UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 29, 2016
or
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-35720
RESTORATION HARDWARE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware |
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45-3052669 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification Number) |
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15 Koch Road, Suite K Corte Madera, CA |
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94925 |
(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code: (415) 924-1005
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |
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☒ |
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Accelerated filer |
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☐ |
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Non-accelerated filer |
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☐ (Do not check if a smaller reporting company) |
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Smaller reporting company |
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☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of December 2, 2016, 40,802,548 shares of registrant’s common stock were outstanding.
RESTORATION HARDWARE HOLDINGS, INC.
INDEX TO FORM 10-Q
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Page |
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Item 1. |
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3 |
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Condensed Consolidated Balance Sheets (Unaudited) as of October 29, 2016, and January 30, 2016 |
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3 |
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4 |
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5 |
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6 |
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Notes to Condensed Consolidated Financial Statements (Unaudited) |
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7 |
Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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23 |
Item 3. |
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39 |
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Item 4. |
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40 |
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Item 1. |
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41 |
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Item 1A. |
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41 |
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Item 2. |
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41 |
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Item 3. |
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41 |
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Item 4. |
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41 |
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Item 5. |
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41 |
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Item 6. |
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42 |
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43 |
2
RESTORATION HARDWARE HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
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October 29, |
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January 30, |
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2016 |
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2016 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
55,426 |
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$ |
349,897 |
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Short-term investments |
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170,153 |
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130,801 |
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Accounts receivable—net |
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35,974 |
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28,567 |
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Merchandise inventories |
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776,586 |
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725,392 |
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Prepaid expense and other current assets |
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113,665 |
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79,020 |
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Total current assets |
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1,151,804 |
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1,313,677 |
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Long-term investments |
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21,056 |
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22,054 |
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Property and equipment—net |
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656,569 |
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515,605 |
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Goodwill |
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175,946 |
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124,301 |
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Trademarks and other intangible assets |
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100,622 |
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48,536 |
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Non-current deferred tax assets |
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25,647 |
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36,739 |
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Other non-current assets |
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24,657 |
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25,462 |
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Total assets |
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$ |
2,156,301 |
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$ |
2,086,374 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable and accrued expenses |
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$ |
231,079 |
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$ |
280,714 |
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Deferred revenue and customer deposits |
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144,574 |
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106,769 |
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Other current liabilities |
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43,768 |
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65,072 |
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Total current liabilities |
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419,421 |
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452,555 |
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Convertible senior notes due 2019—net |
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308,649 |
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297,703 |
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Convertible senior notes due 2020—net |
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231,876 |
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220,000 |
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Financing obligations under build-to-suit lease transactions |
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193,277 |
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146,621 |
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Deferred rent and lease incentives |
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59,516 |
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53,986 |
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Other non-current obligations |
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41,384 |
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29,349 |
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Total liabilities |
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1,254,123 |
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1,200,214 |
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Commitments and contingencies (Note 16) |
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— |
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— |
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Stockholders’ equity: |
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Preferred stock, $0.0001 par value per share, 10,000,000 shares authorized, no shares issued or outstanding as of October 29, 2016 and January 30, 2016 |
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— |
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— |
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Common stock, $0.0001 par value per share, 180,000,000 shares authorized, 41,055,353 shares issued and 40,760,465 shares outstanding as of October 29, 2016; 40,878,163 shares issued and 40,583,275 shares outstanding as of January 30, 2016 |
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4 |
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4 |
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Additional paid-in capital |
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783,050 |
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763,566 |
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Accumulated other comprehensive loss |
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(2,131 |
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(2,700 |
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Retained earnings |
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140,778 |
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144,813 |
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Treasury stock—at cost, 294,888 shares as of both October 29, 2016 and January 30, 2016 |
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(19,523 |
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(19,523 |
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Total stockholders’ equity |
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902,178 |
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886,160 |
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Total liabilities and stockholders’ equity |
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$ |
2,156,301 |
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$ |
2,086,374 |
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The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
3
RESTORATION HARDWARE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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October 29, |
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October 31, |
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October 29, |
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October 31, |
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2016 |
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2015 |
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2016 |
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2015 |
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Net revenues |
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$ |
549,328 |
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$ |
532,411 |
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$ |
1,548,165 |
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$ |
1,461,798 |
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Cost of goods sold |
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373,509 |
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341,661 |
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1,065,032 |
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933,367 |
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Gross profit |
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175,819 |
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190,750 |
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483,133 |
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528,431 |
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Selling, general and administrative expenses |
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160,433 |
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145,874 |
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457,207 |
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410,103 |
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Income from operations |
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15,386 |
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44,876 |
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25,926 |
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118,328 |
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Interest expense—net |
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11,091 |
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11,003 |
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32,528 |
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24,058 |
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Income (loss) before income taxes |
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4,295 |
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33,873 |
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(6,602 |
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94,270 |
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Income tax expense (benefit) |
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1,778 |
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13,163 |
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(2,567 |
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36,469 |
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Net income (loss) |
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$ |
2,517 |
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$ |
20,710 |
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$ |
(4,035 |
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$ |
57,801 |
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Weighted-average shares used in computing basic net income (loss) per share |
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40,730,059 |
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40,282,734 |
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40,653,091 |
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40,080,843 |
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Basic net income (loss) per share |
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$ |
0.06 |
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$ |
0.51 |
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$ |
(0.10 |
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$ |
1.44 |
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Weighted-average shares used in computing diluted net income (loss) per share |
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40,926,450 |
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42,413,657 |
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40,653,091 |
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42,237,967 |
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Diluted net income (loss) per share |
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$ |
0.06 |
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$ |
0.49 |
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$ |
(0.10 |
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$ |
1.37 |
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The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
4
RESTORATION HARDWARE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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October 29, |
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October 31, |
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October 29, |
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October 31, |
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2016 |
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2015 |
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2016 |
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2015 |
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Net income (loss) |
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$ |
2,517 |
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$ |
20,710 |
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$ |
(4,035 |
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$ |
57,801 |
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Net gains (losses) from foreign currency translation |
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(915 |
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(18 |
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485 |
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(872 |
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Net unrealized holding gains (losses) on available-for-sale investments |
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(59 |
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(13 |
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84 |
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(18 |
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Total comprehensive income (loss) |
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$ |
1,543 |
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$ |
20,679 |
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$ |
(3,466 |
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$ |
56,911 |
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The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
5
RESTORATION HARDWARE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Nine Months Ended |
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October 29, |
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October 31, |
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2016 |
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2015 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net income (loss) |
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$ |
(4,035 |
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$ |
57,801 |
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Adjustments to reconcile net income (loss) to net cash used in operating activities: |
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Depreciation and amortization |
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41,248 |
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32,105 |
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Amortization of debt discount |
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21,467 |
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15,153 |
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Excess tax (benefit) shortfall from exercise of stock options |
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2,275 |
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(6,564 |
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Stock-based compensation expense |
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21,711 |
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17,655 |
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Net non-cash charges resulting from inventory step-up |
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5,187 |
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— |
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Other non-cash interest expense |
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2,971 |
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2,070 |
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Change in assets and liabilities—net of acquisition: |
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Accounts receivable |
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(1,445 |
) |
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(6,405 |
) |
Merchandise inventories |
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(23,261 |
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(201,674 |
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Prepaid expense and other assets |
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(30,378 |
) |
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(3,679 |
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Accounts payable and accrued expenses |
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(73,574 |
) |
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48,015 |
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Deferred revenue and customer deposits |
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22,652 |
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15,295 |
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Other current liabilities |
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(25,372 |
) |
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10,317 |
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Deferred rent and lease incentives |
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2,953 |
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2,208 |
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Other non-current obligations |
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8,477 |
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73 |
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Net cash used in operating activities |
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(29,124 |
) |
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(17,630 |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Capital expenditures |
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(104,152 |
) |
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(76,801 |
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Acquisition of building and land |
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— |
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(13,999 |
) |
Construction related deposits |
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(3,829 |
) |
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(8,855 |
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Purchase of trademarks and domain names |
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(164 |
) |
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(218 |
) |
Purchase of investments |
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(186,967 |
) |
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(156,055 |
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Maturities of investments |
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115,938 |
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73,087 |
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Sales of investments |
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31,896 |
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— |
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Acquisition of business—net of cash acquired |
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(116,100 |
) |
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— |
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Net cash used in investing activities |
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(263,378 |
) |
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(182,841 |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Proceeds from issuance of convertible senior notes |
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— |
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296,250 |
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Proceeds from issuance of warrants |
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— |
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30,390 |
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Purchase of convertible note hedges |
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— |
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(68,250 |
) |
Debt issuance costs related to convertible senior notes |
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— |
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(2,382 |
) |
Payments on capital leases |
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(262 |
) |
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(202 |
) |
Proceeds from exercise of stock options |
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1,591 |
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20,465 |
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Excess tax benefit (shortfall) from exercise of stock options |
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(2,275 |
) |
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6,564 |
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Tax withholdings related to issuance of stock-based awards |
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(1,365 |
) |
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(4,295 |
) |
Net cash provided by (used in) financing activities |
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(2,311 |
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278,540 |
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Effects of foreign currency exchange rate translation |
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|
342 |
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(24 |
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Net increase (decrease) in cash and cash equivalents |
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(294,471 |
) |
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|
78,045 |
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Cash and cash equivalents |
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Beginning of period |
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349,897 |
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|
|
148,934 |
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End of period |
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$ |
55,426 |
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$ |
226,979 |
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Non-cash transactions: |
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Property and equipment additions due to build-to-suit lease transactions |
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$ |
46,193 |
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$ |
81,333 |
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Property and equipment additions in accounts payable and accrued expenses at period-end |
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|
23,440 |
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28,440 |
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Property and equipment additions from use of construction related deposits |
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3,965 |
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|
8,000 |
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Issuance of non-current notes payable related to share repurchases from former employees |
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— |
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|
238 |
|
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
6
RESTORATION HARDWARE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1—THE COMPANY
Nature of Business
Restoration Hardware Holdings, Inc., a Delaware corporation, together with its subsidiaries (collectively, the “Company”), is a luxury home furnishings retailer that offers a growing number of categories including furniture, lighting, textiles, bathware, décor, outdoor and garden, tableware, and child and teen furnishings. These products are sold through the Company’s stores, catalogs and websites.
On May 27, 2016, the Company acquired a controlling interest in Design Investors WW Acquisition Company, LLC, which owns the business operating under the name “Waterworks”. Refer to Note 3—Business Combination.
As of October 29, 2016, the Company operated a total of 85 retail stores and 28 outlet stores in 32 states, the District of Columbia, Canada and the U.K., and had sourcing operations in Shanghai and Hong Kong.
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements have been prepared from the Company’s records and, in management’s opinion, include all adjustments, consisting of normal recurring adjustments, necessary to fairly state the Company’s financial position as of October 29, 2016, and the results of operations for the three and nine months ended October 29, 2016 and October 31, 2015. The Company’s current fiscal year ends on January 28, 2017 (“fiscal 2016”).
Certain information and disclosures normally included in the notes to annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted for purposes of these interim condensed consolidated financial statements.
These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2016 (the “2015 Form 10-K”). Certain prior year amounts have been reclassified for consistency with the current period presentation. This reclassification had no effect on the previously reported consolidated results of operations or cash flows, and did not have a material effect on the previously reported consolidated financial position.
The results of operations for the three and nine months ended October 29, 2016 presented herein are not necessarily indicative of the results to be expected for the full fiscal year.
NOTE 2—RECENTLY ISSUED ACCOUNTING STANDARDS
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board (“FASB”) and International Accounting Standards Board issued their converged accounting standard update on revenue recognition, Accounting Standards Update 2014-09—Revenue from Contracts with Customers (Topic 606). This guidance outlines a single comprehensive model for companies 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. Under the new guidance, transfer of control is no longer the same as transfer of risks and rewards as indicated in the prior guidance. The Company will also need to apply the new guidance to determine whether revenue should be recognized over time or at a point in time. This guidance can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The FASB deferred the effective date for the new revenue reporting standard for entities reporting under U.S. GAAP for one year from the original effective date. In accordance with the deferral, ASU 2014-09 will become effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early application is permitted for annual reporting periods ending after December 15, 2016. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, which clarifies the guidance in the new revenue standard regarding an entity’s identification of its performance obligations in a contract, as well as an entity’s evaluation of the nature of its promise to grant a license of intellectual property and whether or not that revenue is recognized over time or at a point in time. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients, which amends the guidance in the new revenue standard on collectability, noncash consideration, presentation of sales tax, and transition.
7
The amendments are intended to address implementation issues that were raised by stakeholders and provide additional practical expedients to reduce the cost and complexity of applying the new revenue standard. These amendments have the same effective date as the new revenue standard. The Company is evaluating the impact of adopting this new accounting standard on its consolidated financial statements and has not selected an adoption date or a transition method.
Consolidation Accounting
In February 2015, the FASB issued Accounting Standards Update No. 2015-02—Consolidation (Topic 810): Amendments to the Consolidation Analysis, which improves targeted areas of the consolidation guidance and reduces the number of consolidation models. The amendments to the guidance are effective for fiscal years beginning after December 15, 2015 (the Company’s first quarter of fiscal 2016), and interim periods within those years, with early adoption permitted. The Company adopted this guidance in the first quarter of fiscal 2016. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.
Classification of Debt Issuance Costs
In April 2015, the FASB issued Accounting Standards Update 2015-03—Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Costs associated with line-of-credit arrangements may continue to be recorded as deferred assets. The update requires retrospective application and represents a change in accounting principle. The debt issuance costs guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company adopted the guidance on a retrospective basis in the first quarter of fiscal 2016. This is a change from the Company’s historical presentation whereby third party offering costs of the Company’s convertible senior notes were classified within other non-current asset on the consolidated balance sheets. To conform to the current period presentation, the Company reclassified $2.1 million as of January 30, 2016 from non-current assets to non-current liabilities on the condensed consolidated balance sheets.
Software Licenses in Cloud Computing Arrangements
In April 2015, the FASB issued Accounting Standards Update No. 2015-05—Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. The amendments in ASU 2015-05 provide 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 other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The amendments in ASU 2015-05 are effective for fiscal years beginning after December 15, 2015, and interim periods within those years. The guidance may be applied either prospectively to all arrangements entered into or materially modified after the effective date or retrospectively. The Company adopted this guidance on a prospective basis in the first quarter of fiscal 2016. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.
Measurement of Inventory
In July 2015, the FASB issued Accounting Standards Update 2015-11—Inventory (Topic 330): Simplifying the Measurement of Inventory, which changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. ASU 2015-11 defines net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance must be applied on a prospective basis and is effective for periods beginning after December 15, 2016, with early adoption permitted. The Company adopted this guidance on a prospective basis in the first quarter of fiscal 2016. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.
Business Combinations
In September 2015, the FASB issued Accounting Standards Update 2015-16—Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. The guidance requires the acquirer to recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustment amounts are determined. The business combination guidance is effective for interim and annual periods beginning after December 15, 2015, with early adoption permitted, and is to be applied on a prospective basis. The Company adopted this guidance on a prospective basis in the first quarter of fiscal 2016. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.
8
In February 2016, the FASB issued Accounting Standards Update 2016-02—Leases, which, for operating leases, requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. The ASU is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effects that the adoption of ASU 2016-02 will have on its consolidated financial statements and anticipates the new guidance will significantly impact its consolidated financial statements given the Company has a significant number of leases.
Financial Instruments
In January 2016, the FASB issued Accounting Standards Update 2016-01—Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which amends various aspects of the recognition, measurement, presentation and disclosure for financial instruments. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted only for certain provisions. The Company is evaluating the impact of adopting this new accounting standard on its consolidated financial statements.
Recognition of Breakage
In March 2016, the FASB issued Accounting Standard Update No. 2016-04—Recognition of Breakage for Certain Prepaid Stored-Value Products. The new guidance creates an exception under ASC 405-20—Liabilities-Extinguishments of Liabilities, to derecognize financial liabilities related to certain prepaid stored-value products using a revenue-like breakage model. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. This guidance can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is evaluating the impact of adopting this new accounting standard on its consolidated financial statements.
Stock-Based Compensation
In March 2016, the FASB issued Accounting Standard Update No. 2016-09—Improvements to Employee Share Based Payment Accounting. The new guidance simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. One provision requires that the excess income tax benefits and tax deficiencies related to share-based payments be recognized within income tax expense in the statement of operations, rather than within additional paid-in capital on the balance sheet. The Company is currently evaluating the potential impact that this provision will have on its consolidated financial statements, which is to be applied prospectively. The Company does not expect the other provisions within the pronouncement to have a material impact on its consolidated financial statements. The new guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The Company plans to adopt this guidance at the beginning of its first quarter of fiscal year 2017.
Cash Flow Classification
In August 2016, the FASB issued Accounting Standard Update No. 2016-15 – Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The new guidance addresses eight specific cash flow issues with the objective of reducing an existing diversity in practices regarding the matter in which certain cash receipts and payments are presented and classified in the statement of cash flows. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the impact of adopting this new accounting standard on its consolidated financial statements.
Income Taxes: Intra-Entity Asset Transfers
In October 2016, the FASB issued Accounting Standard Update No. 2016-16 – Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The new guidance requires the recognition of the income tax consequences of an intercompany asset transfer, other than transfers of inventory, when the transfer occurs. For intercompany transfers of inventory, the income tax effects will continue to be deferred until the inventory has been sold to a third party. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the impact of adopting this new accounting standard on its consolidated financial statements.
9
NOTE 3—BUSINESS COMBINATION
On May 27, 2016, the Company acquired a controlling interest in Design Investors WW Acquisition Company, LLC, which owns the business operating under the name “Waterworks”. The purchase price of the acquisition was approximately $119.9 million consisting of $118.4 million funded with available cash and $1.5 million representing the fair value of rollover units, which amount is subject to adjustment for changes in working capital and other items. The rollover units are included in non-current liabilities on the condensed consolidated balance sheets (refer to Note 14—Stock-Based Compensation). After the transaction, and giving effect to equity interests acquired by management in the business, the Company owns in excess of 90% of the total equity interest in Waterworks.
The addition of Waterworks to the RH platform further positions the Company as an authority in two of the most important and high value rooms of the home—the bath and kitchen—and creates one of the first fully integrated luxury home brands in the world. Furthermore, the Company believes that the Waterworks brand renders the RH brand more valuable and opens RH up to additional high net worth clients, designers and contractors at a much earlier stage in the home project lifecycle. In addition, Waterworks’ long focus and service of the luxury customer is valuable to RH as it continues to elevate the RH brand and customer experience.
For the nine months ended October 29, 2016, the Company incurred $2.8 million of acquisition-related costs associated with the transaction. For the three months ended October 29, 2016, the Company did not incur any acquisition-related costs. These costs and expenses include fees associated with financial, legal and accounting advisors, and employment related costs, and are included in selling, general and administrative expenses on the condensed consolidated statements of operations.
The following table summarizes the purchase price allocation based on the estimated fair value of the acquired assets and assumed liabilities (in thousands):
Tangible assets acquired and liabilities assumed |
|
$ |
16,249 |
|
Intangible assets |
|
|
52,100 |
|
Goodwill |
|
|
51,595 |
|
Total |
|
$ |
119,944 |
|
Under purchase accounting rules, the Company valued the acquired finished goods inventory to fair value, which is defined as the estimated selling price less the sum of (a) costs of disposal and (b) a reasonable profit allowance for the Company’s selling effort. This valuation resulted in an increase in inventory carrying value of approximately $10.8 million for marketable inventory.
Intangible assets represent trade names which have been assigned an indefinite life and therefore are not subject to amortization. The goodwill is representative of the benefits and expected synergies from the integration of Waterworks products and Waterworks’ management and employees, which do not qualify for separate recognition as an intangible asset. The trade names and goodwill are not expected to be deductible for tax purposes.
Results of operations of Waterworks have been included in the Company’s condensed consolidated statements of operations since the May 27, 2016 acquisition date. Pro forma results of the acquired business have not been presented as the results were not considered material to the Company’s consolidated financial statements for all periods presented and would not have been material had the acquisition occurred at the beginning of fiscal 2016.
NOTE 4—PREPAID EXPENSE AND OTHER ASSETS
Prepaid expense and other current assets consist of the following (in thousands):
|
|
October 29, |
|
|
January 30, |
|
||
|
|
2016 |
|
|
2016 |
|
||
Capitalized catalog costs |
|
$ |
62,391 |
|
|
$ |
35,836 |
|
Vendor deposits |
|
|
20,399 |
|
|
|
22,959 |
|
Federal and state tax receivable |
|
|
3,977 |
|
|
|
— |
|
Prepaid expense and other current assets |
|
|
26,898 |
|
|
|
20,225 |
|
Total prepaid expense and other current assets |
|
$ |
113,665 |
|
|
$ |
79,020 |
|
10
Other non-current assets consist of the following (in thousands):
|
|
October 29, |
|
|
January 30, |
|
||
|
|
2016 |
|
|
2016 |
|
||
Construction related deposits |
|
$ |
15,248 |
|
|
$ |
15,384 |
|
Other deposits |
|
|
4,741 |
|
|
|
3,635 |
|
Deferred financing fees |
|
|
1,706 |
|
|
|
2,236 |
|
Other non-current assets |
|
|
2,962 |
|
|
|
4,207 |
|
Total other non-current assets |
|
$ |
24,657 |
|
|
$ |
25,462 |
|
NOTE 5—GOODWILL AND INTANGIBLE ASSETS
The following sets forth the goodwill and intangible assets as of October 29, 2016 (in thousands):
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Foreign Currency Translation |
|
|
Net Book Value |
|
||||
Intangible assets subject to amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of leases (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair market write-up |
|
$ |
1,924 |
|
|
$ |
(1,768 |
) |
|
$ |
— |
|
|
$ |
156 |
|
Fair market write-down (2) |
|
|
(1,467 |
) |
|
|
1,336 |
|
|
|
— |
|
|
|
(131 |
) |
Total intangible assets subject to amortization |
|
$ |
457 |
|
|
$ |
(432 |
) |
|
$ |
— |
|
|
$ |
25 |
|
Intangible assets not subject to amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
176,056 |
|
|
$ |
— |
|
|
$ |
(110 |
) |
|
$ |
175,946 |
|
Trademarks and domain names |
|
$ |
100,466 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
100,466 |
|
(1) |
The fair value of each lease is amortized over the life of the respective lease. |
(2) |
The fair market write-down of leases is included in other non-current obligations on the condensed consolidated balance sheets. |
The following sets forth the goodwill and intangible assets as of January 30, 2016 (in thousands):
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Foreign Currency Translation |
|
|
Net Book Value |
|
||||
Intangible assets subject to amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of leases (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair market write-up |
|
$ |
1,924 |
|
|
$ |
(1,697 |
) |
|
$ |
— |
|
|
$ |
227 |
|
Fair market write-down (2) |
|
|
(1,467 |
) |
|
|
1,289 |
|
|
|
— |
|
|
|
(178 |
) |
Total intangible assets subject to amortization |
|
$ |
457 |
|
|
$ |
(408 |
) |
|
$ |
— |
|
|
$ |
49 |
|
Intangible assets not subject to amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
124,461 |
|
|
$ |
— |
|
|
$ |
(160 |
) |
|
$ |
124,301 |
|
Trademarks and domain names |
|
$ |
48,309 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
48,309 |
|
(1) |
The fair value of each lease is amortized over the life of the respective lease. |
(2) |
The fair market write-down of leases is included in other non-current obligations on the condensed consolidated balance sheets. |
11
NOTE 6—ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accounts payable and accrued expenses consist of the following (in thousands):
|
|
October 29, |
|
|
January 30, |
|
||
|
|
2016 |
|
|
2016 |
|
||
Accounts payable |
|
$ |
121,517 |
|
|
$ |
175,024 |
|
Accrued compensation |
|
|
32,290 |
|
|
|
27,698 |
|
Accrued freight and duty |
|
|
25,037 |
|
|
|
27,230 |
|
Accrued sales taxes |
|
|
14,757 |
|
|
|
19,269 |
|
Accrued catalog costs |
|
|
13,342 |
|
|
|
5,988 |
|
Accrued occupancy |
|
|
13,196 |
|
|
|
15,095 |
|
Accrued professional fees |
|
|
2,466 |
|
|
|
2,736 |
|
Accrued legal settlements |
|
|
695 |
|
|
|
3,000 |
|
Other accrued expenses |
|
|
7,779 |
|
|
|
4,674 |
|
Total accounts payable and accrued expenses |
|
$ |
231,079 |
|
|
$ |
280,714 |
|
Accounts payable included negative cash balances due to outstanding checks of $8.3 million and $18.4 million as of October 29, 2016 and January 30, 2016, respectively.
Other current liabilities consist of the following (in thousands):
|
|
October 29, |
|
|
January 30, |
|
||
|
|
2016 |
|
|
2016 |
|
||
Unredeemed gift card and merchandise credit liability |
|
$ |
27,750 |
|
|
$ |
24,364 |
|
Allowance for sales returns |
|
|
12,780 |
|
|
|
12,688 |
|
Capital lease obligations—current |
|
|
285 |
|
|
|
182 |
|
Federal and state tax payable |
|
|
— |
|
|
|
27,838 |
|
Other current liabilities |
|
|
2,953 |
|
|
|
— |
|
Total other current liabilities |
|
$ |
43,768 |
|
|
$ |
65,072 |
|
NOTE 7—OTHER NON-CURRENT OBLIGATIONS
Other non-current obligations consist of the following (in thousands):
|
|
October 29, |
|
|
January 30, |
|
||
|
|
2016 |
|
|
2016 |
|
||
Notes payable for share repurchases |
|
$ |
19,523 |
|
|
$ |
19,523 |
|
Deferred contract incentive (1) |
|
|
8,334 |
|
|
|
— |
|
Capital lease obligations—non-current |
|
|
7,306 |
|
|
|
7,399 |
|
Unrecognized tax benefits |
|
|
1,952 |
|
|
|
1,125 |
|
Rollover units and profit interests |
|
|
1,678 |
|
|
|
— |
|
Other non-current obligations |
|
|
2,591 |
|
|
|
1,302 |
|
Total other non-current obligations |
|
$ |
41,384 |
|
|
$ |
29,349 |
|
(1) |
Represents the non-current portion of an incentive payment received in relation to a 5-year service agreement. The amount will be amortized over the term of the agreement. |
NOTE 8—CONVERTIBLE SENIOR NOTES
0.00% Convertible Senior Notes due 2020
In June 2015, the Company issued in a private offering $250 million principal amount of 0.00% convertible senior notes due 2020 and, in July 2015, the Company issued an additional $50 million principal amount pursuant to the exercise of the overallotment option granted to the initial purchasers as part of its June 2015 offering (collectively, the “2020 Notes”). The 2020 Notes are governed by the terms of an indenture between the Company and U.S. Bank National Association, as the Trustee. The 2020 Notes will mature on July 15, 2020, unless earlier purchased by the Company or converted. The 2020 Notes will not bear interest, except that the 2020 Notes will be subject to “special interest” in certain limited circumstances in the event of the failure of the Company to perform
12
certain of its obligations under the indenture governing the 2020 Notes. The 2020 Notes are unsecured obligations and do not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company or any of its subsidiaries. Certain events are also considered “events of default” under the 2020 Notes, which may result in the acceleration of the maturity of the 2020 Notes, as described in the indenture governing the 2020 Notes. The 2020 Notes are guaranteed by the Company’s primary operating subsidiary, Restoration Hardware, Inc., as Guarantor. The guarantee is the unsecured obligation of the Guarantor and is subordinated to the Guarantor’s obligations from time to time with respect to its credit agreement and ranks equal in right of payment with respect to Guarantor’s other obligations.
The initial conversion rate applicable to the 2020 Notes is 8.4656 shares of common stock per $1,000 principal amount of 2020 Notes, which is equivalent to an initial conversion price of approximately $118.13 per share. The conversion rate will be subject to adjustment upon the occurrence of certain specified events, but will not be adjusted for any accrued and unpaid special interest. In addition, upon the occurrence of a “make-whole fundamental change” as defined in the indenture, the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its 2020 Notes in connection with such make-whole fundamental change.
Prior to March 15, 2020, the 2020 Notes will be convertible only under the following circumstances: (1) during any calendar quarter commencing after September 30, 2015, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sale price of the Company’s common stock on such trading day is greater than or equal to 130% of the applicable conversion price on such trading day; (2) during the five consecutive business day period after any ten consecutive trading day period in which, for each day of that period, the trading price per $1,000 principal amount of 2020 Notes for such trading day was less than 98% of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate on such trading day; or (3) upon the occurrence of specified corporate transactions. As of October 29, 2016, none of these conditions have occurred and, as a result, the 2020 Notes are not convertible as of October 29, 2016. On and after March 15, 2020, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their 2020 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the 2020 Notes will be settled, at the Company’s election, in cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock. If the Company has not delivered a notice of its election of settlement method prior to the final conversion period it will be deemed to have elected combination settlement with a dollar amount per note to be received upon conversion of $1,000.
The Company may not redeem the 2020 Notes; however, upon the occurrence of a fundamental change (as defined in the indenture governing the notes), holders may require the Company to purchase all or a portion of their 2020 Notes for cash at a price equal to 100% of the principal amount of the 2020 Notes to be purchased plus any accrued and unpaid special interest to, but excluding, the fundamental change purchase date.
Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. Accordingly, in accounting for the issuance of the 2020 Notes, the Company separated the 2020 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, which is recognized as a debt discount, represents the difference between the proceeds from the issuance of the 2020 Notes and the fair value of the liability component of the 2020 Notes. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) will be amortized to interest expense using an effective interest rate of 6.47% over the expected life of the 2020 Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for the debt issuance costs related to the issuance of the 2020 Notes, the Company allocated the total amount incurred to the liability and equity components based on their relative values. Debt issuance costs attributable to the liability component are amortized to interest expense using the effective interest method over the expected life of the 2020 Notes, and debt issuance costs attributable to the equity component are netted with the equity component in stockholders’ equity.
Debt issuance costs related to the 2020 Notes were composed of discounts upon original issuance of $3.8 million and third party offering costs of $2.3 million. Discounts and third party offering costs attributable to the liability component are recorded as a contra-liability and are presented net against the convertible senior notes due 2020 balance on the condensed consolidated balance sheets. During the three months ended October 29, 2016 and October 31, 2015, the Company recorded $0.2 million and $0.2 million, related to the amortization of debt issuance costs, respectively. During the nine months ended October 29, 2016 and October 31, 2015, the Company recorded $0.7 million and $0.3 million related to the amortization of debt issuance costs, respectively.
13
The carrying values of the 2020 Notes, excluding the discounts upon original issuance and third party offering costs, are as follows (in thousands):
|
|
October 29, |
|
|
January 30, |
|
||
|
|
2016 |
|
|
2016 |
|
||
Liability component |
|
|
|
|
|
|
|
|
Principal |
|
$ |
300,000 |
|
|
$ |
300,000 |
|
Less: Debt discount |
|
|
(63,962 |
) |
|
|
(75,113 |
) |
Net carrying amount |
|
$ |
236,038 |
|
|
$ |
224,887 |
|
Equity component (1) |
|
$ |
84,003 |
|
|
$ |
84,003 |
|
(1) |
Included in additional paid-in capital on the condensed consolidated balance sheets. |
The Company recorded interest expense of $3.8 million and $3.6 million for the amortization of the debt discount related to the 2020 Notes during the three months ended October 29, 2016 and October 31, 2015, respectively. The Company recorded interest expense of $11.2 million and $5.3 million for the amortization of the debt discount related to the 2020 Notes during the nine months ended October 29, 2016 and October 31, 2015, respectively.
2020 Notes—Convertible Bond Hedge and Warrant Transactions
In connection with the offering of the 2020 Notes in June 2015 and the exercise in full of the overallotment option in July 2015, the Company entered into convertible note hedge transactions whereby the Company has the option to purchase a total of approximately 5.1 million shares of its common stock at a price of approximately $118.13 per share. The total cost of the convertible note hedge transactions was $68.3 million. In addition, the Company sold warrants whereby the holders of the warrants have the option to purchase a total of approximately 5.1 million shares of the Company’s common stock at a price of $189.00 per share. The Company received $30.4 million in cash proceeds from the sale of these warrants. Taken together, the purchase of the convertible note hedges and sale of the warrants are intended to offset any actual earnings dilution from the conversion of the 2020 Notes until the Company’s common stock is above approximately $189.00 per share. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity, are not accounted for as derivatives and are not remeasured each reporting period. The net costs incurred in connection with the convertible note hedge and warrant transactions were recorded as a reduction to additional paid-in capital on the condensed consolidated balance sheets.
The Company recorded a deferred tax liability of $32.8 million in connection with the debt discount associated with the 2020 Notes and recorded a deferred tax asset of $26.6 million in connection with the convertible note hedge transactions. The deferred tax liability and deferred tax asset are recorded in non-current deferred tax assets on the condensed consolidated balance sheets.
0.00% Convertible Senior Notes due 2019
In June 2014, the Company issued $350 million principal amount of 0.00% convertible senior notes due 2019 (the “2019 Notes”) in a private offering. The 2019 Notes are governed by the terms of an indenture between the Company and U.S. Bank National Association, as the Trustee. The 2019 Notes will mature on June 15, 2019, unless earlier purchased by the Company or converted. The 2019 Notes will not bear interest, except that the 2019 Notes will be subject to “special interest” in certain limited circumstances in the event of the failure of the Company to perform certain of its obligations under the indenture governing the 2019 Notes. The 2019 Notes are unsecured obligations and do not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company or any of its subsidiaries. Certain events are also considered “events of default” under the 2019 Notes, which may result in the acceleration of the maturity of the 2019 Notes, as described in the indenture governing the 2019 Notes.
The initial conversion rate applicable to the 2019 Notes is 8.6143 shares of common stock per $1,000 principal amount of 2019 Notes, which is equivalent to an initial conversion price of approximately $116.09 per share. The conversion rate will be subject to adjustment upon the occurrence of certain specified events, but will not be adjusted for any accrued and unpaid special interest. In addition, upon the occurrence of a “make-whole fundamental change,” the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its 2019 Notes in connection with such make-whole fundamental change.
Prior to March 15, 2019, the 2019 Notes will be convertible only under the following circumstances: (1) during any calendar quarter commencing after September 30, 2014, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sale price of the Company’s common stock on such trading day is greater than or equal to 130% of the applicable conversion price on such trading
14
day; (2) during the five consecutive business day period after any ten consecutive trading day period in which, for each day of that period, the trading price per $1,000 principal amount of 2019 Notes for such trading day was less than 98% of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate on such trading day; or (3) upon the occurrence of specified corporate transactions. As of October 29, 2016, none of these conditions have occurred and, as a result, the 2019 Notes are not convertible as of October 29, 2016. On and after March 15, 2019, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or a portion of their 2019 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the 2019 Notes will be settled, at the Company’s election, in cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock. If the Company has not delivered a notice of its election of settlement method prior to the final conversion period it will be deemed to have elected combination settlement with a dollar amount of $1,000.
The Company may not redeem the 2019 Notes; however, upon the occurrence of a fundamental change (as defined in the indenture governing the notes), holders may require the Company to purchase all or a portion of their 2019 Notes for cash at a price equal to 100% of the principal amount of the 2019 Notes to be purchased plus any accrued and unpaid special interest to, but excluding, the fundamental change purchase date.
Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. Accordingly, in accounting for the issuance of the 2019 Notes, the Company separated the 2019 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, which is recognized as a debt discount, represents the difference between the proceeds from the issuance of the 2019 Notes and the fair value of the liability component of the 2019 Notes. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) will be amortized to interest expense using an effective interest rate of 4.51% over the expected life of the 2019 Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for the debt issuance costs related to the issuance of the 2019 Notes, the Company allocated the total amount incurred to the liability and equity components based on their relative values. Debt issuance costs attributable to the liability component are amortized to interest expense using the effective interest method over the expected life of the 2019 Notes, and debt issuance costs attributable to the equity component are netted with the equity component in stockholders’ equity.
Debt issuance costs related to the 2019 Notes were composed of discounts and commissions payable to the initial purchasers of $4.4 million and third party offering costs of $1.0 million. Discounts, commissions payable to the initial purchasers and third party offering costs attributable to the liability component are recorded as a contra-liability and are presented net against the convertible senior notes due 2019 balance on the condensed consolidated balance sheets. During both the three months ended October 29, 2016 and October 31, 2015, the Company recorded $0.2 million related to the amortization of debt issuance costs. During both the nine months ended October 29, 2016 and October 31, 2015, the Company recorded $0.6 million related to the amortization of debt issuance costs.
The carrying values of the 2019 Notes, excluding the discounts and commissions payable to the initial purchasers and third party offering costs, are as follows (in thousands):
|
|
October 29, |
|
|
January 30, |
|
||
|
|
2016 |
|
|
2016 |
|
||
Liability component |
|
|
|
|
|
|
|
|
Principal |
|
$ |
350,000 |
|
|
$ |
350,000 |
|
Less: Debt discount |
|
|
(38,973 |
) |
|
|
(49,289 |
) |
Net carrying amount |
|
$ |
311,027 |
|
|
$ |
300,711 |
|
Equity component (1) |
|
$ |
70,482 |
|
|
$ |
70,482 |
|
(1) |
Included in additional paid-in capital on the condensed consolidated balance sheets. |
The Company recorded interest expense of $3.5 million and $3.3 million for the amortization of the debt discount related to the 2019 Notes during the three months ended October 29, 2016 and October 31, 2015, respectively. The Company recorded interest expense of $10.3 million and $9.9 million for the amortization of the debt discount related to the 2019 Notes during the nine months ended October 29, 2016 and October 31, 2015, respectively.
15
2019 Notes—Convertible Bond Hedge and Warrant Transactions
In connection with the offering of the 2019 Notes, the Company entered into convertible note hedge transactions whereby the Company has the option to purchase a total of approximately 3.0 million shares of its common stock at a price of approximately $116.09 per share. The total cost of the convertible note hedge transactions was $73.3 million. In addition, the Company sold warrants whereby the holders of the warrants have the option to purchase a total of approximately 3.0 million shares of the Company’s common stock at a price of $171.98 per share. The Company received $40.4 million in cash proceeds from the sale of these warrants. Taken together, the purchase of the convertible note hedges and sale of the warrants are intended to offset any actual dilution from the conversion of the 2019 Notes and to effectively increase the overall conversion price from $116.09 per share to $171.98 per share. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity, are not accounted for as derivatives and are not remeasured each reporting period. The net costs incurred in connection with the convertible note hedge and warrant transactions were recorded as a reduction to additional paid-in capital on the condensed consolidated balance sheets.
The Company recorded a deferred tax liability of $27.5 million in connection with the debt discount associated with the 2019 Notes and recorded a deferred tax asset of $28.6 million in connection with the convertible note hedge transactions. The deferred tax liability and deferred tax assets are included in non-current deferred tax assets on the condensed consolidated balance sheets.
NOTE 9—LINE OF CREDIT
In August 2011, Restoration Hardware, Inc., along with its Canadian subsidiary, Restoration Hardware Canada, Inc., entered into a credit agreement (the “prior credit agreement”) with Bank of America, N.A., as administrative agent, and certain other lenders. On November 24, 2014, the Company amended its existing revolving line of credit by entering into an amended and restated credit agreement with the lenders party thereto and Bank of America, N.A. as administrative agent and collateral agent. The amended and restated credit agreement increased the existing revolving line of credit by $182.5 million, while eliminating the $15.0 million term loan facility under the existing revolving line of credit. Under the amended and restated credit agreement, which has a maturity date of November 24, 2019, the Company has the option to increase the amount of the revolving line of credit by up to an additional $200.0 million, subject to satisfaction of certain customary conditions at the time of such increase.
On August 12, 2015, Restoration Hardware, Inc. and Restoration Hardware Canada, Inc. entered into a First Amendment (the “Amendment”) to the amended and restated credit agreement. The Amendment changes the amended and restated credit agreement definition of “Change of Control” (the occurrence of which triggers a default under the amended and restated credit agreement) so that changes in the composition of the board of directors due to actual or threatened proxy solicitations are treated in the same way as other changes in the composition of the board of directors.
As of October 29, 2016, the Company did not have any amounts outstanding under the revolving line of credit. As of October 29, 2016, the Company had $586.3 million undrawn borrowing availability under the revolving line of credit. As of October 29, 2016 and January 30, 2016, the Company had $13.7 million and $15.0 million in outstanding letters of credit, respectively.
Borrowings under the revolving line of credit are subject to interest, at the borrowers’ option, at either the bank’s reference rate or LIBOR (or the Bank of America “BA” Rate or the Canadian Prime Rate, as such terms are defined in the credit agreement, for Canadian borrowings denominated in Canadian dollars or the United States Index Rate or LIBOR for Canadian borrowings denominated in United States dollars) plus an applicable margin rate, in each case.
The credit agreement contains various restrictive covenants, including, among others, limitations on the ability to incur liens, make loans or other investments, incur additional debt, issue additional equity, merge or consolidate with or into another person, sell assets, pay dividends or make other distributions, or enter into transactions with affiliates, along with other restrictions and limitations typical to credit agreements of this type and size. As of October 29, 2016, the Company was in compliance with all covenants contained in the credit agreement.
NOTE 10—FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Assets and Liabilities
Certain financial assets and liabilities are required to be carried at fair value. Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. In determining the fair value, the Company utilizes market data or assumptions that it believes market participants would use in pricing the asset or liability, which would maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, including assumptions about risk and the risks inherent in the inputs of the valuation technique.
16
The degree of judgment used in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Pricing observability is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction. Financial instruments with readily available active quoted prices for which fair value can be measured generally will have a higher degree of pricing observability and a lesser degree of judgment used in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have less, or no, pricing observability and a higher degree of judgment used in measuring fair value.
The Company’s financial assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories:
|
• |
Level 1—Quoted prices are available in active markets for identical investments as of the reporting date. |
|
• |
Level 2—Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies. |
|
• |
Level 3—Pricing inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment. The inputs used in the determination of fair value require significant management judgment or estimation. |
A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Fair Value Measurements
All of the Company’s investments are classified as available-for-sale and are carried at fair value. Assets measured at fair value were as follows (in thousands):
|
|
October 29, |
|
|
January 30, |
|
||||||||||||||||||
|
|
2016 |
|
|
2016 |
|
||||||||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Total |
|
||||||
Cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
6,443 |
|
|
$ |
— |
|
|
$ |
6,443 |
|
|
$ |
70 |
|
|
$ |
— |
|
|
$ |
70 |
|
Commercial paper |
|
|
— |
|
|
|
999 |
|
|
|
999 |
|
|
|
— |
|
|
|
46,726 |
|
|
|
46,726 |
|
Total cash equivalents |
|
|
6,443 |
|
|
|
999 |
|
|
|
7,442 |
|
|
|
70 |
|
|
|
46,726 |
|
|
|
46,796 |
|
Short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper |
|
|
— |
|
|
|
35,213 |
|
|
|
35,213 |
|
|
|
— |
|
|
|
15,488 |
|
|
|
15,488 |
|
Government agency obligations |
|
|
29,785 |
|
|
|
105,155 |
|
|
|
134,940 |
|
|
|
22,011 |
|
|
|
93,302 |
|
|
|
115,313 |
|
Total short-term investments |
|
|
29,785 |
|
|
|
140,368 |
|
|
|
170,153 |
|
|
|
22,011 |
|
|
|
108,790 |
|
|
|
130,801 |
|
Long-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agency obligations |
|
|
— |
|
|
|
21,056 |
|
|
|
21,056 |
|
|
|
7,829 |
|
|
|
14,225 |
|
|
|
22,054 |
|