Home Shopping Network 2013 Annual Report Download - page 28

26
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 consolidated statements of operations.
Liquidity and Capital Resources
As of December 31, 2013, HSNi had $196.4 million of cash and cash equivalents, down from $222.1 million as of
December 31, 2012.
Net cash provided by operating activities attributable to continuing operations was $231.9 million in 2013 compared
to $147.4 million in 2012, an increase of $84.5 million. This increase was primarily due to improved operating performance
and changes in working capital. Working capital improved primarily as a result of lower inventory receipts, effective inventory
management and the timing of collection of credit card receivables, offset by the timing of income tax payments.
Inventory receipts were particularly high in 2012 as both HSN and Cornerstone were increasing their inventory
balances to support sales growth. HSN's sales growth in 2013 was lower than expected resulting in additional clearance
activity and a reduction in inventory receipts. However, these measures have resulted in inventory in 2013 decreasing by 17%
compared to prior year and aged inventories being at their lowest levels since 2010. Cornerstone continued to grow its
inventory in 2013 to support its future sales growth. Cornerstone's inventory increased 26% in 2013 and 10% in 2012.
Consistent with prior years, HSN continued to increase its offering of Flexpay, an installment program which allows
customers to pay for select merchandise in two to six interest-free, monthly payments. This program increases the Company's
cash requirements as the sales proceeds get delayed by using the Flexpay alternative. Despite the increased usage of Flexpay,
the Company did not experience any deterioration in the aging of Flexpay receivables or had an increase in its write-offs of
receivables in 2013.
Net cash used in investing activities attributable to continuing operations in 2013 was $61.1 million. Capital
expenditures in 2013 was $52.0 million and was primarily for investments in information and digital technology. HSNi also
made an advance payment of $9.1 million for warehouse improvement projects.
Net cash used in financing activities attributable to continuing operations in 2013 was $196.4 million. During 2013,
HSNi repurchased 2.7 million shares of common stock for $146.9 million at an average cost of $53.67. HSNi also paid
dividends totaling $0.79 per common share resulting in $42.3 million in payments during 2013. Repayments of $9.4 million of
HSNi's term loan were made in 2013. HSNi had a cash inflow of $8.4 million from the proceeds from stock option exercises
and a cash outflow of $14.4 million to cover withholding taxes for stock-based awards. Additionally, in 2013 HSNi had $10.4
million of excess tax benefits from stock-based awards.
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
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. As of December
31, 2013, $240.6 million was outstanding under the term loan. 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 term.
The Credit Agreement contains various covenants, limitations and events of default customary for similar facilities
including a maximum leverage ratio of 3.00x and a minimum interest coverage ratio of 3.00x. HSNi was in compliance with all
such covenants as of December 31, 2013, with a leverage ratio of 0.73x and an interest coverage ratio of 60.68x.
Loans under the Credit Agreement bear interest at a per annum rate equal to LIBOR plus a predetermined margin that
ranges from 1.50% to 2.25% or the Base Rate (as defined in the Credit Agreement) plus a predetermined margin that ranges
from 0.50% to 1.25%. HSNi can elect to borrow at either LIBOR or the Base Rate and the predetermined margin is based on
HSNi's leverage ratio. The term loan interest rate as of December 31, 2013 was 1.66%. HSNi pays a commitment fee ranging
from 0.25% to 0.40% (based on the leverage ratio) on the unused portion of the revolving credit facility.
The amount available under the Credit Agreement is reduced by the amount of commercial and standby letters of
credit issued under the revolving credit facility, which totaled $31.7 million as of December 31, 2013. 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, 2013, the additional amount that could be borrowed under