UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 2, 2013
OR
o 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 001-09338
MICHAELS STORES, INC.
(Exact name of registrant as specified in its charter)
Delaware |
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75-1943604 |
(State or other jurisdiction of |
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(I.R.S. employer |
incorporation or organization) |
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identification number) |
8000 Bent Branch Drive
Irving, Texas 75063
(Address of principal executive offices, including zip code)
(972) 409-1300
(Registrants telephone number, including area code)
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 o No o
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
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 the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o |
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Accelerated filer o |
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Non-accelerated filer x |
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Smaller reporting company o |
(Do not check if a 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 o No x
As of December 6, 2013, 100 shares of the Registrants Common Stock were outstanding.
*The Registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, but is not required to file such reports under such sections.
FORM 10-Q
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3 | |
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4 | |
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5 | |
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6 | |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
23 | |
32 | ||
33 | ||
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34 | ||
34 | ||
35 | ||
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36 |
MICHAELS STORES, INC.
Item 1. Financial Statements.MICHAELS STORES, INC.
(in millions, except share data)
(Unaudited)
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November 2, |
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February 2, |
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October 27, |
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2013 |
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2013 |
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2012 |
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(Restated) |
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(Restated) |
| |||
ASSETS |
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|
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|
|
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| |||
Current assets: |
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|
|
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|
| |||
Cash and equivalents |
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$ |
68 |
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$ |
56 |
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$ |
161 |
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Merchandise inventories |
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1,119 |
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862 |
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1,078 |
| |||
Prepaid expenses and other |
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99 |
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86 |
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91 |
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Receivable from Parent |
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1 |
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|
| |||
Deferred income taxes |
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38 |
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37 |
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42 |
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Income tax receivable |
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20 |
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3 |
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17 |
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Total current assets |
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1,345 |
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1,044 |
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1,389 |
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Property and equipment, at cost |
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1,570 |
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1,502 |
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1,478 |
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Less accumulated depreciation and amortization |
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(1,217 |
) |
(1,164 |
) |
(1,134 |
) | |||
Property and equipment, net |
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353 |
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338 |
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344 |
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Goodwill |
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94 |
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94 |
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95 |
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Debt issuance costs, net of accumulated amortization of $57, $54, and $77, respectively |
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38 |
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46 |
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53 |
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Deferred income taxes |
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29 |
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30 |
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32 |
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Long-term receivable from Parent |
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5 |
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Other assets |
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2 |
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3 |
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4 |
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Total non-current assets |
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168 |
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173 |
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184 |
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Total assets |
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$ |
1,866 |
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$ |
1,555 |
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$ |
1,917 |
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LIABILITIES AND STOCKHOLDERS DEFICIT |
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Current liabilities: |
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Accounts payable |
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$ |
467 |
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$ |
263 |
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$ |
374 |
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Accrued liabilities and other |
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342 |
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367 |
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424 |
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Share-based compensation |
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21 |
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35 |
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30 |
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Current portion of long-term debt |
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203 |
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150 |
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180 |
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Deferred income taxes |
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4 |
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4 |
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1 |
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Income taxes payable |
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6 |
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37 |
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6 |
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Total current liabilities |
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1,043 |
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856 |
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1,015 |
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Long-term debt |
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2,878 |
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2,891 |
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3,188 |
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Deferred income taxes |
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2 |
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2 |
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11 |
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Share-based compensation |
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28 |
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27 |
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24 |
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Other long-term liabilities |
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86 |
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83 |
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86 |
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Total long-term liabilities |
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2,994 |
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3,003 |
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3,309 |
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Total liabilities |
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4,037 |
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3,859 |
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4,324 |
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Commitments and contingencies Stockholders deficit: |
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Common Stock, $0.10 par value, 100 shares authorized; 100 shares issued and outstanding |
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Additional paid-in capital |
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63 |
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49 |
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51 |
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Accumulated deficit |
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(2,238 |
) |
(2,359 |
) |
(2,464 |
) | |||
Accumulated other comprehensive income |
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4 |
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6 |
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6 |
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Total stockholders deficit |
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(2,171 |
) |
(2,304 |
) |
(2,407 |
) | |||
Total liabilities and stockholders deficit |
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$ |
1,866 |
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$ |
1,555 |
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$ |
1,917 |
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See accompanying notes to consolidated financial statements.
MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(Unaudited)
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Quarter Ended |
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Nine Months Ended |
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November 2, |
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October 27, |
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November 2, |
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October 27, |
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2013 |
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2012 |
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2013 |
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2012 |
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(Restated) |
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(Restated) |
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Net sales |
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$ |
1,118 |
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$ |
1,014 |
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$ |
3,015 |
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$ |
2,884 |
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Cost of sales and occupancy expense |
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665 |
|
612 |
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1,816 |
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1,736 |
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Gross profit |
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453 |
|
402 |
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1,199 |
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1,148 |
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Selling, general, and administrative expense |
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309 |
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277 |
|
835 |
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787 |
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Share-based compensation expense |
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4 |
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2 |
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15 |
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9 |
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Related party expenses |
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3 |
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3 |
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10 |
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10 |
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Store pre-opening costs |
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2 |
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3 |
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5 |
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5 |
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Operating income |
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135 |
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117 |
|
334 |
|
337 |
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Interest expense |
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45 |
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60 |
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137 |
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187 |
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Refinancing costs and losses on early extinguishment of debt |
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3 |
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7 |
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3 |
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Other (income) and expense, net |
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1 |
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(1 |
) | ||||
Income before income taxes |
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90 |
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54 |
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189 |
|
148 |
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Provision for income taxes |
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32 |
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19 |
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68 |
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53 |
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Net income |
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58 |
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35 |
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121 |
|
95 |
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Other comprehensive income, net of tax: |
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Foreign currency translation adjustment and other |
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(2 |
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Comprehensive income |
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$ |
58 |
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$ |
35 |
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$ |
119 |
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$ |
95 |
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See accompanying notes to consolidated financial statements.
MICHAELS STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
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Nine Months Ended |
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November 2, |
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October 27, |
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2013 |
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2012 |
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(Restated) |
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Operating activities: |
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Net income |
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$ |
121 |
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$ |
95 |
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Adjustments: |
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Depreciation and amortization |
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74 |
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71 |
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Share-based compensation expense |
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19 |
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15 |
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Debt issuance costs amortization |
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6 |
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12 |
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Accretion of long-term debt |
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(1 |
) |
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Refinancing costs and losses on early extinguishment of debt |
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7 |
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3 |
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Changes in assets and liabilities: |
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Merchandise inventories |
|
(254 |
) |
(233 |
) | ||
Prepaid expenses and other |
|
(13 |
) |
(11 |
) | ||
Accounts payable |
|
211 |
|
72 |
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Accrued interest |
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(29 |
) |
36 |
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Accrued liabilities and other |
|
(21 |
) |
(15 |
) | ||
Income taxes |
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(49 |
) |
(33 |
) | ||
Other long-term liabilities |
|
3 |
|
1 |
| ||
Net cash provided by operating activities |
|
74 |
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13 |
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Investing activities: |
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Additions to property and equipment |
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(82 |
) |
(85 |
) | ||
Net cash used in investing activities |
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(82 |
) |
(85 |
) | ||
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Financing activities: |
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|
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Issuance of senior notes due 2018 |
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213 |
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Redemption of senior subordinated notes due 2016 |
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(127 |
) | ||
Repurchase of subordinated discount notes due 2016 |
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(142 |
) |
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Repayments on senior secured term loan facility |
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(8 |
) |
(209 |
) | ||
Borrowings on asset-based revolving credit facility |
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389 |
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Payments on asset-based revolving credit facility |
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(203 |
) |
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Payments of debt issuance costs |
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|
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(8 |
) | ||
Payment of capital leases |
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|
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(2 |
) | ||
Change in cash overdraft |
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(9 |
) |
(5 |
) | ||
Payments on behalf of Parent |
|
(7 |
) |
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Net cash provided by (used in) financing activities |
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20 |
|
(138 |
) | ||
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Net increase (decrease) in cash and equivalents |
|
12 |
|
(210 |
) | ||
Cash and equivalents at beginning of period |
|
56 |
|
371 |
| ||
Cash and equivalents at end of period |
|
$ |
68 |
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$ |
161 |
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|
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Supplemental Cash Flow Information: |
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|
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Cash paid for interest |
|
$ |
160 |
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$ |
138 |
|
Cash paid for income taxes |
|
$ |
115 |
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$ |
85 |
|
See accompanying notes to consolidated financial statements.
MICHAELS STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter and Nine Months Ended November 2, 2013
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Michaels Stores, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. All expressions of the Company, Michaels, us, we, our, and all similar expressions are references to Michaels Stores, Inc. and its consolidated, wholly-owned subsidiaries, unless otherwise expressly stated or the context otherwise requires.
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended February 2, 2013.
The balance sheet at February 2, 2013 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring accruals and other items) considered necessary for a fair presentation have been included.
Because of the seasonal nature of our business, the results of operations for the quarter and nine months ended November 2, 2013 are not indicative of the results to be expected for the entire year.
We report on the basis of a 52- or 53-week fiscal year, which ends on the Saturday closest to January 31. All references herein to fiscal 2013 relate to the 52 weeks ending February 1, 2014, and all references to fiscal 2012 relate to the 53 weeks ended February 2, 2013. In addition, all references herein to the third quarter of fiscal 2013 relate to the 13 weeks ended November 2, 2013, and all references to the third quarter of fiscal 2012 relate to the 13 weeks ended October 27, 2012. Finally, all references to the nine months ended November 2, 2013 relate to the 39 weeks ended November 2, 2013, and the nine months ended October 27, 2012 relate to the 39 weeks ended October 27, 2012.
Recent Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss or a Tax Credit Carryforward Exists. ASU 2013-11 requires unrecognized tax benefits to be presented as a decrease in a net operating loss, similar tax loss or tax credit carryforward if certain criteria are met. ASU 2013-11, which is prospective, is effective for reporting periods beginning after December 15, 2013, with earlier adoption permitted. Beginning with the fourth quarter of fiscal year 2012, the Company has reported unrecognized tax benefits consistent with ASU No. 2013-11.
Note 2. Restatement Share-based Compensation
The Company determined its previously issued unaudited interim consolidated financial statements for the three and nine months ended October 27, 2012, contained an error with respect to ASC 718, Compensation Stock Compensation. The accounting error was material to fiscal 2011 and fiscal 2012 financial statements and those financial statements required restatement. As a result, the Company is also restating its financial statements for the three and nine months ended October 27, 2012. Specifically, former participants in the Companys Equity Incentive Plan and its successor Plan (The Michaels Companies, Inc. (Parent) Equity Incentive Plan, together the Plan) exercised stock options upon their termination from the Company, and the Company repurchased the immature shares. Immature shares are defined as shares held for less than six months following exercise. The Company consistently repurchased shares in this manner and therefore, under accounting rules, established a pattern of repurchasing immature shares during the third quarter of 2011. The Company determined all stock options should have been treated as liability awards in accordance with the rules of ASC 718-10-25-9. Under liability accounting, the Company re-measures the fair value of stock compensation each period and recognizes changes in fair value as awards vest and until the award is settled. The Company originally
recognized expense ratably over the vesting period based on the grant date fair value of the option in accordance with the fixed method of accounting. The impact to share-based compensation cost for the three and nine months ended October 27, 2012, was $2 million ($1, net of tax) and $12 million ($7, net of tax), respectively.
The following tables illustrate the correction as associated with certain line items in the unaudited interim consolidated financial statements (amounts in millions):
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Consolidated Balance Sheet |
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|
As of October 27, 2012 |
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|
(unaudited) |
| |||||||
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|
As |
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Share-based |
|
As |
| |||
Merchandise inventories |
|
$ |
1,076 |
|
$ |
2 |
|
$ |
1,078 |
|
Total current assets |
|
1,387 |
|
2 |
|
1,389 |
| |||
Deferred income taxes |
|
18 |
|
14 |
|
32 |
| |||
Total non-current assets |
|
170 |
|
14 |
|
184 |
| |||
Share-based compensation |
|
|
|
30 |
|
30 |
| |||
Income taxes payable |
|
8 |
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(2 |
) |
6 |
| |||
Total current liabilities |
|
987 |
|
28 |
|
1,015 |
| |||
Share-based compensation |
|
|
|
24 |
|
24 |
| |||
Total long-term liabilities |
|
3,285 |
|
24 |
|
3,309 |
| |||
Additional paid-in capital |
|
61 |
|
(10 |
) |
51 |
| |||
Accumulated deficit |
|
(2,438 |
) |
(26 |
) |
(2,464 |
) | |||
Total stockholders deficit |
|
(2,371 |
) |
(36 |
) |
(2,407 |
) | |||
|
|
Consolidated Statements of Comprehensive Income |
| |||||||
|
|
Quarter Ended October 27, 2012 |
| |||||||
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|
(unaudited) |
| |||||||
|
|
As |
|
Share-based |
|
As |
| |||
Cost of sales and occupancy expense |
|
$ |
611 |
|
$ |
1 |
|
$ |
612 |
|
Gross Profit |
|
403 |
|
(1 |
) |
402 |
| |||
Selling, general and administrative expense |
|
278 |
|
(1 |
) |
277 |
| |||
Share-based compensation expense |
|
|
|
2 |
|
2 |
| |||
Operating income |
|
119 |
|
(2 |
) |
117 |
| |||
Income before income taxes |
|
56 |
|
(2 |
) |
54 |
| |||
Provision for income taxes |
|
20 |
|
(1 |
) |
19 |
| |||
Net income |
|
36 |
|
(1 |
) |
35 |
| |||
Comprehensive income |
|
36 |
|
(1 |
) |
35 |
| |||
|
|
Consolidated Statements of Comprehensive Income |
| |||||||
|
|
Nine Months Ended October 27, 2012 |
| |||||||
|
|
(unaudited) |
| |||||||
|
|
As |
|
Share-based |
|
As |
| |||
Cost of sales and occupancy expense |
|
$ |
1,730 |
|
$ |
6 |
|
$ |
1,736 |
|
Gross Profit |
|
1,154 |
|
(6 |
) |
1,148 |
| |||
Selling, general and administrative expense |
|
790 |
|
(3 |
) |
787 |
| |||
Share-based compensation expense |
|
|
|
9 |
|
9 |
| |||
Operating income |
|
349 |
|
(12 |
) |
337 |
| |||
Income before income taxes |
|
160 |
|
(12 |
) |
148 |
| |||
Provision for income taxes |
|
58 |
|
(5 |
) |
53 |
| |||
Net income |
|
102 |
|
(7 |
) |
95 |
| |||
Comprehensive income |
|
102 |
|
(7 |
) |
95 |
| |||
|
|
Cash Flow Data |
| ||||||
|
|
Nine Months Ended October 27, 2012 |
| ||||||
|
|
(unaudited) |
| ||||||
|
|
As |
|
Share-based |
|
As |
| ||
Operating Activities: |
|
|
|
|
|
|
| ||
Net income |
|
$ |
102 |
|
(7 |
) |
$ |
95 |
|
Share-based compensation and other |
|
4 |
|
11 |
|
15 |
| ||
Merchandise inventories |
|
(236 |
) |
3 |
|
(233 |
) | ||
Accrued liabilities and other |
|
(11 |
) |
(4 |
) |
(15 |
) | ||
Income taxes |
|
(27 |
) |
(6 |
) |
(33 |
) | ||
Net cash provided by operating activities |
|
16 |
|
(3 |
) |
13 |
| ||
Repurchase of Common Stock |
|
(10 |
) |
10 |
|
|
| ||
Proceeds from stock options exercised |
|
7 |
|
(7 |
) |
|
| ||
Net cash used in financing activities |
|
(141 |
) |
3 |
|
(138 |
) | ||
Note 3. Debt
On November 22, 2013, the Audit Committee of our Board of Directors (the Audit Committee), after considering the recommendation of management and discussing with Ernst & Young LLP, our independent registered public accounting firm, concluded it was necessary to restate our previously issued consolidated financial statements for the fiscal years ended February 2, 2013 and January 28, 2012. In connection with the preparation of our Quarterly Report on Form 10-Q for the quarterly period ended November 2, 2013, we determined that we had incorrectly accounted for certain stock compensation transactions under the Financial Accounting Standards Board Accounting Standards Codification (ASC) Topic 718 Compensation Stock Compensation. The Companys covenants for its outstanding debt require annual and quarterly financial statements prepared in accordance with GAAP to be provided within 45 or 90 days of the end of the period. As a result of the restatement described above and in Note 2 to the consolidated financial statements, the Company rescinded its previously issued financial statements for fiscal 2011 and fiscal 2012 and the first and second quarters of 2013. The Company believes it has cured the potential defect through the filing with the Securities and Exchange Commission of its amended fiscal 2011 and fiscal 2012 audited consolidated financial statements on December 2, 2013 and its unaudited quarterly financial statements for the first and second quarter of fiscal 2013 on December 9, 2013. The Company is in compliance with the other terms and conditions of all debt agreements for all periods presented. Our outstanding debt is detailed in the table below.
|
|
November 2, 2013 |
|
February 2, 2013 |
|
October 27, 2012 |
|
Interest Rate |
| |||
|
|
(in millions) |
|
|
| |||||||
|
|
|
|
|
|
|
|
|
| |||
Senior secured term loan |
|
$ |
1,632 |
|
$ |
1,640 |
|
$ |
1,787 |
|
Variable |
|
Senior notes |
|
1,007 |
|
1,007 |
|
1,008 |
|
7.750% |
| |||
Senior subordinated notes |
|
255 |
|
393 |
|
393 |
|
11.375% |
| |||
Subordinated discount notes |
|
|
|
|
|
180 |
|
13.000% |
| |||
Asset-based revolving credit facility |
|
187 |
|
1 |
|
|
|
Variable |
| |||
|
|
|
|
|
|
|
|
|
| |||
Total debt |
|
3,081 |
|
3,041 |
|
3,368 |
|
|
| |||
|
|
|
|
|
|
|
|
|
| |||
Less current portion |
|
203 |
|
150 |
|
180 |
|
|
| |||
|
|
|
|
|
|
|
|
|
| |||
Long-term debt |
|
$ |
2,878 |
|
$ |
2,891 |
|
$ |
3,188 |
|
|
|
113/8% Senior Subordinated Notes due 2016
On January 28, 2013, we caused to be delivered to the holders of our outstanding 113/8% Senior Subordinated Notes due November 1, 2016 (the Senior Subordinated Notes) an irrevocable notice relating to the redemption of $137 million in aggregate principal amount of the Senior Subordinated Notes. On February 27, 2013, we redeemed the $137 million of Senior Subordinated Notes at a redemption price equal to 103.792%. In accordance with Accounting Standards Codification (ASC) 470 Debt, we recorded a loss on early extinguishment of debt of approximately $7 million related to the partial redemption of our Senior Subordinated Notes. The $7 million loss is comprised of a $5 million redemption premium and $2 million to write off related debt issuance costs.
Restated Revolving Credit Facility
As of November 2, 2013, the borrowing base of our restated senior secured asset-based revolving credit facility (the Restated Revolving Credit Facility) was $650 million, of which we had $187 million in borrowings, $62 million of outstanding letters of credit and the unused borrowing capacity was $401 million.
Restated Term Loan Credit Facility
The Company is required to make scheduled quarterly payments, each equal to 0.25% of the original principal amount of the term loans, subject to adjustments relating to the incurrence of additional term loans under our senior secured term loan facility (Restated Term Loan Credit Facility), for the first six years and three quarters, with the balance paid on January 28, 2020. The Company paid $4 million and $8 million for the quarter and nine months ended November 2, 2013, respectively and the current portion of debt includes $16 million that will be paid during the next four quarters.
Note 4. Comprehensive Income
Accumulated other comprehensive income, net of tax, is reflected in the Consolidated Balance Sheets as follows:
|
|
Foreign Currency |
| |
|
|
(in millions) |
| |
Balance at February 2, 2013 |
|
$ |
6 |
|
Foreign currency translation adjustment and other |
|
(2 |
) | |
Balance at November 2, 2013 |
|
$ |
4 |
|
Note 5. Fair Value Measurements
As defined in ASC 820, Fair Value Measurements and Disclosures, 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. ASC 820 establishes a three-level valuation hierarchy for fair value measurements. These valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect less transparent active market data, as well as internal assumptions. These two types of inputs create the following fair value hierarchy:
· Level 1 Quoted prices for identical instruments in active markets;
· Level 2 Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant inputs are observable; and
· Level 3 Instruments with significant unobservable inputs.
We apply fair value techniques on a non-recurring basis for the establishment of potential impairment loss related to goodwill pursuant to ASC 350, IntangiblesGoodwill and Other and determining the fair value of long-lived assets pursuant to ASC 360, Property, Plant, and Equipment. During the quarter and nine months ended November 2, 2013, there were no material events or changes in circumstances indicating the carrying amounts of our goodwill or long-lived assets may not be recoverable.
The table below provides the carrying and fair values of our Restated Term Loan Credit Facility, our 7 3/4% Senior Notes that mature in 2018 (2018 Senior Notes) and our Senior Subordinated Notes, (together, with our 2018 Senior Notes, our notes ) as of November 2, 2013. The fair value of our Restated Term Loan Credit Facility was determined based on quoted market prices of similar instruments which are considered Level 2 inputs within the fair value hierarchy. The fair value of our notes was determined based on recent trades which are considered Level 1 inputs within the fair value hierarchy.
|
|
Carrying Value |
|
Fair Value |
| ||
|
|
(in millions) |
| ||||
Senior secured term loan |
|
$ |
1,632 |
|
$ |
1,641 |
|
Senior notes |
|
1,007 |
|
1,085 |
| ||
Senior subordinated notes |
|
255 |
|
262 |
| ||
Note 6. Income Taxes
The effective tax rate was 35.6% for the third quarter of fiscal 2013. The effective tax rate was 35.2% for the third quarter of fiscal 2012. The current year tax rate is higher than the prior year tax rate due primarily to the reduced rate impact of our permanent adjustments as a result of our greater profit before tax.
The effective tax rate was 36.0% for the first nine months of fiscal 2013. The effective tax rate was 35.8% for the first nine months of fiscal 2012. The rate was higher than the prior year nine month tax rate due primarily to the reduced rate impact of our permanent adjustments as a result of our greater profit before tax. We currently estimate our annualized effective tax rate for fiscal 2013 to be 37.0%.
Note 7. Commitments and Contingencies
We are involved in ongoing legal and regulatory proceedings. Other than those described in the following paragraphs, there were no material changes to our disclosures of commitments and contingencies from our Annual Report on Form 10-K for the fiscal year ended February 2, 2013 and our Quarterly Report on Form 10-Q for the quarterly periods ended May 4, 2013 and August 3, 2013.
Employee Claims
Rea Claim
On September 15, 2011, the Company was served with a lawsuit filed in the California Superior Court in and for the County of Orange (Superior Court) by four former store managers as a purported class action proceeding on behalf of themselves and certain former and current store managers employed by Michaels stores in California. The lawsuit alleges that the Company improperly classified its store managers as exempt employees and as such failed to pay all wages, overtime, waiting time penalties and failed to provide accurate wage statements. The lawsuit also alleges that the foregoing conduct was in breach of various laws, including Californias unfair competition law. The plaintiffs have pled less than five million dollars in damages, penalties, costs of
suit and attorneys fees, exclusive of interest. On December 3, 2013, the Superior Court entered an order certifying a class of approximately 200 members and the Company is considering its options with respect to the ruling. We believe we have meritorious defenses and intend to defend the lawsuit vigorously. We do not believe the resolution of the lawsuit will have a material effect on our consolidated financial statements.
Consumer Class Action Claims
California Zip Code Claims
On August 15, 2008, Linda Carson, a consumer, filed a purported class action proceeding against Michaels Stores, Inc. in the Superior Court of California, County of San Diego (San Diego Superior Court), on behalf of herself and all similarly-situated California consumers. The Carson lawsuit alleges that Michaels unlawfully requested and recorded personally identifiable information (i.e., her zip code) as part of a credit card transaction. The plaintiff sought statutory penalties, costs, interest, and attorneys fees. We contested certification of this claim as a class action and filed a motion to dismiss the claim. On March 9, 2009, the Court dismissed the case with prejudice. The plaintiff appealed this decision to the California Court of Appeals for the Fourth District, San Diego. On July 22, 2010, the Court of Appeals upheld the dismissal of the case. The plaintiff appealed this decision to the Supreme Court of California (California Supreme Court). On September 29, 2010, the California Supreme Court granted the plaintiffs petition for review; however, it stayed any further proceedings in the case until another similar zip code case pending before the court, Pineda v. Williams-Sonoma, was decided. On February 10, 2011, the California Supreme Court ruled, in the Williams-Sonoma case, that zip codes are personally identifiable information and therefore the Song-Beverly Credit Card Act of 1971, as amended (Song Act), prohibits businesses from requesting or requiring zip codes in connection with a credit card transaction. On or about April 6, 2011, the Supreme Court transferred the Carson case back to the Court of Appeals with directions to the Court to reconsider its decision in light of the Pineda decision. Upon reconsideration, the Court of Appeals remanded the case back to the San Diego Superior Court on May 31, 2011.
Additionally, since the California Supreme Court decision on February 10, 2011, three additional purported class action lawsuits alleging violations of the Song Act have been filed against the Company: Carolyn Austin v. Michaels Stores, Inc. and Tiffany Heon v. Michaels Stores, Inc., both in the San Diego Superior Court and Sandra A. Rubinstein v. Michaels Stores, Inc. in the Superior Court of California, County of Los Angeles, Central Division. The Rubinstein case was transferred to the San Diego Superior Court. An order coordinating the cases has been entered and plaintiffs filed a Consolidated Complaint on April 24, 2012. Plaintiffs seek damages, civil penalties, common settlement fund recovery, attorney fees, costs of suit and prejudgment interest. The parties mediated the matter in March and a tentative settlement was reached for an amount that will not have a material effect on our Consolidated Financial Statements. On December 6, 2013, the Court advised that it was granting preliminary approval of the settlement agreement.
General
In addition to the litigation discussed above, we are, and in the future, may be involved in various other lawsuits, claims and proceedings incident to the ordinary course of business. The results of litigation are inherently unpredictable. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in diversion of significant resources.
ASC 450, Contingencies, governs the disclosure and recognition of loss contingencies, including potential losses from litigation and regulatory matters. It imposes different requirements for the recognition and disclosure of loss contingencies based on the likelihood of occurrence of the contingent future event or events. It distinguishes among degrees of likelihood using the following three terms: probable, meaning that the future event or events are likely to occur; remote, meaning that the chance of the future event or events occurring is slight; and reasonably possible, meaning that the chance of the future event or events occurring is more than remote but less than likely. In accordance with ASC 450, the Company accrues for a loss contingency when we conclude that the likelihood of a loss is probable and the amount of the loss can be reasonably estimated. When the loss cannot be reasonably estimated we estimate the range of amounts, and if no amount in the range constitutes a better estimate than any other amount, we accrue for the amount at the low end of the range. We adjust our accruals from time to time as we receive additional information, but the loss we incur may be significantly greater than or less than the amount we have accrued. We disclose loss contingencies if there is at least a reasonable possibility that a material loss has been incurred. No accrual or disclosure is required for losses that are remote.
For the matters disclosed above, as well as other matters previously disclosed in the Companys filings with the Securities and Exchange Commission (SEC), the Company is currently able to estimate a reasonably possible loss or range of loss in excess of amounts accrued (if any). For some of the matters included within this estimation, an accrual has been made because a loss is believed to be both probable and reasonably estimable, but an exposure to loss exists in excess of the amount accrued; in these cases, the estimate reflects the reasonably possible range of loss in excess of the accrued amount. For other matters included within this estimation, no accrual has been made because a loss, although estimable, is believed to be reasonably possible, but not probable; in
these cases the estimate reflects the reasonably possible loss or range of loss within the ranges identified. For the various ranges identified, the aggregate of these estimated amounts is approximately $6 million, which is also inclusive of amounts accrued by the Company.
For other matters previously disclosed in the Companys filings with the SEC, the Company is not currently able to estimate the reasonably possible loss or range of loss, and has indicated such. Many of these matters remain in preliminary stages (even in some cases where a substantial period of time has passed since the commencement of the matter), with few or no substantive legal decisions by the court defining the scope of the claims, the class (if any), or the potentially available damages, and fact discovery is still in progress or has not yet begun. For all these reasons, the Company cannot at this time estimate the reasonably possible loss or range of loss, if any, for these matters.
It is the opinion of the Companys management, based on current knowledge and after taking into account its current legal accruals, the eventual outcome of all matters described in this Note would not be likely to have a material impact on the consolidated financial condition of the Company. Nonetheless, given the substantial or indeterminate amounts sought in certain of these matters, and the inherent unpredictability of such matters, an adverse outcome in certain of these matters could, from time to time, have a material effect on the Companys consolidated results of operations or cash flows in particular quarterly or annual periods.
Note 8. The Michaels Companies and its Subsidiaries
In July 2013, Michaels was reorganized into a holding company structure (Reorganization). The Michaels Companies, Inc. (Parent), Michaels FinCo Holdings, LLC (FinCo Holdings), Michaels FinCo, Inc. ( FinCo Inc) and Michaels Funding, Inc. (Holdings) and Michaels Stores Merger Co, Inc. (MergerCo) were formed in connection with the Reorganization: (i) MergerCo was merged with and into Michaels with Michaels being the surviving corporation; (ii) each share of Michaels common stock was converted into the right to receive one share of Parent common stock, subject to the same vesting conditions, if any, as applied to the share so converted, and each such share of Michaels common stock was cancelled and retired and ceased to exist; and (iii) each option to purchase one or more shares of common stock of Michaels was assumed by Parent and converted into an option to purchase an equivalent number of shares of common stock of Parent with the remaining terms of each such option remaining unchanged except as was necessary to reflect the Reorganization. Approximately 118 million shares of Michaels common stock were converted into Parent common stock. The Michaels shares were then cancelled and retired and an amount equal to the par value of the original shares was transferred from the common stock account to paid-in capital. Michaels then issued 100 shares of stock with a $0.10 par value to Holdings. In addition, common stock issued and outstanding and additional paid-in capital for February 2, 2013 and October 27, 2012 on the Consolidated Balance Sheets have been adjusted to reflect this transaction as if it happened prior to those dates.
As a result of the Reorganization, FinCo Holdings is wholly owned by the Parent. FinCo Inc and Holdings are wholly owned by FinCo Holdings. Michaels is wholly owned by Holdings.
Subsequent to the Reorganization, on July 29, 2013, FinCo Holdings and FinCo Inc issued $800 million aggregate principal amount of 7.50%/8.25% PIK Toggle Notes due 2018 (PIK Notes). The PIK Notes were issued in a private transaction. Interest payments on the PIK Notes are due February 1 and August 1 of each year until maturity. The first two interest payments and the last interest payment are required to be paid entirely in cash. All other interest payments must be made in cash, except that all or a portion of the interest on the PIK Notes may be paid by increasing the principal amount of the outstanding PIK Notes or by issuing additional PIK Notes depending on the amount of cash dividends that can be paid by the Company under our credit agreements governing our Senior Secured Credit Facilities, the terms of the indentures governing our outstanding notes and the terms of our other indebtedness outstanding at the time. The proceeds from the debt issuance were approximately $782 million, after deducting the initial purchasers discount and estimated fees and expenses. FinCo Holdings distributed the net proceeds to Parent and the proceeds were used to fund a cash dividend to the Parents equity and equity-award holders and pay related fees and expenses.
The PIK Notes are senior unsecured obligations of FinCo Holdings and FinCo Inc. The PIK Notes are not guaranteed by the Company, Holdings or any of their subsidiaries, but the indenture governing the PIK Notes contains restrictive covenants that apply to FinCo Holdings and its restricted subsidiaries, including the Company, Holdings and their subsidiaries, and a breach of such covenants would cause FinCo Holdings and FinCo Inc to be in default under the indenture governing the PIK Notes. In addition, neither the PIK Notes nor the dividend transaction is reflected in the financial statements of the Company. The cash interest payments due February 1, 2014 and August 1, 2014 total approximately $61 million. If interest on the PIK Notes for all interest periods is paid in cash, annual interest payments will total $60 million or a total of approximately $301 million from July 29, 2013 until August 1, 2018, the maturity date. Any cash interest payments will be funded by the Company through a cash dividend to Holdings.
Note 9. Segments and Geographic Information
We consider our Michaels U.S., Michaels Canada, Aaron Brothers and online scrapbooking business operations to be our operating segments for purposes of determining reportable segments based on the criteria of ASC 280, Segment Reporting. We determined that our Michaels U.S., Michaels Canada, and Aaron Brothers operating segments have similar economic characteristics and meet the aggregation criteria set forth in ASC 280. Therefore, we combine those operating segments into one reporting segment. During the second quarter of 2013, the online scrapbooking business was discontinued; as an operating segment, it is immaterial to the financial statements as a whole.
Our sales and assets by country are as follows:
|
|
Quarter Ended |
|
Nine Months Ended |
| ||||||||
|
|
November 2, 2013 |
|
October 27, 2012 |
|
November 2, 2013 |
|
October 27, 2012 |
| ||||
|
|
(in millions) |
| ||||||||||
Net Sales: |
|
|
|
|
|
|
|
|
| ||||
United States |
|
$ |
1,013 |
|
$ |
915 |
|
$ |
2,731 |
|
$ |
2,617 |
|
Canada |
|
105 |
|
99 |
|
284 |
|
267 |
| ||||
Consolidated Total |
|
$ |
1,118 |
|
$ |
1,014 |
|
$ |
3,015 |
|
$ |
2,884 |
|
|
|
November 2, 2013 |
|
February 2, 2013 |
|
October 27, 2012 |
| |||
|
|
|
|
(Restated) |
|
(Restated) |
| |||
|
|
(in millions) |
| |||||||
Total Assets: |
|
|
|
|
|
|
| |||
United States |
|
$ |
1,728 |
|
$ |
1,446 |
|
$ |
1,777 |
|
Canada |
|
138 |
|
109 |
|
140 |
| |||
Consolidated Total |
|
$ |
1,866 |
|
$ |
1,555 |
|
$ |
1,917 |
|
Our chief operating decision makers evaluate historical operating performance, plan and forecast future periods operating performance based on earnings before interest, income taxes, depreciation, amortization, and refinancing costs and losses on early extinguishment of debt (EBITDA (excluding refinancing costs and losses on early extinguishment of debt)). We believe EBITDA (excluding refinancing costs and losses on early extinguishment of debt) represents the financial measure that more closely reflects the operating effectiveness of factors over which management has control. As such, an element of base incentive compensation targets for certain management personnel are based on EBITDA (excluding refinancing costs and losses on early extinguishment of debt). A reconciliation of EBITDA (excluding refinancing costs and losses on early extinguishment of debt) to Net income is presented below.
|
|
Quarter Ended |
|
Nine Months Ended |
| ||||||||
|
|
November 2, 2013 |
|
October 27, 2012 |
|
November 2, 2013 |
|
October 27, 2012 |
| ||||
|
|
|
|
(Restated) |
|
|
|
(Restated) |
| ||||
|
|
(in millions) |
| ||||||||||
Net income |
|
$ |
58 |
|
$ |
35 |
|
$ |
121 |
|
$ |
95 |
|
Interest expense |
|
45 |
|
60 |
|
137 |
|
187 |
| ||||
Refinancing costs and losses on early extinguishments of debt |
|
|
|
3 |
|
7 |
|
3 |
| ||||
Provision for income taxes |
|
32 |
|
19 |
|
68 |
|
53 |
| ||||
Depreciation and amortization |
|
24 |
|
25 |
|
74 |
|
71 |
| ||||
EBITDA (excluding refinancing costs and losses on early extinguishments of debt) |
|
$ |
159 |
|
$ |
142 |
|
$ |
407 |
|
$ |
409 |
|
Note 10. Related Party Transactions
We pay annual management fees to Bain Capital Partners, LLC (Bain Capital) and The Blackstone Group L.P. (The Blackstone Group and, together with Bain Capital, the Sponsors) and Highfields Capital Management LP in the amount of $12 million and $1 million, respectively. We recognized $3 million of expense related to annual management fees during each of the third quarters of fiscal 2013 and fiscal 2012 and $10 million during each of the nine months ended November 2, 2013 and October 27, 2012. These expenses are included in related party expenses on the Consolidated Statements of Comprehensive Income.
Bain Capital owns a majority equity position in LogicSource, an external vendor we utilize for print procurement services. Payments associated with this vendor during the third quarters of fiscal 2013 and fiscal 2012 were $2 million and $1 million,
respectively and were $4 million and $3 million during the nine months ended November 2, 2013 and October 27, 2012, respectively. These expenses are included in Selling, general and administrative expense on the Consolidated Statements of Comprehensive Income.
The Blackstone Group owns a majority equity position in Brixmor Properties Group, a vendor we utilize to lease certain properties. Payments associated with this vendor were $1 million during each of the third quarters of fiscal 2013 and fiscal 2012. Payments associated with this vendor were $3 million during each of the nine months ended November 2, 2013 and October 27, 2012. These expenses are included in Cost of sales and occupancy expense in the Consolidated Statements of Comprehensive Income.
The Blackstone Group owns a majority equity position in RGIS, an external vendor we utilize to count our store inventory. Payments associated with this vendor were $2 million during each of the third quarters of fiscal 2013 and fiscal 2012. Payments associated with this vendor were $5 million and $6 million during the nine months ended November 2, 2013 and October 27, 2012, respectively. These expenses are included in Selling, general and administrative expense on the Consolidated Statements of Comprehensive Income.
The Blackstone Group owns a majority equity position in Vistar, an external vendor we utilize for all of the candy-type items in our stores. Payments associated with this vendor were $5 million during each of the third quarters of fiscal 2013 and fiscal 2012. Payments associated with this vendor were $17 million and $16 million during the nine months ended November 2, 2013 and October 27, 2012, respectively. These expenses are recognized in cost of sales as the sales are recorded.
Our current directors (other than Jill A. Greenthal, John J. Mahoney and Carl S. Rubin) are affiliates of Bain Capital or The Blackstone Group. As such, some or all of such directors may have an indirect material interest in payments with respect to debt securities of the Company that have been purchased by affiliates of Bain Capital and The Blackstone Group. As of November 2, 2013, affiliates of The Blackstone Group held $33 million of our Restated Term Loan Credit Facility.
As a result of the Reorganization discussed in Note 8, at November 2, 2013, the Company has recorded a receivable from Parent of $6 million for payments made by the Company primarily related to the repurchase of Parent stock from former Company officers. Amounts paid by the Company on Parents behalf related to the dividend payment discussed in Note 8, and stock option exercises discussed above were $3 million for the quarter ended November 2, 2013 and $23 million for the nine months ended November 2, 2013.
Note 11. Condensed Consolidating Financial Information
All obligations of the Company under its notes, the Restated Revolving Credit Facility and the Restated Term Loan Credit Facility are guaranteed by each of its subsidiaries other than Aaron Brothers Card Services, LLC, Artistree of Canada, ULC and Michaels Stores of Puerto Rico, LLC and will be guaranteed by its direct parent, Holdings. As of November 2, 2013, the financial statements of Aaron Brothers Card Services, LLC, Artistree of Canada, ULC and Michaels Stores of Puerto Rico, LLC were immaterial. Each subsidiary guarantor is 100% owned, directly or indirectly, by the Company and such guarantees of each subsidiary guarantor are (and the guarantee of Holdings will be) joint and several and full and unconditional.
The following condensed consolidating financial information represents the financial information of Michaels Stores, Inc. and its wholly-owned subsidiary guarantors, prepared on the equity basis of accounting. The information is presented in accordance with the requirements of Rule 3-10 under the SECs Regulation S-X. The financial information may not necessarily be indicative of results of operations, cash flows, or financial position had the subsidiary guarantors operated as independent entities.
Supplemental Condensed Consolidating Balance Sheet
|
|
November 2, 2013 |
| ||||||||||
|
|
Parent |
|
Guarantor |
|
Eliminations |
|
Consolidated |
| ||||
|
|
(in millions) |
| ||||||||||
ASSETS |
|
|
|
|
|
|
|
|
| ||||
Current assets: |
|
|
|
|
|
|
|
|
| ||||
Cash and equivalents |
|
$ |
49 |
|
$ |
19 |
|
$ |
|
|
$ |
68 |
|
Merchandise inventories |
|
745 |
|
374 |
|
|
|
1,119 |
| ||||
Intercompany receivables |
|
1 |
|
614 |
|
(614 |
) |
1 |
| ||||
Other |
|
129 |
|
28 |
|
|
|
157 |
| ||||
Total current assets |
|
924 |
|
1,035 |
|
(614 |
) |
1,345 |
| ||||
Property and equipment, net |
|
278 |
|
75 |
|
|
|
353 |
| ||||
Goodwill |
|
94 |
|
|
|
|
|
94 |
| ||||
Investment in subsidiaries |
|
489 |
|
|
|
(489 |
) |
|
| ||||
Long-term receivable from Parent |
|
5 |
|
|
|
|
|
5 |
| ||||
Other assets |
|
66 |
|
3 |
|
|
|
69 |
| ||||
Total assets |
|
$ |
1,856 |
|
$ |
1,113 |
|
$ |
(1,103 |
) |
$ |
1,866 |
|
|
|
|
|
|
|
|
|
|
| ||||
LIABILITIES AND STOCKHOLDERS DEFICIT |
|
|
|
|
|
|
|
|
| ||||
Current liabilities: |
|
|
|
|
|
|
|
|
| ||||
Accounts payable |
|
$ |
13 |
|
$ |
454 |
|
$ |
|
|
$ |
467 |
|
Accrued liabilities and other |
|
209 |
|
133 |
|
|
|
342 |
| ||||
Share-based compensation |
|
8 |
|
13 |
|
|
|
21 |
| ||||
Current portion of long-term debt |
|
203 |
|
|
|
|
|
203 |
| ||||
Intercompany payable |
|
614 |
|
|
|
(614 |
) |
|
| ||||
Other |
|
9 |
|
1 |
|
|
|
10 |
| ||||
Total current liabilities |
|
1,056 |
|
601 |
|
(614 |
) |
1,043 |
| ||||
Long-term debt |
|
2,878 |
|
|
|
|
|
2,878 |
| ||||
Share-based compensation |
|
18 |
|
10 |
|
|
|
28 |
| ||||
Other long-term liabilities |
|
75 |
|
13 |
|
|
|
88 |
| ||||
Total stockholders deficit |
|
(2,171 |
) |
489 |
|
(489 |
) |
(2,171 |
) | ||||
Total liabilities and stockholders deficit |
|
$ |
1,856 |
|
$ |
1,113 |
|
$ |
(1,103 |
) |
$ |
1,866 |
|
Supplemental Condensed Consolidating Balance Sheet
|
|
February 2, 2013 |
| ||||||||||
|
|
Parent |
|
Guarantor |
|
Eliminations |
|
Consolidated |
| ||||
|
|
(in millions) |
| ||||||||||
ASSETS |
|
|
|
|
|
|
|
|
| ||||
Current assets: |
|
|
|
|
|
|
|
|
| ||||
Cash and equivalents |
|
$ |
37 |
|
$ |
19 |
|
$ |
|
|
$ |
56 |
|
Merchandise inventories |
|
591 |
|
271 |
|
|
|
862 |
| ||||
Intercompany receivables |
|
|
|
329 |
|
(329 |
) |
|
| ||||
Other |
|
105 |
|
21 |
|
|
|
126 |
| ||||
Total current assets |
|
733 |
|
640 |
|
(329 |
) |
1,044 |
| ||||
Property and equipment, net |
|
271 |
|
67 |
|
|
|
338 |
| ||||
Goodwill |
|
94 |
|
|
|
|
|
94 |
| ||||
Investment in subsidiaries |
|
284 |
|
|
|
(284 |
) |
|
| ||||
Other assets |
|
76 |
|
3 |
|
|
|
79 |
| ||||
Total assets |
|
$ |
1,458 |
|
$ |
710 |
|
$ |
(613 |
) |
$ |
1,555 |
|
|
|
|
|
|
|
|
|
|
| ||||
LIABILITIES AND STOCKHOLDERS DEFICIT |
|
|
|
|
|
|
|
|
| ||||
Current liabilities: |
|
|
|
|
|
|
|
|
| ||||
Accounts payable |
|
$ |
5 |
|
$ |
258 |
|
$ |
|
|
$ |
263 |
|
Accrued liabilities and other |
|
235 |
|
132 |
|
|
|
367 |
| ||||
Share-based compensation |
|
22 |
|
13 |
|
|
|
35 |
| ||||
Current portion of long-term debt |
|
150 |
|
|
|
|
|
150 |
| ||||
Intercompany payable |
|
329 |
|
|
|
(329 |
) |
|
| ||||
Other |
|
36 |
|
5 |
|
|
|
41 |
| ||||
Total current liabilities |
|
777 |
|
408 |
|
(329 |
) |
856 |
| ||||
Long-term debt |
|
2,891 |
|
|
|
|
|
2,891 |
| ||||
Other long-term liabilities |
|
73 |
|
12 |
|
|
|
85 |
| ||||
Share-based compensation |
|
21 |
|
6 |
|
|
|
27 |
| ||||
Total stockholders deficit |
|
(2,304 |
) |
284 |
|
(284 |
) |
(2,304 |
) | ||||
Total liabilities and stockholders deficit |
|
$ |
1,458 |
|
$ |
710 |
|
$ |
(613 |
) |
$ |
1,555 |
|
Supplemental Condensed Consolidating Balance Sheet
|
|
October 27, 2012 |
| ||||||||||
|
|
Parent |
|
Guarantor |
|
Eliminations |
|
Consolidated |
| ||||
|
|
Restated (in millions) |
| ||||||||||
ASSETS |
|
|
|
|
|
|
|
|
| ||||
Current assets: |
|
|
|
|
|
|
|
|
| ||||
Cash and equivalents |
|
$ |
138 |
|
$ |
23 |
|
$ |
|
|
$ |
161 |
|
Merchandise inventories |
|
717 |
|
361 |
|
|
|
1,078 |
| ||||
Intercompany receivables |
|
|
|
637 |
|
(637 |
) |
|
| ||||
Other |
|
120 |
|
30 |
|
|
|
150 |
| ||||
Total current assets |
|
975 |
|
1,051 |
|
(637 |
) |
1,389 |
| ||||
Property and equipment, net |
|
277 |
|
67 |
|
|
|
344 |
| ||||
Goodwill |
|
95 |
|
|
|
|
|
95 |
| ||||
Investment in subsidiaries |
|
610 |
|
|
|
(610 |
) |
|
| ||||
Other assets |
|
86 |
|
3 |
|
|
|
89 |
| ||||
Total assets |
|
$ |
2,043 |
|
$ |
1,121 |
|
$ |
(1,247 |
) |
$ |
1,917 |
|
|
|
|
|
|
|
|
|
|
| ||||
LIABILITIES AND STOCKHOLDERS DEFICIT |
|
|
|
|
|
|
|
|
| ||||
Current liabilities: |
|
|
|
|
|
|
|
|
| ||||
Accounts payable |
|
$ |
23 |
|
$ |
351 |
|
$ |
|
|
$ |
374 |
|
Accrued liabilities and other |
|
295 |
|
129 |
|
|
|
424 |
| ||||
Share-based compensation |
|
19 |
|
11 |
|
|
|
30 |
| ||||
Current portion of long-term debt |
|
180 |
|
|
|
|
|
180 |
| ||||
Intercompany payable |
|
637 |
|
|
|
(637 |
) |
|
| ||||
Other |
|
6 |
|
1 |
|
|
|
7 |
| ||||
Total current liabilities |
|
1,160 |
|
492 |
|
(637 |
) |
1,015 |
| ||||
Long-term debt |
|
3,188 |
|
|
|
|
|
3,188 |
| ||||
Other long-term liabilities |
|
85 |
|
12 |
|
|
|
97 |
| ||||
Share-based compensation |
|
17 |
|
7 |
|
|
|
24 |
| ||||
Total stockholders deficit |
|
(2,407 |
) |
610 |
|
(610 |
) |
(2,407 |
) | ||||
Total liabilities and stockholders deficit |
|
$ |
2,043 |
|
$ |
1,121 |
|
$ |
(1,247 |
) |
$ |
1,917 |
|
Supplemental Condensed Consolidating Statement of Comprehensive Income
|
|
Quarter Ended November 2, 2013 |
| ||||||||||
|
|
Parent |
|
Guarantor |
|
Eliminations |
|
Consolidated |
| ||||
|
|
(in millions) |
| ||||||||||
Net sales |
|
$ |
981 |
|
$ |
748 |
|
$ |
(611 |
) |
$ |
1,118 |
|
Cost of sales and occupancy expense |
|
623 |
|
653 |
|
(611 |
) |
665 |
| ||||
Gross profit |
|
358 |
|
95 |
|
|
|
453 |
| ||||
Selling, general, and administrative expense |
|
265 |
|
44 |
|
|
|
309 |
| ||||
Share-based compensation expense |
|
3 |
|
1 |
|
|
|
4 |
| ||||
Related party expenses |
|
3 |
|
|
|
|
|
3 |
| ||||
Store pre-opening costs |
|
1 |
|
1 |
|
|
|
2 |
| ||||
Operating income |
|
86 |
|
49 |
|
|
|
135 |
| ||||
Interest expense |
|
45 |
|
|
|
|
|
45 |
| ||||
Refinancing costs and losses on early extinguishment of debt |
|
|
|
|
|
|
|
|
| ||||
Other (income) and expense, net |
|
|
|
|
|
|
|
|
| ||||
Intercompany charges (income) |
|
20 |
|
(20 |
) |
|
|
|
| ||||
Equity in earnings of subsidiaries |
|
69 |
|
|
|
(69 |
) |
|
| ||||
Income before income taxes |
|
90 |
|
69 |
|
(69 |
) |
90 |
| ||||
Provision for income taxes |
|
32 |
|
25 |
|
(25 |
) |
32 |
| ||||
Net income |
|
58 |
|
44 |
|
(44 |
) |
58 |
| ||||
|
|
|
|
|
|
|
|
|
|
| |||
Comprehensive income |
|
$ |
58 |
|
$ |
44 |
|
$ |
(44 |
) |
$ |
58 |
|
Supplemental Condensed Consolidating Statement of Comprehensive Income
|
|
Quarter Ended October 27, 2012 |
| ||||||||||
|
|
Parent |
|
Guarantor |
|
Eliminations |
|
Consolidated |
| ||||
|
|
(in millions) |
| ||||||||||
Net sales |
|
$ |
883 |
|
$ |
685 |
|
$ |
(554 |
) |
$ |
1,014 |
|
Cost of sales and occupancy expense |
|
573 |
|
593 |
|
(554 |
) |
612 |
| ||||
Gross profit |
|
310 |
|
92 |
|
|
|
402 |
| ||||
Selling, general, and administrative expense |
|
239 |
|
38 |
|
|
|
277 |
| ||||
Share-based compensation expense |
|
1 |
|
1 |
|
|
|
2 |
| ||||
Related party expenses |
|
3 |
|
|
|
|
|
3 |
| ||||
Store pre-opening costs |
|
2 |
|
1 |
|
|
|
3 |
| ||||
Operating income |
|
65 |
|
52 |
|
|
|
117 |
| ||||
Interest expense |
|
60 |
|
|
|
|
|
60 |
| ||||
Refinancing costs and losses on early extinguishment of debt |
|
3 |
|
|
|
|
|
3 |
| ||||
Other (income) and expense, net |
|
|
|
|
|
|
|
|
| ||||
Intercompany charges (income) |
|
21 |
|
(21 |
) |
|
|
|
| ||||
Equity in earnings of subsidiaries |
|
73 |
|
|
|
(73 |
) |
|
| ||||
Income before income taxes |
|
54 |
|
73 |
|
(73 |
) |
54 |
| ||||
Provision for income taxes |
|
19 |
|
26 |
|
(26 |
) |
19 |
| ||||
Net income |
|
35 |
|
47 |
|
(47 |
) |
35 |
| ||||
Comprehensive income |
|
$ |
35 |
|
$ |
47 |
|
$ |
(47 |
) |
$ |
35 |
|
Supplemental Condensed Consolidating Statement of Comprehensive Income
|
|
Nine Months Ended November 2, 2013 |
| ||||||||||
|
|
Parent |
|
Guarantor |
|
Eliminations |
|
Consolidated |
| ||||
|
|
(in millions) |
| ||||||||||
Net sales |
|
$ |
2,633 |
|
$ |
1,829 |
|
$ |
(1,447 |
) |
$ |
3,015 |
|
Cost of sales and occupancy expense |
|
1,702 |
|
1,561 |
|
(1,447 |
) |
1,816 |
| ||||
Gross profit |
|
931 |
|
268 |
|
|
|
1,199 |
| ||||
Selling, general, and administrative expense |
|
721 |
|
114 |
|
|
|
835 |
| ||||
Share-based compensation expense |
|
12 |
|
3 |
|
|
|
15 |
| ||||
Related party expenses |
|
10 |
|
|
|
|
|
10 |
| ||||
Store pre-opening costs |
|
4 |
|
1 |
|
|
|
5 |
| ||||
Operating income |
|
184 |
|
150 |
|
|
|
334 |
| ||||
Interest expense |
|
137 |
|
|
|
|
|
137 |
| ||||
Refinancing costs and losses on early extinguishment of debt |
|
7 |
|
|
|
|
|
7 |
| ||||
Other (income) and expense, net |
|
|
|
1 |
|
|
|
1 |
| ||||
Intercompany charges (income) |
|
44 |
|
(44 |
) |
|
|
|
| ||||
Equity in earnings of subsidiaries |
|
193 |
|
|
|
(193 |
) |
|
| ||||
Income before income taxes |
|
189 |
|
193 |
|
(193 |
) |
189 |
| ||||
Provision for income taxes |
|
68 |
|
69 |
|
(69 |
) |
68 |
| ||||
Net income |
|
121 |
|
124 |
|
(124 |
) |
121 |
| ||||
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
| ||||
Foreign currency translation adjustment |
|
(2 |
) |
|
|
|
|
(2 |
) | ||||
Comprehensive income |
|
$ |
119 |
|
$ |
124 |
|
$ |
(124 |
) |
$ |
119 |
|
Supplemental Condensed Consolidating Statement of Comprehensive Income
|
|
Nine Months Ended October 27, 2012 |
| ||||||||||
|
|
Parent |
|
Guarantor |
|
Eliminations |
|
Consolidated |
| ||||
|
|
(in millions) |
| ||||||||||
Net sales |
|
$ |
2,520 |
|
$ |
1,756 |
|
$ |
(1,392 |
) |
$ |
2,884 |
|
Cost of sales and occupancy expense |
|
1,625 |
|
1,503 |
|
(1,392 |
) |
1,736 |
| ||||
Gross profit |
|
895 |
|
253 |
|
|
|
1,148 |
| ||||
Selling, general, and administrative expense |
|
681 |
|
106 |
|
|
|
787 |
| ||||
Share-based compensation expense |
|
7 |
|
2 |
|
|
|
9 |
| ||||
Related party expenses |
|
10 |
|
|
|
|
|
10 |
| ||||
Store pre-opening costs |
|
4 |
|
1 |
|
|
|
5 |
| ||||
Operating income |
|
193 |
|
144 |
|
|
|
337 |
| ||||
Interest expense |
|
187 |
|
|
|
|
|
187 |
| ||||
Refinancing costs and losses on early extinguishment of debt |
|
3 |
|
|
|
|
|
3 |
| ||||
Other (income) and expense, net |
|
(1 |
) |
|
|
|
|
(1 |
) | ||||
Intercompany charges (income) |
|
53 |
|
(53 |
) |
|
|
|
| ||||
Equity in earnings of subsidiaries |
|
197 |
|
|
|
(197 |
) |
|
| ||||
Income before income taxes |
|
148 |
|
197 |
|
(197 |
) |
148 |
| ||||
Provision for income taxes |
|
53 |
|
71 |
|
(71 |
) |
53 |
| ||||
Net income |
|
95 |
|
126 |
|
(126 |
) |
95 |
| ||||
Comprehensive income |
|
$ |
95 |
|
$ |
126 |
|
$ |
(126 |
) |
$ |
95 |
|
Supplemental Condensed Consolidating Statement of Cash Flows
|
|
Nine Months Ended November 2, 2013 |
| ||||||||||
|
|
Parent |
|
Guarantor |
|
Eliminations |
|
Consolidated |
| ||||
|
|
(in millions) |
| ||||||||||
Operating activities: |
|
|
|
|
|
|
|
|
| ||||
Net cash provided by operating activities |
|
$ |
51 |
|
$ |
94 |
|
$ |
(71 |
) |
$ |
74 |
|
|
|
|
|
|
|
|
|
|
| ||||
Investing activities: |
|
|
|
|
|
|
|
|
| ||||
Cash paid for property and equipment |
|
(59 |
) |
(23 |
) |
|
|
(82 |
) | ||||
Net cash used in investing activities |
|
(59 |
) |
(23 |
) |
|
|
(82 |
) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Financing activities: |
|
|
|
|
|
|
|
|
| ||||
Net repayments of short-term debt |
|
36 |
|
|
|
|
|
36 |
| ||||
Intercompany dividends |
|
|
|
(71 |
) |
71 |
|
|
| ||||
Other financing activities |
|
(16 |
) |
|
|
|
|
(16 |
) | ||||
Net cash provided by (used in) financing activities |
|
20 |
|
(71 |
) |
71 |
|
20 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Increase in cash and equivalents |
|
12 |
|
|
|
|
|
12 |
| ||||
Beginning cash and equivalents |
|
37 |
|
19 |
|
|
|
56 |
| ||||
Ending cash and equivalents |
|
$ |
49 |
|
$ |
19 |
|
$ |
|
|
$ |
68 |
|
Supplemental Condensed Consolidating Statement of Cash Flows
|
|
Nine Months Ended October 27, 2012 |
| ||||||||||
|
|
Parent |
|
Guarantor |
|
Eliminations |
|
Consolidated |
| ||||
|
|
Restated (in millions) |
| ||||||||||
Operating activities: |
|
|
|
|
|
|
|
|
| ||||
Net cash (used in) provided by operating activities |
|
$ |
(22 |
) |
$ |
109 |
|
$ |
(74 |
) |
$ |
13 |
|
|
|
|
|
|
|
|
|
|
| ||||
Investing activities: |
|
|
|
|
|
|
|
|
| ||||
Cash paid for property and equipment |
|
(66 |
) |
(19 |
) |
|
|
(85 |
) | ||||
Net cash used in investing activities |
|
(66 |
) |
(19 |
) |
|
|
(85 |
) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Financing activities: |
|
|
|
|
|
|
|
|
| ||||
Net repayments of long term debt |
|
(123 |
) |
|
|
|
|
(123 |
) | ||||
Intercompany dividends |
|
|
|
(74 |
) |
74 |
|
|
| ||||
Other financing activities |
|
(14 |
) |
(1 |
) |
|
|
(15 |
) | ||||
Net cash used in financing activities |
|
(137 |
) |
(75 |
) |
74 |
|
(138 |
) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Decrease in cash and equivalents |
|
(225 |
) |
15 |
|
|
|
(210 |
) | ||||
Beginning cash and equivalents |
|
363 |
|
8 |
|
|
|
371 |
| ||||
Ending cash and equivalents |
|
$ |
138 |
|
$ |
23 |
|
$ |
|
|
$ |
161 |
|
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
All expressions of the Company, us, we, our, and all similar expressions are references to Michaels Stores, Inc. and its consolidated wholly-owned subsidiaries, unless otherwise expressly stated or the context otherwise requires.
Disclosure Regarding Forward-Looking Information
The following discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. The following discussion, as well as other portions of this Quarterly Report on Form 10-Q, contains forward-looking statements that reflect our plans, estimates, and beliefs. Any statements contained herein (including, but not limited to, statements to the effect that Michaels or its management anticipates, plans, estimates, expects, believes, and other similar expressions) that are not statements of historical fact should be considered forward-looking statements and should be read in conjunction with our consolidated financial statements and related notes in our Annual Report on Form 10-K for the fiscal year ended February 2, 2013. Such forward-looking statements are based upon managements current knowledge and assumptions about future events and involve risks and uncertainties that could cause actual results, performance or achievements to be materially different from anticipated results, prospects, performance or achievements expressed or implied by such forward-looking statements. Such risks and uncertainties include, but are not limited to:
· risks related to general economic conditions; if recovery from the economic downturn continues to be slow or prolonged, it could continue to adversely affect consumer confidence and retail spending, decrease demand for our merchandise and adversely impact our results of operations, cash flows and financial condition;
· risks related to our substantial indebtedness, as our leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations under our notes and credit facilities;
· our ability to open new stores and increase comparable store sales growth, as our growth depends on our strategy of expanding our base of retail stores; and if we are unable to continue this strategy, our ability to increase our sales, profitability, and cash flow could be impaired;
· our reliance on foreign suppliers increases our risk of obtaining adequate, timely, and cost-effective product supplies;
· damage to the reputation of the Michaels brand or our private and exclusive brands could adversely affect our sales;
· significant increases in inflation or commodity prices such as petroleum, natural gas, electricity, steel, wood and paper may adversely affect our costs, including cost of merchandise;
· our suppliers may fail us;
· risks associated with the vendors from whom our products are sourced could materially adversely affect our revenue and gross profit;
· product recalls and/or product liability, as well as changes in product safety and other consumer protection laws, may adversely impact our operations, merchandise offerings, reputation, results of operation, cash flow, and financial condition;
· unexpected or unfavorable consumer responses to our promotional or merchandising programs could materially adversely affect our sales, results of operations, cash flow and financial condition;
· improvements to our supply chain may not be fully successful;
· changes in customer demand could materially adversely affect our sales, results of operations, and cash flow;
· how well we manage our business;
· competition could negatively impact our business;
· failure to adequately maintain security and prevent unauthorized access to electronic and other confidential information and data breaches could materially adversely affect our financial condition and operating results;
· our information systems may prove inadequate;
· our disclosed material weakness in our internal control over financial reporting related to our accounting for share-based compensation expense could adversely affect our ability to report our financial results of operations or cash flows accurately and on a timely basis;
· failure to attract or retain senior management could adversely affect our operations;
· a weak fourth quarter would materially adversely affect our results of operations;
· changes in newspaper subscription rates may result in reduced exposure to our circular advertisements;
· changes in regulations or enforcement may adversely impact our business;
· restrictions in our debt agreements that limit our flexibility in operating our business, as our senior secured credit facilities and the indentures governing our notes contain various covenants that limit our ability to engage in specified types of transactions and require that we maintain specified financial ratios upon the occurrence of certain events;
· disruptions in the capital markets could increase our costs of doing business;
· our real estate leases generally obligate us for long periods, which subjects us to various financial risks;
· we have co-sourced certain of our information technology, accounts payable, payroll, accounting and human resources functions, and may co-source other administrative functions, which makes us more dependent upon third parties;
· we are exposed to fluctuations in exchange rates between the U.S. and Canadian dollar, which is the functional currency of our Canadian subsidiaries;
· failure to attract and retain quality sales, distribution center and other associates in appropriate numbers as well as experienced buying and management personnel could adversely affect our performance;
· our results may be adversely affected by serious disruptions or catastrophic events, including geo-political events and weather;
· our, and our subsidiaries, ability to generate sufficient cash from operations to make distributions to FinCo Holdings in an amount sufficient to make required interest and prinicpal and other payments on its indebtedness; and
· the interests of our indirect parent, FinCo Holdings, and our Sponsors may conflict with the interests of our debt holders.
For more details on factors that may cause actual results to differ materially from such forward-looking statements, please see Item 1A. Risk Factors of our Annual Report on Form 10-K for the fiscal year ended February 2, 2013, and other reports from time to time filed with or furnished to the Securities and Exchange Commission (SEC). We disclaim any intention to, and undertake no obligation to, update or revise any forward-looking statement.
General
We report on the basis of a 52- or 53-week fiscal year, which ends on the Saturday closest to January 31. All references herein to fiscal 2013 relate to the 52 weeks ending February 1, 2014 and all references to fiscal 2012 relate to the 53 weeks ended February 2, 2013. In addition, all references herein to the third quarter of fiscal 2013 relate to the 13 weeks ended November 2, 2013 and all references to the third quarter of fiscal 2012 relate to the 13 weeks ended October 27, 2012. Finally, all references to the nine months ended November 2, 2013 relate to the 39 weeks ended November 2, 2013, and the nine months ended October 27, 2012 relate to the 39 weeks ended October 27, 2012.
The following table sets forth certain of our unaudited operating data:
|
|
Quarter Ended |
|
Nine Months Ended |
| |||||||
|
|
November 2, |
|
October 27, |
|
November 2, |
|
October 27, |
| |||
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| |||
Michaels stores: |
|
|
|
|
|
|
|
|
| |||
Retail stores open at beginning of period |
|
1,119 |
|
1,074 |
|
1,099 |
|
1,064 |
| |||
Retail stores opened during the period |
|
19 |
|
26 |
|
40 |
|
36 |
| |||
Retail stores opened (relocations) during the period |
|
6 |
|
3 |
|
14 |
|
13 |
| |||
Retail stores closed during the period |
|
(1 |
) |
(1 |
) |
(2 |
) |
(1 |
) | |||
Retail stores closed (relocations) during the period |
|
(6 |
) |
(3 |
) |
(14 |
) |
(13 |
) | |||
Retail stores open at end of period |
|
1,137 |
|
1,099 |
|
1,137 |
|
1,099 |
| |||
|
|
|
|
|
|
|
|
|
| |||
Aaron Brothers stores: |
|
|
|
|
|
|
|
|
| |||
Retail stores open at beginning of period |
|
122 |
|
128 |
|
125 |
|
134 |
| |||
Retail stores opened (relocations) during the period |
|
|
|
|
|
2 |
|
|
| |||
Retail stores closed during the period |
|
|
|
(1 |
) |
(4 |
) |
(7 |
) | |||
Retail stores closed (relocations) during the period |
|
|
|
|
|
(1 |
) |
|
| |||
Retail stores open at end of period |
|
122 |
|
127 |
|
122 |
|
127 |
| |||
|
|
|
|
|
|
|
|
|
| |||
Total store count at end of period |
|
1,259 |
|
1,226 |
|
1,259 |
|
1,226 |
| |||
|
|
|
|
|
|
|
|
|
| |||
Other operating data: |
|
|
|
|
|
|
|
|
| |||
Average inventory per Michaels store (in thousands) (1) |
|
$ |
946 |
|
$ |
944 |
|
946 |
|
$ |
944 |
|
Comparable store sales increase (decrease) (2) |
|
7.9 |
% |
(0.2 |
)% |
2.1 |
% |
1.4 |
% | |||
(1) The calculation of average inventory per Michaels store excludes our Aaron Brothers stores.
(2) Comparable store sales increase (decrease) represents the increase (decrease) in Net sales for Michaels and Aaron Brothers stores open the same number of months in the indicated period and the comparable period of the previous year, including stores that were relocated or expanded during either period. A store is deemed to become comparable in its 14th month of operation in order to eliminate grand opening sales distortions. A store temporarily closed more than two weeks is not considered comparable during the month it closed. If a store is closed longer than two weeks but less than two months, it becomes comparable in the month in which it reopens, subject to a mid-month convention. A store closed longer than two months becomes comparable in its 14th month of operation after its reopening.
Restatement - Share-based Compensation
The Company determined its previously issued unaudited interim consolidated financial statements for the three and nine months ended October 27, 2012, contained an error with respect to ASC 718, Compensation Stock Compensation. The accounting error was material to fiscal 2011 and fiscal 2012 financial statements and those financial statements required restatement. As a result, the Company is also restating its financial statements for the three and nine months ended October 27, 2012. Specifically, former participants in the Companys Equity Incentive Plan and its successor Plan (The Michaels Companies, Inc. (Parent) Equity Incentive Plan, together the Plan) exercised stock options upon their termination from the Company, and the Company repurchased the shares which were held less than six months (immature shares). The Company consistently repurchased shares in this manner and therefore, under accounting rules, established a pattern of repurchasing immature shares during the third quarter of 2011. The Company determined all stock options should have been treated as liability awards in accordance with the rules of ASC 718-10-25-9. Under liability accounting, the Company re-measures the fair value of stock compensation each period and recognizes changes in fair value as awards vest and until the award is settled. The Company originally recognized expense ratably over the vesting period based on the grant date fair value of the option in accordance with the fixed method of accounting. The Company determined the accounting error was material to fiscal 2011 and fiscal 2012 financial statements and those financial statements required restatement. As a result, the Company is also restating its financial statements for this period. The non-cash impact to share-based compensation expense for the three and nine months ended October 27, 2012, was $2 million ($1, net of tax) and $12 million ($7, net of tax), respectively. The following tables illustrate the correction as it is associated with certain line items in the financial statements (amounts in millions):
|
|
Consolidated Balance Sheet |
| |||||||
|
|
As of October 27, 2012 |
| |||||||
|
|
(unaudited) |
| |||||||
|
|
As |
|
Share-based |
|
As |
| |||
Merchandise inventories |
|
$ |
1,076 |
|
$ |
2 |
|
$ |
1,078 |
|
Total current assets |
|
1,387 |
|
2 |
|
1,389 |
| |||
Deferred income taxes |
|
18 |
|
14 |
|
32 |
| |||
Total non-current assets |
|
170 |
|
14 |
|
184 |
| |||
Share-based compensation |
|
|
|
30 |
|
30 |
| |||
Income taxes payable |
|
8 |
|
(2 |
) |
6 |
| |||
Total current liabilities |
|
987 |
|
28 |
|
1,015 |
| |||
Share-based compensation |
|
|
|
24 |
|
24 |
| |||
Total long-term liabilities |
|
3,285 |
|
24 |
|
3,309 |
| |||
Additional paid-in capital |
|
61 |
|
(10 |
) |
51 |
| |||
Accumulated deficit |
|
(2,438 |
) |
(26 |
) |
(2,464 |
) | |||
Total stockholders deficit |
|
(2,371 |
) |
(36 |
) |
(2,407 |
) | |||
|
|
Consolidated Statements of Comprehensive Income |
| |||||||
|
|
Quarter Ended October 27, 2012 |
| |||||||
|
|
(unaudited) |
| |||||||
|
|
As |
|
Share-based |
|
As |
| |||
Cost of sales and occupancy expense |
|
$ |
611 |
|
$ |
1 |
|
$ |
612 |
|
Gross Profit |
|
403 |
|
(1 |
) |
402 |
| |||
Selling, general and administrative expense |
|
278 |
|
(1 |
) |
277 |
| |||
Share-based compensation expense |
|
|
|
2 |
|
2 |
| |||
Operating income |
|
119 |
|
(2 |
) |
117 |
| |||
Income before income taxes |
|
56 |
|
(2 |
) |
54 |
| |||
Provision for income taxes |
|
20 |
|
(1 |
) |
19 |
| |||
Net income |
|
36 |
|
(1 |
) |
35 |
| |||
Comprehensive income |
|
36 |
|
(1 |
) |
35 |
| |||
|
|
Consolidated Statements of Comprehensive Income |
| |||||||
|
|
Nine Months Ended October 27, 2012 |
| |||||||
|
|
(unaudited) |
| |||||||
|
|
As |
|
Share-based |
|
As |
| |||
Cost of sales and occupancy expense |
|
$ |
1,730 |
|
$ |
6 |
|
$ |
1,736 |
|
Gross Profit |
|
1,154 |
|
(6 |
) |
1,148 |
| |||
Selling, general and administrative expense |
|
790 |
|
(3 |
) |
787 |
| |||
Share-based compensation expense |
|
|
|
9 |
|
9 |
| |||
Operating income |
|
349 |
|
(12 |
) |
337 |
| |||
Income before income taxes |
|
160 |
|
(12 |
) |
148 |
| |||
Provision for income taxes |
|
58 |
|
(5 |
) |
53 |
| |||
Net income |
|
102 |
|
(7 |
) |
95 |
| |||
Comprehensive income |
|
102 |
|
(7 |
) |
95 |
| |||
|
|
Cash Flow Data |
| ||||||
|
|
Nine Months Ended October 27, 2012 |
| ||||||
|
|
(unaudited) |
| ||||||
|
|
As |
|
Share-based |
|
As |
| ||
Operating Activities: |
|
|
|
|
|
|
| ||
Net income |
|
$ |
102 |
|
(7 |
) |
$ |
95 |
|
Share-based compensation |
|
4 |
|
11 |
|
15 |
| ||
Merchandise inventories |
|
(236 |
) |
3 |
|
(233 |
) | ||
Accrued liabilities and other |
|
(11 |
) |
(4 |
) |
(15 |
) | ||
Income taxes |
|
(27 |
) |
(6 |
) |
(33 |
) | ||
Net cash provided by operating activities |
|
16 |
|
(3 |
) |
13 |
| ||
Repurchase of Common Stock |
|
(10 |
) |
10 |
|
|
| ||
Proceeds from stock options exercised |
|
7 |
|
(7 |
) |
|
| ||
Net cash used in financing activities |
|
(141 |
) |
3 |
|
(138 |
) | ||
Results of Operations
The following table sets forth the percentage relationship to Net sales of each line item of our unaudited Consolidated Statements of Comprehensive Income. This table should be read in conjunction with the following discussion and with our consolidated financial statements, including the related notes, contained herein.
|
|
Quarter Ended |
|
Nine Months Ended |
| ||||
|
|
November 2, |
|
October 27, |
|
November 2, |
|
October 27, |
|
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
|
Net sales |
|
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
Cost of sales and occupancy expense |
|
59.5 |
|
60.4 |
|
60.2 |
|
60.2 |
|
Gross profit |
|
40.5 |
|
39.6 |
|
39.8 |
|
39.8 |
|
Selling, general, and administrative expense |
|
27.6 |
|
27.3 |
|
27.7 |
|
27.3 |
|
Share-based compensation expense |
|
0.4 |
|
0.2 |
|
0.5 |
|
0.3 |
|
Related party expenses |
|
0.3 |
|
0.3 |
|
0.3 |
|
0.3 |
|
Store pre-opening costs |
|
0.2 |
|
0.3 |
|
0.2 |
|
0.2 |
|
Operating income |
|
12.1 |
|
11.5 |
|
11.1 |
|
11.7 |
|
Interest expense |
|
4.0 |
|
5.9 |
|
4.5 |
|
6.5 |
|
Refinancing costs and losses on early extinguishment of debt |
|
|
|
0.3 |
|
0.2 |
|
0.1 |
|
Other (income) and expense, net |
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
8.1 |
|
5.4 |
|
6.3 |
|
5.1 |
|
Provision for income taxes |
|
2.9 |
|
1.9 |
|
2.3 |
|
1.8 |
|
Net income |
|
5.2 |
% |
3.5 |
% |
4.0 |
% |
3.3 |
% |
Quarter Ended November 2, 2013 Compared to the Quarter Ended October 27, 2012
Net SalesNet sales increased for the third quarter of fiscal 2013 by $104 million, or 10.3%, over the third quarter of fiscal 2012 due primarily to a $79 million increase in comparable store sales and $25 million of incremental revenue from our non-comparable store sales. Comparable store sales increased 7.9% due to a 3.9% increase in customer transactions, a 3.8% increase in the average ticket and a positive impact of 0.2% from deferred custom framing revenue. The fluctuation in the exchange rates between the United States and Canadian dollars adversely impacted the average ticket by 50 basis points. Two of our strongest categories were kids crafts and custom framing. The increase in kids crafts was primarily due to sales of the Rainbow Loom and replacement rubber bands. The increase in custom framing is driven by improved product mix and visualization capabilities in our stores.
Cost of Sales and Occupancy ExpenseCost of sales and occupancy expense increased $53 million to $665 million in the third quarter of fiscal 2013 from $612 million in the third quarter of fiscal 2012. Cost of sales increased primarily due to increased merchandise costs of $49 million from higher sales compared to the prior year, $5 million from increased freight and distribution costs (primarily for the Rainbow Loom), and $5 million for inventory markdowns due to an increase in discontinued stock keeping units associated with planned merchandise resets and a slower sell through of this merchandise. This was partially offset by a $4 million decrease attributable to improved efficiencies and new product offerings in our vertically integrated framing operations and a $6 million decrease due to our direct import penetration and private brand initiatives in the current year compared to the prior year. In addition, we had a $5 million increase in rent and related expenses primarily related to opening new stores.
Cost of sales and occupancy expense decreased 90 basis points as a percentage of Net sales to 59.5% for the third quarter of fiscal 2013 from 60.4% for the third quarter of fiscal 2012. Occupancy costs decreased 100 basis points due to lower common area maintenance, insurance and property tax expenses, lower utility expenses and increased leverage of rent expenses on higher comparable stores sales this quarter compared to the same quarter last year. Cost of sales increased 10 basis points due to a 50 basis point increase in freight and distribution costs, which offset by a 20 basis point decrease in merchandise costs due to our direct import and private brand initiatives, as well as improved pricing and promotion management and a 20 basis point improvement in efficiencies and new product offerings in our vertically integrated framing operation.
Selling, General, and Administrative Expense Selling, general and administrative expense was $309 million in the third quarter of fiscal 2013 compared to $277 million in the third quarter of fiscal 2012. Selling, general and administrative expense increased by $9 million due to incremental store costs related to operating 38 additional Michaels stores at the end of the third quarter of fiscal 2013 compared to the end of the third quarter of fiscal 2012. Additionally, Selling, general and administrative expense increased by $20 million for higher accrued bonus expense, $3 million for higher outside professional fees, and $2 million for higher credit card fees due to higher sales. As a percentage of Net sales, Selling, general and administrative expense increased 30 basis points due primarily to an 160 basis point increase in bonus expense and a 80 basis point increase for new stores costs. These costs were partially offset by 100 basis points improvement from increased leverage on store payroll and benefits and 70 points of leverage for advertising expenses.
Share-Based Compensation ExpenseShare-based compensation expense was $4 million for the third quarter of fiscal 2013 compared to $2 million for the third quarter of fiscal 2012.
Related Party ExpensesRelated party expenses were $3 million in each of the third quarters of fiscal 2013 and fiscal 2012, respectively, consisting of management fees and associated expenses paid to affiliates of two investment firms: Bain Capital Partners, LLC and The Blackstone Group, L.P. (collectively, together with their applicable affiliates, the Sponsors) and Highfields Capital Management, LP.
Interest ExpenseInterest expense decreased $15 million to $45 million in the third quarter of fiscal 2013 from $60 million in the third quarter of fiscal 2012. The decrease is attributable to a $287 million reduction in our total debt outstanding and a lower average interest rate associated with our amended senior secured term loan facility.
Provision for Income TaxesThe effective tax rate was 35.6% for the third quarter of fiscal 2013. The effective tax rate was 35.2% for the third quarter of fiscal 2012. The current year tax rate is higher than the prior year tax rate due primarily to the reduced rate impact of our permanent adjustments as a result of our greater profit before tax. We currently estimate our annualized effective tax rate for fiscal 2013 to be 37.0%.
Nine months Ended November 2, 2013 Compared to the Nine months Ended October 27, 2012
Net SalesNet sales increased for the first nine months of fiscal 2013 by $131 million, or 4.5%, over the first nine months of fiscal 2012 due primarily to $70 million of incremental revenue from our non-comparable store sales and a $61 million increase in comparable store sales. Comparable store sales increased 2.1% driven by a 2.9% increase in the average ticket, partially offset by a 0.8% decrease in customer transactions. The fluctuation in the exchange rates between the United States and Canadian dollars adversely impacted the average ticket by 30 basis points. Two of our strongest categories were kids crafts and custom framing. The increase in kids crafts was primarily due to sales of the Rainbow Loom and replacement rubber bands. The increase in custom framing is driven by improved product mix and visualization capabilities in our stores.
Cost of Sales and Occupancy ExpenseCost of sales and occupancy expense increased $80 million to $1,816 million for the first nine months of fiscal 2013 from $1,736 million for the first nine months of fiscal 2012. Cost of sales increased $78 million due primarily to a $61 million increase in merchandise costs associated with higher sales, a $10 million increase in inventory markdowns due to an increase in discontinued stock keeping units associated with planned merchandise resets and a slower sell through of this merchandise, a $3 million reduction in the recognition of vendor allowances compared to the prior year, and a $4 million increase in freight and distribution costs (primarily for the Rainbow Loom). This was partially offset by a $9 million decrease due to improved efficiencies and new product offerings in our vertically integrated framing operations and an $11 million decrease due to our direct import penetration and private brand initiatives in the current year compared to the prior year. In addition, we had a $29 million increase in rent and related expenses, including $15 million from opening new stores, a $7 million increase in store remodel and improvement expenses and a $6 million increase due to higher maintenance costs.
Cost of sales and occupancy expense was flat as a percentage of Net sales at 60.2%. Occupancy costs increased 30 basis points due to increased remodel expenses and lease expenses on new stores, as well as increased spend on repairs and maintenance expenses compared to the prior year. As a percentage of Net sales, cost of sales for the nine months of fiscal 2013 was the 30 basis points lower than the nine months ended 2012 for the reasons indicated above.
Selling, General, and Administrative Expense Selling, general and administrative expense was $835 million for the first nine months of fiscal 2013 compared to $787 million for the first nine months of fiscal 2012. The $48 million increase was driven primarily by $19 million of incremental costs related to operating 73 additional Michaels stores. Additionally, Selling, general and administrative expense increased by $12 million for higher bonus expense and other benefits expense, $8 million for outside professional fees, and $7 million for store and corporate payroll and benefits.
As a percentage of Net sales, Selling, general and administrative expense increased 40 basis points due to a 60 basis point increase in new store costs and a 30 basis point increase in bonus expense. These costs were partially offset by improved leverage on corporate and store payroll costs of 50 basis points.
Share-Based Compensation ExpenseShare-based compensation expense increased to $15 million for the first nine month of fiscal 2013 from $9 million for the first nine months of fiscal 2012. During the nine months ended November 2, 2013, the Company recognized share-based compensation costs under the liability accounting rules of ASC 718-10-25-9, Compensation Stock Compensation which resulted in an increase in expense due to an increased fair value of options and vesting.
Related Party ExpensesRelated party expenses were $10 million for the first nine months of each of fiscal 2013 and fiscal 2012, consisting of management fees and associated expenses paid to our Sponsors and Highfields Capital Management, LP.
Interest Expense Interest expense decreased $50 million to $137 million in the third quarter of fiscal 2013 from $187 million in the third quarter of fiscal 2012. The decrease is attributable to a $287 million reduction in our total debt outstanding and a lower average interest rate associated with our amended senior secured term loan facility.
Refinancing Costs and Losses on Early Extinguishment of Debt We recorded a loss on the early extinguishment of debt of $7 million during the first nine months of fiscal 2013, consisting of a $5 million redemption premium and $2 million to write off debt issuance costs related to the redemption of $137 million in aggregate principal amount of our 113/8% Senior Subordinated Notes due November 1, 2016 (the Senior Subordinated Notes). See Note 3 to the consolidated financial statements for further discussion. During the first nine months of fiscal 2012, we recorded a loss on the early extinguishment of debt of $3 million, consisting of $2 million to write off debt issuance costs related to our restated senior secured asset-based revolving credit facility (Restated Revolving Credit Facility) and $1 million to write off debt issuance costs associated with the partial prepayment of our existing term loans under the Senior Secured Term Loan Facility.
Other (Income) and Expense, netOther (income) and expense is related primarily to a $1 million foreign exchange rate loss for the first nine months of fiscal 2013 and a $1 million foreign exchange rate gain for the first nine months of fiscal 2012.
Provision for Income TaxesThe effective tax rate was 36.0% for the first nine months of fiscal 2013. The effective tax rate was 35.8% for the first nine months of fiscal 2012. The rate was higher than the prior year nine month tax rate due primarily to the reduced rate impact of our permanent adjustments as a result of our greater profit before tax. We currently estimate our annualized effective tax rate for fiscal 2013 to be 37.0%.
Liquidity and Capital Resources
We require cash principally for day-to-day operations, to finance capital investments, to purchase inventory, to service our outstanding debt, and for seasonal working capital needs. We expect that our available cash, cash flow generated from operating activities, and funds available under our Restated Revolving Credit Facility will be sufficient to fund planned capital expenditures, working capital requirements, debt repayments, debt service requirements and anticipated growth for the foreseeable future. Our ability to satisfy our liquidity needs and continue to refinance or reduce debt could be adversely affected by the occurrence of any of the events described under Item 1A. Risk Factors of our Annual Report on Form 10-K for the fiscal year ended February 2, 2013 or our failure to meet our debt covenants as described in Liquidity and Capital ResourcesCash Flow from Financing Activities. Our Restated Revolving Credit Facility provides senior secured financing of up to $650 million, subject to a borrowing base. As of November 2, 2013, the borrowing base was $650 million, of which we had $187 million in outstanding borrowings, $62 million of outstanding letters of credit and $401 million of unused borrowing capacity. Our cash and equivalents increased $12 million to $68 million at November 2, 2013 from $56 million at February 2, 2013.
Our substantial indebtedness could adversely affect our ability to raise additional capital, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk, and prevent us from meeting our obligations. Management reacts strategically to changes in economic conditions and monitors compliance with debt covenants to seek to mitigate any potential material impacts to our financial condition and flexibility.
The Company intends to use excess operating cash flows to repay portions of its indebtedness, pay dividends to its parent and fund growth opportunities, depending on market conditions. If the Company uses its excess cash flows to pay dividends or repay its debt, it will reduce the amount of excess cash available for additional capital expenditures. The Company intends to make dividends to FinCo Holdings to fund the February 1 and August 1interest payments due on the PIK Notes (as defined below) of approximately $31 million and $30 million, respectively, and to the extent that such dividends can be made by the Company in compliance with covenants applicable to it under the terms of its indebtedness, future interest payments on the PIK Notes. If interest on the PIK Notes is paid in cash, annual interest payments will total $60 million or a total of approximately $301 million from July 29, 2013 until August 1, 2018, the maturity date.
As of February 2, 2013, we had an aggregate principal amount of $393 million of our Senior Subordinated Notes scheduled to mature in November 2016. On February 27, 2013, we redeemed $137 million in aggregate principal amount of the outstanding Senior Subordinated Notes with cash on hand and borrowings made under our senior secured term loan facility (Restated Term Loan Credit Facility) for an aggregate redemption price (including the applicable redemption premium and accrued and unpaid interest) of $147 million. The 7 3/4% Senior Notes mature in 2018 (2018 Senior Notes), and the Restated Term Loan Credit Facility matures in or after 2018. Although no assurance can be given, depending on market conditions and other factors, we plan to repay or refinance such indebtedness prior to maturity.
We and our subsidiaries, affiliates, and significant shareholders may continue from time to time to seek to retire or purchase our outstanding debt through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions, by tender offer or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors.
Cash Flow from Operating Activities
Cash flow provided by operating activities during the first nine months of fiscal 2013 was $74 million compared to cash flow provided by operating activities of $13 million during the first nine months of fiscal 2012. The $61 million change was primarily due to a $139 million increase in cash due to the timing of vendor payments and higher net income of $26 million. These amounts were partially offset by a $65 million decrease due to the timing of interest payments, a $21 million decrease due to the timing of inventory purchases and a $16 million decrease due to the timing of income tax payments.
Average inventory per Michaels store (including supporting distribution centers) increased 0.2% from $944,000 at October 27, 2012 to $946,000 at November 2, 2013.
Cash Flow from Investing Activities
Cash flow used in investing activities represents the following capital expenditure activities:
|
|
Nine Months Ended |
| ||||
|
|
November 2, |
|
October 27, |
| ||
|
|
2013 |
|
2012 |
| ||
|
|
(in millions) |
| ||||
New and relocated stores and stores not yet opened (1) |
|
$ |
32 |
|
$ |
31 |
|
Existing stores |
|
17 |
|
19 |
| ||
Information systems |
|
19 |
|
24 |
| ||
Corporate and other |
|
14 |
|
11 |
| ||
|
|
$ |
82 |
|
$ |
85 |
|
(1) In the first nine months of fiscal 2013, we incurred capital expenditures related to the opening of 40 Michaels stores in addition to the relocation of 14 Michaels stores. In the first nine months of fiscal 2012, we incurred capital expenditures related to the opening of 36 Michaels stores in addition to the relocation of 13 Michaels stores.
Cash Flow from Financing Activities
Cash flow provided by financing activities during the first nine months of fiscal 2013 was $20 million compared to cash used in financing activities of $138 million during the first nine months of fiscal 2012. Cash flow provided by financing activities for the first
nine months of fiscal 2013 was impacted by the redemption of the $137 million of Senior Subordinated Notes at a redemption price of 103.792%, or a total of $142 million, and net borrowings of $186 million under our Restated Revolving Credit Facility.
Other
In July 2013, Michaels was reorganized into a holding company structure (Reorganization). The Michaels Companies, Inc. (Parent), Michaels FinCo Holdings, LLC (FinCo Holdings), Michaels FinCo, Inc. ( FinCo Inc) and Michaels Funding, Inc. (Holdings) and Michaels Stores Merger Co, Inc. (MergerCo) were formed in connection with the Reorganization: (i) MergerCo was merged with and into Michaels with Michaels being the surviving corporation; (ii) each share of Michaels common stock was converted into the right to receive one share of Parent common stock, subject to the same vesting conditions, if any, as applied to the share so converted, and each such share of Michaels common stock was cancelled and retired and ceased to exist; and (iii) each option to purchase one or more shares of common stock of Michaels was assumed by Parent and converted into an option to purchase an equivalent number of shares of common stock of Parent with the remaining terms of each such option remaining unchanged except as was necessary to reflect the Reorganization.
As a result, FinCo Holdings is wholly owned by the Parent. FinCo Inc and Holdings are wholly owned by FinCo Holdings. Michaels is wholly owned by Holdings.
Subsequent to the Reorganization, FinCo Holdings and FinCo Inc issued $800 million aggregate principal amount of 7.50%/8.25% PIK Toggle Notes due 2018 (PIK Notes). The PIK Notes were issued in a private transaction. Interest payments on the PIK Notes are due February 1 and August 1 of each year until maturity. The first two interest payments and the last interest payment are required to be paid entirely in cash. Otherwise, under certain circumstances, all or a portion of the interest on the PIK Notes may be paid by increasing the principal amount of the outstanding PIK Notes or by issuing additional PIK Notes. The PIK Notes are not guaranteed by the Company, Holdings or any of their subsidiaries, but the indenture governing the PIK Notes contains restrictive covenants that apply to FinCo Holdings and its restricted subsidiaries, including the Company, Holdings and their subsidiaries, and a breach of such covenants would cause FinCo Holdings and FinCo Inc to be in default under the indenture governing the PIK Notes. The proceeds from the debt issuance were approximately $782 million, after deducting the initial purchasers discount and estimated fees and expenses. FinCo Holdings distributed the net proceeds to Parent and the proceeds were used to fund a cash dividend to the Parents equity and equity-award holders and pay related fees and expenses.
While not required, the Company intends to make dividends to its FinCo Holdings to fund the February 1, 2014 and August 1, 2014 interest payment of approximately $31 million and $30 million, respectively, on the PIK Notes and, to the extent that such dividends can be made consistent with covenants applicable to the Company under the terms of its indebtedness, future interest payments on the PIK Notes. If interest on the PIK Notes is paid in cash, annual interest payments will total $60 million or a total of approximately $301 million from July 29, 2013 until August 1, 2018, the maturity date.
Non-GAAP Measures
The following table sets forth the Companys Earnings before Interest, Taxes, Depreciation, Amortization, and Loss on early extinguishment of debt (EBITDA excluding refinancing costs and losses on early extinguishment of debt). The Company defines EBITDA (excluding refinancing costs and losses on early extinguishment of debt) as Net income before interest, income taxes, depreciation, amortization and loss on early extinguishment of debt. Additionally, the table presents Adjusted Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA). The Company defines Adjusted EBITDA as EBITDA (excluding refinancing costs and losses on early extinguishment of debt) adjusted for certain defined amounts that are added to, or subtracted from, EBITDA (excluding refinancing costs and losses on early extinguishment of debt) (collectively, the Adjustments) in accordance with the Companys Restated Term Loan Credit Facility and Restated Revolving Credit Facility. The Adjustments are described in further detail in the table and the footnotes to the table below.
The Company has presented EBITDA (excluding refinancing costs and losses on early extinguishment of debt) and Adjusted EBITDA to provide investors with additional information to evaluate our operating performance and our ability to service our debt. The Company uses EBITDA (excluding refinancing costs and losses on early extinguishment of debt), among other metrics, to evaluate operating performance, to plan and forecast future periods operating performance and as an element of its incentive compensation targets. Adjusted EBITDA is a required calculation under the Companys Restated Term Loan Credit Facility and its Restated Revolving Credit Facility. As it relates to the Restated Term Loan Credit Facility, Adjusted EBITDA is used in the calculations of fixed charge coverage and leverage ratios, which, under certain circumstances may result in limitations on the Companys ability to make restricted payments as well as the determination of mandatory repayments of the loans. Under the Restated Revolving Credit Facility, Adjusted EBITDA is used in the calculation of fixed charge coverage ratios, which under certain circumstances, may restrict the Companys ability to make certain payments (characterized as restricted payments), investments (including acquisitions) and debt repayments , and which under certain circumstances will be used as a maintenance covenant.
As EBITDA (excluding refinancing costs and losses on early extinguishment of debt) and Adjusted EBITDA are not measures of operating performance or liquidity calculated in accordance with U.S. generally accepted accounting principles (GAAP), these measures should not be considered in isolation of, or as a substitute for, Net income, as an indicator of operating performance, or net cash provided by operating activities as an indicator of liquidity. Our computation of EBITDA (excluding refinancing costs and losses on early extinguishment of debt) and Adjusted EBITDA may differ from similarly titled measures used by other companies. As EBITDA (excluding refinancing costs and losses on early extinguishment of debt) and Adjusted EBITDA exclude certain financial information compared with Net income and Net cash provided by operating activities, the most directly comparable GAAP financial measures, users of this financial information should consider the types of events and transactions which are excluded.
The table below shows a reconciliation of EBITDA (excluding refinancing costs and losses on early extinguishment of debt) and Adjusted EBITDA to Net income and Net cash used in operating activities.
|
|
Quarter Ended |
|
Nine Months Ended |
| ||||||||
|
|
November 2, |
|
October 27, |
|
November 2, |
|
October 27, |
| ||||
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
|
|
|
|
(Restated) |
|
|
|
(Restated) |
| ||||
|
|
(in millions) |
| ||||||||||
|
|
|
| ||||||||||
Net cash provided by operating activities |
|
$ |
88 |
|
$ |
93 |
|
$ |
74 |
|
$ |
13 |
|
Depreciation and amortization |
|
(24 |
) |
(25 |
) |
(74 |
) |
(71 |
) | ||||
Share-based compensation expense |
|
(6 |
) |
(4 |
) |
(19 |
) |
(15 |
) | ||||
Debt issuance costs amortization |
|
(2 |
) |
(4 |
) |
(6 |
) |
(12 |
) | ||||
Refinancing costs and losses on early extinguishment of debt |
|
|
|
(3 |
) |
(7 |
) |
(3 |
) | ||||
Changes in assets and liabilities |
|
2 |
|
(22 |
) |
153 |
|
183 |
| ||||
Net income |
|
58 |
|
35 |
|
121 |
|
95 |
| ||||
Interest expense |
|
45 |
|
60 |
|
137 |
|
187 |
| ||||
Refinancing costs and losses on early extinguishment of debt |
|
|
|
3 |
|
7 |
|
3 |
| ||||
Provision for income taxes |
|
32 |
|
19 |
|
68 |
|
53 |
| ||||
Depreciation and amortization |
|
24 |
|
25 |
|
74 |
|
71 |
| ||||
EBITDA (excluding refinancing costs and losses on early extinguishment of debt) |
|
159 |
|
142 |
|
407 |
|
409 |
| ||||
Adjustments: |
|
|
|
|
|
|
|
|
| ||||
Share-based compensation expense |
|
6 |
|
4 |
|
19 |
|
15 |
| ||||
Sponsor fees |
|
3 |
|
3 |
|
10 |
|
10 |
| ||||
Termination expense |
|
1 |
|
1 |
|
2 |
|
1 |
| ||||
Store pre-opening costs |
|
2 |
|
3 |
|
5 |
|
5 |
| ||||
Store remodel costs |
|
2 |
|
1 |
|
6 |
|
1 |
| ||||
Foreign currency transaction losses (gains) |
|
|
|
|
|
1 |
|
(1 |
) | ||||
Sign on bonuses |
|
|
|
|
|
2 |
|
|
| ||||
Moving and relocation expenses |
|
1 |
|
|
|
2 |
|
2 |
| ||||
Store closing costs |
|
3 |
|
|
|
4 |
|
2 |
| ||||
Other (1) |
|
|
|
|
|
1 |
|
|
| ||||
Adjusted EBITDA |
|
$ |
177 |
|
$ |
154 |
|
$ |
459 |
|
$ |
444 |
|
(1) Other adjustments relate to items such as franchise taxes and certain legal settlements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to fluctuations in exchange rates between the U.S. and Canadian dollar, which is the functional currency of our Canadian subsidiaries. Our sales, costs and expenses of our Canadian subsidiaries, when translated into U.S. dollars, can fluctuate due to exchange rate movement. As of November 2, 2013, a 10% increase or decrease in the exchange rate of the U.S. and Canadian dollar would impact Net income by approximately $1 million.
We have market risk exposure arising from changes in interest rates on our Restated Term Loan Credit Facility and our Restated Revolving Credit Facility, together the (Senior Secured Credit Facilities). The interest rates on our Senior Secured Credit Facilities will reprice periodically, which will impact our earnings and cash flow. The interest rates on our 2018 Senior Notes and Senior Subordinated Notes are fixed. Based on our overall interest rate exposure to variable rate debt outstanding as of November 2, 2013, a 1% increase or decrease in interest rates would increase or decrease income before income taxes by $18 million. A 1% increase in interest rates would decrease the fair value of our long-term fixed rate debt by $10 million. A 1% decrease in interest rates would increase the fair value of our long-term fixed rate debt by $11 million. A change in interest rates would not materially affect the fair value of our variable rate debt as the debt reprices periodically.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report.
Based on the evaluation discussed above, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report due to the material weakness identified in the Companys internal control over financial reporting described below.
We did not maintain effective controls related to the administration of our share repurchases. Specifically, the Company established a pattern of repurchasing common stock shares at the time option awards were exercised following termination of employment of participants in the Plan. Since the repurchased shares were not owned for a period of more than six months, the holders of the shares were, according to accounting rules, not subject to the risk and rewards of ownership. The pattern of repurchasing immature shares, demonstrates an administrative practice that results in all stock options being treated as liability awards under the accounting rules of ASC 718-10-25-9, Compensation Stock Compensation (ASC 718). The control deficiency resulted in an adjustment to share-based compensation costs (which are classified in cost of sales and share-based compensation expense), merchandise inventories, income tax expense, additional paid-in capital, and deferred taxes. Under liability accounting, the Company re-measures the fair value of stock compensation each period and recognizes changes in fair value as awards vest and until the award is settled. The Company originally recognized expense ratably over the vesting period based on the grant date fair value of the option in accordance with the fixed method of accounting. As a result of this material error, management concluded a material weakness exists in the Companys internal controls related to the administration of share repurchases and controls were ineffective at timely detecting and correcting errors related to share-based compensation in accordance with U.S. generally accepted accounting principles.
As the material weakness was not remediated as of November 2, 2013, the material weakness could result in a misstatement of the aforementioned account balances or disclosures that would result in a material misstatement to our annual or interim consolidated financial statements that would not be prevented or detected. Management will implement the following procedures related to this material weakness and expects testing of the operating effectiveness to be successfully completed during the fourth quarter of fiscal 2013.
· Establish and monitor additional internal control procedures related to share repurchases to ensure all required approvals are received prior to repurchase, including our Board, CEO, and CFO. In addition, the accounting department will review repurchases for appropriate accounting under ASC 718 prior to a commitment to repurchase.
· Perform a formal review with the Company officers and Board members responsible for the administration of stock repurchases regarding the terms of the Plan and the Stockholders Agreement with recurring training when responsibilities change.
· Provide enhanced education of the Companys financial reporting staff on ASC 718 and ensure the Company complies with all aspects of the accounting standard.
Additionally, the Company will distribute formal communication to all option holders and stockholders emphasizing the exercise terms under the Plan and related option agreements, and the call feature repurchase restrictions contained in the Stockholders Agreement. Consequently, the Company expects to account for share-based compensation under the equity method beginning in the fourth quarter of fiscal 2013.
Change in Internal Control Over Financial Reporting
There were no changes in the Companys internal control over financial reporting during the fiscal quarter ended November 2, 2013, that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
MICHAELS STORES, INC.
Information regarding legal proceedings is incorporated herein by reference from Note 7 to our Consolidated Financial Statements.
Submission of Matters to a Vote of Security Holders
By a written consent effective September 18, 2013, holders of 100% of the common stock of the Company voted their shares to elect John J. Mahoney to the board of directors. The affirmative vote of more than 50% of the stockholders was required to take such action.
Iran Sanctions Related Disclosure
Under the Iran Threat Reduction and Syrian Human Rights Act of 2012, which added Section 13(r) of the Securities Exchange Act of 1934, we are required to include certain disclosures in our periodic reports if we or any of our affiliates knowingly engaged in certain specified activities during the period covered by this Quarterly Report on Form 10-Q. Because the SEC defines the term affiliate broadly, it includes any entity controlled by us as well as any person or entity that controls us or is under common control with us (control is also construed broadly by the SEC). We do not believe we and our consolidated subsidiaries have knowingly engaged in any transaction or dealing reportable under Section 13(r) of the Exchange Act during the quarter ended November 2, 2013.
The Blackstone Group L.P., one of our Sponsors, informed us of disclosures publicly filed and/or provided to them by Travelport Limited, which may be considered their affiliate. These disclosures are included in, and the Company hereby incorporates by reference herein, Exhibit 99.1 to this Quarterly Report on Form 10-Q.
(a) Exhibits:
Exhibit |
|
Description of Exhibit |
|
|
|
10.1 |
|
Form of Restricted Stock Award Agreement for Independent Directors under the Michaels Companies, Inc. Equity Incentive Plan (filed herewith).* |
|
|
|
31.1 |
|
Certifications of Carl S. Rubin pursuant to §302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
|
|
|
31.2 |
|
Certifications of Charles M. Sonsteby pursuant to §302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
|
|
|
32.1 |
|
Certification pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
|
|
|
99.1 |
|
Section 13 (r) Disclosure. |
|
|
|
101.INS |
|
XBRL Instance Document |
|
|
|
101.SCH |
|
XBRL Taxonomy Extension Schema |
|
|
|
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase |
|
|
|
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase |
|
|
|
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase |
|
|
|
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase |
*Management contract or compensatory plan or arrangement.
MICHAELS STORES, INC.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
MICHAELS STORES, INC. | |
|
|
|
|
By: |
/s/ Carl S. Rubin |
|
|
Carl S. Rubin |
|
|
Chief Executive Officer |
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
By: |
/s/ Charles M. Sonsteby |
|
|
Charles M. Sonsteby |
|
|
Chief Administrative Officer & Chief Financial Officer |
|
|
(Principal Financial Officer) |
|
|
|
Dated: December 10, 2013 |
|
|
INDEX TO EXHIBITS
Exhibit |
|
Description of Exhibit |
|
|
|
10.1 |
|
Form of Restricted Stock Award Agreement for Independent Directors under the Michaels Companies, Inc. Equity Incentive Plan (filed herewith).* |
|
|
|
31.1 |
|
Certifications of Carl S. Rubin pursuant to §302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
|
|
|
31.2 |
|
Certifications of Charles M. Sonsteby pursuant to §302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
|
|
|
32.1 |
|
Certification pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
|
|
|
99.1 |
|
Section 13 (r) Disclosure. |
|
|
|
101.INS |
|
XBRL Instance Document |
|
|
|
101.SCH |
|
XBRL Taxonomy Extension Schema |
|
|
|
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase |
|
|
|
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase |
|
|
|
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase |
|
|
|
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase |
*Management contract or compensatory plan or arrangement.
Exhibit 10.1
Execution Version
|
|
|
|
|
Name of Recipient |
THE MICHAELS COMPANIES, INC.
EQUITY INCENTIVE PLAN
Restricted Stock Award Agreement
(Board of Directors)
The Michaels Companies, Inc.
8000 Bent Branch Drive
Irving, Texas 75063
Attn: Michael J. Veitenheimer
Ladies and Gentlemen:
The undersigned (i) acknowledges that he has received an award (the Award) of restricted stock from The Michaels Companies, Inc. (the Company) under The Michaels Companies, Inc. Equity Incentive Plan (the Plan), subject to the terms set forth below and in the Plan; (ii) further acknowledges receipt of a copy of the Plan as in effect on the date hereof; and (iii) agrees with the Company as follows:
1. Effective Date. This Agreement shall take effect as of , 201 , which is the date of grant of the Award.
2. Shares Subject to Award. The Award consists of shares (the Shares) of common stock of the Company (Stock). The undersigneds rights to the Shares are subject to the restrictions described in this Agreement and the Plan (which is incorporated herein by reference with the same effect as if set forth herein in full) in addition to such other restrictions, if any, as may be imposed by law.
3. Meaning of Certain Terms. Except as otherwise expressly provided, all terms used herein shall have the same meaning as in the Plan. The term vest as used herein with respect to any Share means the lapsing of the restrictions described herein with respect to such Share.
4. Nontransferability of Shares. The Shares acquired by the undersigned pursuant to this Agreement shall not be sold, transferred, pledged, assigned or otherwise encumbered or disposed of except as provided below and in the Plan.
5. Vesting of Shares. The shares acquired hereunder shall vest in accordance with the provisions of this Paragraph 5 and applicable provisions of the Plan, as follows: Shares on , 201 . Notwithstanding the foregoing, no shares shall vest on any vesting date specified above unless the undersigned is then, and since the date of grant has continuously been, a member of the Board of Directors of the Company or its subsidiaries.
6. Forfeiture Risk. If the undersigned ceases to be a member of the Board of Directors of the Company or its subsidiaries for any reason, any then outstanding and unvested Shares
acquired by the undersigned hereunder shall be automatically and immediately forfeited. The undersigned hereby (i) appoints the Company as the attorney-in-fact of the undersigned to take such actions as may be necessary or appropriate to effectuate a transfer of the record ownership of any such shares that are unvested and forfeited hereunder, (ii) agrees to deliver to the Company, as a precondition to the issuance of any certificate or certificates with respect to unvested Shares hereunder, one or more stock powers, endorsed in blank, with respect to such Shares, and (iii) agrees to sign such other powers and take such other actions as the Company may reasonably request to accomplish the transfer or forfeiture of any unvested Shares that are forfeited hereunder.
7. Retention of Certificates. Any certificates representing unvested Shares shall be held by the Company. If unvested Shares are held in book entry form, the undersigned agrees that the Company may give stop transfer instructions to the depository to ensure compliance with the provisions hereof.
8. Effect of Certain Transactions. In the event of a Change of Control (as defined in the Stockholders Agreement), all then outstanding and unvested Shares acquired by the undersigned hereunder shall automatically and immediately vest.
9. Joinder to Agreements. The undersigned acknowledges and agrees that the Shares acquired hereunder will be subject to the Stockholders Agreement and to the Registration Rights Agreement and the transfer and other restrictions, rights, and obligations set forth in those agreements. By executing this Agreement, the undersigned hereby becomes a party to and bound by the Stockholders Agreement and the Registration Rights Agreement as a Manager (as such term is defined in those agreements), without any further action on the part of the undersigned, the Company or any other Person.
10. Legend. Any certificates representing unvested Shares shall be held by the Company, and any such certificate shall contain a legend substantially in the following form:
THE TRANSFERABILITY OF THIS CERTIFICATE AND THE SHARES OF STOCK REPRESENTED HEREBY ARE SUBJECT TO THE TERMS AND CONDITIONS (INCLUDING FORFEITURE) OF THE MICHAELS COMPANIES, INC. EQUITY INCENTIVE PLAN AND A RESTRICTED STOCK AWARD AGREEMENT ENTERED INTO BETWEEN THE REGISTERED OWNER AND THE MICHAELS COMPANIES, INC.COPIES OF SUCH PLAN AND AGREEMENT ARE ON FILE IN THE OFFICES OF THE MICHAELS COMPANIES, INC.
As soon as practicable following the vesting of any such Shares the Company shall cause a certificate or certificates covering such Shares, without the aforesaid legend, to be issued and delivered to the undersigned. If any Shares are held in book-entry form, the Company may take such steps as it deems necessary or appropriate to record and manifest the restrictions applicable to such Shares.
11. Dividends, etc.. The undersigned shall be entitled to (i) receive any and all dividends or other distributions paid with respect to those Shares of which he is the record owner on the record date for such dividend or other distribution, and (ii) vote any Shares of which he is the record owner on the record date for such vote; provided, however, that any property (other than cash) distributed with respect to a share of Stock (the associated share) acquired hereunder, including without limitation a distribution of Stock by reason of a stock dividend, stock split or otherwise, or a distribution of other securities with respect to an associated share, shall be subject to the restrictions of this Agreement in the same manner and for so long as the
associated share remains subject to such restrictions, and shall be promptly forfeited if and when the associated share is so forfeited; and further provided, that the Administrator may require that any cash distribution with respect to the Shares other than a normal cash dividend be placed in escrow or otherwise made subject to such restrictions as the Administrator deems appropriate to carry out the intent of the Plan. References in this Agreement to the Shares shall refer, mutatis mutandis, to any such restricted amounts.
12. Sale of Vested Shares. The undersigned understands that he will be free to sell any Share once it has vested, subject to (i) satisfaction of any applicable tax withholding requirements with respect to the vesting or transfer of such Share; (ii) the completion of any administrative steps (for example, but without limitation, the transfer of certificates) that the Company may reasonably impose; (iii) applicable requirements of federal and state securities laws, (iv) the Stockholders Agreement and (v) the Registration Rights Agreement.
13. Certain Tax Matters. The undersigned expressly acknowledges the following:
a. The undersigned has been advised to confer promptly with a professional tax advisor to consider whether the undersigned should make a so-called 83(b) election with respect to the Shares. Any such election, to be effective, must be made in accordance with applicable regulations and within thirty (30) days following the date of this Award. The Company has made no recommendation to the undersigned with respect to the advisability of making such an election.
b. The undersigned expressly acknowledges and agrees that he will be responsible for all taxes related to the Shares.
|
Very truly yours, | |
|
| |
|
| |
|
| |
|
| |
Dated: , 2013 |
| |
|
| |
The foregoing Restricted Stock |
| |
Award Agreement is hereby accepted: |
| |
|
| |
THE MICHAELS COMPANIES, INC. |
| |
|
| |
|
|
|
Michael J. Veitenheimer |
|
|
SVP & Secretary |
|
|
Exhibit 31.1
CERTIFICATIONS
I, Carl S. Rubin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Michaels Stores, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: December 10, 2013 |
/s/ Carl S. Rubin |
|
Carl S. Rubin |
|
Chief Executive Officer |
|
(Principal Executive Officer) |
Exhibit 31.2
CERTIFICATIONS
I, Charles M. Sonsteby, certify that
1. I have reviewed this quarterly report on Form 10-Q of Michaels Stores, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: December 10, 2013 |
/s/ Charles M. Sonsteby |
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Charles M. Sonsteby |
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Chief Administrative Officer & Chief Financial Officer |
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( Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. § 1350,
AS ADOPTED PURSUANT TO § 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of the Quarterly Report on Form 10-Q of Michaels Stores, Inc., a Delaware corporation (the Company), for the period ended November 2, 2013, as filed with the Securities and Exchange Commission on the date hereof (the Report), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to such officers knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: December 10, 2013 |
/s/ Carl S. Rubin |
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Carl S. Rubin |
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Chief Executive Officer |
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(Principal Executive Officer) |
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|
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|
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/s/ Charles M. Sonsteby |
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Charles M. Sonsteby |
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Chief Administrative Officer & Chief Financial Officer |
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(Principal Financial Officer) |
The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Report or as a separate disclosure document.
Exhibit 99.1
SECTION 13(r) DISCLOSURE
Travelport Limited, which may be considered as an affiliate of The Blackstone Group, L.P., provided the disclosure reproduced below in connection with activities during the third fiscal quarter of 2013. We have no involvement in or control over the activities of Travelport Limited, any of its predecessor companies or any of its subsidiaries, and we have not independently verified or participated in the preparation of this disclosure.
As part of our global business in the travel industry, we provide certain passenger travel related GDS and Airline IT Solutions services to Iran Air. We also provide certain Airline IT Solutions services to Iran Air Tours. All of these services are either exempt from applicable sanctions prohibitions pursuant to a statutory exemption in the International Emergency Economic Powers Act permitting transactions ordinarily incident to travel or, to the extent not otherwise exempt, specifically licensed by the U.S. Office of Foreign Assets Control (OFAC). Subject to any changes in the exempt/licensed status of such activities, we intend to continue these business activities, which are directly related to and promote the arrangement of travel for individuals.
The gross revenue and net profit attributable to these activities in the quarter ended September 30, 2013 were approximately $164,000 and $122,000, respectively.
Summary of Significant Accounting Policies (Policies)
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9 Months Ended |
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Nov. 02, 2013
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Summary of Significant Accounting Policies | |
Basis of Presentation | Basis of Presentation
The consolidated financial statements include the accounts of Michaels Stores, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. All expressions of the “Company”, “Michaels”, “us,” “we,” “our,” and all similar expressions are references to Michaels Stores, Inc. and its consolidated, wholly-owned subsidiaries, unless otherwise expressly stated or the context otherwise requires.
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended February 2, 2013.
The balance sheet at February 2, 2013 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring accruals and other items) considered necessary for a fair presentation have been included.
Because of the seasonal nature of our business, the results of operations for the quarter and nine months ended November 2, 2013 are not indicative of the results to be expected for the entire year.
We report on the basis of a 52- or 53-week fiscal year, which ends on the Saturday closest to January 31. All references herein to “fiscal 2013” relate to the 52 weeks ending February 1, 2014, and all references to “fiscal 2012” relate to the 53 weeks ended February 2, 2013. In addition, all references herein to “the third quarter of fiscal 2013” relate to the 13 weeks ended November 2, 2013, and all references to “the third quarter of fiscal 2012” relate to the 13 weeks ended October 27, 2012. Finally, all references to “the nine months ended November 2, 2013” relate to the 39 weeks ended November 2, 2013, and “the nine months ended October 27, 2012” relate to the 39 weeks ended October 27, 2012.
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Recent Accounting Pronouncements | Recent Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss or a Tax Credit Carryforward Exists.” ASU 2013-11 requires unrecognized tax benefits to be presented as a decrease in a net operating loss, similar tax loss or tax credit carryforward if certain criteria are met. ASU 2013-11, which is prospective, is effective for reporting periods beginning after December 15, 2013, with earlier adoption permitted. Beginning with the fourth quarter of fiscal year 2012, the Company has reported unrecognized tax benefits consistent with ASU No. 2013-11.
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