$
|
2,894,058
|
|
|
$
|
(2,884,200
|
)
|
|
$
|
9,858
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Balance as of January 1, 2015
|
|
Accumulated Impairment
|
|
Net Balance as of January 1, 2015
|
|
Additions
|
|
Impairment
|
|
Net Balance as of December 31, 2015
|
HSN
|
|
$
|
2,391,594
|
|
|
$
|
(2,391,594
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Cornerstone
|
|
502,464
|
|
|
(492,606
|
)
|
|
9,858
|
|
|
—
|
|
|
—
|
|
|
9,858
|
|
Total
|
|
$
|
2,894,058
|
|
|
$
|
(2,884,200
|
)
|
|
$
|
9,858
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on the quantitative assessments performed in the fourth quarters of
2016
and
2015
, HSNi concluded there was no impairment of its goodwill.
NOTE 4—PROPERTY AND EQUIPMENT
The balance of property and equipment, net, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
Capitalized software
|
|
$
|
252,741
|
|
|
$
|
234,249
|
|
Computer and broadcast equipment
|
|
91,119
|
|
|
91,533
|
|
Buildings and leasehold improvements
|
|
113,731
|
|
|
108,656
|
|
Furniture and other equipment
|
|
124,518
|
|
|
96,512
|
|
Projects in progress
|
|
27,666
|
|
|
55,294
|
|
Land and land improvements
|
|
10,584
|
|
|
10,597
|
|
|
|
620,359
|
|
|
596,841
|
|
Less: accumulated depreciation and amortization
|
|
(409,253
|
)
|
|
(385,048
|
)
|
Total property and equipment, net
|
|
$
|
211,106
|
|
|
$
|
211,793
|
|
Long-lived assets, including projects in progress, are tested for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. There were no impairment charges related to HSNi's long-lived assets in fiscal
2016
or
2015
. As we periodically reassess estimated future cash flows and asset fair values, changes in our estimates and assumptions may cause us to realize impairment charges in the future.
NOTE 5—ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
Accrued sales returns
|
|
$
|
38,904
|
|
|
$
|
39,649
|
|
Accrued cable and satellite distribution fees
|
|
43,129
|
|
|
35,081
|
|
Accrued freight and fulfillment expenses
|
|
44,188
|
|
|
35,342
|
|
Accrued compensation and benefits
|
|
21,108
|
|
|
38,616
|
|
Other accrued expenses and current liabilities
|
|
77,936
|
|
|
86,354
|
|
Total accrued expenses and other current liabilities
|
|
$
|
225,265
|
|
|
$
|
235,042
|
|
NOTE 6—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 and/or the target market. HSNi has two reportable segments, HSN and Cornerstone. The accounting policies of the segments are the same as those described in Note 2 – Summary of Significant Accounting Policies. Intercompany accounts and transactions have been eliminated in consolidation.
HSNi’s primary performance 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) other significant items. Significant items, while periodically affecting our results, may vary significantly from period to period and have a disproportionate effect in a given period, thereby affecting the comparability of results. 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 has certain limitations in that it does not take into account the impact to HSNi’s consolidated statements of operations of certain expenses, gains and losses; including stock-based compensation, amortization of intangibles, depreciation, gains and losses on asset dispositions, asset impairment charges, acquisition-related accounting expenses and other significant items.
The following tables reconcile consolidated net income to operating income for HSNi's operating segments and Adjusted EBITDA (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
|
HSN
|
|
Cornerstone
|
|
Total
|
Net income
|
|
|
|
|
|
$
|
118,708
|
|
Income tax provision
|
|
|
|
|
|
71,020
|
|
Income before income taxes
|
|
|
|
|
|
189,728
|
|
Interest expense, net
|
|
|
|
|
|
16,079
|
|
Operating income (loss)
|
|
$
|
216,301
|
|
|
$
|
(10,494
|
)
|
|
$
|
205,807
|
|
Stock-based compensation expense
|
|
15,073
|
|
|
4,160
|
|
|
19,233
|
|
Depreciation and amortization
|
|
29,328
|
|
|
13,384
|
|
|
42,712
|
|
Loss on sale of businesses and asset impairments (a)
|
|
—
|
|
|
31,232
|
|
|
31,232
|
|
Loss on disposition of fixed assets
|
|
134
|
|
|
38
|
|
|
172
|
|
Adjusted EBITDA
|
|
$
|
260,836
|
|
|
$
|
38,320
|
|
|
$
|
299,156
|
|
|
|
|
|
|
|
|
(
a
) Non-GAAP results for the year ended December 31, 2016 exclude a loss on sale and asset impairment charges of
$31.2 million
for the divestitures of TravelSmith and Chasing Fireflies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2015
|
|
|
HSN
|
|
Cornerstone
|
|
Total
|
Net income
|
|
|
|
|
|
$
|
169,239
|
|
Income tax provision
|
|
|
|
|
|
99,615
|
|
Income before income taxes
|
|
|
|
|
|
268,854
|
|
Interest expense, net
|
|
|
|
|
|
15,180
|
|
Operating income
|
|
$
|
253,622
|
|
|
$
|
30,412
|
|
|
$
|
284,034
|
|
Stock-based compensation expense
|
|
13,889
|
|
|
4,519
|
|
|
18,408
|
|
Depreciation and amortization
|
|
29,371
|
|
|
14,047
|
|
|
43,418
|
|
Asset impairments (a)
|
|
—
|
|
|
5,568
|
|
|
5,568
|
|
Exit and reorganization costs (b)
|
|
5,208
|
|
|
—
|
|
|
5,208
|
|
Loss on disposition of fixed assets
|
|
791
|
|
|
15
|
|
|
806
|
|
Adjusted EBITDA
|
|
$
|
302,881
|
|
|
$
|
54,561
|
|
|
$
|
357,442
|
|
|
|
|
|
|
|
|
(a) Non-GAAP results for the year ended December 31, 2015 exclude
$6.7 million
of charges for the impairment of intangible assets and
$1.1 million
of other non-cash adjustments.
(b) Non-GAAP results for 2015 exclude
$2.0 million
of severance costs associated with a reorganization at HSN and
$3.2 million
for certain costs associated with the planned closure of one of HSN's distribution centers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2014
|
|
|
HSN
|
|
Cornerstone
|
|
Total
|
Net income
|
|
|
|
|
|
$
|
172,984
|
|
Income tax provision
|
|
|
|
|
|
104,543
|
|
Income before income taxes
|
|
|
|
|
|
277,527
|
|
Interest expense, net
|
|
|
|
|
|
7,082
|
|
Operating income
|
|
$
|
252,098
|
|
|
$
|
32,511
|
|
|
$
|
284,609
|
|
Stock-based compensation expense
|
|
12,224
|
|
|
3,382
|
|
|
15,606
|
|
Depreciation and amortization
|
|
29,762
|
|
|
14,172
|
|
|
43,934
|
|
Breakage income (a)
|
|
(4,962
|
)
|
|
—
|
|
|
(4,962
|
)
|
CPSC settlement (b)
|
|
—
|
|
|
3,100
|
|
|
3,100
|
|
Loss on disposition of fixed assets
|
|
19
|
|
|
34
|
|
|
53
|
|
Adjusted EBITDA
|
|
$
|
289,141
|
|
|
$
|
53,199
|
|
|
$
|
342,340
|
|
|
|
|
|
|
|
|
(a) Non-GAAP results for the year ended December 31, 2014 exclude
$5.0 million
of breakage income related to the initial reversal of certain customer credits that had accumulated over many years.
(b) Non-GAAP results for the year ended December 31, 2014 exclude a
$3.1 million
settlement with the Consumer Product Safety Commission ("CPSC").
Financial information by segment is as follows (thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Net sales:
|
|
|
|
|
|
|
HSN
|
|
$
|
2,474,554
|
|
|
$
|
2,542,107
|
|
|
$
|
2,476,088
|
|
Cornerstone
|
|
1,092,931
|
|
|
1,148,468
|
|
|
1,111,907
|
|
Total
|
|
$
|
3,567,485
|
|
|
$
|
3,690,575
|
|
|
$
|
3,587,995
|
|
Identifiable assets:
|
|
|
|
|
|
|
HSN
|
|
$
|
1,020,531
|
|
|
$
|
1,029,475
|
|
|
$
|
1,107,932
|
|
Cornerstone
|
|
284,002
|
|
|
305,096
|
|
|
289,154
|
|
Total
|
|
1,304,533
|
|
|
1,334,571
|
|
|
1,397,086
|
|
Capital expenditures:
|
|
|
|
|
|
|
HSN
|
|
$
|
25,089
|
|
|
$
|
44,844
|
|
|
$
|
32,307
|
|
Cornerstone
|
|
16,653
|
|
|
15,848
|
|
|
15,009
|
|
Total
|
|
$
|
41,742
|
|
|
$
|
60,692
|
|
|
$
|
47,316
|
|
HSNi does not report revenue from external customers for each product or each group of similar products as it is impracticable to do so. HSNi maintains operations principally in the United States with no long-lived assets and insignificant net sales in all other countries.
NOTE 7—LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
Secured credit agreement expiring January 27, 2020:
|
|
|
|
|
Term loan
|
|
$
|
475,000
|
|
|
$
|
500,000
|
|
Revolving credit facility
|
|
40,000
|
|
|
140,000
|
|
Long-term debt
|
|
515,000
|
|
|
640,000
|
|
Unamortized deferred financing costs
|
|
(5,122
|
)
|
|
(6,892
|
)
|
Long-term debt, net of unamortized deferred financing costs
|
|
509,878
|
|
|
633,108
|
|
Less: current maturities
|
|
(25,000
|
)
|
|
(25,000
|
)
|
Long-term debt, less current maturities and net of unamortized deferred financing costs
|
|
$
|
484,878
|
|
|
$
|
608,108
|
|
On January 27, 2015, HSNi entered into a
$1.25 billion
five
-year syndicated credit agreement ("Credit Agreement") which is secured by
100%
of the voting equity securities of HSNi's U.S. subsidiaries and
65%
of HSNi's first-tier foreign subsidiaries. This Credit Agreement replaced the existing credit agreement that was set to expire in April 2017. Certain HSNi subsidiaries have unconditionally guaranteed HSNi's obligations under the Credit Agreement. The Credit Agreement, which includes a
$750 million
revolving credit facility and a
$500 million
term loan, may be increased up to
$1.75 billion
subject to certain conditions and expires January 27, 2020. HSNi drew
$500 million
from its term loan and
$200 million
under the revolving credit facility, both under the new Credit Agreement, in the first quarter of 2015 to repay its outstanding term loan of
$228.1 million
and to fund a
$524 million
special cash dividend that was paid on February 19, 2015.
In connection with the termination of the prior credit agreement,
$0.5 million
of the
$2.4 million
of unamortized deferred financing costs were expensed in the first quarter of 2015. The remaining balance of
$1.9 million
along with the
$6.6 million
in capitalized financing costs related to the Credit Agreement are being amortized to interest expense over the
five
-year term of the Credit Agreement.
The Credit Agreement includes various covenants, limitations and events of default customary for similar facilities
including a maximum leverage ratio of
3.50
x and a minimum interest coverage ratio of
3.00
x (both as defined in the Credit Agreement). HSNi was in compliance with all such covenants as of December 31, 2016 with a leverage ratio of
1.7
x and an interest coverage ratio of
20.6
x. The Credit Agreement also contains covenants that limit our ability and the ability of our
subsidiaries to, among other things, incur additional indebtedness, pay dividends or make other distributions to third parties, repurchase or redeem our stock, make investments, sell assets, incur liens, enter into agreements restricting our subsidiaries' ability to pay dividends, enter into transactions with affiliates and consolidate, merge or sell all or substantially all of our assets. The Credit Agreement also contains provisions that limit the ability of HSNi to make Restricted Payments, defined as cash dividends, distribution of other property, repurchase of the Company’s common stock, prepayment or redemption of debt, etc., however, so long as the Company’s leverage ratio is below
3.00
x after giving pro forma effect to any proposed Restricted Payments, the amount of such Restricted Payments are not limited. In the event the Company’s leverage ratio is equal to or greater than
3.00
x or after giving pro forma effect to any proposed Restricted Payments, then such Restricted Payments are limited to
$150 million
in any such fiscal year. The current cash dividend of
$1.40
annually per share represents a Restricted Payment of approximately
$73.2 million
. Dividends, loans or advances to HSNi by its subsidiaries are not restricted by the Credit Agreement.
Loans under the Credit Agreement bear interest at a per annum rate equal to a LIBOR rate plus a predetermined margin that ranges from
1.25%
to
2.25%
or the Base Rate (as defined in the Credit Agreement) plus a predetermined margin that ranges from
0.25%
to
1.25%
. HSNi can elect to borrow at either a LIBOR or the Base Rate and the predetermined margin is based on HSNi's leverage ratio. The interest rate on the
$515.0 million
outstanding long-term debt balance as of December 31, 2016 was
2.75%
. HSNi pays a commitment fee ranging from
0.20%
to
0.40%
(based on the leverage ratio) on the unused portion of the revolving credit facility.
The amount available under the revolving credit facility portion of the Credit Agreement is reduced by the amount of commercial and standby letters of credit issued under the revolving credit facility, which totaled
$10.2 million
as of December 31, 2016. The ability to draw funds under the revolving credit facility is dependent upon meeting the aforementioned financial covenants, which may limit HSNi’s ability to draw the full amount of the facility. As of December 31, 2016, the additional amount that could be borrowed under the revolving credit facility in consideration of the financial covenants and outstanding letters of credit, was approximately
$522.7 million
.
Aggregate contractual maturities of long-term debt are as follows (in thousands):
|
|
|
|
|
Years Ending December 31,
|
|
2017
|
$
|
25,000
|
|
2018
|
37,500
|
|
2019
|
37,500
|
|
2020
|
415,000
|
|
2021
|
—
|
|
|
$
|
515,000
|
|
NOTE 8—DERIVATIVE INSTRUMENTS
HSNi uses derivatives in the management of its interest rate risk with respect to its variable rate debt. HSNi's strategy is to eliminate the cash flow risk on a portion of its variable rate debt caused by changes in the benchmark interest rate (LIBOR). Derivative instruments are not entered into for speculative purposes.
HSNi uses interest rate swap contracts to eliminate the cash flow risk on a portion of its variable rate debt. HSNi pays at a fixed rate and receives payments at a variable rate based on one-month LIBOR. The swaps effectively fix the floating LIBOR-based interest of our outstanding LIBOR-based debt. The interest rate swaps were designated and qualified as cash flow hedges; therefore, the effective portions of the changes in fair value are recorded in accumulated other comprehensive income (loss). Any ineffective portions of the changes in fair value of the interest rate swaps will be immediately recognized in earnings in the consolidated statements of operations.
The interest rate swaps effectively convert
$187.5 million
of our variable rate term loan to a fixed rate of
0.8525%
through April 2017, and then increases to
$250.0 million
in April 2017 with a maturity date in January 2020 with a fixed rate of
1.05%
(in both cases the swapped fixed rate is exclusive of the credit spread under the Credit Agreement). Based on HSNi's leverage ratio as of December 31,
2016
, the all-in fixed rate was
2.3525%
. The changes in fair value of the interest rate swap (inclusive of reclassifications to net income) were income of
$2.3 million
and a loss of
$0.2 million
, net of tax, for the years ended December
2016
and
2015
, and were included in other comprehensive income (loss).
The fair value of the interest rate swaps at December 31,
2016
was
$3.6 million
and was recorded in "Other non-current assets." The fair value of the interest rate swap liability as of December 31,
2015
was
$0.2 million
and was recorded in "Other long-term liabilities" in the consolidated balance sheets. As of December 31,
2016
, HSNi estimates that less than
$0.1 million
of unrealized losses included in accumulated other comprehensive income (loss) related to these swaps will be realized and reported in earnings within the next twelve months. See Note 9 for discussion of the fair value measurements concerning these interest rate swaps.
NOTE 9—FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value assumptions are made at a specific point in time and changes in underlying assumptions could significantly affect these estimates. HSNi applies the following framework for measuring fair value which is based on a three-level hierarchy:
Level 1
—Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2
—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3
—Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.
The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturity of these items. The following table summarizes the fair value of HSNi's other financial assets and liabilities which are measured at fair value on a recurring basis in the consolidated balance sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Total Fair Value and Carrying Value on Balance Sheet
|
|
Fair Value Measurement Category
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
3,577
|
|
|
$
|
—
|
|
|
$
|
3,577
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
Total Fair Value and Carrying Value on Balance Sheet
|
|
Fair Value Measurement Category
|
Level 1
|
|
Level 2
|
|
Level 3
|
Liabilities:
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
$
|
169
|
|
|
$
|
—
|
|
|
$
|
169
|
|
|
$
|
—
|
|
HSNi's interest rate swaps were carried on the balance sheet at fair value as of
December 31, 2016
and
December 31, 2015
. The swaps were entered into for the purpose of hedging the variability of interest expense and interest payments on HSNi's long-term variable rate debt. The fair value is based on a valuation model which utilizes interest rate yield curves and credit spreads as the significant inputs to the model. These inputs are observable in active markets (level 2 criteria). HSNi considers credit risk associated with its own standing as well as the credit standing of any counterparties involved in the valuation of its financial instruments.
The following table summarizes the fair value of HSNi’s financial assets and liabilities which are carried at cost (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Carrying
Value
|
|
Fair Value
|
|
Fair Value Measurement Category
|
Level 1
|
|
Level 2
|
|
Level 3
|
Term loan expiring January 27, 2020
|
|
$
|
475,000
|
|
|
$
|
475,000
|
|
|
$
|
—
|
|
|
$
|
475,000
|
|
|
$
|
—
|
|
Revolving credit facility
|
|
$
|
40,000
|
|
|
$
|
40,000
|
|
|
$
|
—
|
|
|
$
|
40,000
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
Carrying
Value
|
|
Fair Value
|
|
Fair Value Measurement Category
|
Level 1
|
|
Level 2
|
|
Level 3
|
Term loan expiring January 27, 2020
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
|
$
|
—
|
|
|
$
|
500,000
|
|
|
$
|
—
|
|
Revolving credit facility
|
|
$
|
140,000
|
|
|
$
|
140,000
|
|
|
$
|
—
|
|
|
$
|
140,000
|
|
|
$
|
—
|
|
The fair value of the term loan was estimated by discounting expected cash flows at the rates currently offered to HSNi for debt of the same remaining maturities (level 2 criteria).
HSNi assesses the impairment of goodwill and indefinite-lived intangible assets at fair value at least annually during the fourth quarter and whenever events or circumstances indicate that the carrying value may not be fully recoverable. HSNi also measures certain assets, such as property and equipment and definite-lived intangible assets, at fair value on a non-recurring basis. These assets are recognized at fair value if they are deemed to be impaired.
At June 30, 2016, the assets and liabilities of Chasing Fireflies and TravelSmith were considered to be a disposal group held for sale. Therefore, the disposal group was measured at its fair value less the estimated costs to sell which resulted in a non-cash asset impairment charge of
$20.4 million
that was recognized during the second quarter. On September 8, 2016, Cornerstone completed the divestitures of Chasing Fireflies and TravelSmith and recorded a loss on sale of
$10.8 million
during the year ended December 31, 2016. The impairment charge and loss on sale were recorded within the Cornerstone segment and are included in "Loss on sale of businesses and asset impairments" expense in the accompanying consolidated statements of operations. See Note 20 for further discussion.
During the third and fourth quarters of 2015, as a result of declines in operating performances at certain Cornerstone brands, HSNi performed quantitative assessments of certain intangible assets and concluded fair value adjustments were necessary. HSNi wrote off the remaining identified intangible assets related to its 2012 acquisition of Chasing Fireflies resulting in impairment charges totaling
$6.7 million
. The impairment charges were recorded within the Cornerstone segment and are included in "Loss on sale of businesses and asset impairments" expense in the accompanying consolidated statements of operations. The fair value of the intangible assets, consisting of trademarks and tradenames, was determined using the relief from royalty method. Key inputs used in this calculation included revenue growth, discount, royalty and terminal growth rates.
NOTE 10—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.
Basic Earnings Per Share
For the years ended December 31,
2016
,
2015
and
2014
, basic earnings per share was computed using the number of weighted average shares of common stock outstanding and assumed to be outstanding for the period.
Diluted Earnings Per Share
For the years ended December 31,
2016
,
2015
and
2014
, diluted earnings per share was computed using the number of shares of common stock outstanding and assumed to be outstanding for the year and, if dilutive, the incremental common stock that HSNi would issue upon the assumed exercise of stock options and stock appreciation rights and the vesting of restricted stock units using the treasury stock method.
The following table presents HSNi’s basic and diluted earnings per share (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
118,708
|
|
|
$
|
169,239
|
|
|
$
|
172,984
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding:
|
|
|
|
|
|
|
Basic
|
|
52,359
|
|
|
52,627
|
|
|
52,736
|
|
Dilutive effect of stock-based compensation awards
|
|
504
|
|
|
878
|
|
|
897
|
|
Diluted
|
|
52,863
|
|
|
53,505
|
|
|
53,633
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
Basic
|
|
$
|
2.27
|
|
|
$
|
3.22
|
|
|
$
|
3.28
|
|
Diluted
|
|
$
|
2.25
|
|
|
$
|
3.16
|
|
|
$
|
3.23
|
|
|
|
|
|
|
|
|
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
|
|
2,076
|
|
|
560
|
|
|
763
|
|
NOTE 11—STOCK-BASED AWARDS
Stock-based compensation expense is included in the following line items in the accompanying consolidated statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
2016
|
|
2015
|
|
2014
|
Selling and marketing
|
|
$
|
6,412
|
|
|
$
|
6,171
|
|
|
$
|
4,736
|
|
General and administrative
|
|
12,821
|
|
|
12,237
|
|
|
10,870
|
|
Stock-based compensation expense before income taxes
|
|
19,233
|
|
|
18,408
|
|
|
15,606
|
|
Income tax benefit
|
|
(6,734
|
)
|
|
(6,563
|
)
|
|
(5,685
|
)
|
Stock-based compensation expense after income taxes
|
|
$
|
12,499
|
|
|
$
|
11,845
|
|
|
$
|
9,921
|
|
|
|
|
|
|
|
|
As of
December 31, 2016
, there was approximately
$22.9 million
of unrecognized compensation cost, net of estimated forfeitures, related to all equity-based awards, which is currently expected to be recognized on a straight-line basis over a weighted average period of approximately
1.9
years.
Second Amended and Restated 2008 Stock and Annual Incentive Plan
The Second Amended and Restated 2008 Stock and Annual Incentive Plan, as amended (the “Plan”), authorizes the issuance of
8.0 million
shares (
8.8 million
shares after giving effect to the anti-dilution provisions of the Plan related to the special cash dividend) 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.
In connection with the special cash dividend of
$10.00
per common share paid on February 19, 2015, and as required by the anti-dilution provisions of the Plan, adjustments were made to outstanding equity awards as of the ex-dividend date to preserve their value following the dividend, as follows: (i) the number of shares subject to outstanding restricted stock units was increased as a result of the reinvestment of the dividend; and (ii) the exercise prices of outstanding stock options and stock appreciation rights and the grant date fair value of market stock units were reduced and the number of shares subject to such awards was increased. These adjustments did not result in additional stock-based compensation expense as the fair value of the outstanding awards did not change. As further required by the Plan, the maximum number of shares issuable under the Plan was also proportionally adjusted, which resulted in approximately
0.8 million
additional shares available to be issued. As of
December 31, 2016
, there were approximately
1.7 million
shares of common stock available for grants under the Plan.
HSNi can grant restricted stock, restricted stock units ("RSUs"), market stock units ("MSUs"), performance share units ("PSUs"), 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 date of grant. RSUs and PSUs have rights to receive dividend equivalents that vest at the same time the underlying awards 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
$3.3 million
,
$16.7 million
and
$12.7 million
for the years ended December 31,
2016
,
2015
and
2014
, respectively.
Restricted Stock Units
RSUs are awards that are denominated in a hypothetical equivalent number of shares of HSNi’s common stock. At the time of grant, HSNi determines if the RSUs will be settled in cash, stock or both. The value to the holder of the RSU is based upon the market value of HSNi’s stock when the RSUs vest. Compensation expense for RSUs granted under the Plan is measured at the grant date as the fair market value of HSNi’s common stock and expensed ratably over the vesting term. The RSUs are generally subject to service-based vesting over a term of
3 years
to
5 years
.
A summary of the status of the nonvested RSUs and dividend equivalents, as of
December 31, 2016
and changes during the year ended
December 31, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of
RSUs
|
|
Weighted
Average Grant
Date Fair Value
|
Nonvested at January 1, 2016 (including 83,132 outstanding dividend equivalents)
|
|
674,894
|
|
|
$
|
57.92
|
|
Granted
|
|
318,228
|
|
|
44.16
|
|
Additional units granted related to dividend equivalents due to quarterly dividends
|
|
24,602
|
|
|
—
|
|
Vested
|
|
(152,252
|
)
|
|
58.45
|
|
Forfeited
|
|
(102,843
|
)
|
|
56.01
|
|
Nonvested at December 31, 2016 (including 74,181 outstanding dividend equivalents)
|
|
762,629
|
|
|
51.86
|
|
The weighted average per share fair value of RSUs granted during the years ended
December 31, 2016
,
2015
and
2014
based on market prices of HSNi’s common stock on the grant date was
$44.16
,
$65.89
and
$55.06
, respectively.
The total fair value of RSUs that vested during the years ended
December 31, 2016
,
2015
and
2014
and settled in HSNi common stock was
$6.6 million
,
$12.0 million
and
$10.9 million
, respectively. HSNi realizes a tax benefit for RSUs held by its employees in the year in which the award vests. The tax benefit realized by HSNi related to RSUs was approximately
$3.4 million
,
$5.4 million
and
$4.2 million
for the years ended December 31,
2016
,
2015
and
2014
, respectively.
As of
December 31, 2016
, there was approximately
$16.7 million
of unrecognized compensation cost, net of estimated forfeitures, related to RSUs, which is currently expected to be recognized on a straight-line basis over a weighted average period of approximately
2.1
years.
Stock Options and SARs
SARs are similar to traditional stock options, except, upon exercise, holders of SARs will only receive a value equal to the spread between the current market price per share of the common stock and the exercise price. The SARs granted by HSNi may be settled in cash or common stock of HSNi, in the sole discretion of HSNi. All SARs exercised by employees of HSNi have been settled in stock. For all SARs currently outstanding, HSNi intends to settle these awards in stock upon exercise. The exercise price for awards granted under the Plan is required to be priced at, or above, the fair market value of HSNi’s stock at the date of grant. Awards typically vest ratably over a term of
3 years
.
A summary of the status of the outstanding stock options and SARs as of
December 31, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
options
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Contractual
Term (in years)
|
|
Aggregate
Intrinsic Value
|
Outstanding at January 1, 2016
|
|
1,810,973
|
|
|
$
|
45.80
|
|
|
|
|
|
Granted
|
|
928,990
|
|
|
44.86
|
|
|
|
|
|
Exercised
|
|
(39,054
|
)
|
|
23.27
|
|
|
|
|
|
Forfeited
|
|
(101,675
|
)
|
|
49.41
|
|
|
|
|
|
Expired
|
|
(19,017
|
)
|
|
46.25
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
2,580,217
|
|
|
45.66
|
|
|
6.6
|
|
$
|
4,430,444
|
|
Vested and expected to vest at December 31, 2016
|
|
2,437,355
|
|
|
45.47
|
|
|
6.5
|
|
$
|
4,430,444
|
|
Exercisable at December 31, 2016
|
|
1,308,868
|
|
|
41.69
|
|
|
4.6
|
|
$
|
4,430,444
|
|
The aggregate intrinsic value in the table above represents the pre-tax difference between the closing price of HSNi’s common stock on December 31,
2016
of
$34.30
and the exercise price for all “in the money” awards at
December 31, 2016
. This amount changes based on the fair market value of HSNi’s common stock. The intrinsic value of the stock options and SARs exercised during the years ended December 31,
2016
,
2015
and
2014
was approximately
$0.8 million
,
$44.4 million
and
$23.4 million
, respectively. Cash received from stock option exercises for the years ended December 31,
2016
,
2015
and
2014
was
$0.2 million
,
$15.0 million
, and
$0.6 million
, respectively. The tax benefit realized from stock option exercises for the years ended December 31,
2016
,
2015
and
2014
was
$0.3 million
,
$12.2 million
, and
$8.8 million
, respectively.
The fair value of each stock option and SAR award, which HSNi intends to settle in stock, is estimated on the grant date using the Black-Scholes option pricing model. The Black-Scholes option pricing model incorporates various assumptions, including expected volatility and expected term. Expected stock price volatilities are estimated based on HSNi's historical volatility and the historical and implied volatilities of comparable publicly-traded companies. The risk-free interest rates are based on U.S. Treasury yields for notes with comparable terms as the awards in effect at the grant date. The expected term of options and SARs granted is based on an analysis of historical employee termination rates and option exercise patterns, giving consideration to expectations of future employee behavior. Dividends yields are estimated based on HSNi's historical and anticipated dividend payments.
The weighted average assumptions used in the Black-Scholes option pricing model are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Volatility factor
|
|
26.3
|
%
|
|
29.2
|
%
|
|
36.4
|
%
|
Risk-free interest rate
|
|
1.23
|
%
|
|
1.49
|
%
|
|
1.55
|
%
|
Expected term
|
|
4.5
|
|
|
4.4
|
|
|
4.7
|
|
Dividend yield
|
|
3.1
|
%
|
|
2.1
|
%
|
|
1.8
|
%
|
The weighted average fair values of stock options and SARs granted from the Plan during the years ended December 31,
2016
,
2015
and
2014
at market prices equal to HSNi’s common stock on the grant date were
$7.31
,
$13.65
, and
$15.24
, respectively.
At the date of the Spin-off, HSNi granted stock options to its Chief Executive Officer at exercise prices greater than market value on the date of grant with a term of
10 years
. The weighted average exercise price and the weighted average fair value for the
373,000
stock options that were outstanding as of
December 31, 2016
were
$38.89
and
$3.01
, respectively. All other awards granted under the Plan have exercise prices based on the fair market value of HSNi’s common stock at the date of grant.
As of
December 31, 2016
, there was approximately
$6.2 million
of unrecognized compensation cost, net of estimated forfeitures, related to stock options and SARs, which is currently expected to be recognized on a straight-line basis over a weighted average period of approximately
1.3
years.
The following table summarizes the information about stock options and SARs outstanding and exercisable as of
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Exercisable
|
|
|
Number
Outstanding at
December 31,
2016
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Contractual
Term in Years
|
|
Number
Exercisable at
December 31,
2016
|
|
Weighted
Average
Exercise Price
|
$0.00 to $9.99
|
|
95,202
|
|
|
$
|
4.91
|
|
|
2.0
|
|
95,202
|
|
|
$
|
4.91
|
|
$10.00 to $19.99
|
|
48,873
|
|
|
16.11
|
|
|
2.3
|
|
48,873
|
|
|
16.11
|
|
$20.00 to $29.99
|
|
57,541
|
|
|
25.86
|
|
|
4.1
|
|
57,541
|
|
|
25.86
|
|
$30.00 to $39.99
|
|
450,822
|
|
|
37.52
|
|
|
2.2
|
|
450,822
|
|
|
37.52
|
|
$40.00 to $49.99
|
|
1,216,719
|
|
|
45.72
|
|
|
8.5
|
|
236,836
|
|
|
47.73
|
|
$50.00 to $59.99
|
|
283,116
|
|
|
51.56
|
|
|
6.2
|
|
275,666
|
|
|
51.57
|
|
$60.00 to $69.99
|
|
427,944
|
|
|
65.24
|
|
|
8.1
|
|
143,928
|
|
|
65.24
|
|
|
|
2,580,217
|
|
|
|
|
|
|
1,308,868
|
|
|
|
Performance-Based Awards
During the third quarter of 2013, HSNi granted approximately
116,000
MSUs (after giving effect to the anti-dilution provisions of the Plan related to the special cash dividend) to its Chief Executive Officer. The MSUs vest over performance periods of
3 years
and
5 years
(
50%
for each period). Payout percentages range between
0%
and
200%
of the target award depending on the awards' market condition, the future price of HSNi's stock at the end of each performance period as compared to HSNi's stock price at the date of grant (as defined in the MSU agreement). The fair value of the MSUs at the grant date was
$8.3 million
, or an average of
$82.67
per unit, and is recognized on a graded-vested basis over the performance periods. The fair value was measured on the grant date by applying a Monte Carlo simulation pricing model which estimates the potential outcome of reaching the market condition based on simulated future stock prices. The weighted average assumptions used in the valuation of the MSUs were the following: volatility factor of
39.7%
, risk-free interest rate of
1.00%
, expected term of
4.0 years
and dividend yield of
1.1%
. The fair value of the MSUs that vested during the year ended
December 31, 2016
and settled in HSNi common stock was
$2.4 million
.
During the years ended December 31,
2016
,
2015
and
2014
, HSNi granted performance-based awards to certain executive employees which vest over a
three
-year performance period. The awards vest between
0%
and
200%
of the target award based on the company's Total Shareholder Return relative to an indexed peer group. For the year ended December 31,
2016
, HSNi granted these awards using PSUs which represent a right to receive shares of HSNi common stock. For the years ended December 31,
2015
and
2014
, HSNi granted these awards using a similar performance metric but they will be settled in cash. The aggregate target value of the performance-based awards granted during the years ended December 31,
2016
,
2015
and
2014
was
$5.0 million
,
$5.2 million
and
$4.4 million
, respectively, with grant date fair value of
$5.0 million
,
$4.9 million
and
$3.8 million
, respectively, measured using a Monte-Carlo simulation.
The compensation expense for these PSUs is based on the fair value of the awards measured at the grant date and is expensed ratably over the vesting term. Performance cash awards are accounted for as liability-based awards as they will be settled in cash. The compensation expense for the cash awards is remeasured at the end of each reporting period. As of December 31,
2016
and
2015
, a liability of
$0.7 million
and
$2.3 million
, respectively, was recorded for these awards.
A summary of the status of the nonvested MSUs, PSUs and dividend equivalents, as of
December 31, 2016
and changes during the year ended
December 31, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of
MSUs and PSUs (a)
|
|
Weighted
Average Grant
Date Fair Value
|
Nonvested at January 1, 2016
|
|
231,602
|
|
|
$
|
82.67
|
|
Granted (a)
|
|
184,580
|
|
|
54.06
|
|
Additional units granted related to quarterly dividend equivalents
|
|
5,810
|
|
|
—
|
|
Vested
|
|
(57,049
|
)
|
|
78.04
|
|
Forfeited
|
|
(69,557
|
)
|
|
74.31
|
|
Nonvested at December 31, 2016
|
|
295,386
|
|
|
67.35
|
|
|
|
|
|
|
(a) Shares granted are based on the achievement of certain performance criteria and represent the maximum number of shares that can vest (
200%
).
Employee Stock Purchase Plan
The HSN, Inc. 2010 Employee Stock Purchase Plan (“ESPP”) was approved May 2010 and
750,000
shares of HSNi common stock were reserved for issuance under the ESPP. The ESPP permits employees to purchase shares of HSNi’s common stock during semi-annual purchase periods. Under the terms of the ESPP, eligible employees accumulate funds through payroll deductions and purchase shares at a price equal to the lesser of
85%
of the fair market value of the common stock at the grant date or purchase date. All shares purchased under the ESPP must be held for a period of
6
months.
For the year ended December 31,
2016
, HSNi granted approximately
62,000
options under the ESPP. The fair value of each option granted under the ESPP is determined on the grant date using the Black-Scholes option pricing model. The following are the weighted average assumptions used in the valuation of the ESPP options for the years ended December 31,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Volatility factor
|
|
32.0
|
%
|
|
21.7
|
%
|
|
22.0
|
%
|
Risk-free interest rate
|
|
0.42
|
%
|
|
0.12
|
%
|
|
0.08
|
%
|
Expected term
|
|
0.5
|
|
|
0.5
|
|
|
0.5
|
|
Dividend yield
|
|
2.8
|
%
|
|
1.9
|
%
|
|
1.7
|
%
|
For the years ended December 31,
2016
,
2015
and
2014
, approximately
$0.6 million
,
$0.6 million
and
$0.5 million
, respectively, of expenses related to the ESPP were included in the consolidated statements of operations. For the years ended December 31,
2016
,
2015
and
2014
, HSNi received cash proceeds from the participating employees of approximately
$2.2 million
,
$2.4 million
and
$2.0 million
, respectively.
Restricted Common Equity in Cornerstone Brands
In connection with the acquisition of Cornerstone Brands by IAC in 2005 certain members of Cornerstone Brand’s management were granted restricted common equity in Cornerstone Brands. These awards were granted on April 1, 2005 and were initially measured at fair value, which was amortized to expense over the vesting period. These awards vested ratably over
4 years
, or earlier based upon the occurrence of certain prescribed events. The awards vested in non-voting restricted common shares of Cornerstone Brands. As of December 31,
2016
, these awards were significantly out of the money and are not expected to result in any cost should HSNi exercise its call right.
NOTE 12—INCOME TAXES
The components of the provision for income taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Current income tax (provision) benefit:
|
|
|
|
|
|
|
Federal
|
|
$
|
(51,616
|
)
|
|
$
|
(98,496
|
)
|
|
$
|
(96,269
|
)
|
State
|
|
(5,552
|
)
|
|
(11,829
|
)
|
|
(10,289
|
)
|
Current income tax (provision) benefit
|
|
(57,168
|
)
|
|
(110,325
|
)
|
|
(106,558
|
)
|
Deferred income tax benefit (provision):
|
|
|
|
|
|
|
Federal
|
|
(12,195
|
)
|
|
9,188
|
|
|
1,468
|
|
State
|
|
(1,657
|
)
|
|
1,522
|
|
|
547
|
|
Deferred income tax benefit (provision)
|
|
(13,852
|
)
|
|
10,710
|
|
|
2,015
|
|
Income tax (provision) benefit
|
|
$
|
(71,020
|
)
|
|
$
|
(99,615
|
)
|
|
$
|
(104,543
|
)
|
Current income taxes payable has been reduced by
$3.8 million
,
$17.5 million
, and
$12.9 million
for the years ended December 31,
2016
,
2015
and
2014
, respectively, for tax deductions attributable to stock-based compensation. The related income tax benefits of this stock-based compensation were recorded as amounts charged or credited to the income tax provision and additional paid-in capital.
The tax effects of cumulative temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31,
2016
and
2015
are presented below (in thousands). The valuation allowance is related to items for which it is more likely than not that the tax benefit will not be realized.
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
Deferred tax assets:
|
|
|
|
|
Provision for accrued expenses
|
|
$
|
31,659
|
|
|
$
|
38,472
|
|
Inventories
|
|
15,166
|
|
|
14,996
|
|
Stock-based compensation
|
|
15,667
|
|
|
14,132
|
|
Net operating losses
|
|
556
|
|
|
652
|
|
Other
|
|
3,556
|
|
|
4,160
|
|
Total deferred tax assets
|
|
66,604
|
|
|
72,412
|
|
Less valuation allowance
|
|
(533
|
)
|
|
(528
|
)
|
Net deferred tax assets
|
|
66,071
|
|
|
71,884
|
|
Deferred tax liabilities:
|
|
|
|
|
Intangible assets
|
|
(96,627
|
)
|
|
(91,051
|
)
|
Prepaid expenses
|
|
(10,682
|
)
|
|
(11,170
|
)
|
Property and equipment
|
|
(18,522
|
)
|
|
(14,161
|
)
|
Total deferred tax liabilities
|
|
(125,831
|
)
|
|
(116,382
|
)
|
Net deferred tax liability
|
|
$
|
(59,760
|
)
|
|
$
|
(44,498
|
)
|
At December 31,
2016
, HSNi had
$5.3 million
of net operating loss carryforwards which begin expiring in 2017. HSNi had a valuation allowance of approximately
$0.5 million
as of December 31, 2016 and 2015. Valuation allowances are recorded for deferred tax assets related to separate state net operating losses.
A reconciliation of the income tax provision to the amounts computed by applying the statutory federal income tax rate to earnings before income taxes is shown as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Income tax provision at the federal statutory rate of 35%
|
|
$
|
(66,405
|
)
|
|
$
|
(94,099
|
)
|
|
$
|
(97,135
|
)
|
State income taxes, net of effect of federal tax benefit
|
|
(4,686
|
)
|
|
(6,730
|
)
|
|
(6,306
|
)
|
Other, net
|
|
71
|
|
|
1,214
|
|
|
(1,102
|
)
|
Income tax provision
|
|
$
|
(71,020
|
)
|
|
$
|
(99,615
|
)
|
|
$
|
(104,543
|
)
|
A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Balance at beginning of year
|
|
$
|
3,418
|
|
|
$
|
2,011
|
|
|
$
|
910
|
|
Additions based on tax positions related to the current year
|
|
648
|
|
|
630
|
|
|
525
|
|
Additions for tax positions of prior years
|
|
536
|
|
|
777
|
|
|
576
|
|
Reductions for tax positions of prior years
|
|
(34
|
)
|
|
—
|
|
|
—
|
|
Balance at end of year
|
|
$
|
4,568
|
|
|
$
|
3,418
|
|
|
$
|
2,011
|
|
As of December 31,
2016
and
2015
, the unrecognized tax benefits, including interest, were
$5.4 million
and
$4.1 million
, respectively. At December 31,
2016
and
2015
, there are approximately
$4.6 million
and
$3.3 million
of unrecognized tax benefits that, if recognized, would affect the annual effective tax rate.
HSNi recognizes interest and, if applicable, penalties related to unrecognized tax benefits in income tax expense. There is no material interest on unrecognized tax benefits included in income tax expense for the years ended December 31,
2016
,
2015
and
2014
. At December 31,
2016
and
2015
, HSNi has no material accrual for the payment of interest or penalties.
HSNi believes that it is reasonably possible that its unrecognized tax benefits could decrease by an immaterial amount within twelve months of the current reporting date due to settlement with the taxing authority.
HSNi is routinely under audit by federal, state, local and foreign tax authorities. These audits include questioning the timing and the amount of deductions and the allocation of income among various tax jurisdictions. Income taxes payable include amounts considered sufficient to pay assessments that may result from examination of prior year returns; however, the amount paid upon resolution of issues raised may differ from the amount provided. Differences between the reserves for tax contingencies and the amounts owed by HSNi are recorded in the period they become known.
The Internal Revenue Service ("IRS") has examined HSNi's consolidated federal income tax return for the year ended December 31, 2010 and performed a limited scope examination of HSNi's consolidated federal income tax return for the year ended December 31, 2011. No material adjustments resulted from these IRS examinations. New York State has completed it’s examination of income tax returns for the periods ended December 31, 2011 through December 31, 2013 without a material adjustment. The State of Florida has begun an income tax examination of HSNi’s tax returns for the years ended December 31, 2013 through December 31, 2015. HSNi does not anticipate any material adjustments to our tax liabilities resulting from this examination.
HSNi and several companies previously owned by IAC/InterActiveCorp, or IAC, were spun-off from IAC on August 20, 2008. In connection with the Spin-off, HSNi entered into a Tax Sharing Agreement with IAC. Pursuant to this agreement, each of the companies included in the Spin-off ("Spincos") was indemnified by IAC for additional tax liabilities related to consolidated or combined federal and state tax returns prepared and filed by IAC prior to the Spin-off. However, each Spinco agreed to, among other things, assume any additional tax liabilities related to their separately filed state income tax returns. All examinations have concluded or statutes of limitations have expired related to IAC's consolidated or combined federal and state tax returns for years including HSNi operations prior to the Spin-off.
The Tax Sharing Agreement also provides, among other things, that each Spinco indemnifies 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 any post Spin-off (i) act or failure to act by such Spinco described in the covenants in the Tax Sharing Agreement, (ii) acquisition of equity, securities, or assets of such Spinco or a member of its group, and (iii) 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 IRS private letter ruling and/or tax opinions. This indemnification remains effective until IAC's tax returns for the two year period after the Spin-off are no longer subject to examination.
NOTE 13—COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, HSNi is a party to various audits, claims and lawsuits. These audits or litigation may relate to claims involving property, personal injury, contract, intellectual property (including patent infringement), sales tax, regulatory compliance, employment matters and other claims. HSNi establishes reserves for specific legal, tax or other compliance matters that it has determined the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable. Management has also identified certain legal, tax or other matters where it believes an unfavorable outcome is not
probable and, therefore,
no
reserve is established. Although management currently believes that an unfavorable resolution of claims against HSNi, including claims where an unfavorable outcome is reasonably possible, will not have a material impact on its liquidity, results of operations, financial condition or cash flows, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future and an unfavorable resolution of such a proceeding could have a material impact. Moreover, any claims or regulatory actions against HSNi, whether meritorious or not, could be time-consuming, result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources.
HSNi leases a satellite transponder, warehouse, stores and office space, equipment and services used in connection with its operations under various operating leases, many of which contain escalation clauses.
Future minimum payments under operating lease agreements are as follows (in thousands):
|
|
|
|
|
Years Ending December 31,
|
|
2017
|
$
|
28,391
|
|
2018
|
23,878
|
|
2019
|
21,060
|
|
2020
|
13,838
|
|
2021
|
9,563
|
|
Thereafter
|
38,214
|
|
Total
|
$
|
134,944
|
|
Expenses charged under these agreements were
$27.9 million
,
$27.1 million
, and
$25.1 million
for the years ended December 31,
2016
,
2015
and
2014
, respectively, and were included in "General and administrative" expense in the accompanying consolidated statements of operations.
HSNi also has funding commitments that could potentially require its performance in the event of demands by third parties or contingent events, as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Commitments Expiration Per Period
|
|
|
Total Amounts
Committed
|
|
Less Than
1 Year
|
|
1 - 3 Years
|
|
3 - 5 Years
|
|
More Than
5 Years
|
Letters of credit and surety bonds
|
|
$
|
13,301
|
|
|
$
|
13,241
|
|
|
$
|
60
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Purchase obligations
|
|
40,724
|
|
|
29,240
|
|
|
11,484
|
|
|
—
|
|
|
—
|
|
Total commercial commitments
|
|
$
|
54,025
|
|
|
$
|
42,481
|
|
|
$
|
11,544
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The letters of credit (“LOCs”) primarily consist of trade LOCs, which are used for inventory purchases. Trade LOCs are guarantees of payment based upon the delivery of goods. The surety bonds primarily consist of customs bonds, which relate to the import of merchandise into the United States.
The purchase obligations primarily relate to cable contracts and include obligations for future cable distribution and commission guarantees.
NOTE 14—RELATED PARTY TRANSACTIONS
Relationship Between Liberty Media Corporation and HSNi
Spinco Agreement
In connection with the Spin-off, pursuant to a Spinco Assignment and Assumption Agreement (the “Spinco Agreement”), dated as of August 20, 2008, among HSNi, IAC, Liberty Media Corporation (“Liberty”) and a subsidiary of Liberty that held shares of IAC common stock and IAC Class B common stock (together with Liberty, the “Liberty Parties”), HSNi (i) assumed from IAC all rights and obligations providing for post-Spin-off governance and other arrangements at HSNi under the Spinco Agreement, dated May 13, 2008, among IAC, Liberty and affiliates of Liberty that held shares of IAC common stock and/or Class B common stock at the time such Spinco Agreement was entered into, and (ii) as required by the Spinco Agreement, entered into a registration rights agreement with the Liberty Parties. Following is a summary of the material terms of the Spinco Agreement:
Representation of Liberty on the Spinco Boards of Directors
The Spinco Agreement generally provides that so long as Liberty beneficially owns securities of HSNi representing at least
20%
of the total voting power of HSNi’s equity securities, Liberty has the right to nominate up to
20%
of the directors serving on HSNi’s Board of Directors (rounded up to the nearest whole number). Any director nominated by Liberty must be reasonably acceptable to a majority of the directors on HSNi’s Board who were not nominated by Liberty. All but one of Liberty’s nominees serving on the Board of Directors must qualify as “independent” under applicable stock exchange rules. In addition, the Nominating Committee of the Board may include only “Qualified Directors,” namely directors other than any who were nominated by Liberty, are officers or employees of HSNi or were not nominated by the Nominating Committee of the HSNi Board in their initial election to the Board and for whose election any Liberty Party voted shares.
Acquisition Restrictions
The Liberty Parties have agreed not to acquire beneficial ownership of any equity securities of HSNi (with specified exceptions) unless:
|
|
•
|
the acquisition was approved by a majority of the Qualified Directors;
|
|
|
•
|
the acquisition is permitted under the provisions described in “Competing Offers” below; or
|
|
|
•
|
after giving effect to the acquisition, Liberty’s ownership percentage of the equity securities of HSNi, based on voting power, would not exceed the Applicable Percentage.
|
The “Applicable Percentage” is Liberty’s ownership percentage upon the Spin-off of HSNi, based on voting power (approximately
30%
), plus
5%
, but in no event more than
35%
. Notwithstanding the foregoing, Liberty’s beneficial ownership may increase (and has increased) above the Applicable Percentage as a result of HSNi’s share repurchase program. Following the Spin-off, the Applicable Percentage for the Spinco is reduced for specified transfers of equity securities of the Spinco by the Liberty Parties. During the first two years following the Spin-off, acquisitions by the Liberty Parties were further limited to specified extraordinary transactions and, otherwise, to acquisitions representing no more than one-third of HSNi Common Stock received by the Liberty Parties in the Spin-off:
|
|
•
|
transfers pursuant to a third party tender or exchange offer or in connection with any merger or other business combination, which merger or business combination has been approved by HSNi;
|
|
|
•
|
transfers in a public offering in a manner designed to result in a wide distribution, provided that no such transfer is made, to the knowledge of the Liberty Parties, to any person whose ownership percentage (based on voting power) of HSNi’s equity securities, giving effect to the transfer, would exceed
15%
;
|
|
|
•
|
a transfer of all of the equity securities of HSNi beneficially owned by the Liberty Parties and their affiliates in a single transaction if the transferee’s ownership percentage (based on voting power), after giving effect to the transfer, would not exceed the Applicable Percentage and only if the transferee assumes all of the rights and obligations (subject to limited exceptions) of the Liberty Parties under the Spinco Agreement;
|
|
|
•
|
specified transfers in connection with changes in the beneficial ownership of the ultimate parent company of a Liberty Party or a distribution of the equity interests of a Liberty Party or certain similar events; and
|
|
|
•
|
specified transfers relating to certain hedging transactions or stock lending transactions in respect of the Liberty Parties’ equity securities in HSNi, subject to specified restrictions.
|
Competing Offers
During the period when Liberty continues to have the right to nominate directors to HSNi’s Board of Directors, if the Board of Directors determines to pursue certain types of transactions on a negotiated basis (either through an “auction” or with a single bidder), Liberty is granted certain rights to compete with the bidder or bidders, including the right to receive certain notices and information, subject to specified conditions and limitations. In connection with any such transaction that HSNi is negotiating with a single bidder, the Board of Directors must consider any offer for a transaction made in good faith by Liberty but is not obligated to accept any such offer or to enter into negotiations with Liberty.
If a third party (x) commences a tender or exchange offer for at least
35%
of the capital stock of HSNi other than pursuant to an agreement with HSNi or (y) publicly discloses that its ownership percentage (based on voting power) exceeds
20%
and HSNi’s Board fails to take certain actions to block such third party from acquiring an ownership percentage of HSNi (based on voting power) exceeding the Applicable Percentage, the Liberty Parties generally will be relieved of the obligations described under “Standstill Restrictions” and “Acquisition Restrictions” above to the extent reasonably necessary to permit Liberty to commence and consummate a competing offer. If Liberty’s ownership percentage (based on voting power) as a result of the consummation of a competing offer in response to a tender or exchange offer described in (x) above exceeds
50%
, any
consent or approval requirements of the Qualified Directors in the Spinco Agreement will be terminated, and, following the later of the second anniversary of the Spin-off and the date that Liberty’s ownership percentage (based on voting power) exceeds
50%
, the obligations described under “Acquisition Restrictions” will be terminated.
Other
Following the Spin-off, amendments to the Spinco Agreement and determinations required to be made thereunder (including approval of transactions between a Liberty Party and HSNi that would be reportable under the proxy rules) will require the approval of the Qualified Directors.
Registration Rights Agreement
Under the registration rights agreement, the Liberty Parties and their permitted transferees (the “Holders”) will be entitled to three demand registration rights (and unlimited piggyback registration rights) in respect of the shares of HSNi common stock received by the Liberty Parties as a result of the Spin-off and other shares of HSNi common stock acquired by the Liberty Parties consistent with the Spinco Agreement (collectively, the “Registrable Shares”). The Holders will be permitted to exercise their registration rights in connection with certain hedging transactions that they may enter into with respect to the Registrable Shares.
HSNi will be obligated to indemnify the Holders, and each selling Holder will be obligated to indemnify HSNi, against specified liabilities in connection with misstatements or omissions in any registration statement.
NOTE 15—SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
(in thousands)
|
Cash paid during the period for:
|
|
|
|
|
|
|
Income tax payments
|
|
$
|
68,898
|
|
|
$
|
99,012
|
|
|
$
|
87,787
|
|
Income tax refunds
|
|
(282
|
)
|
|
(102
|
)
|
|
(482
|
)
|
Interest payments
|
|
15,027
|
|
|
13,087
|
|
|
6,142
|
|
Non-cash investing activities:
|
|
|
|
|
|
|
Capital expenditures incurred but paid in advance
|
|
—
|
|
|
—
|
|
|
9,100
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
Effective portion of change in interest rate swap
|
|
3,018
|
|
|
(1,620
|
)
|
|
(1,581
|
)
|
NOTE 16—SHAREHOLDERS’ EQUITY
Stock Purchase Rights
In December 2008, HSNi’s Board of Directors approved the creation of a Series A Junior Participating Preferred Stock, adopted a shareholders rights plan and declared a dividend of
one
right for each outstanding share of common stock held by our shareholders of record as of the close of business on January 5, 2009. The rights attached to any additional shares of common stock issued after January 5, 2009. Initially, these rights, which trade with the shares of HSNi’s common stock, will not be exercisable. Under the rights plan, these rights will be exercisable if a person or group acquires or commences a tender or exchange offer for
15%
or more of HSNi’s common stock (except for certain grandfathered persons, such as Liberty, to which higher thresholds apply). If the rights become exercisable, each right will permit its holder, other than the “acquiring person,” to purchase from us shares of common stock at a
50%
discount to the then prevailing market price. As a result, the rights will cause substantial dilution to a person or group that becomes an “acquiring person” on terms not approved by HSNi’s Board of Directors.
Accumulated Other Comprehensive (Loss) Income
Accumulated other comprehensive income (loss) includes the cumulative gains and losses of derivative instruments that qualify as cash flow hedges. The following table provides a rollforward of accumulated other comprehensive income (loss) for the years ended December 31,
2016
,
2015
and
2014
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Accumulated other comprehensive (loss) income as of January 1,
|
|
$
|
(95
|
)
|
|
$
|
127
|
|
|
$
|
354
|
|
Other comprehensive income (loss) before reclassifications
|
|
3,018
|
|
|
(1,620
|
)
|
|
(1,581
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss) to interest expense in the consolidated statements of operations
|
|
707
|
|
|
1,263
|
|
|
1,215
|
|
Income tax (expense) benefit
|
|
(1,410
|
)
|
|
135
|
|
|
139
|
|
Other comprehensive income (loss), net of tax
|
|
2,315
|
|
|
(222
|
)
|
|
(227
|
)
|
Accumulated other comprehensive income (loss) as of December 31,
|
|
$
|
2,220
|
|
|
$
|
(95
|
)
|
|
$
|
127
|
|
Share Repurchase Program
On September 27, 2011, HSNi’s Board of Directors approved a share repurchase program which allowed HSNi to purchase
10 million
shares of its common stock from time to time through privately negotiated and/or open market transactions. In July 2014, HSNi completed its
10 million
share repurchase program at an aggregate cost of
$451.0 million
, representing an average cost of
$45.10
per share. All shares were immediately retired upon purchase.
Effective January 27, 2015, HSNi's Board of Directors approved a new share repurchase program which allows HSNi to purchase up to
4 million
shares of its common stock from time to time through privately negotiated and/or open market
transactions. The timing of repurchases and actual number of shares repurchased depends on a variety of factors, including the
stock price, corporate and regulatory requirements, restrictions under HSNi’s debt obligations and other market and economic
conditions. As of December 31,
2016
, approximately
2.7 million
shares remained authorized for repurchase under the program.
The following table summarizes HSNi's share repurchase activity (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Number of shares repurchased and retired
|
|
357
|
|
|
948
|
|
|
1,011
|
|
Average price per share
|
|
$
|
46.45
|
|
|
$
|
61.73
|
|
|
$
|
54.87
|
|
Total cost
|
|
$
|
16,567
|
|
|
$
|
58,510
|
|
|
$
|
55,467
|
|
Dividend Policy
During the year ended December 31,
2016
, HSNi's Board of Directors approved four quarterly cash dividends totaling
$1.40
per common share resulting in dividend payments of approximately
$73.2 million
. During the year ended December 31, 2015, HSNi’s Board of Directors approved four quarterly cash dividends totaling
$1.40
per common share and a special cash dividend of
$10.00
per common share that was payable February 19, 2015 resulting in aggregate dividend payments of approximately
$597.9 million
.
In February 2017, HSNi's Board of Directors approved a quarterly cash dividend of
$0.35
per common share. The dividend will be paid March 22, 2017 to HSNi's record holders as of March 8, 2017.
NOTE 17—QUARTERLY RESULTS (UNAUDITED)
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Quarter Ended (a)
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March 31,
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June 30,
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September 30,
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December 31,
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(b)
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(c)
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(d)
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(In thousands, except per share data)
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Year Ended December 31, 2016
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Net sales
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$
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816,765
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$
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854,308
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$
|
823,023
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$
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1,073,389
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Gross profit
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289,478
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311,824
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|
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280,076
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335,290
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Operating income
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49,829
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46,214
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36,875
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|
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72,890
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Net income
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28,585
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26,445
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20,158
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43,520
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Net income per share:
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Basic
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$
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0.55
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$
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0.50
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$
|
0.39
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$
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0.83
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Diluted
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$
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0.54
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$
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0.50
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$
|
0.38
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$
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0.82
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Dividends declared per common share
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|
$
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0.35
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|
$
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0.35
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$
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0.35
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$
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0.35
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Year Ended December 31, 2015
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Net sales
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$
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841,887
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$
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885,642
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$
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864,868
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$
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1,098,178
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Gross profit
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300,206
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336,537
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306,274
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371,546
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Operating income
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|
57,009
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|
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70,703
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|
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57,833
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|
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98,488
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Net income
|
|
33,689
|
|
|
41,632
|
|
|
34,208
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|
|
59,710
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Net income per share:
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Basic
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$
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0.64
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$
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0.79
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$
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0.65
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$
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1.14
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Diluted
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$
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0.63
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$
|
0.78
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$
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0.64
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|
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$
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1.12
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Dividends declared per common share
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$
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10.35
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$
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0.35
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$
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0.35
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$
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0.35
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(a)
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The results of TravelSmith and Chasing Fireflies are included through the date of divestitures on September 8, 2016.
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(b)
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The second quarter of 2016 includes an asset impairment charge of
$20.4 million
, or
$0.24
per diluted share, related to the TravelSmith and Chasing Fireflies disposal group. The second quarter of 2015 includes
$3.0 million
, or
$0.03
per diluted share, for certain costs associated with the planned closure of one of HSN's distribution centers as part of its supply chain optimization initiative.
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(c)
|
The third quarter of 2016 includes the loss on sale of
$11.2 million
, or
$0.13
per diluted share, related to the divestitures of TravelSmith and Chasing Fireflies. The third quarter of 2015 includes a non-cash charge of
$5.0 million
, or
$0.06
per diluted share, at Cornerstone for impairment of intangible assets related to Chasing Fireflies.
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(d)
|
The fourth quarter of 2016 includes the impact of the supply chain optimization implementation issues which decreased gross profit by approximately
$13.0 million
and increased operating expenses by approximately
$3.0 million
, having a combined impact of
$0.19
per diluted share. The fourth quarter of 2015 includes
$2.0 million
, or
$0.02
per diluted share, of severance costs associated with a reorganization at HSN.
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(e)
|
Cornerstone's fourth quarter of 2016 consisted of 14-weeks compared to 13-weeks in the prior year resulting in an additional
$15 million
in net sales in 2016.
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NOTE 18—RETIREMENT AND SAVINGS PLANS
Effective December 31, 2008, HSNi established the HSN, Inc. Retirement Savings Plan that qualifies under Section 401(k) of the Internal Revenue Code. Participating employees may contribute up to
50%
of their pretax salary, up to the statutory limits. For the years ended December 31,
2016
,
2015
and
2014
, HSNi contributed
fifty cents
for each dollar a participant contributed of the first
6%
of a participant's deferrals. HSNi’s matching contributions were
$5.1 million
,
$5.0 million
and
$4.6 million
for the years ended December 31,
2016
,
2015
and
2014
, respectively.
Effective January 1, 2014, HSNi initiated a nonqualified deferred compensation plan allowing salary and annual bonus deferrals for qualifying employees as permitted by the Internal Revenue Code. Participant deferrals earn investment returns based on a select number of investment options, including equity and debt mutual funds. HSNi invested comparable amounts in marketable securities through life insurance policies to mitigate the risk associated with the investment return on the employee deferrals. Assets related to the funded portion of the deferred compensation plan are held in a rabbi trust which remains subject to claims of HSNi's general creditors. HSNi remains liable to the participants for the unfunded portion of the plan. HSNi records changes in the fair value of the asset and liability in the statement of operations. As of December 31,
2016
and
2015
, the company-owned life insurance policies had a cash surrender value of
$3.6 million
and
$1.9 million
, respectively and were recorded in "Other non-current assets" in the consolidated balance sheet. The Plan's deferred compensation liability as of
December 31,
2016
and
2015
was
$3.6 million
and
$2.0 million
, respectively and was recorded in "Other long-term liabilities" in the consolidated balance sheet.
NOTE 19—COSTS ASSOCIATED WITH AN EXIT ACTIVITY
As part of its supply chain optimization initiative, HSNi announced in June 2015 its plan to close the HSN distribution center in Roanoke, Virginia and expand the capabilities of its distribution center in Piney Flats, Tennessee. The closure will involve the eventual elimination of approximately
350
positions at the Virginia facility. HSNi expects the closure to occur in accordance with a two-year transition plan and be substantially completed in 2017.
HSN expects to incur approximately
$4 million
to
$5 million
in total charges related to the closure. These charges include approximately
$3 million
to
$4 million
in employee-related expenses, including severance payments and retention incentives. During the years ended December 31, 2016 and 2015, HSN recognized
$0
and
$3.2 million
, respectively, in employee-related costs which are included in "General and administrative” operating expenses in the accompanying consolidated statements of operations.
A summary of HSNi’s liability associated with exit activities, which is recorded in “Accrued expenses and other current liabilities” in the accompanying consolidated balance sheets, are presented in the following table (in thousands):
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|
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Employee Related Costs
|
|
2016
|
|
2015
|
Balance at January 1,
|
$
|
3,221
|
|
|
$
|
—
|
|
Provisions
|
—
|
|
|
3,132
|
|
Payments
|
(121
|
)
|
|
—
|
|
Adjustments
|
—
|
|
|
89
|
|
Balance at December 31,
|
$
|
3,100
|
|
|
$
|
3,221
|
|
|
|
|
|
NOTE 20—DIVESTITURES
On September 8, 2016, HSNi completed the sale of substantially all of the assets and certain liabilities of Chasing Fireflies and TravelSmith, two of the apparel brands included within the Cornerstone segment. The sale price included
$1 million
in cash and
$2 million
of contingent consideration that was based on the achievement of certain performance metrics in 2016 which are not expected to be achieved. During the year ended December 31, 2016, Cornerstone recorded a pre-tax loss on sale of
$10.8 million
. The transaction included cash charges of approximately
$3.5 million
related to transactions costs and employee and lease liabilities.
The assets and liabilities of the two brands were classified as held for sale as of June 30, 2016 which resulted in a non-cash asset impairment charge of
$20.4 million
recorded in the second quarter of 2016 within the Cornerstone segment and was included in "Loss on sale of businesses and asset impairments" expense in the accompanying consolidated statements of operations.
The loss on sale and asset impairment charges related to this sale are recorded in the consolidated statements of operations in the line item “Loss on sale of businesses and asset impairments.” The assets sold were largely represented by
$29.3 million
of inventory and
$8.4 million
of other assets, and approximately
$8.6 million
of current liabilities.
HSNi entered into a transition services agreement with the buyer to provide fulfillment services and various back office support services through February 2017. Charges by HSNi under this transition services agreement of approximately
$4.7 million
for the year ended December 31, 2016 are recorded in net sales in the consolidated statements of operations.
HSNi determined the sale of these businesses would not represent a strategic shift in its business nor will it have a major effect on its consolidated results of operations, financial position or cash
flows. Accordingly, the disposal group is not presented in the consolidated financial statements as a discontinued operation.