TMCnet News
XO GROUP INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion and analysis in conjunction with our consolidated financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements relating to future events and the future performance of XO Group based on our current expectations, assumptions, estimates and projections about us and our industry. These forward-looking statements involve risks and uncertainties. Actual results or events could differ materially from those anticipated in such forward-looking statements as a result of certain factors, as more fully described in this section and elsewhere in this report. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. Executive Overview XO Group Inc. is the premier consumer Internet and media company devoted to weddings, pregnancy, and everything in between, providing couples, nesters and new parents with the trusted information, products, and advice they need to guide them through some of the most transformative events of their lives. Our family of premium brands began with the number one wedding brand, The Knot, and has grown to include The Nest, The Bump, and Ijie.com. We also operate a number of ancillary sites, including WeddingChannel.com and Weddings.com. XO Group is recognized by the industry for innovation in media - from the web to social media and mobile, magazines and books, and video. XO Group has grown its business to include online sponsorship and advertising, registry services, e-commerce, and publishing. Our goal is to build a brand and mobile-driven marketplace for lifestage decisions. We aim to provide our consumers even greater real-time, on-the-go access to our trusted brands and vendors, and to build back-end systems that make that access more valuable to our advertisers and business partners. 2013 Highlights The highlights of 2013 were: • During the year, XO Group appointed Michael Steib as President and Gillian Munson as Chief Financial Officer. We also increased headcount in our product and technology groups focused on the development of mobile technologies. During 2014, we will continue to add talented employees in order to help accelerate our mobile initiatives. • Total net revenue increased 3.6% to $133.8 million. • National online advertising increased 2.5% to $27.2 million. • Local online advertising revenue increased 9.1% to $54.4 million. • Registry services revenue increased by 27.2% to $7.9 million. • Merchandise revenue decreased 13.8% to $18.4 million. • Publishing and other revenue increased by 3.0% to $25.8 million. • We generated operating income of $12.5 million, compared to $14.2 million in the prior year. The year-over-year decrease in operating income was primarily due to increased operating expenses, partially offset by an increase in gross profit of 4.6%, driven by the revenue growth highlighted above. The increase in operating expenses was primarily due to additional personnel, supporting further initiatives in product and technology development, as well as increased general and administrative expenses related to changes to the executive team. • Net income attributable to XO Group in 2013 was $5.8 million, or $0.23 per diluted share, compared to $8.7 million, or $0.35 per diluted share in 2012. Non-operating expenses contributing to the decrease in net income and per share metrics included an other-than-temporary impairment charge related to an investment in an equity interest of $1.8 million. • At December 31, 2013, our total cash and cash equivalents were $90.7 million, an increase of $13.3 million compared to the balance at December 31, 2012. Cash generated from operations of $22.2 million in 2013 was offset by investments in capitalized software of $4.3 million, purchases of fixed assets of $1.6 million, acquisitions and investments in equity interests of $1.9 million, as well as financing activities totaling $1.0 million. • At December 31, 2013, we had no debt. 31-------------------------------------------------------------------------------- Table of Contents Key Metrics We evaluate our operating and financial performance using various performance indicators. Our management relies on the key performance indicators set forth below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational efficiencies. We discuss revenue and gross margin under "Results of Operations", and cash flow results under "Liquidity and Capital Resources". Other measures of our performance, including adjusted EBITDA, Adjusted net income and Free cash flow are defined and discussed under "Non-GAAP Financial Measures" below. Years Ended December 31, 2013 2012 2011 (Dollar Amounts in Thousands) Total net revenue $ 133,814 $ 129,131 $ 124,257 Total gross margin 83.3 % 82.5 % 79.8 % Adjusted EBITDA $ 26,722 $ 25,469 $ 21,430 Adjusted net income $ 8,920 $ 9,235 $ 6,416 Free cash flow $ 16,275 $ 22,542 $ 12,409Cash and cash equivalents at December 31 $ 90,697 $ 77,407 $ 77,376 Total employees at December 31 705 677 631 Non-GAAP Financial Measures This Form 10-K includes information about certain financial measures that are not prepared in accordance with U.S. generally accepted accounting principles ("GAAP" or "U.S. GAAP"), including Adjusted EBITDA, Adjusted net income, Adjusted net income per diluted share and Free cash flow. These non-GAAP measures have important limitations as analytical tools and should not be considered in isolation or as substitutes for an analysis of our results as reported under U.S. GAAP. Our use of these terms may vary from the use of similarly-titled measures by others in our industry due to the potential inconsistencies in the method of calculation and differences due to items subject to interpretation. Management defines its non-GAAP financial measures as follows: • Adjusted EBITDA represents GAAP net income (loss) adjusted to exclude, if applicable: (1) provision (benefit) for income taxes, (2) depreciation and amortization, (3) stock-based compensation expense, (4) impairment charges and asset write-offs, (5) loss in equity interests, (6) interest and other income, net (7) net loss attributable to non-controlling interest and (8) other incremental or unusual charges incurred in the period. • Adjusted net income represents GAAP net income (loss), adjusted for incremental or unusual costs incurred in the current period, which may include: (1) impairment charges and asset write-offs, (2) executive severance and (3) non-recurring foreign taxes, interest and penalties. • Adjusted net income per diluted share represents Adjusted net income (as defined above), divided by the diluted weighted-average number of shares outstanding for the period. • Free cash flow represents GAAP net cash provided by operations, less capital expenditures. Management believes that these non-GAAP financial measures, when viewed with our results under U.S. GAAP and the accompanying reconciliations, provide useful information about our period-over-period growth and provide additional information that is useful for evaluating our operating performance. In addition, Free cash flow provides management with useful information for managing the cash needs of our business. However, Adjusted EBITDA, Adjusted net income, Adjusted net income per diluted share and Free cash flow are not measures of financial performance under U.S. GAAP and, accordingly, should not be considered substitutes for or superior to Net income (loss), Net income (loss) per diluted share and Net cash provided by operating activities as indicators of operating performance. 32-------------------------------------------------------------------------------- Table of Contents The table below provides reconciliations between the non-GAAP financial measures discussed above to the comparable U.S. GAAP measures: Years Ended December 31, 2013 2012 2011 (In Thousands, Except for per Share Data) Net income attributable to XO Group Inc. $ 5,794 $ 8,714 $ 6,040 Provision for income taxes 4,841 5,658 4,025 Depreciation and amortization 4,808 3,874 4,702 Stock-based compensation expense 6,697 6,388 5,933 Long-lived asset impairment charges 1,430 958 716 Loss in equity interests 2,016 55 269 Interest and other income, net (144 ) (113 ) (203 ) Net loss attributable to noncontrolling interest - (65 ) (52 ) Executive severance charges(a) 350 - - Foreign VAT, interest and penalties(b) 930 - - Adjusted EBITDA $ 26,722 $ 25,469 $ 21,430 Depreciation and amortization (4,808 ) (3,874 ) (4,702 ) Stock-based compensation expense (6,697 ) (6,388 ) (5,933 ) Loss in equity interests (2,016 ) (55 ) (269 ) Interest and other income, net 144 113 203 Impairment of equity interest(c) 1,773 - - Adjusted income before income taxes 15,118 15,265 10,729 Adjusted provision for income taxes(d) 6,198 6,030 4,313 Adjusted net income $ 8,920 $ 9,235 $ 6,416 Adjusted net income per diluted share $ 0.35 $ 0.37 $ 0.22 Diluted weighted average number of shares outstanding 25,596 25,218 29,692 Net cash provided by operating activities $ 22,243 $ 25,373 $ 24,051 Less: Capital expenditures (5,968 ) (2,831 ) (11,642 ) Free cash flow $ 16,275 $ 22,542 $ 12,409 (a) Incremental costs included in "General and administrative" expenses on the Consolidated Statements of Operations for the twelve months ended December 31, 2013 include severance of $0.4 million, representing the severance for a former executive of the Company. (b) Incremental costs included in "General and administrative" expenses on the Consolidated Statements of Operations for the twelve months ended December 31, 2013 include foreign value-added tax ("VAT"), interest and penalties of $0.9 million. (c) Impairment of equity interest of $1.8 million is included in "Loss in equity interests" on the Consolidated Statements of Operations for the twelve months ended December 31, 2013. (d) Adjusted provision for income taxes was calculated using our effective tax rate, excluding discrete items, for each respective year. 33-------------------------------------------------------------------------------- Table of Contents Results of Operations Year Ended December 31, 2013 Compared to Year Ended December 31, 2012 The following table summarizes results of operations for 2013 compared to 2012: Year Ended December 31, 2013 2012 Increase/(Decrease) % of Net % of Net Amount Revenue Amount Revenue Amount % (Dollars in Thousands, Except for per Share Data) Net revenue $ 133,814 100.0 % $ 129,131 100.0 % $ 4,683 3.6 % Cost of revenue 22,401 16.7 22,602 17.5 (201 ) (0.8 ) Gross profit 111,413 83.3 106,529 82.5 4,884 4.6 Operating expenses 98,906 73.9 92,280 71.5 6,626 7.2 Income from operations 12,507 9.4 14,249 11.0 (1,742 ) (12.2 ) Loss in equity interest (2,016 ) (1.5 ) (55 ) - (1,961 ) (3,565.5 ) Interest and other income, net 144 0.1 113 0.1 31 27.4 Income before income taxes 10,635 8.0 14,307 11.1 (3,672 ) (25.7 ) Provision for income taxes 4,841 3.6 5,658 4.4 (817 ) (14.4 ) Net income 5,794 4.3 8,649 6.7 (2,855 ) (33.0 ) Plus: net loss attributable to noncontrolling interest - - 65 - (65 ) (100.0 ) Net income attributable to XO Group Inc. $ 5,794 4.3 % $ 8,714 6.7 % $ (2,920 ) (33.5 )% Net income per share attributable to XO Group Inc. common stockholders: Basic $ 0.24 $ 0.35 $ (0.11 ) (31.4 )% Diluted $ 0.23 $ 0.35 $ (0.12 ) (34.3 )% Net Revenue Net revenue increased to $133.8 million for the year ended December 31, 2013, from $129.1 million for the year ended December 31, 2012. The following table sets forth revenue by category for the year ended December 31, 2013 compared to the year ended December 31, 2012, the percentage increase or decrease between those periods, and the percentage of total net revenue that each category represented for those periods: Year Ended December 31, Percentage Percentage of Net Revenue Increase/ Total Net Revenue 2013 2012 (Decrease) 2013 2012 (In Thousands) National online sponsorship and advertising $ 27,216 $ 26,561 2.5 % 20.3 % 20.6 % Local online sponsorship and advertising 54,445 49,914 9.1 40.7 38.7 Total online sponsorship and advertising 81,661 76,475 6.8 61.0 59.3 Registry services 7,926 6,231 27.2 5.9 4.8 Merchandise 18,406 21,359 (13.8 ) 13.8 16.5 Publishing and other 25,821 25,066 3.0 19.3 19.4 Total net revenue $ 133,814 $ 129,131 3.6 % 100.0 % 100.0 % 34-------------------------------------------------------------------------------- Table of Contents Online sponsorship and advertising - The increase in total online sponsorship and advertising of 6.8% was primarily driven by an increase in revenue from local advertising programs. Local online sponsorship and advertising revenue increased 9.1%, primarily attributable to an increase in the number of local vendors advertising with us on our network of websites, as well as an increase in average vendor spending. As of December 31, 2013, we had over 22,700 local vendors displaying over 30,500 profiles, compared to over 22,100 vendors displaying over 29,100 profiles as of December 31, 2012. Revenue from national online sponsorship and advertising also contributed to the increase but at a lower growth rate year over year. Registry services - The increase of 27.2% was primarily driven by an increase in sales from our registry partners, as well as the favorable impact from several product enhancements resulting from our registry replatform. These product enhancements significantly improved user experience with our registry services, resulting in a higher conversion rate to purchase. Merchandise - The decrease of 13.8% was primarily driven by lower revenue generated from our ancillary sites due to reduced site traffic and a reduction in storefronts, due to a shift in focus on The Knot Shop. Publishing and other - The increase of 3.0% was primarily driven by an increase in revenue per advertising page sold related to The Knot national and regional magazines, as well as an increase in the number of advertising pages for the regional magazines. Our expectation is that total revenue growth rates will be consistent with the previous five years. We believe that there is significant opportunity for future growth, but we are cognizant that it will take more time for the cumulative momentum of our efforts to manifest in more substantial year-over-year growth rates. We believe that our core value proposition is more relevant than ever, with our iconic brands connecting large, motivated audiences with the resources they need. We will continue to position ourselves to ensure our products remain the preferred way to connect members, vendors and advertisers. Gross Profit/Gross Margin Cost of revenues consists of the cost of merchandise sold, which includes outbound shipping and personalization costs, costs related to the production of national and regional magazines, payroll and related expenses for our personnel who are responsible for the production of online and offline media, and costs of Internet and hosting services. Gross margin improved 0.8% to 83.3%, compared to 82.5% in 2012. The following table presents the components of gross profit and gross margin for the year ended December 31, 2013 compared to the year ended December 31, 2012: Year Ended December 31, 2013 2012 Increase/(Decrease) Gross Gross Gross Gross Gross Gross Profit Margin % Profit Margin % Profit Margin % (Dollars in Thousands) Online sponsorship and advertising (national and local) $ 79,734 97.6 % $ 74,734 97.7 % $ 5,000 (0.1 )% Registry services 7,926 100.0 6,231 100.0 1,695 - Merchandise 7,110 38.6 8,905 41.7 (1,795 ) (3.1 ) Publishing and other 16,643 64.5 16,659 66.5 (16 ) (2.0 ) Total gross profit $ 111,413 83.3 % $ 106,529 82.5 % $ 4,884 0.8 % The increase in the total gross margin percentage was primarily attributable to increases in revenue for the two lines of business that have the highest margins, specifically online sponsorship and advertising and registry services, and by a decline in revenue from our lower-margin merchandise business. Our registry services business has no cost of revenue. Our gross margin percentage for merchandise declined due to greater promotional sales of product, including personalized product. Our gross margin percentage for publishing and other declined due to an increase in returns of newsstand copies distributed for our National magazine. 35-------------------------------------------------------------------------------- Table of Contents Operating Expenses Operating expenses increased 7.2% to $98.9 million, compared to $92.3 million in 2012 and as a percentage of net revenue, operating expenses were 73.9% and 71.5% for the years ended December 31, 2013 and 2012, respectively. The following table presents the components of operating expenses and the percentage of revenue that each component represented for the year ended December 31, 2013 compared to the year ended December 31, 2012: Year Ended December 31, Percentage Percentage of Operating Expenses Increase/ Total Net Revenue 2013 2012 (Decrease) 2013 2012 (In Thousands) Product and content development $ 29,877 $ 26,229 13.9 % 22.3 % 20.4 % Sales and marketing 39,718 40,239 (1.3 ) 29.7 31.2 General and administrative 23,073 20,980 10.0 17.2 16.2 Long-lived asset impairment charges 1,430 958 49.3 1.1 0.7 Depreciation and amortization 4,808 3,874 24.1 3.6 3.0 Total operating expenses $ 98,906 $ 92,280 7.2 % 73.9 % 71.5 % Product and Content Development - The increase of 13.9% was primarily attributable to an increase in employee headcount, as well as an increase in non-capitalizable expenditures to support our initiatives in product and technology development. Sales and Marketing - The decrease of 1.3% was primarily attributable to a decrease in employee headcount. General and Administrative - The increase of 10.0% was primarily attributable to increased compensation costs resulting from changes to the executive team, including executive severance charges, as well as provisions for value-added taxes, interest and related penalties payable in China. Long-lived asset impairment charges - During the year ended December 31, 2013, we recorded $1.4 million in impairment charges related to tradenames, including $1.2 million for the WeddingChannel tradename (see the Critical Accounting Policies section of this Management's Discussion and Analysis for additional details), compared to impairment charges of approximately $1.0 million in the prior year on the tradenames of WeddingChannel and an e-commerce company that we acquired in May 2009. Depreciation and Amortization - The increase of 24.1% was primarily attributable to the full year of amortization expense recorded in 2013 related to the tradenames for WeddingChannel and an e-commerce company we acquired in May 2009, compared to three months of amortization related to these tradenames recorded in 2012. These intangible assets were considered indefinite-lived assets until the fourth quarter of 2012, when they were changed to definite-lived assets as a result of the Company's annual impairment analysis. In 2014, we expect to make significant investments in product and content and to a lesser degree in sales and marketing. We plan to be conservative with our general and administrative spend. Additionally, we expect depreciation and amortization expense to increase modestly, driven by the expected launch of several new products over the next twelve months. Interest and Other Income, net Interest and other income, net increased 27.4% to $144,000 for the year ended December 31, 2013, compared to $113,000 for the year ended December 31, 2012. The increase was primarily attributable to other income recorded by one of our foreign subsidiaries for subsidies received from the local government, as well as slightly higher foreign currency transaction gains as compared to the prior year. Loss in Equity Interests Loss in equity interests for the years ended December 31, 2013 and 2012 was $2.0 million and $55,000, respectively. The increase in the loss for the current year resulted from an impairment charge that was recorded for our investment in PricingEngine, Inc. of $1.8 million, as a result of the Company's other-than-temporary impairment analysis performed in the fourth quarter. The 36-------------------------------------------------------------------------------- Table of Contents remaining increase in the loss in equity interests for the year ended December 31, 2013 was due to the recognition of the Company's portion of the total losses related to its equity interests. Provision for Income Taxes The following table presents our income before income taxes, provision for income taxes and effective tax rate for the periods presented: Year Ended December 31, 2013 2012 (Dollars in Thousands) Income before income taxes $ 10,635 $ 14,307 Provision for income taxes 4,841 5,658 Effective tax rate 45.5 % 39.5 % The effective tax rate for the year ended December 31, 2013 was 45.5%, compared to 39.5% for the year ended December 31, 2012. The increase in the Company's effective tax rate in the current year was attributable to additional foreign taxes recorded of $78,000 related to the years ended December 31, 2010 through 2012, and an increase to unrecognized tax benefits related to current and prior year filings. Our effective tax rate may fluctuate significantly based on the mix of our taxable income among states or due to the income recognized by our international entities, changes in the valuation of our deferred tax assets or liabilities, and changes in tax laws, regulations, or interpretations thereof. Net Loss Attributable to Noncontrolling Interest There was no net loss attributable to noncontrolling interest for the year ended December 31, 2013. Net loss attributable to noncontrolling interest for the year ended December 31, 2012 resulted from the 25% equity interest in one of our consolidated subsidiaries held by another investor until April 20, 2012, when we purchased the remaining noncontrolling interest for $500,000. 37-------------------------------------------------------------------------------- Table of Contents Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 The following table summarizes results of operations for 2012 compared to 2011: Year Ended December 31, 2012 2011 Increase/(Decrease) % of Net % of Net Amount Revenue Amount Revenue Amount % (Dollars in Thousands, Except for per Share Data) Net revenue $ 129,131 100.0 % $ 124,257 100.0 % $ 4,874 3.9 % Cost of revenue 22,602 17.5 25,086 20.2 (2,484 ) (9.9 ) Gross profit 106,529 82.5 99,171 79.8 7,358 7.4 Operating expenses 92,280 71.5 89,092 71.7 3,188 3.6 Income from operations 14,249 11.0 10,079 8.1 4,170 41.4 Loss in equity interest (55 ) - (269 ) (0.2 ) 214 79.6 Interest and other income, net 113 0.1 203 0.2 (90 ) (44.3 ) Income before income taxes 14,307 11.1 10,013 8.1 4,294 42.9 Provision for income taxes 5,658 4.4 4,025 3.2 1,633 40.6 Net income 8,649 6.7 5,988 4.8 2,661 44.4 Plus: net loss attributable to noncontrolling interest 65 - 52 - 13 25.0 Net income attributable to XO Group Inc. $ 8,714 6.7 % $ 6,040 4.9 % $ 2,674 44.3 % Net income per share attributable to XO Group Inc. common stockholders: Basic $ 0.35 $ 0.21 $ 0.14 66.7 % Diluted $ 0.35 $ 0.20 $ 0.15 75.0 % Net Revenue Net revenue increased to $129.1 million for the year ended December 31, 2012, from $124.3 million for the year ended December 31, 2011. The following table sets forth revenue by category for the year ended December 31, 2012 compared to the year ended December 31, 2011, the percentage increase or decrease between those periods, and the percentage of total net revenue that each category represented for those periods: Year Ended December 31, Percentage Percentage of Net Revenue Increase/ Total Net Revenue 2012 2011 (Decrease) 2012 2011 (In Thousands) National online sponsorship and advertising $ 26,561 $ 26,617 (0.2 )% 20.6 % 21.4 % Local online sponsorship and advertising 49,914 43,450 14.9 38.7 35.0 Total online sponsorship and advertising 76,475 70,067 9.1 59.3 56.4 Registry services 6,231 6,398 (2.6 ) 4.8 5.1 Merchandise 21,359 25,420 (16.0 ) 16.5 20.5 Publishing and other 25,066 22,372 12.0 19.4 18.0 Total net revenue $ 129,131 $ 124,257 3.9 % 100.0 % 100.0 % Online sponsorship and advertising - The increase in total online sponsorship and advertising of 9.1% was primarily driven by an increase in revenue from local advertising programs. Local online sponsorship and advertising revenue increased 14.9%, primarily attributable to an increase in the number of local vendors advertising with us on our network of websites, as well as an increase in average vendor spending. As of December 31, 2012, we had over 22,000 local vendors displaying over 29,000 profiles, 38-------------------------------------------------------------------------------- Table of Contents compared to nearly 21,000 vendors displaying over 28,000 profiles as of December 31, 2011. Revenue from national online sponsorship and advertising was generally flat year over year. Registry services - The decrease of 2.6% was primarily driven by a decrease in sales and higher returns from Macy's Inc. ("Macy's"), partially offset by increased registry commissions from our new and historic registry retail partners. The overall decrease in registry sales compared to the prior year can be attributed to a significant shift of our traffic from desktop to mobile. Due to various improvements needed to optimize the current mobile user experience by both the Company and our registry partners, the shift to mobile resulted in a decrease in registry commissions earned in the current year. Merchandise - The decrease of 16.0% was primarily driven by lower revenue from the WeddingChannel Store due to a steady decline in traffic to that site. As a result, in August 2012, all WeddingChannel Store traffic was redirected to The Knot Shop. Also contributing to the decrease was lower revenue generated from an e-commerce company we acquired in May 2009 due to reduced site traffic, which was impacted by the changes in the environment for search engine optimization. Publishing and other - The increase of 12.0% was primarily driven by an increase in advertising pages and revenue per advertising page sold related to The Knot national and regional magazines. Higher sales and the addition of a second publication of The Bump magazine in two of its cities also contributed to the increase. Gross Profit/Gross Margin Cost of revenues consists of the cost of merchandise sold, including outbound shipping costs, costs related to the production of national and regional magazines, payroll and related expenses for our personnel who are responsible for the production of online and offline media, and costs of Internet and hosting services. The majority of the costs are shared over various revenue streams. Gross margin improved 2.7% to 82.5%, compared to 79.8% in 2011. The following table presents the components of gross profit and gross margin for the year ended December 31, 2012 compared to the year ended December 31, 2011: Year Ended December 31, 2012 2011 Increase/(Decrease) Gross Gross Gross Gross Gross Gross Profit Margin % Profit Margin % Profit Margin % (Dollars in Thousands) Online sponsorship and advertising (national and local) $ 74,734 97.7 % $ 67,963 97.0 % $ 6,771 0.7 % Registry services 6,231 100.0 6,398 100.0 (167 ) - Merchandise 8,905 41.7 9,759 38.4 (854 ) 3.3 Publishing and other 16,659 66.5 15,051 67.3 1,608 (0.8 ) Total gross profit $ 106,529 82.5 % $ 99,171 79.8 % $ 7,358 2.7 % The increase in gross margin was primarily attributable to the increase in online sponsorship and advertising gross profit. Although online sponsorship and advertising gross margin was only slightly higher than last year, it remains a high gross margin business. The increase in net revenue for the year ended December 31, 2012 attributable to local online sponsorship and advertising was the primary driver of the increase in our total gross profit and gross margin over the prior year comparable period. Operating Expenses Operating expenses increased 3.6% to $92.3 million, compared to $89.1 million in 2011, primarily attributable to increased personnel and information technology costs to support our growth initiatives. As a percentage of net revenue, operating expenses were 71.5% and 71.7% for the years ended December 31, 2012 and 2011, respectively. The following table presents the components of operating expenses and the percentage of revenue that each component represented for the year ended December 31, 2012 compared to the year ended December 31, 2011: 39-------------------------------------------------------------------------------- Table of Contents Year Ended December 31, Percentage Percentage of Operating Expenses Increase/ Total Net Revenue 2012 2011 (Decrease) 2012 2011 (In Thousands) Product and content development $ 26,229 $ 24,276 8.0 % 20.4 % 19.5 % Sales and marketing 40,239 38,738 3.9 31.2 31.2 General and administrative 20,980 20,660 1.5 16.2 16.6 Long-lived asset impairment charges 958 716 33.8 0.7 0.6 Depreciation and amortization 3,874 4,702 (17.6 ) 3.0 3.8 Total operating expenses $ 92,280 $ 89,092 3.6 % 71.5 % 71.7 % Product and Content Development - The increase of 8.0% was primarily attributable to an increase in expenditures related to our technology development projects, as well as incremental operating expenses related to our Beijing, China office and our software development center in Guangzhou, China. The expenses were primarily related to personnel and occupancy. Sales and Marketing - The increase of 3.9% was primarily attributable to an increase in employee headcount to support our growth initiatives domestically and internationally. General and Administrative - The increase of 1.5% was primarily attributable to an increase in employee headcount to support our growth initiatives domestically and internationally, an increase in rent expense for our Beijing, China office, as well as incremental operating expenses related to our Shanghai, China branch. Long-lived asset impairment charges - Impairment charges were $958,000 for the year ended December 31, 2012. During the third quarter of 2012, we concluded there were impairment indicators with respect to the tradenames of WeddingChannel and an e-commerce company we acquired in May 2009. Recent trending of lower overall e-commerce revenue, a decrease in advertising and registry services revenue attributable to the WeddingChannel tradename and lower projected revenues in the future resulted in an impairment charge of $736,000 on the WeddingChannel tradename and $222,000 on the tradename of the company we acquired in May 2009. Depreciation and Amortization - The decrease of 17.6% was primarily attributable to the amortization expense recorded in the prior year of $688,000 related to WeddingChannel's technology intangible asset, before writing off the remaining balance in the third quarter of 2011 due to impairment. Interest and Other Income Interest and other income, net decreased 44.3% to $113,000, compared to $203,000 for the year ended December 31, 2011. The decrease was attributable to the recognition of a gain recorded in the prior year of $169,000 to mark-up our investment in a previously held noncontrolling interest as a result of the fair valuation analysis that was performed prior to obtaining a controlling interest. Loss in Equity Interest Loss in equity interest for each of the years ended December 31, 2012 and 2011 was $55,000 and $269,000, respectively. On April 20, 2012, we purchased a 5% equity investment in an organization that helps match professionals offering pro bono services with not-for-profit organizations looking for specific skill sets for programs they want to launch. During the year ended December 31, 2012, we recognized a loss of $48,000 on our investment in this entity. On December 10, 2012, the Company paid $1.0 million in cash and contributed the assets of a subsidiary in exchange for a 17.4% equity investment in an unrelated third-party. During the year ended December 31, 2012, we recognized a loss on equity investment of $7,000 representing our share of the unrelated third-party's losses for the year ended December 31, 2012. The loss in equity interest recorded during the year ended December 31, 2011 relates to an entity in which we owned 50% until August 2011, when we purchased an additional 25% equity interest, resulting in a controlling interest in this entity. As a result of the acquisition of a controlling interest, we stopped recording our portion of this entity's income or losses below the operating results line due to the inclusion of this entity in our consolidated results of operations. 40-------------------------------------------------------------------------------- Table of Contents Provision for Income Taxes The following table presents our income (loss) before income taxes, provision (benefit) for income taxes and effective tax rate for the periods presented: Year Ended December 31, 2012 2011 (Dollars in Thousands) Income before income taxes $ 14,307 $ 10,013 Provision for income taxes 5,658 4,025 Effective tax rate 39.5 % 40.2 % The effective tax rate for the year ended December 31, 2012 was a provision of 39.5%, compared to 40.2% for the year ended December 31, 2011. Although the rate was relatively flat year over year, our effective tax rate could fluctuate significantly and could be adversely affected to the extent earnings are lower than anticipated in states where we have lower statutory tax rates and higher than anticipated in states where we have higher statutory tax rates. Our effective tax rate could also fluctuate due to the income recognized by our international entities, changes in the valuation of our deferred tax assets or liabilities, or changes in tax laws, regulations, or interpretations thereof. Net Loss Attributable to Noncontrolling Interest Net loss attributable to noncontrolling interest for the year ended December 31, 2012 was $65,000. Net loss attributable to noncontrolling interest represents the 25% equity interest in one of our consolidated subsidiaries held by an investor until April 20, 2012, when we purchased the remaining noncontrolling interest for $500,000. 41-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Cash Flow Cash and cash equivalents consist of cash and highly liquid investments with maturities of 90 days or less at the date of acquisition. At December 31, 2013, we had $90.7 million in cash and cash equivalents, compared to $77.4 million at December 31, 2012 and $77.4 million at December 31, 2011. The following table sets forth our cash flows from operating activities, investing activities and financing activities for the periods indicated: For the Year Ended December 31, 2013 2012 2011 (In Thousands)Net cash provided by operating activities $ 22,243 $ 25,373 $ 24,051 Net cash used in investing activities (7,952 ) (4,368 ) (14,255 ) Net cash used in financing activities (1,001 ) (20,974 ) (72,006 ) Increase (decrease) in cash and cash equivalents $ 13,290 $ 31 $ (62,210 ) Operating Activities Net cash provided by operating activities was $22.2 million for the year ended December 31, 2013. This was driven by our net income of $5.8 million adjusted for non-cash items. Non-cash items included depreciation, amortization, stock-based compensation, reserve for returns and other non-cash items of $22.9 million. These contributions to cash from operations were partially offset by an increase in operating assets and liabilities of $6.4 million, including a $3.2 million increase in prepaid expenses and other current assets, mainly due to prepayments for income taxes of $2.7 million. Also contributing to the change in operating assets and liabilities was a $3.4 million increase in accounts receivable, net of deferred revenue. These increases were partially offset by an increase in accounts payable and accrued expenses of $0.9 million. Net cash provided by operating activities was $25.4 million for the year ended December 31, 2012. This was driven by our net income of $8.6 million adjusted for non-cash items. Non-cash items included depreciation, amortization, stock-based compensation, reserve for returns and other non-cash items of $13.8 million. Also contributing to the increase was an increase in the change in operating assets and liabilities of $3.0 million, primarily due to decreases in prepaid expenses and other current assets and inventories of $2.4 million and $1.6 million, respectively, as well as an increase in deferred rent of $0.7 million. Partially offsetting the increase in the change in operating assets and liabilities was an increase in accounts receivable net of deferred revenue of $2.4 million. Net cash provided by operating activities was $24.1 million for the year ended December 31, 2011. This was driven by our net income of $6.0 million adjusted for non-cash items. Non-cash items included depreciation, amortization, stock-based compensation, reserve for returns and other non-cash items of $19.7 million. This increase was offset by a decrease in the change in operating assets and liabilities of $1.6 million. The decrease was driven by an increase in trade accounts receivable net of deferred revenue of $8.1 million, driven by our national and local advertising businesses. This use of cash was offset by increased deferred rent of $5.8 million driven primarily by rent and other costs incurred in connection with our new leased office space in New York. Investing Activities Net cash used in investing activities was $8.0 million for the year ended December 31, 2013, primarily consisting of investments in capitalized software of $4.3 million, purchases of property and equipment of $1.6 million and acquisitions and investments in equity interests of $1.9 million. Additionally, upon the maturity of the U.S. Treasury Bills purchased in May 2011, the Company purchased new U.S. Treasury Bills using the proceeds received from our prior investment of $2.6 million. These U.S. Treasury Bills serve as the collateral for the letter of credit related to our leased property for the corporate headquarters in New York. Pursuant to our lease agreement, the letter of credit is required to be in effect during the entire term of the lease as security for our obligations under the lease. Net cash used in investing activities was $4.4 million for the year ended December 31, 2012, primarily consisting of investments in capitalized software of $1.5 million, purchases of property and equipment of $1.3 million and investments in equity interests of $1.5 million. Upon the maturity of the U.S. Treasury Bills purchased in May 2011, the Company purchased new U.S. Treasury 42-------------------------------------------------------------------------------- Table of Contents Bills using the proceeds received from our prior investment of $2.6 million. These U.S. Treasury Bills serve as the collateral for the letter of credit related to our leased property for the corporate headquarters in New York. Pursuant to our lease agreement, the letter of credit is required to be in effect during the entire term of the lease as security for our obligations under the lease. Net cash used in investing activities was $14.3 million for the year ended December 31, 2011, primarily consisting of purchases of property and equipment of $10.4 million and investments in capitalized software of $1.2 million. Of the $10.4 million of fixed asset spending, we spent $7.7 million on leasehold improvements for our new corporate headquarters in New York (before anticipated landlord reimbursement of $5.1 million). We also purchased $2.6 million in short-term U.S. Treasury Bills to collateralize the irrevocable letter of credit we entered into with UBS, as required under the terms of an agreement entered into on May 13, 2011 with 195 Broadway LLC in respect of our lease of office space in New York. Financing Activities Net cash used in financing activities was $1.0 million for the year ended December 31, 2013. This was driven by cash used to satisfy tax withholding obligations for employees related to the vesting of their restricted stock awards of $1.8 million. This use of cash was partially offset by the proceeds from the issuances of common stock in connection with our employee stock purchase plan, as well as the exercise of stock options of $0.5 million and excess tax benefits from stock-based awards of $0.3 million. Net cash used in financing activities was $21.0 million for the year ended December 31, 2012. This was driven by repurchases of our common stock under our Board-approved stock repurchase programs. On December 19, 2011, the Board of Directors authorized a stock repurchase program of $20.0 million of our common stock. Under this program, we repurchased 2.1 million shares of our stock in the open market at an average price of $8.96 per share, for a total price of $18.9 million. All shares were retired upon repurchase. On June 12, 2012, we completed the program. We also had repurchases of common stock in connection with the surrender of these shares by employees to satisfy tax withholding obligations related to the vesting of restricted stock awards of $1.9 million. The reversal of excess tax benefits for stock-based awards of $0.4 million also contributed to the net cash used in financing activities. These uses of cash were partially offset by the proceeds from the issuance of common stock in connection with our employee stock purchase plan, as well as the exercise of stock options of $0.3 million. Net cash provided by financing activities was $72.0 million for the year ended December 31, 2011. This was driven by repurchases of our common stock under our Board-approved stock repurchase programs. On February 25, 2011, we entered into a stock purchase agreement with Macy's, pursuant to which we agreed to repurchase 3.7 million shares of our common stock held by Macy's. The aggregate purchase price of the transaction was $37.7 million, based on the closing price of $10.26 per share for our common stock on the date of the agreement. The shares repurchased represented 10.7% of our outstanding common stock. We also repurchased 3.8 million shares of our stock on the open market at an average price of $8.82 per share, for a total price of $33.4 million. The shares repurchased on the open market represented 11.1% of our outstanding common stock. All shares were retired upon repurchase. We also had repurchases of common stock in connection with the surrender of shares by employees to satisfy tax withholding obligations related to the vesting of restricted stock awards of $1.6 million. These uses of cash were offset by excess tax benefits for stock-based awards of $0.4 million, and the proceeds from the issuance of common stock in connection with our employee stock purchase plan, as well as the exercise of stock options of $0.3 million. We expect our sources of liquidity to primarily include cash generated from operations. We believe that our existing cash and cash equivalents, together with cash expected to be generated from operations, will be sufficient to fund our operating activities, anticipated capital expenditures, investments in product and technology, potential business and asset acquisitions, strategic investments, and repurchases of our common stock for the foreseeable future. 43-------------------------------------------------------------------------------- Table of Contents Contractual Obligations and Commitments The following table summarizes XO Group's contractual obligations as of December 31, 2013: Payments Due by Period Less Than More Than Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years (In Thousands) Operating leases $ 25,285 $ 3,771 $ 6,275 $ 5,678 $ 9,561 Purchase commitments 4,438 3,402 1,036 - - Total $ 29,723 $ 7,173 $ 7,311 $ 5,678 $ 9,561 The above table excludes deferred rent of $5.9 million, which substantially represented accruals to recognize rent expense on a straight-line basis over the respective lives of our operating leases under which rental payments increase over the lease periods. These accruals will be reduced as the operating lease payments are made. Due to the uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits at December 31, 2013, we are unable to make a reasonably reliable estimate of the timing of any potential cash settlements with taxing authorities. Therefore, $3.8 million of unrecognized tax benefits have been excluded from the contractual obligation table above. Off-Balance Sheet Arrangements As of December 31, 2013, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Seasonality We believe that the impact of the frequency of weddings varying from quarter to quarter results in lower registry services and merchandise revenues in the first and fourth quarters. Our publishing business typically experiences a quarter to quarter revenue decline in the first and third quarters due to the cyclical pattern of our regional publishing schedule. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities on an on-going basis. Significant estimates and assumptions made by management include the determination of fair value of equity awards issued, fair value of our reporting unit, valuation of intangible assets (and their related useful lives), certain components of the income tax provisions, including valuation allowances on our deferred tax assets, compensation accruals, allowances for bad debts, inventory obsolescence reserves and reserves for future returns. We base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances. The level of uncertainty in estimates and assumptions increases with the length of time until the underlying transactions are completed. Actual results could differ from estimates in amounts that may be material to the financial statements. We believe the following critical accounting policies involve significant areas of management's estimates and judgments in the preparation of our consolidated financial statements. For further information, refer to Note 2 of the Consolidated Financial Statements included herein. Revenue Recognition We recognize revenues primarily from the sale of online sponsorship and advertising programs, commissions earned in connection with the sale of gift registry products, the sale of merchandise and the publication of magazines, provided that there is persuasive evidence of an arrangement, the service has been provided or the product has been shipped, the selling price is fixed or determinable, collection is reasonably assured and we have no significant remaining obligation. Online sponsorship programs are designed to integrate advertising with online editorial content. Sponsors can purchase the exclusive right to promote products or services on a specific online editorial area and can purchase a special feature on our sites. 44-------------------------------------------------------------------------------- Table of Contents These arrangements commonly include banner advertisements and direct e-mail marketing. Sponsors can also promote their services and products within the programming on our streaming video channels, The Knot TV, The Nest TV and The Bump TV. Online advertising includes online banner advertisements and direct e-mail marketing as well as placement in our online search tools. This category also includes online listings, including preferred placement and other premium programs, in the local area of our websites for local wedding and other vendors. Local vendors may purchase online listings through fixed term contracts or open-ended subscriptions. Certain elements of online sponsorship and advertising contracts provide for the delivery of a minimum number of impressions. Impressions are the featuring of a sponsor's advertisement, banner, link or other form of content on our sites. We recognize online sponsorship and advertising revenue over the duration of the contracts on a straight-line basis when we deliver impressions in excess of minimum guarantees. To the extent that minimum guaranteed impressions are not met, we are often obligated to extend the period of the contract until the guaranteed impressions are achieved. If this occurs, we defer and recognize the corresponding revenue over the extended period based on impressions delivered. Registry services revenue primarily represents commissions from retailers who participate in our registry aggregation service, which offers couples and their guests the opportunity to view multiple registries in one location and for guests to order gifts off of these registries. After the retail partners fulfill and ship the sales orders, the related commissions are contractually earned by us and recognized as revenue. Product returns or exchanges do not materially impact the commissions earned by us. We only record net commissions, and not gross revenue and cost of revenue associated with these products, since we are not primarily obligated in these transactions, are not subject to inventory risk and amounts earned are determined using a fixed percentage. Merchandise revenue generally includes the selling price of wedding supplies through our websites, as well as related outbound shipping and handling charges since we are the primary party obligated in a transaction, are subject to inventory risk, and we establish our own pricing and selection of suppliers. Merchandise revenue is recognized when products are shipped to customers, reduced by discounts as well as an allowance for estimated sales returns. Merchandise revenue excludes related sales taxes collected. Publishing revenue primarily includes print advertising revenue derived from the publication of national and regional magazines and guides. This revenue is recognized upon the publication of the related magazines, at which time all material services related to the magazine have been performed. Additionally, publishing revenue is derived from the sale of magazines on newsstands and in bookstores, and from author royalties received related to book publishing contracts. Revenue from the sale of magazines is recognized when the magazines are shipped, reduced by an allowance for estimated sales returns. Author royalties, to date, have been derived primarily from publisher royalty advances that are recognized as revenue when all of our contractual obligations have been met, which is typically upon the delivery to, and acceptance by, the publisher of the final manuscript. Multiple-deliverables included in an arrangement, primarily online and print advertising sales, are separated into different units of accounting and the arrangement consideration is allocated to the identified separate units based on their relative selling prices. Selling prices for deliverables that qualify as separate units of accounting are determined using a hierarchy of: (a) vendor-specific objective evidence of selling price, (2) third party evidence, and (3) best estimate of selling price. We use best estimate of selling price of our deliverables in allocating consideration to each deliverable since deliverables are typically priced with a wide range of discounts. Our best estimate of selling price is intended to represent the price at which we would sell the deliverable if we were to sell the item regularly on a stand-alone basis. The amount of revenue allocated to delivered items is limited by contingent revenue, if any. Allowance for Doubtful Accounts We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. In determining these allowances, we evaluate a number of factors, including the credit risk of customers, historical trends and other relevant information. If the financial condition of our customers were to deteriorate, additional allowances may be required. Inventory Inventory consists primarily of finished goods and is valued at the lower of cost or market. We assess the ultimate realizability of our inventory, which requires us to make judgments as to future demand and compare that with current inventory levels. We record a provision to write-down our inventory balance based upon that assessment. If our merchandise revenue grows, the investment in inventory would likely increase. It is possible that we would need to further write-down our inventory provisions in the future. 45-------------------------------------------------------------------------------- Table of Contents Goodwill, Other Intangible and Long-lived Assets The purchase price of acquired companies is allocated between intangible assets and the net tangible assets of the acquired businesses with the residual of the purchase price recorded as goodwill. At December 31, 2013, we had goodwill of $38.5 million and intangible assets, net of accumulated amortization of $3.4 million. We evaluate goodwill and indefinite-lived intangible assets annually as of October 1 for impairment, or more often if events or changes in circumstances indicate that the carrying value may not be recoverable. To complete our impairment analysis of goodwill and indefinite-lived intangible assets, we estimate fair value using multiple approaches and also consider whether events or changes in circumstances such as significant declines in revenue or earnings, or material adverse changes in the business climate indicate that the carrying value of assets may be impaired. There were no impairments of goodwill in any of the periods presented in the Consolidated Financial Statements. However, in our annual impairment analysis of indefinite-lived intangible assets for 2013 and 2012, we determined that certain indefinite-lived intangible assets were impaired by $235,000 and $958,000, respectively (see Note 5 to our Consolidated Financial Statements for additional details). We concluded there were no impairment indicators in 2011. Our definite-lived intangible assets include customer and advertiser relationships, developed technology and patents, trademarks and tradenames and service contracts. All definite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives, which we believe is consistent with the expected future cash flows to be generated by the respective assets. Definite-lived intangible assets and other long-lived assets are evaluated for recoverability whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. In evaluating an asset for recoverability, we estimate the future cash flow expected to result from the use of the asset and eventual disposition. If the expected future undiscounted cash flow is less than the carrying amount of the asset, an impairment loss, equal to the excess of the carrying amount over the fair value of the asset, is recognized. During 2013, we determined that certain definite-lived intangible assets were impaired by $1.2 million (see Note 5 to our Consolidated Financial Statements for additional details). Other long-lived assets primarily consist of software, leasehold improvements, computer and office equipment and furniture and fixtures, which are subject to depreciation over the useful life of the asset. The useful lives of other long-lived assets are determined based on our estimate of the period over which the asset will be utilized; such periods are periodically reviewed for reasonableness. We may be required to change these estimates based on changes in our industry or other changing circumstances. If these estimates change in the future, we may be required to recognize increased or decreased depreciation expense for these assets. Income Taxes We account for income taxes using the asset and liability method, as required by the accounting standard for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as net operating loss and tax credit carryforwards. Deferred taxes are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in results of operations in the period that includes the enactment date. The effects of any future changes in tax laws or rates have not been considered. We regularly review deferred tax assets to assess their potential realization and establish a valuation allowance for portions of such assets to reduce the carrying value if we do not consider it to be more likely than not that the deferred tax assets will be realized. Our review includes evaluating both positive (e.g., sources of taxable income) and negative (e.g., recent historical losses) evidence that could impact the realizability of our deferred tax assets. We recognize the impact of an uncertain tax position in our financial statements if, in management's judgment, the position is more-likely-then-not sustainable upon audit based on the position's technical merits. This involves the identification of potential uncertain tax positions, the evaluation of applicable tax laws and an assessment of whether a liability for an uncertain tax position is necessary. We operate and are subject to audit in multiple taxing jurisdictions. We record interest and penalties related to income taxes as a component of income tax expense. A substantial portion of our net operating losses were acquired in connection with the acquisition of WeddingChannel.com and are subject to a limitation on future utilization under Section 382 of the Internal Revenue Code. We currently estimate that the effect of Section 382 will generally limit the amount of the loss carryforwards of WeddingChannel.com that is available to offset future taxable income to approximately $3.6 million annually. The overall determination of the annual loss limitation is subject to interpretation; therefore, the annual loss limitation could be subject to change. 46-------------------------------------------------------------------------------- Table of Contents Stock-Based Compensation We measure the cost of employee services received in exchange for an award of equity instruments based on the measurement-date fair value of the award. The fair value of restricted stock is determined using the intrinsic value of the stock at the time of grant. The fair value of the options granted during 2013 was determined using the Black-Scholes option pricing model (see Note 4 to our Consolidated Financial Statements for further details). Using this model, fair value was calculated based on assumptions with respect to (i) expected volatility of our stock price, (ii) the expected term of the award, (iii) expected dividend yield on our stock, and (iv) a risk-free interest rate, which is based on quoted U.S. Treasury rates for securities with maturities approximating the expected term. Specifically, the expected term of the options granted during 2013 was determined using the "simplified method" as prescribed by SAB Topic 14D.2, which is presumed to be the midpoint between the vesting date and the end of the contractual term. The simplified method was used to determine the expected term of the options, due to the extended period of time that has lapsed since our last option grant, as well as differences in the contractual terms of the option awards compared to options granted in prior periods, such that our historical share option experience does not provide a reasonable basis to estimate the expected term. We intend to continue to consistently apply the simplified method until a sufficient amount of historical information regarding exercise data becomes available. We did not grant any stock options during the years ended December 31, 2012 or 2011. The fair value of the Employee Stock Purchase Plan ("ESPP") rights is estimated on the date of grant using the Black-Scholes option-pricing model (see Note 4 to our Consolidated Financial Statements for further details). Using this model, fair value is calculated based on assumptions with respect to (i) expected volatility of our stock price, (ii) the expected life of the award, which for ESPP rights is the period of time between the offering date and the exercise date (as defined in Note 4 to our Consolidated Financial Statements), (iii) expected dividend yield on our stock, and (iv) a risk-free interest rate, which is based on quoted U.S. Treasury rates for securities with maturities approximating the expected term. Expected volatility is calculated using our quoted stock price. The expected dividend yield is zero, as we have never paid dividends and currently intend to retain future earnings, if any, to finance the expansion of the business. The use of different assumptions in the Black-Scholes pricing model would result in different amounts of stock-based compensation expense related to the ESPP; however, in total, stock-based compensation expense for the ESPP is not material to our Consolidated Financial Statements. For grants of restricted stock and options, we record compensation expense based on the fair value of the shares on the grant date over the requisite service period, less estimated forfeitures. Forfeitures of equity awards are estimated at the grant date and reduce the compensation recognized. Estimated forfeitures of equity awards are periodically reviewed for reasonableness. We consider several factors when estimating future forfeitures, including types of awards, employee level and historical experience. Actual forfeitures may differ from current estimates. Recently Adopted Accounting Pronouncements In July 2012, the accounting standard relating to indefinite-lived intangible assets was updated to reduce the cost and complexity of performing an impairment test on such assets. The amendment to the standard allows an entity to first assess the qualitative factors to determine if the indefinite-lived intangible asset is impaired as a basis to determine whether or not to perform the quantitative impairment test. This updated standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this updated standard did not result in a material impact on our consolidated financial statements. In February 2013, the accounting standard relating to comprehensive income was updated to require entities to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. This updated standard is effective for annual and interim reporting periods beginning after December 15, 2012. The adoption of this updated standard did not result in a material impact on our consolidated financial statements. Recently Issued Accounting Pronouncements In July 2013, the accounting standard relating to an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists was updated to clarify the balance sheet presentation.The updated standard is effective 47-------------------------------------------------------------------------------- Table of Contents for annual and interim reporting periods beginning after December 15, 2013. This standard is not expected to have a material impact on our consolidated financial statements. |