Restoration Hardware 2014 Annual Report Download - page 90

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self insurance program related to claims filed. Expenses related to this self insured program are computed on an
actuarial basis, based on claims experience, regulatory requirements, an estimate of claims incurred but not yet
reported (“IBNR”) and other relevant factors. The projections involved in this process are subject to uncertainty
related to the timing and amount of claims filed, levels of IBNR, fluctuations in health care costs and changes to
regulatory requirements. The Company had liabilities of $3.0 million and $1.7 million related to health care
coverage as of January 31, 2015 and February 1, 2014, respectively.
The Company is self-insured for all workers’ compensation claims related to incidents incurred after
November 1, 2013 and prior to November 1, 2007. The Company had liabilities of $2.6 million and $1.7 million
related to workers’ compensation claims as of January 31, 2015 and February 1, 2014, respectively.
Stock-Based Compensation
The Company recognizes the fair value of stock-based compensation in the consolidated financial
statements as compensation expense over the requisite service period. In addition, excess tax benefits related to
stock-based compensation awards are reflected as financing cash flows. For service-only awards, compensation
expense is recognized on a straight-line basis, net of forfeitures, over the requisite service period for the fair
value of awards that actually vest. Fair value for restricted stock units is valued using the closing price of the
Company’s stock on the date of grant. The fair value of each option award granted under the Company’s award
plans subsequent to its initial public offering is estimated on the date of grant using a Black-Scholes Merton
option pricing model with the following assumptions:
• Expected volatility—Based on the lack of historical data for its own shares, the Company bases its
expected volatility on a representative peer group that takes into account industry, market
capitalization, stage of life cycle and capital structure.
• Expected term—Represents the period of time that options granted are expected to be outstanding. The
Company elected to calculate the expected term of the option awards using the “simplified method.”
This election was made based on the lack of sufficient historical exercise data to provide a reasonable
basis upon which to estimate expected term. Under the “simplified” calculation method, the expected
term is calculated as an average of the vesting period and the contractual life of the options.
• Risk-free interest rate—Based on the U.S. Treasury zero-coupon bond rate with a remaining term
approximate of the expected term of the option.
• Dividend yield—As the Company has not paid dividends, nor does it currently plan to pay dividends in
the future, the assumed dividend yield is zero.
Prior to the Reorganization, Home Holdings had granted performance-based units that vested and became
deliverable upon achievement or satisfaction of performance conditions specified in the performance agreement
or upon the return on investment attained by certain of the equity investors in Home Holdings at defined liquidity
events, including an initial public offering or certain sale or merger transactions. The Company estimated the fair
value of performance-based units awarded to employees at the grant date based on the fair value of the Company
on such date. The Company also considered the probability of achieving the established performance targets in
determining its stock-based compensation with respect to these awards. The Company recognizes compensation
cost over the performance period. When the performance is related to a specific event occurring in the future, the
Company recognizes the full expense at the time of the event. At the time of the Reorganization, these
performance-based units were replaced with shares of the Company’s common stock with substantially similar
restrictions, terms and conditions. Refer to Note 15—Stock-Based Compensation.
Cost of Goods Sold
Cost of goods sold includes, but is not limited to, the direct cost of purchased merchandise, inventory
shrinkage, inventory reserves and write-downs, inbound freight, all freight costs to get merchandise to the
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