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Table of Contents
Income Tax Provision
For the years ended December 31, 2012, 2011 and 2010, HSNi recorded tax provisions from continuing operations of $83.4 million, $80.1
million and $66.2 million, respectively, which represent effective tax rates of 37.9%, 38.6% and 39.7%, respectively. The 2012, 2011 and 2010
tax rates are higher than the federal statutory rate of 35% due principally to state income taxes.
Discontinued Operations
In May 2012, substantially all of the assets and certain liabilities of Smith+Noble, a Cornerstone brand specializing in window treatments,
were sold for $5.5 million. The operating results for Smith+Noble are included in “Loss from discontinued operations, net of tax” in the
consolidated statements of operations for all periods presented. Cornerstone recorded an after-tax loss on the sale of $0.1 million in the second
quarter of 2012, which is included in “Loss from discontinued operations, net of tax”
in the accompanying consolidated statements of operations.
In July 2012, substantially all of the assets and certain liabilities of The Territory Ahead, a Cornerstone brand specializing in casual
apparel for men and women, were sold for approximately $1.1 million. The operating results for The Territory Ahead are included in “
Loss from
discontinued operations, net of tax” in the consolidated statements of operations for all periods presented. An impairment charge of $5.9 million
was recorded in the second quarter of 2012 to reduce the carrying value of the net assets to their estimated net realizable value and is included in
“Loss from discontinued operations, net of tax” in the accompanying statements of operations.
Liquidity and Capital Resources
As of December 31, 2012, HSNi had $222.1 million of cash and cash equivalents, down from $381.8 million as of December 31, 2011.
Net cash provided by operating activities attributable to continuing operations was $147.4 million in 2012 compared to $165.4 million in
2011, a decrease of $18.0 million. This decrease was primarily due to additional working capital requirements to support our sales growth
including higher inventory levels and increased Flexpay usage, partially offset by the improved operating performance.
Net cash used in investing activities attributable to continuing operations in 2012 of $62.1 million resulted from $45.8 million in capital
expenditures and $22.9 million for the acquisition of Chasing Fireflies, partially offset by the $6.6 million in proceeds received from the
divestitures of Smith+Noble and The Territory Ahead. The capital expenditures were primarily at HSN and were for investments in information
and digital technology, warehouse improvements and infrastructure. In 2013, HSNi expects to make approximately $70 million in capital
expenditures primarily for investments in information technology, digital and warehouse improvements.
Net cash used in financing activities attributable to continuing operations in 2012 was $239.5 million. During the third quarter of 2012,
HSNi drew $250 million on its term loan to fund the redemption of its Senior Notes for $253.5 million. During 2012, HSNi repurchased 5.5
million shares of common stock for $221.8 million, or an average cost of $40.40. HSNi also paid dividends totaling $0.555 per common share
resulting in $31.0 million in payments during 2012. HSNi had a cash inflow of $20.7 million from the proceeds from stock option exercises and
a cash outflow of $18.2 million used to cover withholding taxes for our stock-based awards. Additionally, in 2012 HSNi had an inflow of $19.0
million for excess tax benefits from stock-based awards.
Net cash used in discontinued operations in 2012 was $5.5 million and relates primarily to the operating activities of Smith+Noble and The
Territory Ahead, divested brands of the Cornerstone operating segment. HSNi does not expect future cash flows associated with discontinued
operations to be material.
HSNi's $600 million Credit Agreement is secured by 100% of the voting equity securities of HSNi's U.S. subsidiaries and 65% of the
voting equity securities of HSNi's first-tier foreign subsidiaries. This Credit Agreement replaced the credit agreement that was set to expire in
July 2013. Certain HSNi subsidiaries have unconditionally guaranteed HSNi's obligations under the Credit Agreement. The Credit Agreement,
which includes a $350 million revolving credit facility and a $250 million delayed draw term loan, may be increased up to $850 million subject
to certain conditions and expires April 24, 2017. HSNi drew $250 million from its term loan on July 31, 2012 to fund the redemption of the
Senior Notes, as discussed below. HSNi capitalized $5.5 million in financing costs related to the Credit Agreement and is amortizing these costs
to interest expense over the Credit Agreement's five-year life.
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