HHGREGG, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
Years Ended
March 31, 2013
,
2012
, and
2011
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
Preferred
Stock
|
|
Common
Stock
|
|
Additional
Paid-in
Capital
|
|
Accumulated Other Comprehensive Loss
|
|
(Accumulated Deficit) Retained
Earnings
|
|
Note Receivable
For Common
Stock
|
|
Common Stock
Held in
Treasury
|
|
Total
Stockholders’
Equity
|
Balance at March 31, 2010
|
38,517,388
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
254,770
|
|
|
$
|
(982
|
)
|
|
$
|
(300
|
)
|
|
$
|
(84
|
)
|
|
$
|
—
|
|
|
$
|
253,408
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
48,208
|
|
|
|
|
|
|
48,208
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
982
|
|
|
|
|
|
|
|
|
982
|
|
Payments received on notes receivable for issuance of common stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
43
|
|
|
—
|
|
|
43
|
|
Exercise of stock options
|
1,919,485
|
|
|
—
|
|
|
—
|
|
|
4,955
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,955
|
|
Stock compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
5,199
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,199
|
|
Excess tax benefit from stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
14,913
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14,913
|
|
Net settlement of shares - taxes
|
(712,136
|
)
|
|
—
|
|
|
—
|
|
|
(11,122
|
)
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11,122
|
)
|
Balance at March 31, 2011
|
39,724,737
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
268,715
|
|
|
$
|
—
|
|
|
$
|
47,908
|
|
|
$
|
(41
|
)
|
|
$
|
—
|
|
|
$
|
316,586
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
81,373
|
|
|
|
|
|
|
$
|
81,373
|
|
Exercise of stock options and vesting of RSUs
|
341,268
|
|
|
—
|
|
|
—
|
|
|
2,464
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,464
|
|
Stock compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
5,935
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,935
|
|
Excess tax benefit from stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
732
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
732
|
|
Repurchase of common stock
|
(3,714,289
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
(47,570
|
)
|
|
(47,570
|
)
|
Balance at March 31, 2012
|
36,351,716
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
277,846
|
|
|
$
|
—
|
|
|
$
|
129,281
|
|
|
$
|
(41
|
)
|
|
$
|
(47,570
|
)
|
|
$
|
359,520
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
25,369
|
|
|
|
|
|
|
25,369
|
|
Payments received on notes receivable for issuance of common stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
41
|
|
|
—
|
|
|
41
|
|
Exercise of stock options and vesting of RSUs
|
574,738
|
|
|
—
|
|
|
—
|
|
|
4,356
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,356
|
|
Stock compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
5,150
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,150
|
|
Excess tax benefit from stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
454
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
454
|
|
Repurchase of common stock
|
(5,458,001
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
(48,232
|
)
|
|
(48,232
|
)
|
Balance at March 31, 2013
|
31,468,453
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
287,806
|
|
|
$
|
—
|
|
|
$
|
154,650
|
|
|
$
|
—
|
|
|
$
|
(95,802
|
)
|
|
$
|
346,658
|
|
See accompanying notes to consolidated financial statements.
HHGREGG, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended
March 31, 2013
,
2012
, and
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
(In thousands)
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income
|
$
|
25,369
|
|
|
$
|
81,373
|
|
|
$
|
48,208
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
40,135
|
|
|
33,752
|
|
|
26,238
|
|
Amortization of deferred financing costs
|
664
|
|
|
664
|
|
|
1,198
|
|
Stock-based compensation
|
5,150
|
|
|
5,935
|
|
|
5,199
|
|
Excess tax benefits from stock-based compensation
|
(586
|
)
|
|
(732
|
)
|
|
(14,913
|
)
|
Gain on sales of property and equipment
|
(216
|
)
|
|
(332
|
)
|
|
(379
|
)
|
Loss on early extinguishment of debt
|
—
|
|
|
—
|
|
|
2,071
|
|
Deferred income taxes
|
7,599
|
|
|
9,382
|
|
|
11,612
|
|
Asset impairment charges
|
504
|
|
|
813
|
|
|
88
|
|
Tenant allowances received from landlords
|
11,608
|
|
|
22,895
|
|
|
16,040
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable—trade
|
(4,804
|
)
|
|
(10,536
|
)
|
|
(1,619
|
)
|
Accounts receivable—other
|
507
|
|
|
(2,836
|
)
|
|
3,605
|
|
Merchandise inventories
|
(33,153
|
)
|
|
(70,401
|
)
|
|
(10,505
|
)
|
Income tax receivable/payable
|
(3,173
|
)
|
|
3,037
|
|
|
2,523
|
|
Prepaid expenses and other assets
|
575
|
|
|
4,606
|
|
|
(2,706
|
)
|
Accounts payable
|
6,932
|
|
|
38,374
|
|
|
(48,976
|
)
|
Customer deposits
|
9,049
|
|
|
7,202
|
|
|
1,461
|
|
Accrued liabilities
|
5,687
|
|
|
(3,403
|
)
|
|
16,735
|
|
Deferred rent
|
(5,760
|
)
|
|
(2,819
|
)
|
|
1,914
|
|
Other long-term liabilities
|
(34
|
)
|
|
63
|
|
|
1,203
|
|
Net cash provided by operating activities
|
66,053
|
|
|
117,037
|
|
|
58,997
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Purchases of property and equipment
|
(54,020
|
)
|
|
(83,054
|
)
|
|
(59,938
|
)
|
Net proceeds from sale leaseback transactions
|
—
|
|
|
1,625
|
|
|
—
|
|
Proceeds from sales of property and equipment
|
34
|
|
|
80
|
|
|
153
|
|
Net cash used in investing activities
|
(53,986
|
)
|
|
(81,349
|
)
|
|
(59,785
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
Purchases of treasury stock
|
(48,232
|
)
|
|
(47,570
|
)
|
|
—
|
|
Proceeds from exercise of stock options
|
4,356
|
|
|
2,464
|
|
|
4,955
|
|
Excess tax benefits from stock-based compensation
|
586
|
|
|
732
|
|
|
14,913
|
|
Net settlement of shares - payment of tax withholding
|
—
|
|
|
—
|
|
|
(11,122
|
)
|
Net increase (decrease) in bank overdrafts
|
11,506
|
|
|
(4,776
|
)
|
|
(2,263
|
)
|
Payment on notes payable
|
—
|
|
|
—
|
|
|
(908
|
)
|
Net borrowings on inventory financing facility
|
9,024
|
|
|
—
|
|
|
—
|
|
Payment of financing costs
|
—
|
|
|
(88
|
)
|
|
(2,440
|
)
|
Payment for early debt extinguishment
|
—
|
|
|
—
|
|
|
(87,433
|
)
|
Other, net
|
41
|
|
|
—
|
|
|
43
|
|
Net cash used in financing activities
|
(22,719
|
)
|
|
(49,238
|
)
|
|
(84,255
|
)
|
Net decrease in cash and cash equivalents
|
(10,652
|
)
|
|
(13,550
|
)
|
|
(85,043
|
)
|
Cash and cash equivalents
|
|
|
|
|
|
Beginning of period
|
59,244
|
|
|
72,794
|
|
|
157,837
|
|
End of period
|
$
|
48,592
|
|
|
$
|
59,244
|
|
|
$
|
72,794
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
Interest paid
|
$
|
1,903
|
|
|
$
|
2,119
|
|
|
$
|
3,979
|
|
Income taxes paid
|
$
|
11,629
|
|
|
$
|
13,219
|
|
|
$
|
1,975
|
|
Capital expenditures included in accounts payable
|
$
|
1,491
|
|
|
$
|
1,216
|
|
|
$
|
6,581
|
|
See accompanying notes to consolidated financial statements.
HHGREGG, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
|
|
(1)
|
Summary of Significant Accounting Policies
|
Description of Business
hhgregg, Inc. is a specialty retailer of home appliances, consumer electronics, computers and mobile products, home entertainment furniture, mattresses, fitness equipment and related services operating under the name hhgregg
™
. As of
March 31, 2013
, the Company had
228
stores located in
Alabama, Delaware, Florida, Georgia, Illinois, Indiana, Kentucky, Louisiana, Maryland, Mississippi, Missouri, New Jersey, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia, West Virginia, and Wisconsin
. The Company operates in
one
reportable segment.
hhgregg was formed in Delaware on April 12, 2007. As part of a corporate reorganization effected on July 19, 2007, the stockholders of Gregg Appliances Inc. (“Gregg Appliances”) contributed all of their shares of Gregg Appliances to hhgregg in exchange for common stock of hhgregg. As a result, Gregg Appliances became a wholly-owned subsidiary of hhgregg.
|
|
(b)
|
Principles of Consolidation
|
The consolidated financial statements include the accounts of hhgregg and its wholly-owned subsidiary, Gregg Appliances (the "Company" or "hhgregg"). The financial statements of Gregg Appliances include its wholly-owned subsidiary HHG Distributing LLC (“HHG Distributing”), which has no assets or operations. All intercompany balances and transactions have been eliminated upon consolidation.
Management uses estimates and assumptions in preparing financial statements in conformity with accounting principles generally accepted in the United States. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates and assumptions.
The Company’s fiscal year is the twelve month period ended March 31.
|
|
(e)
|
Cash and Cash Equivalents
|
Cash primarily consists of cash on hand and bank deposits. Cash equivalents primarily consist of money market accounts and other highly liquid investments with an original maturity of three months or less when purchased. The amounts of cash equivalents at
March 31, 2013
and
2012
were
$45.0 million
and
$0.0 million
, respectively. The weighted-average interest on cash equivalents at
March 31, 2013
was
0.01%
. The Company had outstanding checks in excess of funds on deposit (book overdrafts) at
March 31, 2013
and
2012
of
$11.5 million
and
$0.0 million
.
Accounts receivable are recorded at the invoiced amount and are subject to finance charges. Accounts receivable-trade primarily consists of credit card receivables. Accounts receivable-other consists mainly of amounts due from vendors for advertising and volume rebates. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers. Activity for the allowance for doubtful accounts for the years ended
March 31, 2013
,
2012
and
2011
, in thousands, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts
|
|
|
Balance at
beginning of
period
|
|
Charged to
Costs and
Expenses
|
|
Deductions
|
|
Balance
at End of
Period
|
Year ended March 31, 2013
|
|
$
|
25
|
|
|
$
|
15
|
|
|
$
|
(39
|
)
|
|
$
|
1
|
|
Year ended March 31, 2012
|
|
134
|
|
|
84
|
|
|
(193
|
)
|
|
25
|
|
Year ended March 31, 2011
|
|
177
|
|
|
92
|
|
|
(135
|
)
|
|
134
|
|
|
|
(g)
|
Merchandise Inventories
|
Inventory is valued at the lower of the cost of the inventory or fair market value through the establishment of markdown and inventory loss reserves. The Company’s markdown reserve represents the excess of the carrying amount, typically average cost, over the amount it expects to realize from the ultimate sale or other disposal of the inventory. Subsequent changes in facts or circumstances do not result in the restoration of previously recorded markdowns or an increase in that newly established cost basis.
The Company purchases a significant portion of its merchandise from
two
vendors. For the year ended
March 31, 2013
, two vendors accounted for
27.5%
and
17.0%
, respectively, of merchandise purchases. For the year ended
March 31, 2012
,
two
vendors accounted for
20.5%
and
15.2%
, respectively, of merchandise purchases. For the year ended
March 31, 2011
,
two
vendors accounted for
19.1%
and
18.4%
, respectively, of merchandise purchases.
The Company included amounts due to a third party financing company for use under an inventory financing facility, entered into during the first quarter of fiscal
2013
, within accounts payable in the accompanying consolidated balance sheet. Borrowings and payments on the inventory financing facility are classified as financing activities in the consolidated statements of cash flows. The inventory financing facility is a
$20 million
unsecured credit line that is non-interest bearing and is not collateralized with the inventory purchased. The facility includes customary covenants as well as customary events of default. The amounts borrowed on the credit line fluctuate on a daily basis, but as of the end of each quarter and as of March 31, 2013, the amount of borrowings included within accounts payable was as follows: June 30, 2012,
$11.1 million
; September 30, 2012,
$13.2 million
; December 31, 2012,
$4.3 million
; and March 31, 2013,
$9.0 million
. As of March 31, 2013, the Company had
$11.0 million
available under the facility. The Company incurred no interest on the borrowings for the year ended March 31, 2013.
|
|
(h)
|
Property and Equipment
|
Property and equipment are recorded at cost and are depreciated over their expected useful lives on a straight-line basis. Leasehold improvements are depreciated over the shorter of the lease term or expected useful life. Repairs and maintenance costs are charged directly to expense as incurred. In certain lease arrangements, the Company is considered the owner of the building during the construction period. At the end of the construction period, the Company will sell and lease the location back applying provisions of lease accounting guidance. Any gains on sale and leaseback transactions are deferred and amortized over the life of the respective lease. The Company does not have any continuing involvement with the sale and leaseback locations, other than a normal leaseback, and the locations are accounted for as operating leases. In fiscal
2013
, the Company did not execute any sale and leaseback transactions. In fiscal
2012
, the Company executed one sale and leaseback transaction netting
$1.6 million
in proceeds on the sale.
Property and equipment consisted of the following at March 31,
2013
and
2012
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
Machinery and equipment
|
|
$
|
25,328
|
|
|
$
|
23,340
|
|
Store fixtures and furniture
|
|
175,659
|
|
|
146,924
|
|
Vehicles
|
|
2,269
|
|
|
2,286
|
|
Signs
|
|
19,163
|
|
|
16,969
|
|
Leasehold improvements
|
|
172,952
|
|
|
146,983
|
|
Construction in progress
|
|
5,995
|
|
|
11,429
|
|
|
|
401,366
|
|
|
347,931
|
|
Less accumulated depreciation and amortization
|
|
(183,455
|
)
|
|
(143,658
|
)
|
Net property and equipment
|
|
$
|
217,911
|
|
|
$
|
204,273
|
|
Estimated useful lives by major asset category are as follows:
|
|
|
|
Asset
|
|
Life
(in years)
|
Machinery and equipment
|
|
5-7
|
Store fixtures and furniture
|
|
3-7
|
Vehicles
|
|
5
|
Signs
|
|
7
|
Leasehold improvements
|
|
5-15
|
Depreciation and amortization expense for the years ended
March 31, 2013
,
2012
and
2011
was
$40.1 million
,
$33.8 million
and
$26.2 million
, respectively.
|
|
(i)
|
Impairment of Long-Lived Assets
|
Long-lived assets other than goodwill and indefinite-lived intangible assets, which are separately tested for impairment, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. When evaluating long-lived assets for potential impairment, the Company compares the carrying amount of the asset or asset group to the asset’s or asset group’s estimated undiscounted future cash flows. If the estimated future cash flows are less than the carrying amount of the asset or asset group, an impairment loss is calculated. The impairment loss calculation compares the carrying amount of the asset or asset group to the asset’s or asset group’s estimated fair value, which may be based on estimated discounted future cash flows. An impairment loss is recognized for the amount by which the asset’s or asset group’s carrying amount exceeds the asset’s or asset group’s estimated fair value. If an impairment loss is recognized, the adjusted carrying amount of the asset or asset group becomes its new cost basis. For a depreciable long-lived asset, the new cost basis will be depreciated (amortized) over the remaining useful life of that asset or asset group.
For the fiscal year ended
March 31, 2013
, the Company had one store which performed lower than chain average due to decreasing sales and profit contribution, and triggered the need for further impairment analysis to be completed. During fiscal years ended March 31,
2012
and
2011
, the Company had
two
separate stores in each year, whose profit contributions were significantly lower than the chain average due to decreased sales at each respective location. This decrease in profit in all instances triggered the need for an impairment analysis to be performed in accordance with guidance on impairment of long-lived assets. The estimated undiscounted future cash flows generated by the stores were less than their carrying amounts, therefore the carrying amounts of the assets related to these stores were reduced to fair value, resulting in a pre-tax charge of
$0.5 million
,
$0.8 million
and
$0.1 million
for the years ended
March 31, 2013
,
2012
and
2011
, respectively.
|
|
(j)
|
Deferred Financing Costs
|
Costs incurred related to debt financing are capitalized and amortized over the life of the related debt as a component of interest expense. Debt financing costs are related to the Company’s Revolving Credit Facility as discussed in note 6 below. The Company recognized related amortization expense of deferred financing costs of
$0.7 million
,
$0.7 million
and
$1.2 million
for the years ended
March 31, 2013
,
2012
and
2011
, respectively. In fiscal 2011,
$1.2 million
of deferred financing costs were written off in connection with the Company’s early extinguishment of debt related primarily to the Revolving Credit Facility and Term B Facility.
|
|
(k)
|
Self-Insured Liabilities
|
The Company is self-insured for certain losses related to workers’ compensation, medical insurance, general liability and motor vehicle insurance claims. However, the Company obtains third-party insurance coverage to limit its exposure to these claims. The following table provides the Company’s stop loss coverage for the fiscal years ended
March 31, 2013
,
2012
and
2011
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
March 31,
|
|
|
2013
|
|
2012
|
|
2011
|
Workers’ Compensation — per occurrence
|
|
$
|
300
|
|
|
$
|
300
|
|
|
$
|
300
|
|
Workers’ Compensation — per occurrence (OH)
|
|
$
|
500
|
|
|
$
|
500
|
|
|
$
|
500
|
|
General Liability — per occurrence
|
|
$
|
250
|
|
|
$
|
250
|
|
|
$
|
250
|
|
Motor Vehicles — per occurrence
|
|
$
|
100
|
|
|
$
|
100
|
|
|
$
|
100
|
|
Medical Insurance — per participant, per year
|
|
$
|
300
|
|
|
$
|
300
|
|
|
$
|
150
|
|
When estimating self-insured liabilities, a number of factors are considered, including historical claims experience, demographic factors, severity factors and valuations provided by independent third-party actuaries. Quarterly, management reviews its assumptions and the valuations provided by independent third-party actuaries to determine the adequacy of the self-insured liabilities.
|
|
(l)
|
Accrued Straight-Line Rent
|
Retail and distribution operations are conducted from leased locations. The leases generally require payment of real estate taxes, insurance and common area maintenance, in addition to rent. The terms of the lease agreements generally range from
10
to
15
years. Most of the leases contain renewal options and escalation clauses, and certain store leases require contingent rents based on factors such as specified percentages of revenue or the consumer price index.
For leases that contain predetermined fixed escalations of the minimum rent, the related rent expense is recognized on a straight-line basis from the date the Company takes possession of the property to the end of the lease term. Any difference between the straight-line rent amounts and amounts payable under the leases are recorded as part of deferred rent. Cash or lease incentives received upon entering into certain store leases (tenant allowances) are recognized on a straight-line basis as a reduction to rent from the date the Company takes possession of the property through the end of the lease term. The unamortized portion of tenant allowances is recorded as a part of deferred rent. For leases that require contingent rents, management makes an estimate of the contingent rent annually and recognizes the related rent expense on a straight-line basis over the year. As of
March 31, 2013
and
2012
, deferred rent included in long-term liabilities in the Company’s consolidated balance sheets was
$77.8 million
and
$71.3 million
, respectively.
Transaction costs associated with the sale and leaseback of properties and any related deferred gain or loss are recognized on a straight-line basis over the initial period of the lease agreements. The Company does not have any retained or contingent interests in the properties, nor does the Company provide any guarantees in connection with the sale and leaseback of properties, other than a corporate-level guarantee of lease payments. At
March 31, 2013
and
2012
, deferred gains of
$2.0 million
and
$2.3 million
, respectively, were recorded in other long term liabilities relating to sale and leaseback transactions.
The Company recognizes revenue from the sale of merchandise at the time the customer takes possession of the merchandise. The Company recognizes revenue related to the delivery of merchandise at the time the merchandise is delivered. The Company honors returns from customers within 30 days from the date of sale and provides allowances for returns based on historical experience. The Company recorded an allowance for sales returns in accrued liabilities of
$0.5 million
and
$0.7 million
at
March 31, 2013
and
2012
, respectively. The Company recognizes service revenue at the time that evidence of an agreement exists, the service is completed, the price is fixed or determinable, and collectability is reasonably assured.
The Company sells gift cards to its customers in its retail stores and online. The Company does not charge administrative fees on unused gift cards and the Company’s gift cards (other than promotional rebate gift cards) do not have an expiration date. Revenue is recognized from gift cards when: (i) the gift card is redeemed by the customer or (ii) the likelihood of the gift card being redeemed by the customer is remote, referred to as gift card breakage, and the Company determines that it does not have a legal obligation to remit the value of unredeemed gift cards to the relevant jurisdictions. The Company determines it’s gift card breakage rate based on historical redemption patterns. Breakage recognized was not material to the Company’s results of operations during fiscal
2013
,
2012
or
2011
.
The Company sells premium service plans (“PSPs”) on appliance and electronic merchandise for periods ranging up to
10 years
. For PSPs sold by the Company on behalf of a third party, the net commission revenue is recognized at the time of sale. The Company is not the primary obligor on PSPs sold on behalf of third parties. Funds received for PSPs in which the Company is the primary obligor are deferred in accrued liabilities and other long-term liabilities in the Company’s consolidated
balance sheets, and the incremental direct costs of selling the PSPs are capitalized and amortized on a straight-line basis over the term of the service agreement. Costs of services performed pursuant to the PSPs are expensed as incurred.
The information below provides the changes in the Company’s deferred revenue on extended service agreements for the years ended
March 31, 2013
,
2012
and
2011
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
Deferred revenue on extended service agreements:
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
623
|
|
|
$
|
485
|
|
|
$
|
377
|
|
Revenue deferred on new agreements
|
|
4,111
|
|
|
2,403
|
|
|
1,945
|
|
Revenue recognized
|
|
(3,686
|
)
|
|
(2,265
|
)
|
|
(1,837
|
)
|
Balance at end of year
|
|
$
|
1,048
|
|
|
$
|
623
|
|
|
$
|
485
|
|
For revenue transactions that involve multiple deliverables, we defer the revenue associated with any undelivered elements. The amount of revenue deferred in connection with the undelivered elements is determined using the relative fair value of each element, which is generally based on each element's relative retail price. The Company frequently offers sales incentives that entitle customers to receive a reduction in the price of a product or service by submitting a claim for a refund or rebate. When certain purchase requirements are met, the customer is eligible to receive a hhgregg rebate gift card that may be redeemed on future purchases at hhgregg stores. Rebate gift cards expire either six or twelve months from the date of issuance. The Company defers revenue at the time an eligible transaction occurs, based on the percentage of gift cards that are projected to be redeemed and the relative fair value of the gift cards. The Company recognizes revenue when: (i) a gift card is redeemed by the customer, or (ii) a rebate gift card expires. The Company does not yet have historical redemption patterns on the rebate gift cards, therefore, no estimate can be made for breakage (i.e. when redemption becomes remote). At March 31, 2013, deferred revenue related to the rebate gift cards included within accrued liabilities within our Consolidated Balance Sheets was
$5.2 million
. There was
no
deferred revenue as of March 31, 2012.
The Company offers a private-label credit card agreement through a lending institution for the issuance of promotional financing bearing the hhgregg brand name. Under the agreement, the lending institution manages and directly extends credit to the customers. Cardholders who choose a private-label credit card can receive zero-interest promotional financing on qualifying purchases. The banks are the sole owner of the accounts receivable generated under the programs and absorb losses associated with non-payment by the cardholders and fraudulent usage of the accounts. Accordingly, we do not hold any consumer receivables related to these programs. We pay financing fees to the lending institution and these fees are variable based on certain factors such as the London Interbank Offered Rate (“LIBOR”) and types of promotional financing offers.
Cost of goods sold is defined as the cost of gross inventory sold, including any handling charges, in-bound freight expenses and physical inventory losses, less the recognized portion of certain vendor allowances. Because the Company does not include costs related to its store distribution facilities, including depreciation expense, in cost of goods sold, the Company’s gross profit may not be comparable to that of other retailers that include these costs in cost of goods sold and in the calculation of gross profit.
|
|
(o)
|
Selling, General and Administrative Expenses
|
Selling, general and administrative expenses includes wages, rent, taxes (other than income taxes), insurance, utilities, delivery costs, distribution costs, service expense, repairs and maintenance of stores and equipment, store opening costs, stock-based compensation and other general administrative expenses.
Shipping and handling costs and expenses of
$105.9 million
,
$102.9 million
, and
$84.3 million
for fiscal
2013
,
2012
and
2011
, respectively, were included in selling, general, and administrative expenses. Included in these costs were delivery expenses of
$55.9 million
,
$51.0 million
, and
$40.9 million
for the years ended March 31,
2013
,
2012
, and
2011
, respectively.
The Company receives funds from its vendors for various programs including volume purchase rebates, marketing support, markdowns, margin protection, training and sales incentives. Vendor allowances provided as a reimbursement of specific, incremental and identifiable costs incurred to promote a vendor’s products are included as an expense reduction when the cost is incurred. All other vendor allowances are initially deferred and recorded as a reduction of merchandise inventories. The deferred amounts are then included as a reduction of cost of goods sold when the related product is sold.
Advertising costs are expensed as incurred, with the exception of television production costs which are expensed the first time the advertisement is aired. These amounts have been reduced by vendor allowances under cooperative advertising which totaled
$43.1 million
,
$44.4 million
, and
$40.6 million
for the years ended
March 31, 2013
,
2012
and
2011
, respectively.
Store opening costs, other than capital expenditures, are expensed as incurred and recorded in selling, general and administrative expenses.
The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company is subject to U.S. federal and certain state and local income taxes. The Company’s income tax returns, like those of most companies, are periodically audited by federal and state tax authorities. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. At any one time, multiple tax years are subject to audit by the various tax authorities. In evaluating the exposures associated with the Company’s various tax filing positions, the Company records a liability for more likely than not exposures. A number of years may elapse before a particular matter, for which the Company has established a liability, is audited and fully resolved or clarified. The Company adjusts its liability for unrecognized tax benefits and income tax provision in the period in which an uncertain tax position is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the tax position or when more information becomes available.
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that all or some portion of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which temporary differences are expected to reverse, the Company believes it is more likely than not that it will realize the benefits of these deductible differences.
The Company collects certain taxes from their customers at the time of sale and remits the collected taxes to government authorities. These taxes are excluded from net sales and cost of goods sold in the Company’s consolidated statements of income.
|
|
(t)
|
Stock-Based Compensation
|
The Company records all stock-based compensation, including grants of employee stock options and restricted stock units, using the fair value-based method. Refer to note 8 for additional information regarding the Company’s stock-based compensation.
Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
|
|
(v)
|
Recently Issued Accounting Pronouncements
|
Comprehensive Income
— In June 2011, the FASB issued new guidance on the presentation of comprehensive income. Specifically, the new guidance requires an entity to present components of net income and other comprehensive income in one
continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The new guidance eliminated the previous option to report other comprehensive income and its components in the statement of changes in equity. While the new guidance changed the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. Accordingly, we adopted the new guidance on April 1, 2012, and have presented total comprehensive income in the Consolidated Statements of Comprehensive Income.
|
|
(2)
|
Fair Value Measurements
|
The Company uses a three-tier valuation hierarchy for its fair value measurements based upon observable and non-observable inputs:
Level 1 — unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
Level 2 — inputs other than quoted market prices included in Level 1 that are observable, either directly or indirectly, for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 — unobservable inputs for the asset or liability, as there is little, if any, market activity at the measurement date.
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
The fair value hierarchy requires the use of observable market data when available. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability. The Company had no assets or liabilities that were measured at fair value on a recurring basis as of
March 31, 2013
or
2012
.
Assets and Liabilities that are Measured at Fair Value on a Non-Recurring Basis
The Company has property and equipment that are measured at fair value on a non-recurring basis when impairment indicators are present. The assets are adjusted to fair value only when the carrying values exceed the fair values. The categorization of the framework used to price the assets is considered a Level 3, due to the subjective nature of the unobservable inputs used to determine the fair value. Property and equipment fair values were derived using a discounted cash flow model to estimate the present value of net cash flows that the asset or asset group was expected to generate. The key inputs to the discounted cash flow model generally included our forecasts of net cash generated from revenue, expenses and other significant cash outflows, such as certain capital expenditures, as well as an appropriate discount rate. For the twelve months ended December 31, 2012, the Company had
one
store whose profit contributions were significantly lower than the chain average due to decreased sales. This decrease in profit triggered the need for an impairment analysis to be performed in accordance with guidance on impairment of long-lived assets. The estimated undiscounted future cash flows generated by the store was less than its carrying amount, therefore the carrying amount of the assets related to this store were reduced to fair value.
The following table summarizes the fair value remeasurements recorded during the years ended
March 31, 2013
, and
2012
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
Carrying value (pre-asset impairment)
|
|
$
|
0.9
|
|
|
$
|
2.1
|
|
|
$
|
0.2
|
|
Asset impairment loss (included in income from operations)
|
|
0.5
|
|
|
0.8
|
|
|
0.1
|
|
Remaining net carrying value
|
|
$
|
0.4
|
|
|
$
|
1.3
|
|
|
$
|
0.1
|
|
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable — trade, accounts receivable — other, accounts payable and customer deposits approximate fair value because of the short maturity of these instruments.
|
|
(3)
|
Derivative Instruments and Hedging Activities
|
In October 2009 the Company entered into an interest rate swap agreement to manage its exposure on
$75 million
of its Term B Facility effective October 2009 with an original expiration date of October 2011. This interest rate swap arrangement was terminated on March 29, 2011 in connection with the repayment of our Term B Facility.
Changes in the fair value of interest rate swaps designated as hedging instruments that effectively offset the variability of cash flows associated with variable rate, long-term debt obligations are reported in accumulated other comprehensive income (loss). These amounts subsequently are reclassified into interest expense as a yield adjustment of the hedged interest payments in the same period in which the related interest affects earnings.
During the year ended March 31, 2011, the hedge was considered effective and a net unrealized gain of
$0.5 million
was recorded in other comprehensive income. Upon termination of the hedge on March 29, 2011, the remaining balance in other comprehensive loss was written off and was included in loss related to early extinguishment of debt in the Company’s consolidated statements of income.
Net income per basic share is calculated based on the weighted-average number of outstanding common shares. Net income per diluted share is calculated based on the weighted-average number of outstanding common shares plus the effect of potential dilutive common shares. When the Company reports net income, the calculation of net income per diluted share excludes shares underlying outstanding stock options with exercise prices that exceed the average market price of the Company’s common stock for the period and certain options and restricted stock units with unrecognized compensation cost, as the effect would be antidilutive. Potential dilutive common shares are composed of shares of common stock issuable upon the exercise of stock options and restricted stock units. The following table presents net income per basic and diluted share for the years ended March 31,
2013
,
2012
and
2011
(in thousands, except share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
Net income (A)
|
$
|
25,369
|
|
|
$
|
81,373
|
|
|
$
|
48,208
|
|
Weighted average outstanding shares of common stock (B)
|
34,430,641
|
|
|
37,749,354
|
|
|
39,394,708
|
|
Dilutive effect of employee stock options and restricted stock units
|
66,147
|
|
|
330,331
|
|
|
973,515
|
|
Common stock and potential dilutive common shares (C)
|
34,496,788
|
|
|
38,079,685
|
|
|
40,368,223
|
|
Net income per share:
|
|
|
|
|
|
Basic (A/B)
|
$
|
0.74
|
|
|
$
|
2.16
|
|
|
$
|
1.22
|
|
Diluted (A/C)
|
$
|
0.74
|
|
|
$
|
2.14
|
|
|
$
|
1.19
|
|
Antidilutive shares not included in the net income per diluted share calculation for the years ended March 31,
2013
,
2012
and
2011
were
3,529,249
,
2,660,197
and
797,500
, respectively.
Net merchandise inventories consisted of the following at
March 31, 2013
and
2012
(in thousands):
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
Appliances
|
$
|
120,972
|
|
|
$
|
102,703
|
|
Video
|
90,441
|
|
|
88,191
|
|
Computing and mobile phones
|
45,964
|
|
|
41,615
|
|
Other
|
58,185
|
|
|
49,900
|
|
Net merchandise inventory
|
$
|
315,562
|
|
|
$
|
282,409
|
|
A summary of debt at
March 31, 2013
and
2012
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
Revolving Credit Facility
|
$
|
—
|
|
|
$
|
—
|
|
Senior Secured Term Loan
On July 25, 2007, Gregg Appliances entered into a senior credit agreement (the “Term B Facility”) with a bank group obtaining
$100 million
senior secured term loan B maturing on July 25, 2013. On March 29, 2011, Gregg Appliances repaid the Term B Facility loan balance in full using excess cash. In connection with this repayment, we recorded a pre-tax loss related to the early extinguishment of debt of
$1.8 million
, which was primarily due to the write off of capitalized debt issuance costs and the termination of an interest rate swap arrangement.
Revolving Credit Facility
The capacity for borrowings under the Company’s Revolving Credit Facility is
$300 million
, subject to borrowing base availability. The facility expires on
March 29, 2016
.
Interest on borrowings (other than Eurodollar rate borrowings) is payable monthly at a fluctuating rate based on the bank’s prime rate or LIBOR plus an applicable margin. Interest on Eurodollar rate borrowings is payable on the last day of each “interest period” applicable to such borrowing or on the three month anniversary of the beginning of such “interest period” for interest periods greater than three months. The unused line rate is determined based on the amount of the daily average of the outstanding borrowings for the immediately preceding calendar quarter period (the “Daily Average”). For a Daily Average greater than or equal to
50%
of the defined borrowing base, the unused line rate is
0.375%
. For a Daily Average less than 50% of the defined borrowing base, the unused line rate is
0.50%
. The Revolving Credit Facility is guaranteed by Gregg Appliances’ wholly-owned subsidiary, HHG Distributing, which has no assets or operations. The guarantee is full and unconditional and Gregg Appliances has no other subsidiaries.
Pursuant to the Revolving Credit Facility, the borrowing base is equal to the sum of (i) the lesser of (a)
90%
of the net orderly liquidation value of all eligible inventory of Gregg Appliances or (b)
75%
of the net book value of such eligible inventory and (ii)
90%
of all commercial and credit card receivables of Gregg Appliances, in each case subject to customary reserves and eligibility criteria.
Under the Revolving Credit Facility, Gregg Appliances is not required to comply with any financial maintenance covenant unless “excess availability” is less than the greater of (i)
10.0%
of the lesser of (A) the defined borrowing base or (B) the defined maximum credit or (ii)
$20.0 million
during the continuance of which event Gregg Appliances is subject to compliance with a fixed charge coverage ratio of
1.0
to
1.0
.
Pursuant to the Revolving Credit Facility, if Gregg Appliances has “excess availability” of less than
12.5%
of the lesser of (A) the defined borrowing base or (B) the defined maximum credit, it may, in certain circumstances more specifically described in the Revolving Credit Facility, become subject to cash dominion control.
The Revolving Credit Facility places limitations on the ability of Gregg Appliances to, among other things, incur debt, create other liens on its assets, make investments, sell assets, pay dividends, undertake transactions with affiliates, enter into merger transactions, enter into unrelated businesses, open collateral locations outside of the United States, or enter into consignment assignments or floor plan financing arrangements. The Revolving Credit Facility also contains various customary representations and warranties, financial and collateral reporting requirements and other affirmative and negative covenants. Gregg Appliances was in compliance with the restrictions and covenants in the Revolving Credit Facility at
March 31, 2013
.
As of
March 31, 2013
and
2012
, Gregg Appliances had
no
borrowings outstanding under the Revolving Credit Facility. As of
March 31, 2013
, Gregg Appliances had
$4.9 million
of letters of credit outstanding, which expire through
December 31, 2013
. As of
March 31, 2012
, Gregg Appliances had
$5.2 million
of letters of credit outstanding which expired by
December 31, 2012
. The total borrowing availability under the Revolving Credit Facility was
$189.8 million
and
$175.0 million
as of
March 31, 2013
and
2012
, respectively. The interest rate based on the bank’s prime rate as of
March 31, 2013
and
2012
was
4.25%
.
Income tax expense for the years ended
March 31, 2013
,
2012
and
2011
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
6,448
|
|
|
$
|
12,428
|
|
|
$
|
14,715
|
|
State
|
|
2,008
|
|
|
3,982
|
|
|
4,695
|
|
Total current
|
|
8,456
|
|
|
16,410
|
|
|
19,410
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
7,163
|
|
|
8,960
|
|
|
11,384
|
|
State
|
|
436
|
|
|
422
|
|
|
228
|
|
Total deferred
|
|
7,599
|
|
|
9,382
|
|
|
11,612
|
|
Total expense
|
|
$
|
16,055
|
|
|
$
|
25,792
|
|
|
$
|
31,022
|
|
Deferred income taxes at
March 31, 2013
and
2012
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
Deferred tax assets:
|
|
|
|
|
Goodwill for tax purposes
|
|
$
|
45,038
|
|
|
$
|
51,629
|
|
Accrued expenses
|
|
11,086
|
|
|
10,456
|
|
Long-term deferred compensation
|
|
2,145
|
|
|
2,219
|
|
Inventories
|
|
3,259
|
|
|
2,995
|
|
Stock-compensation expense
|
|
8,114
|
|
|
6,261
|
|
Other
|
|
2,165
|
|
|
2,007
|
|
Credit carryforwards
|
|
286
|
|
|
2,691
|
|
Total deferred tax assets
|
|
72,093
|
|
|
78,258
|
|
Deferred tax liabilities:
|
|
|
|
|
Property and equipment
|
|
29,958
|
|
|
28,667
|
|
Other
|
|
1,125
|
|
|
982
|
|
Total deferred tax liabilities
|
|
31,083
|
|
|
29,649
|
|
Net deferred tax assets
|
|
$
|
41,010
|
|
|
$
|
48,609
|
|
At
March 31, 2013
and
2012
, the Company had no net operating loss carryforwards for federal or state income tax purposes and the Company had no liability for unrecognized tax benefits. At
March 31, 2012
, the Company had an alternative minimum tax credit carryforward of
$2.4 million
which was fully utilized in the current fiscal year.
The Company recognizes interest and penalties in income tax expense in its consolidated statements of income. At
March 31, 2013
and
2012
, the Company had no accrued interest and penalties.
The Company files a consolidated U.S. federal income tax return, as well as income tax returns in various states. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before fiscal 2010.
The expense (benefit) for income taxes differs from the amount of income tax determined by applying the U.S. federal income tax rate of
35%
to income before income taxes due to the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
Computed “expected” tax expense
|
|
$
|
14,498
|
|
|
$
|
37,508
|
|
|
$
|
27,730
|
|
State income tax expense, net of federal income tax benefit
|
|
1,516
|
|
|
2,901
|
|
|
3,200
|
|
Non-taxable Life Insurance Proceeds
|
|
—
|
|
|
(14,000
|
)
|
|
—
|
|
Other
|
|
41
|
|
|
(617
|
)
|
|
92
|
|
|
|
$
|
16,055
|
|
|
$
|
25,792
|
|
|
$
|
31,022
|
|
|
|
(8)
|
Stock-based Compensation
|
Stock Options
The Company maintains stock-based compensation plans which allow for the issuance of non-qualified stock options and restricted stock to officers, other key employees and members of the Board of Directors. On April 12, 2007, the Company’s Board of Directors approved the adoption of the hhgregg, Inc. 2007 Equity Incentive Plan (“Equity Incentive Plan”). The Equity Incentive Plan provides for the grant of nonqualified stock options, incentive stock options, stock appreciation rights, awards of restricted stock, awards of restricted stock units, awards of performance units, and stock grants. On June 23, 2010, an amendment (the “Amendment”) to the Equity Incentive Plan was adopted by the Company’s Board of Directors that increased the number of shares of common stock reserved for issuance under the Equity Incentive Plan from
3,000,000
to
6,000,000
. The Amendment was ratified and approved by the Company’s stockholders at the annual meeting of stockholders on August 3, 2010. If an option expires, is terminated or canceled without having been exercised or repurchased by the Company, or common stock is used to exercise an option, the terminated portion of the option or the common stock used to exercise the option will become available for future grants under the Equity Incentive Plan unless the plan is terminated. The term of the Company’s Equity Incentive Plan commenced on the date of approval by the Company’s Board of Directors and continues until the tenth anniversary of the approval by the Company’s Board of Directors. The Company’s Equity Incentive Plan is administered by the Company’s Compensation Committee. Prior to the Equity Incentive Plan being adopted, the Company utilized the Gregg Appliances, Inc. 2005 Stock Option Plan ("Stock Option Plan"). The Stock Option Plan provided for the grant of incentive stock options and nonqualified stock options to the Company’s officers, directors, consultants, and key employees.
During the years ended March 31,
2013
,
2012
and
2011
the Company granted options for
795,000
,
813,400
, and
805,000
shares of common stock under the 2007 Equity Incentive Plan to certain employees and directors of the Company. The options vest in equal amounts over a
three
-year period beginning on the first anniversary of the date of grant and expire
7 years
from the date of the grant. The fair value of each option grant is estimated on the date of grant and is amortized on a straight-line basis over the vesting period.
The weighted-average estimated fair value of options granted to employees and directors under the 2007 Equity Incentive Plan was
$5.34
,
$6.06
, and
$11.10
during the 12 months ended March 31,
2013
,
2012
and
2011
, respectively, using the Black-Scholes model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
Risk-free interest rate
|
0.56% - 0.69
|
|
|
1.3
|
%
|
|
1.9
|
%
|
Dividend yield
|
—
|
|
|
—
|
|
|
—
|
|
Expected volatility
|
61.9
|
%
|
|
52.2
|
%
|
|
45.5
|
%
|
Expected life of the options (years)
|
4.5
|
|
|
4.5
|
|
|
4.5
|
|
The following table summarizes the activity under the Company’s Stock Option Plans for the
twelve months ended March 31, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Options
Outstanding
|
|
Weighted
Average
Exercise
Price
|
|
Weighted Average Remaining Contractual Life
|
|
Aggregate Intrinsic Value (in thousands)
|
Outstanding at March 31, 2012
|
3,673,862
|
|
|
$
|
15.40
|
|
|
|
|
|
Granted
|
795,000
|
|
|
10.77
|
|
|
|
|
|
Exercised
|
(574,738
|
)
|
|
7.58
|
|
|
|
|
|
Canceled
|
(222,323
|
)
|
|
13.32
|
|
|
|
|
|
Expired
|
(349,339
|
)
|
|
15.03
|
|
|
|
|
|
Outstanding at March 31, 2013
|
3,322,462
|
|
|
$
|
15.81
|
|
|
4.07
|
|
$
|
400
|
|
Vested or expected to vest at March 31, 2013
|
3,269,156
|
|
|
$
|
15.88
|
|
|
4.04
|
|
$
|
386
|
|
Exercisable at March 31, 2013
|
1,991,918
|
|
|
$
|
16.73
|
|
|
3.05
|
|
$
|
189
|
|
The following table summarizes stock option vesting activity during the fiscal year ended March 31,
2013
:
|
|
|
|
|
|
|
|
|
Nonvested shares
|
|
Shares
|
|
Weighted
Average
Grant-Date
Fair Value
|
Nonvested at March 31, 2012
|
|
1,420,850
|
|
|
$
|
7.75
|
|
Granted during fiscal 2013
|
|
795,000
|
|
|
5.34
|
|
Vested during fiscal 2013
|
|
(662,983
|
)
|
|
8.01
|
|
Canceled during fiscal 2013
|
|
(222,323
|
)
|
|
5.81
|
|
Nonvested at March 31, 2013
|
|
1,330,544
|
|
|
$
|
6.47
|
|
During fiscal
2013
,
2012
and
2011
,
$5.2 million
(
$3.1 million
net of tax),
$5.7 million
(
$3.4 million
net of tax) and
$5.2 million
(
$3.1 million
net of tax), respectively, was charged to expense related to the stock option plans. The total intrinsic value of options exercised during the years ended March 31,
2013
,
2012
and
2011
was
$1.6 million
,
$2.5 million
and
$39.0 million
, respectively. Total unrecognized stock option compensation cost (adjusted for forfeitures) at March 31,
2013
was
$4.8 million
and is expected to be recognized over a weighted average period of
1.7 years
. Net cash proceeds from the exercise of stock options were
$4.4 million
,
$2.5 million
and
$5.0 million
in fiscal
2013
,
2012
and
2011
, respectively. The total grant date fair value of stock options vested during the years ended March 31,
2013
,
2012
and
2011
was
$5.3 million
,
$5.4 million
and
$3.5 million
, respectively.
Time Vested Restricted Stock Units
During the
twelve months ended March 31, 2013
, the Company granted
93,900
time vested restricted stock units (“RSUs”) under the 2007 Equity Incentive Plan to certain employees and directors of the Company. The time vested RSUs vest
three
years from the date of grant. Upon vesting, the outstanding number of time vested RSUs will be converted into shares of common stock. Time vested RSUs are forfeited if they have not vested before the employment of the participant terminates for any reason other than death or total permanent disability or certain other circumstances as described in such participant’s RSU agreement. Upon death or disability, the participant is entitled to receive a portion of the award based upon the period of time lapsed between the date of grant of the time vested RSU and the termination of employment. The fair value of time vested RSU awards is based on the Company’s stock price at the close of the market on the date of grant. The weighted average grant date fair value for the time vested RSUs issued during the
twelve months ended March 31, 2013
was
$10.86
. Total unrecognized compensation cost for the time vested RSUs (adjusted for forfeitures) at March 31,
2013
was
$1.1 million
and is expected to be recognized over a weighted average period of
1.76
years.
The following table summarizes time vested RSU vesting activity for the
twelve months ended March 31, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested RSU’s
|
Shares
|
|
Weighted
Average
Grant-Date
Fair Value
|
|
Weighted Average Remaining Contractual Life
|
|
Aggregate Intrinsic Value (in thousands)
|
Nonvested at March 31, 2012
|
72,900
|
|
|
$
|
14.17
|
|
|
|
|
|
Granted
|
93,900
|
|
|
10.86
|
|
|
|
|
|
Vested
|
—
|
|
|
—
|
|
|
|
|
|
Forfeited
|
(11,200
|
)
|
|
11.28
|
|
|
|
|
|
Nonvested at March 31, 2013
|
155,600
|
|
|
$
|
12.38
|
|
|
1.76
|
|
$
|
—
|
|
Performance-Based Restricted Stock Units
The Company awarded performance-based RSUs to certain officers of the Company during the
twelve months ended March 31, 2013
. Under these awards, a number of performance-based RSUs will be granted to each participant based upon the attainment of the applicable bonus targets as approved by the Company’s Compensation Committee. Performance-based RSUs are earned shortly after the end of the performance measurement period and vest
three
years after grant date. If a participant is not employed by the Company on the date the performance-based RSUs vest, the performance-based RSUs are forfeited, except in the case of death or total permanent disability or certain other circumstances as described in such participant’s RSU agreement. Upon death or disability, the participant is entitled to receive a portion of the award based upon the period of time lapsed between the date of grant of the performance-based RSU and the termination of employment if the applicable performance target was achieved. Additionally, to the extent performance conditions are not met, performance-based RSUs are forfeited.
During the
twelve months ended March 31, 2013
, the Company granted
92,820
performance-based RSUs,
6,300
of which have been forfeited as of
March 31, 2013
. The fair value of performance-based RSUs is based on the Company’s stock price at the close of the market on the date of grant and the probability that the established bonus targets will be achieved. The weighted average grant date fair value for the performance-based RSUs outstanding for the
twelve months ended March 31, 2013
was
$10.86
.
The composition of net rent expense for all operating leases, including leases of property and equipment, was as follows for the years ended March 31,
2013
,
2012
and
2011
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
Minimum rentals
|
|
$
|
83,373
|
|
|
$
|
76,497
|
|
|
$
|
64,597
|
|
Minimum rentals with related parties
|
|
6,034
|
|
|
6,118
|
|
|
6,095
|
|
Contingent rentals
|
|
74
|
|
|
147
|
|
|
116
|
|
Total rent expense
|
|
$
|
89,481
|
|
|
$
|
82,762
|
|
|
$
|
70,808
|
|
Future minimum required rental payments for noncancelable operating leases, with terms of one year or more, consist of the following as of March 31,
2013
(in thousands):
|
|
|
|
|
|
Rental
Payments
|
Payable in fiscal year:
|
|
2014
|
$
|
87,022
|
|
2015
|
88,590
|
|
2016
|
85,555
|
|
2017
|
81,895
|
|
2018
|
79,106
|
|
Thereafter
|
302,082
|
|
|
|
Total required payments
|
$
|
724,250
|
|
|
|
Total minimum rental lease payments have not been reduced by minimum sublease rent income of approximately
$1.1 million
due under future noncancelable subleases.
|
|
(10)
|
Related Party Transactions
|
The Company also has several leases with the former Executive Chairman and Director of the Company and members of his immediate family for its headquarters and certain stores. See note 9 for discussion of minimum rentals with related parties.
|
|
(11)
|
Employee Benefit Plans
|
The Company sponsors a 401(k) retirement savings plan ("Plan") covering all employees who have attained the age of
21
and have worked at least
1000
hours within a
12
-month period. Plan participants may elect to contribute
1%
to
12%
of their compensation to the Plan, subject to IRS limitations. The Company provides a discretionary matching contribution up to
7%
of each participant’s compensation, with total Company expense, including payment of administrative fees, aggregating approximately
$0.9 million
,
$0.7 million
, and
$0.4 million
for the years ended March 31,
2013
,
2012
, and
2011
, respectively.
The Company has an unfunded, non-qualified deferred compensation plan for members of executive management. Benefits accrue to individual participants annually based on a predetermined formula, as defined, which considers operating results of the Company and the participant’s base salary. Vesting of benefits is attained upon reaching
55
years of age or
10
years of continuous service, measurement of which is retroactive to the participant’s most recent start date. Annual interest is credited to participant accounts at an interest rate determined at the sole discretion of the Company. Benefits will be paid to individual participants upon the later of terminating employment with the Company or the participant attaining the age of
55
. The Company recorded
$0.2 million
in expense related to this plan for the years ended March 31,
2013
and
2012
, representing interest earned, but did not contribute additional amounts as the Company did not achieve the predetermined operating results target. The Company recorded approximately
$0.9 million
in expenses related to this plan for the year ended March 31,
2011
. Amounts accrued in other long-term liabilities at March 31,
2013
and
2012
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
Beginning accrual
|
|
$
|
5,618
|
|
|
$
|
6,054
|
|
Annual benefit accrual
|
|
—
|
|
|
—
|
|
Credited annual interest
|
|
150
|
|
|
151
|
|
Payments to vested participants
|
|
(223
|
)
|
|
(456
|
)
|
Plan forfeitures
|
|
(114
|
)
|
|
(131
|
)
|
Ending accrual
|
|
$
|
5,431
|
|
|
$
|
5,618
|
|
The Company is engaged in various legal proceedings in the ordinary course of business and has certain unresolved claims pending. The ultimate liability or range of loss, if any, for the aggregate amounts claimed cannot be determined at this time. However, management believes, based on the examination of these matters and experiences to date, that the ultimate liability, if any, in excess of amounts already provided for in the consolidated financial statements is not likely to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.
|
|
(13)
|
Interim Financial Results (Unaudited)
|
The following table sets forth certain unaudited quarterly information for each of the eight fiscal quarters for the years ended March 31,
2013
and
2012
(in thousands, except net (loss) income per share data). In management’s opinion, this unaudited quarterly information has been prepared on a consistent basis with the audited financial statements and includes all necessary adjustments, consisting only of normal recurring adjustments that management considers necessary for a fair presentation of the unaudited quarterly results when read in conjunction with the consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended March 31, 2013
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
Net sales
|
|
$
|
489,856
|
|
|
$
|
587,636
|
|
|
$
|
799,635
|
|
|
$
|
597,632
|
|
Cost of goods sold
|
|
343,197
|
|
|
413,489
|
|
|
581,450
|
|
|
419,037
|
|
Gross profit
|
|
146,659
|
|
|
174,147
|
|
|
218,185
|
|
|
178,595
|
|
Selling, general and administrative expenses
|
|
118,773
|
|
|
125,794
|
|
|
139,303
|
|
|
123,885
|
|
Net advertising expense
|
|
27,616
|
|
|
31,754
|
|
|
38,715
|
|
|
27,348
|
|
Depreciation and amortization expense
|
|
9,414
|
|
|
9,843
|
|
|
10,416
|
|
|
10,462
|
|
Asset impairment charge
|
|
—
|
|
|
—
|
|
|
504
|
|
|
—
|
|
(Loss) income from operations
|
|
(9,144
|
)
|
|
6,756
|
|
|
29,247
|
|
|
16,900
|
|
Other expense (income):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
478
|
|
|
510
|
|
|
704
|
|
|
652
|
|
Interest income
|
|
(2
|
)
|
|
(3
|
)
|
|
(3
|
)
|
|
(1
|
)
|
Total other expense
|
|
476
|
|
|
507
|
|
|
701
|
|
|
651
|
|
(Loss) income before income taxes
|
|
(9,620
|
)
|
|
6,249
|
|
|
28,546
|
|
|
16,249
|
|
Income tax (benefit) expense
|
|
(3,920
|
)
|
|
2,489
|
|
|
11,157
|
|
|
6,329
|
|
Net (loss) income
|
|
$
|
(5,700
|
)
|
|
$
|
3,760
|
|
|
$
|
17,389
|
|
|
$
|
9,920
|
|
Net (loss) income per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.16
|
)
|
|
$
|
0.11
|
|
|
$
|
0.51
|
|
|
$
|
0.31
|
|
Diluted
|
|
$
|
(0.16
|
)
|
|
$
|
0.11
|
|
|
$
|
0.51
|
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended March 31, 2012
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
Net sales
|
|
$
|
431,455
|
|
|
$
|
618,603
|
|
|
$
|
829,546
|
|
|
$
|
613,788
|
|
Cost of goods sold
|
|
301,141
|
|
|
441,924
|
|
|
603,640
|
|
|
426,299
|
|
Gross profit
|
|
130,314
|
|
|
176,679
|
|
|
225,906
|
|
|
187,489
|
|
Selling, general and administrative expenses
|
|
103,244
|
|
|
127,676
|
|
|
140,609
|
|
|
127,071
|
|
Net advertising expense
|
|
20,195
|
|
|
30,466
|
|
|
39,488
|
|
|
27,274
|
|
Depreciation and amortization expense
|
|
7,287
|
|
|
8,184
|
|
|
8,765
|
|
|
9,516
|
|
Life insurance proceeds
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(40,000
|
)
|
Asset impairment charge
|
|
—
|
|
|
—
|
|
|
—
|
|
|
813
|
|
(Loss) income from operations
|
|
(412
|
)
|
|
10,353
|
|
|
37,044
|
|
|
62,815
|
|
Other expense (income):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
512
|
|
|
571
|
|
|
881
|
|
|
694
|
|
Interest income
|
|
(4
|
)
|
|
—
|
|
|
(1
|
)
|
|
(18
|
)
|
Total other expense
|
|
508
|
|
|
571
|
|
|
880
|
|
|
676
|
|
(Loss) income before income taxes
|
|
(920
|
)
|
|
9,782
|
|
|
36,164
|
|
|
62,139
|
|
Income (benefit) tax expense
|
|
(159
|
)
|
|
3,756
|
|
|
13,686
|
|
|
8,509
|
|
Net (loss) income
|
|
$
|
(761
|
)
|
|
$
|
6,026
|
|
|
$
|
22,478
|
|
|
$
|
53,630
|
|
Net (loss) income per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.02
|
)
|
|
$
|
0.16
|
|
|
$
|
0.60
|
|
|
$
|
1.46
|
|
Diluted
|
|
$
|
(0.02
|
)
|
|
$
|
0.16
|
|
|
$
|
0.60
|
|
|
$
|
1.45
|
|
(14) Share Repurchase Program
On
May 24, 2012
, the Company’s Board of Directors authorized a new share repurchase program (the “May 2012 Program”) allowing the Company to repurchase up to
$50 million
of its common stock. The share repurchase program allows the Company to purchase its common stock on the open market or in privately negotiated transactions in accordance with applicable laws and regulations, and expires on
May 23, 2013
. The previous share repurchase program expired on May 19, 2012.
The following table shows the number and cost of shares repurchased during the
twelve months ended March 31, 2013
and
2012
, respectively ($ in thousands):
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
March 31, 2013
|
|
March 31, 2012
|
May 2012 Program
|
|
|
|
Number of shares repurchased
|
5,458,001
|
|
|
—
|
|
Cost of shares repurchased
|
$
|
48,232
|
|
|
$
|
—
|
|
May 2011 Program
|
|
|
|
Number of shares repurchased
|
—
|
|
|
3,714,289
|
|
Cost of shares repurchased
|
$
|
—
|
|
|
$
|
47,570
|
|
As of
March 31, 2013
, the Company had
$1.8 million
remaining under the May
2013
Program. The repurchased shares are classified as treasury stock within stockholders’ equity in the accompanying consolidated balance sheets.
|
|
(15)
|
Life Insurance Proceeds
|
During the fiscal year ended March 31, 2012, the Company received
$40.0 million
in proceeds on a key man life insurance policy that was held on our Executive Chairman of the Board, who passed away on January 22, 2012. The proceeds were non-taxable and are recorded in income from operations in the accompanying consolidated statements of income for fiscal 2012.
On April 2, 2013, the Company's Board of Directors approved a one-time voluntary stock option exchange program (the "Offer") as amended on April 17, 2013. On April 2, 2013, the Company commenced the Offer, which allowed employees to surrender all outstanding and unexercised stock options, whether vested or unvested, that were granted subsequent to July 18, 2007, (the “Eligible Options”) in a
one
-for-one exchange for new options (the “New Options”). Under the Offer, employees who chose to participate would receive New Options with an exercise price per share equal to the greater of (a)
$10.00
or (b) the closing price of the Company's Common Stock as reported on the New York Stock Exchange on the new option grant date. Additionally, the Offer did not allow partial tenders of any option grant, however employees could choose to exchange some but not all Eligible Option Grants held by any optionee. Options granted prior to July 19, 2007 were not eligible for exchange.
The Exchange Offer expired on April 30, 2013. Pursuant to the Exchange Offer, a total of
58
eligible participants tendered and the Company accepted for cancellation, options to purchase an aggregate of
898,665
shares of the Company's common stock. The eligible stock options that were accepted for cancellation represented approximately
31%
of the options eligible for participation in the Exchange Offer. Pursuant to the terms and conditions of the Amended Exchange Offer, on May 1, 2013, the Company issued
898,665
stock options in exchange for the tendered stock options. The Company will recognize the incremental expense resulting from this exchange, aggregating
$1.3 million
, over the
three
-year vesting period in accordance with the Exchange Offer.
On May 16, 2013, the Company’s Board of Directors authorized a share repurchase program allowing it to repurchase up to
$50 million
of its common stock, which becomes effective on May 22, 2013. The share repurchase program allows the Company to purchase its common stock on the open market or in privately negotiated transactions in accordance with applicable laws and regulations, and expires on May 22, 2014.