HSN (HSNI) 10-Q 2013 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_______________________________________________________________________________________________

FORM 10-Q

S	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2013
Or
£	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File No. 001-34061

________________________________________________________________________________________________

HSN, INC.

(Exact name of registrant as specified in its charter)

________________________________________________________________________________________________

Delaware	26-2590893
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1 HSN Drive, St. Petersburg, Florida	33729
(Address of principal executive offices)	(Zip Code)

(727) 872-1000

(Registrant’s 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 S No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes S No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer S Accelerated filer £ Non‑accelerated filer £ (Do not check if a smaller reporting company) Smaller reporting company £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No S

As of November 5, 2013, the registrant had 52,881,489 shares of common stock, $0.01 par value per share, outstanding.

	TABLE OF CONTENTS
		Page
	PART I-FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	1
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2013 and 2012	1
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2013 and 2012	2
	Consolidated Balance Sheets as of September 30, 2013, December 31, 2012 and September 30, 2012	3
	Consolidated Statements of Shareholders' Equity for the Nine Months Ended September 30, 2013 and Year Ended December 31, 2012	4
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23
	PART II-OTHER INFORMATION
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Mine Safety Disclosures	24
Item 5.	Other Information	25
Item 6.	Exhibits	25
Signatures		26

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HSN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Net sales	$	798,890		$	778,769		$	2,384,147		$	2,283,864
Cost of sales	510,300			493,253			1,506,633			1,437,986
Gross profit	288,590			285,516			877,514			845,878
Operating expenses:
Selling and marketing	165,395			163,169			504,812			481,351
General and administrative	51,708			63,341			157,495			170,364
Depreciation and amortization	10,402			9,694			30,305			28,250
Total operating expenses	227,505			236,204			692,612			679,965
Operating income	61,085			49,312			184,902			165,913
Other income (expense):
Interest income	48			59			150			313
Interest expense	(1,673		)	(3,738		)	(5,078		)	(18,858		)
Loss on debt extinguishment	—			(18,309		)	—			(18,627		)
Total other expense, net	(1,625		)	(21,988		)	(4,928		)	(37,172		)
Income from continuing operations before income taxes	59,460			27,324			179,974			128,741
Income tax provision	(17,408		)	(9,766		)	(63,098		)	(48,284		)
Income from continuing operations	42,052			17,558			116,876			80,457
Income (loss) from discontinued operations, net of tax	—			128			—			(5,854		)
Net income	$	42,052		$	17,686		$	116,876		$	74,603
Income from continuing operations per share:
Basic	$	0.79		$	0.32		$	2.17		$	1.41
Diluted	$	0.77		$	0.31		$	2.12		$	1.37
Net income per share:
Basic	$	0.79		$	0.32		$	2.17		$	1.31
Diluted	$	0.77		$	0.31		$	2.12		$	1.27
Shares used in computing earnings per share:
Basic	53,234			55,476			53,849			56,913
Diluted	54,379			57,085			55,123			58,524
Dividends declared per share	$	0.18		$	0.125		$	0.54		$	0.375

The accompanying notes are an integral part of these consolidated financial statements.

1

HSN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2013			2012		2013		2012
Net income	$	42,052		$	17,686	$	116,876	$	74,603
Other comprehensive (loss) income:
Change in fair value of derivative instrument, net of tax	(751		)	—		867		—
Other comprehensive (loss) income, net of tax	(751		)	—		867		—
Comprehensive income	$	41,301		$	17,686	$	117,743	$	74,603

The accompanying notes are an integral part of these consolidated financial statements.

2

HSN, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

	September 30,			December 31,			September 30,
	2013			2012			2012
ASSETS
Current assets:
Cash and cash equivalents	$	108,251		$	222,092		$	129,938
Accounts receivable, net of allowance of $13,456, $14,537 and $11,840, respectively	192,931			249,890			178,144
Inventories	383,144			330,936			391,316
Deferred income taxes	29,560			27,603			22,640
Prepaid expenses and other current assets	59,216			46,172			54,022
Total current assets	773,102			876,693			776,060
Property and equipment, net	170,903			171,303			159,026
Intangible assets, net	265,761			266,876			267,466
Goodwill	9,858			9,858			9,858
Other non-current assets	6,692			7,222			6,753
TOTAL ASSETS	$	1,226,316		$	1,331,952		$	1,219,163
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable, trade	$	228,296		$	267,061		$	233,904
Current maturities of long-term debt	12,500			9,375			6,250
Accrued expenses and other current liabilities	171,114			215,389			170,951
Total current liabilities	411,910			491,825			411,105
Long-term debt, less current maturities	231,250			240,625			243,750
Deferred income taxes	89,893			79,002			76,051
Other long-term liabilities	11,619			15,986			15,716
Total liabilities	744,672			827,438			746,622
Commitments and contingencies (Note 13)
SHAREHOLDERS’ EQUITY:
Preferred stock $0.01 par value; 25,000,000 authorized shares; no issued shares	—			—			—
Common stock $0.01 par value; 300,000,000 authorized shares; 53,015,019, 54,853,684 and 54,820,212 issued shares at September 30, 2013, December 31, 2012 and September 30, 2012, respectively	531			549			548
Additional paid-in capital	1,824,165			1,964,760			1,988,389
Accumulated deficit	(1,343,448		)	(1,460,324		)	(1,516,396		)
Accumulated other comprehensive income (loss)	396			(471		)	—
Total shareholders’ equity	481,644			504,514			472,541
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,226,316		$	1,331,952		$	1,219,163

The accompanying notes are an integral part of these consolidated financial statements.

3

HSN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)

(Unaudited)

	Preferred Stock			Common Stock					Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive (Loss) Income			Total
	Shares	Amount		Shares		Amount
Balance as of December 31, 2011	—	$	—	58,414		$	584		$	2,180,112		$	(1,590,999	)	$	—		$	589,697
Net income	—	—		—		—			—			130,675			—			130,675
Other comprehensive loss	—	—		—		—			—			—			(471		)	(471		)
Stock-based compensation expense for equity awards	—	—		—		—			14,440			—			—			14,440
Cash dividend declared on common stock	—	—		—		—			(31,049		)	—			—			(31,049		)
Issuance of common stock from stock-based compensation awards, including tax benefit of $18,900	—	—		1,901		19			21,797			—			—			21,816
Repurchases of common stock	—	—		(5,461	)	(54		)	(220,540		)	—			—			(220,594		)
Balance as of December 31, 2012	—	—		54,854		549			1,964,760			(1,460,324		)	(471		)	504,514
Net income	—	—		—		—			—			116,876			—			116,876
Other comprehensive income	—	—		—		—			—			—			867			867
Stock-based compensation expense for equity awards	—	—		—		—			10,279			—			—			10,279
Cash dividend declared on common stock	—	—		—		—			(29,046		)	—			—			(29,046		)
Issuance of common stock from stock-based compensation awards, including tax benefit of $7,090	—	—		708		7			15,172			—			—			15,179
Repurchases of common stock	—	—		(2,547	)	(25		)	(137,000		)	—			—			(137,025		)
Balance as of September 30, 2013	—	$	—	53,015		$	531		$	1,824,165		$	(1,343,448	)	$	396		$	481,644

The accompanying notes are an integral part of these consolidated financial statements.

4

HSN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended September 30,
	2013			2012
Cash flows from operating activities attributable to continuing operations:
Net income	$	116,876		$	74,603
Loss from discontinued operations, net of tax	—			(5,854		)
Income from continuing operations	116,876			80,457
Adjustments to reconcile income from continuing operations to net cash provided by operating activities attributable to continuing operations:
Depreciation and amortization	30,305			28,250
Stock-based compensation expense	10,279			15,278
Loss on debt extinguishment	—			18,627
Amortization of debt issuance costs	847			1,491
Loss on disposition of fixed assets	1,069			449
Deferred income taxes	8,412			(418		)
Bad debt expense	15,001			16,547
Excess tax benefits from stock-based awards	(7,754		)	(16,162		)
Other	—			42
Changes in current assets and liabilities:
Accounts receivable	41,745			27,182
Inventories	(52,208		)	(96,497		)
Prepaid expenses and other assets	(12,725		)	(10,819		)
Accounts payable, accrued expenses and other current liabilities	(56,698		)	(59,322		)
Net cash provided by operating activities attributable to continuing operations	95,149			5,105
Cash flows from investing activities attributable to continuing operations:
Capital expenditures	(34,088		)	(28,230		)
Acquisition of business, net of cash received	—			(22,875		)
Proceeds received on sale of subsidiary	—			6,580
Net cash used in investing activities attributable to continuing operations	(34,088		)	(44,525		)
Cash flows from financing activities attributable to continuing operations:
Redemption of Senior Notes	—			(253,500		)
Borrowing under term loan	—			250,000
Repayment of long-term debt	(6,250		)	—
Payments of debt issuance costs	—			(4,607		)
Repurchase of common stock	(137,025		)	(184,652		)
Cash dividends paid	(29,046		)	(21,272		)
Proceeds from issuance of common stock	5,886			6,357
Tax withholdings related to stock-based awards	(13,897		)	(15,482		)
Excess tax benefits from stock-based awards	7,754			16,162
Payment of contingent consideration obligation	(2,172		)	—
Net cash used in financing activities attributable to continuing operations	(174,750		)	(206,994		)
Total cash used in continuing operations	(113,689		)	(246,414		)
Cash flows from discontinued operations:
Net cash used in operating activities attributable to discontinued operations	(152		)	(5,294		)
Net cash used in investing activities attributable to discontinued operations	—			(162		)
Total cash used in discontinued operations	(152		)	(5,456		)
Net decrease in cash and cash equivalents	(113,841		)	(251,870		)
Cash and cash equivalents at beginning of period	222,092			381,808
Cash and cash equivalents at end of period	$	108,251		$	129,938

The accompanying notes are an integral part of these consolidated financial statements.

5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1—ORGANIZATION

Company Overview

HSN, Inc. (“HSNi”) is an interactive multi-channel retailer that markets and sells a wide range of third party and private label merchandise directly to consumers through various platforms including (i) television home shopping programming broadcast on the HSN television networks; (ii) catalogs, which consist primarily of the Cornerstone portfolio of leading print catalogs which includes, Ballard Designs, Chasing Fireflies, Frontgate, Garnet Hill, Grandin Road, Improvements and TravelSmith; (iii) websites, which consist primarily of HSN.com and the eight branded websites operated by Cornerstone; (iv) retail and outlet stores; and (v) mobile devices. HSNi’s television home shopping business, related digital sales and outlet stores are referred to herein as “HSN” and all catalog operations, including related digital sales and stores, are collectively referred to herein as “Cornerstone.”

HSN offerings primarily consist of jewelry, fashion (apparel & accessories), beauty & wellness, and home & other (including household, home design, electronics, culinary, fitness and other). Merchandise offered by Cornerstone primarily consists of home furnishings (including indoor/outdoor furniture, home décor, tabletop, textiles, window treatments and other home related goods) and apparel & accessories.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). They do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of HSNi's management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of the results that may be expected for a full year. The accompanying unaudited consolidated financial statements should be read in conjunction with HSNi's audited consolidated financial statements and notes thereto for the year ended December 31, 2012. The consolidated balance sheet as of December 31, 2012 and the consolidated statement of shareholders' equity for the year ended December 31, 2012 were derived from the audited consolidated financial statements at that date but may not include all disclosures required by GAAP. Intercompany transactions and accounts have been eliminated in consolidation.

The operating results of Smith+Noble and The Territory Ahead, two Cornerstone brands that were sold in the second and third quarters of 2012, respectively, are presented as discontinued operations in the consolidated statements of operations and the consolidated statements of cash flows for all periods presented. See Note 12 for further discussion of discontinued operations.

Reclassifications

Reclassifications were made to prior period amounts within the operating activities section in the consolidated statements of cash flows to conform to the current year's presentation.

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES

Accounting Estimates

HSNi prepares its financial statements in conformity with GAAP. These principles require management to make certain estimates and assumptions during the preparation of its consolidated financial statements. These estimates and assumptions impact the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. They also impact the reported amount of net earnings during any period. Actual results could differ from those estimates. In the opinion of HSNi's management, the assumptions underlying these interim unaudited financial statements are reasonable.

6

Significant estimates underlying the accompanying consolidated financial statements include: the determination of the lower of cost or market adjustment for inventory; sales returns and other revenue allowances; the allowance for doubtful accounts; the recoverability of long-lived assets; the impairment of intangible assets; the annual expected effective tax rate, the determination of deferred income taxes, including related valuation allowances; the accrual for actual, pending or threatened litigation, claims and assessments; and assumptions related to the determination of incentive compensation and contingent consideration.    

NOTE 3—PROPERTY AND EQUIPMENT

The balance of property and equipment, net, is as follows (in thousands):

	September 30,			December 31,			September 30,
	2013			2012			2012
Capitalized software	$	211,145		$	196,529		$	201,513
Computer and broadcast equipment	86,209			83,038			95,176
Buildings and leasehold improvements	101,316			98,241			96,180
Furniture and other equipment	82,170			79,748			78,918
Projects in progress	8,666			18,494			7,677
Land and land improvements	10,312			10,734			10,646
	499,818			486,784			490,110
Less: accumulated depreciation and amortization	(328,915		)	(315,481		)	(331,084		)
Total property and equipment, net	$	170,903		$	171,303		$	159,026

NOTE 4—SEGMENT INFORMATION

HSNi presents its operating segments and related financial information in a manner consistent with how the chief operating decision maker and executive management view the businesses, how the businesses are organized as to segment management, and the focus of the businesses with regards to the types of products or services offered or the target market. HSNi has two operating segments, HSN and Cornerstone. The accounting policies of the segments are the same as those described in Note 2 – Summary of Significant Accounting Policies included in HSNi's Annual Report on Form 10-K for the year ended December 31, 2012. Intercompany accounts and transactions have been eliminated in consolidation.

HSNi’s primary performance metric is Adjusted EBITDA, which is defined as operating income excluding, if applicable: (1) non-cash charges including: (a) stock-based compensation expense, (b) amortization of intangibles, (c) depreciation and gains and losses on asset dispositions, and (d) goodwill, long-lived asset and intangible asset impairments; (2) pro forma adjustments for significant acquisitions; and (3) other significant items. Significant items, while periodically affecting our results, may vary significantly from period to period and have a disproportionate effect in a given period, thereby affecting the comparability of results. Adjusted EBITDA is not a measure determined in accordance with GAAP, and should not be considered in isolation or as a substitute for operating income, net income or any other measure determined in accordance with GAAP. Adjusted EBITDA is used as a measurement of operating efficiency and overall financial performance and HSNi believes it to be a helpful measure for those evaluating companies in the retail and media industries. Adjusted EBITDA has certain limitations in that it does not take into account the impact to HSNi’s consolidated statements of operations of certain expenses, gains and losses that are excluded from the company's definition of Adjusted EBITDA.

7

The following tables reconcile Adjusted EBITDA to operating income for HSNi’s operating segments and to HSNi’s consolidated net income (in thousands):

	Three Months Ended September 30, 2013									Three Months Ended September 30, 2012
	HSN			Cornerstone			Total			HSN			Cornerstone			Total
Adjusted EBITDA	$	57,136		$	17,426		$	74,562		$	56,790		$	14,969		$	71,759
Stock-based compensation expense	(2,128		)	(896		)	(3,024		)	(2,771		)	(1,857		)	(4,628		)
Depreciation and amortization	(7,368		)	(3,034		)	(10,402		)	(6,665		)	(3,029		)	(9,694		)
Sales tax settlement	—			—			—			—			(7,750		)	(7,750		)
Loss on disposition of fixed assets	(10		)	(41		)	(51		)	(374		)	(1		)	(375		)
Operating income	$	47,630		$	13,455		61,085			$	46,980		$	2,332		49,312
Total other expense, net							(1,625		)							(21,988		)
Income from continuing operations before income taxes							59,460									27,324
Income tax provision							(17,408		)							(9,766		)
Income from continuing operations							42,052									17,558
Income from discontinued operations, net of tax							—									128
Net income							$	42,052								$	17,686

	Nine Months Ended September 30, 2013									Nine Months Ended September 30, 2012
	HSN			Cornerstone			Total			HSN			Cornerstone			Total
Adjusted EBITDA	$	173,205		$	53,350		$	226,555		$	166,821		$	50,819		$	217,640
Stock-based compensation expense	(7,712		)	(2,567		)	(10,279		)	(8,810		)	(6,468		)	(15,278		)
Depreciation and amortization	(21,226		)	(9,079		)	(30,305		)	(19,839		)	(8,411		)	(28,250		)
Sales tax settlement	—			—			—			—			(7,750		)	(7,750		)
Loss on disposition of fixed assets	(1,028		)	(41		)	(1,069		)	(418		)	(31		)	(449		)
Operating income	$	143,239		$	41,663		184,902			$	137,754		$	28,159		165,913
Total other expense, net							(4,928		)							(37,172		)
Income from continuing operations before income taxes							179,974									128,741
Income tax provision							(63,098		)							(48,284		)
Income from continuing operations							116,876									80,457
Loss from discontinued operations, net of tax							—									(5,854		)
Net income							$	116,876								$	74,603

The net sales for each of HSNi's reportable segments are as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Net sales:
HSN	$	538,639	$	537,393	$	1,614,949	$	1,581,268
Cornerstone	260,251		241,376		769,198		702,596
Total	$	798,890	$	778,769	$	2,384,147	$	2,283,864

8

NOTE 5—EARNINGS PER SHARE

HSNi computes basic earnings per share using the weighted average number of common shares outstanding for the period. HSNi computes diluted earnings per share using the treasury stock method, which includes the weighted average number of common shares outstanding for the period plus the potential dilution that could occur if various equity awards to issue common stock were exercised or restricted equity awards were vested resulting in the issuance of common stock that could share in HSNi’s earnings.

The following table presents HSNi’s basic and diluted earnings per share (in thousands, except per share data):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Net income (loss):
Continuing operations	$	42,052	$	17,558	$	116,876	$	80,457
Discontinued operations	—		128		—		(5,854		)
Net income	$	42,052	$	17,686	$	116,876	$	74,603
Weighted average number of shares outstanding:
Basic	53,234		55,476		53,849		56,913
Dilutive effect of stock-based compensation awards	1,145		1,609		1,274		1,611
Diluted	54,379		57,085		55,123		58,524
Net income (loss) per share - basic:
Continuing operations	$	0.79	$	0.32	$	2.17	$	1.41
Discontinued operations	—		—		—		(0.10		)
Net income	$	0.79	$	0.32	$	2.17	$	1.31
Net income (loss) per share - diluted:
Continuing operations	$	0.77	$	0.31	$	2.12	$	1.37
Discontinued operations	—		—		—		(0.10		)
Net income	$	0.77	$	0.31	$	2.12	$	1.27
Unexercised employee stock options and stock appreciation rights and unvested restricted stock units excluded from the diluted EPS calculation because their effect would have been antidilutive	431		731		432		807

NOTE 6—LONG-TERM DEBT

The balance of long-term debt, including current maturities, is as follows (in thousands):

	September 30,			December 31,			September 30,
	2013			2012			2012
Secured credit agreement expiring April 24, 2017:
Term loan	$	243,750		$	250,000		$	250,000
Revolving credit facility	—			—			—
Total long-term debt	243,750			250,000			250,000
Less: current maturities	(12,500		)	(9,375		)	(6,250		)
Long-term debt, less current maturities	$	231,250		$	240,625		$	243,750

On April 24, 2012, HSNi entered into a $600 millionfive-year syndicated credit agreement ("Credit Agreement") which is secured by 100% of the voting equity securities of HSNi's U.S. subsidiaries and 65% of HSNi's first-tier foreign subsidiaries. This Credit Agreement replaced the credit agreement that was set to expire in July 2013. Certain HSNi subsidiaries have unconditionally guaranteed HSNi's obligations under the Credit Agreement.  The Credit Agreement, which includes a $350 million revolving credit facility and a $250 million delayed draw term loan, may be increased up to $850 million subject to certain conditions and expires April 24, 2017. HSNi drew $250 million from its term loan on July 31, 2012 to fund the

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redemption of the Senior Notes, as discussed below. HSNi capitalized $5.5 million in financing costs related to the Credit Agreement and is amortizing these costs to interest expense over the Credit Agreement's five-year life.

The Credit Agreement includes various covenants, limitations and events of default customary for similar facilities including a maximum leverage ratio of 3.00x and a minimum interest coverage ratio of 3.00x. HSNi was in compliance with all such covenants as of September 30, 2013 with a leverage ratio of 0.75x and an interest coverage ratio of 58.72x. The Credit Agreement also contains covenants that limit our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness, pay dividends or make other distributions to third parties, repurchase or redeem our stock, make investments, sell assets, incur liens, enter into agreements restricting our subsidiaries' ability to pay dividends, enter into transactions with affiliates and consolidate, merge or sell all or substantially all of our assets. Dividend payments, loans or advances to HSNi by its subsidiaries are not restricted by the Credit Agreement.

Loans under the Credit Agreement bear interest at a per annum rate equal to LIBOR plus a predetermined margin that ranges from 1.50% to 2.25% or the Base Rate (as defined in the Credit Agreement) plus a predetermined margin that ranges from 0.50% to 1.25%.  HSNi can elect to borrow at either LIBOR or the Base Rate and the predetermined margin is based on HSNi's leverage ratio. The term loan interest rate as of September 30, 2013 was 1.68%.  HSNi pays a commitment fee ranging from 0.25% to 0.40% (based on the leverage ratio) on the unused portion of the revolving credit facility. 

The amount available to HSNi under the revolving credit facility portion of the Credit Agreement is reduced by the amount of outstanding letters of credit issued under the revolving credit facility, which totaled $36.7 million as of September 30, 2013. The ability to draw funds under the revolving credit facility is dependent upon meeting the aforementioned financial covenants. As of September 30, 2013, the amount that could be borrowed under the revolving credit facility, in consideration of the financial covenants and the outstanding letters of credit, was approximately $313.3 million. As of September 30, 2013, there was no outstanding balance due under the revolving credit facility.

On July 28, 2008, HSNi issued $240 million of 11.25% senior notes due 2016 (the “Senior Notes”). The Senior Notes were fully redeemed on August 1, 2012 for $253.5 million, or 105.625% of the principal amount, plus accrued and unpaid interest to the redemption date, at which time the Senior Notes were no longer deemed to be outstanding, interest ceased to accrue thereon and all rights of the holders of the Senior Notes ceased to exist, except for the right to receive the redemption price. HSNi drew $250 million from its term loan on July 31, 2012 and used its cash on hand to fund the redemption. HSNi reported approximately $18.3 million in pre-tax charges associated with redemption of the Senior Notes in the quarter ended September 30, 2012. These charges resulted from the redemption premium of $13.5 million and $4.8 million related to the write-off of unamortized issuance costs and original issue discount.

NOTE 7—DERIVATIVE INSTRUMENTS

HSNi uses derivatives in the management of its interest rate risk with respect to its variable rate debt. HSNi's strategy is to eliminate the cash flow risk on a portion of its variable rate debt caused by changes in the benchmark interest rate (LIBOR). Derivative instruments are not entered into for speculative purposes.

HSNi entered into a forward-starting interest rate swap agreement on December 20, 2012 with a notional amount of $187.5 million at a fixed rate of 0.8525%, resulting in an all-in fixed rate of 2.3525% based on HSNi's leverage ratio as of September 30, 2013. The interest rate swap takes effect on January 31, 2014 with a maturity date in April 2017. Under this swap, HSNi pays at a fixed rate and receives payments at a variable rate based on one-month LIBOR. The swap effectively fixes the floating LIBOR-based interest of our outstanding LIBOR-based debt. The interest rate swap was designated and qualified as a cash flow hedge; therefore, the effective portion of the changes in fair value is recorded in accumulated other comprehensive income. Any ineffective portions of the changes in fair value of the interest rate swap will be immediately recognized directly to earnings in the consolidated statement of operations. The change in fair value of the interest rate swap for the three and nine months ended September 30, 2013 was a loss of $0.8 million and a gain of $0.9 million, respectively, net of tax, and were included in other comprehensive (loss) income. See Note 8 for discussion of the fair value measurements concerning this interest rate swap.

As of September 30, 2013, the fair value of the interest rate swap was an asset of $0.6 million and was recorded in "Other non-current assets" in the consolidated balance sheets. As of December 31, 2012, the fair value of the interest rate swap was a liability of $0.8 million and was recorded in "Other long-term liabilities" in the consolidated balance sheets. As of September 30, 2013, HSNi estimates that approximately $0.8 million of unrealized losses included in accumulated other comprehensive income related to this swap will be realized and reported in earnings within the next twelve months.

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NOTE 8—FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value assumptions are made at a specific point in time and changes in underlying assumptions could significantly affect these estimates. HSNi applies the following framework for measuring fair value which is based on a three-level hierarchy:

Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.

Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3—Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.

The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturity of these items. The following table summarizes the fair value of HSNi's other financial assets and liabilities which are measured at fair value on a recurring basis in the consolidated balance sheets (in thousands):

	September 30, 2013
		Total Fair Value and Carrying Value on Balance Sheet		Fair Value Measurement Category
				Level 1		Level 2		Level 3
Assets:
Interest rate swap		$	635	$	—	$	635	$	—

	December 31, 2012
		Total Fair Value and Carrying Value on Balance Sheet		Fair Value Measurement Category
				Level 1		Level 2		Level 3
Liabilities:
Interest rate swap		$	755	$	—	$	755	$	—

HSNi's interest rate swap was carried on the balance sheet at fair value as of September 30, 2013 and December 31, 2012. The swap was entered into in December 2012 for the purpose of hedging the variability of interest expense and interest payments on HSNi's long-term variable rate debt. Because this swap is not actively traded, the fair value was based on a valuation model. Interest rate yield curves and credit spreads are the significant inputs included in the valuation model. These inputs are observable in active markets (level 2 criteria). HSNi considers credit risk associated with its own standing as well as the credit standing of any counterparties involved in the valuation of its financial instruments.

The following table summarizes the fair value of HSNi’s financial assets and liabilities which are carried at cost (in thousands):

	September 30, 2013
	Carrying Value		Fair Value		Fair Value Measurement Category
					Level 1		Level 2		Level 3
Term Loan	$	243,750	$	243,750	$	—	$	243,750	$	—

	December 31, 2012
	Carrying Value		Fair Value		Fair Value Measurement Category
					Level 1		Level 2		Level 3
Term Loan	$	250,000	$	250,000	$	—	$	250,000	$	—

	September 30, 2012
	Carrying Value		Fair Value		Fair Value Measurement Category
					Level 1		Level 2		Level 3
Term Loan	$	250,000	$	250,000	$	—	$	250,000	$	—

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The fair value of the term loan was estimated by discounting expected cash flows at the rates currently offered to HSNi for debt of the same remaining maturities, as advised by HSNi's bankers (level 2 criteria).

As of June 30, 2012, the assets and liabilities of The Territory Ahead were considered a disposal group held for sale. During the three months ended June 30, 2012, an impairment charge of $5.9 million, or $3.7 million net of tax, was recorded to reduce the carrying value of the net assets to their estimated net realizable value. See Note 12 - Discontinued Operations for further discussion of this impairment charge.

HSNi measures certain assets, such as property and equipment and intangible assets, at fair value on a nonrecurring basis. These assets are recognized at fair value if they are deemed to be impaired. During the nine months ended September 30, 2013 and 2012, there were no assets, other than The Territory Ahead disposal group, that were required to be recorded at fair value as no impairment indicators were present.

NOTE 9—INCOME TAXES

HSNi calculates its interim income tax provision in accordance with the accounting guidance for income taxes in interim periods. At the end of each interim period, HSNi makes its best estimate of the annual expected effective tax rate and applies that rate to its ordinary year-to-date income or loss. The tax or benefit related to significant, unusual, or extraordinary items that will be separately reported or reported net of their related tax effect are individually computed and recognized in the interim period in which those items occur.

In addition, the effect of changes in enacted tax laws or rates, tax status, or judgment on the realizability of beginning-of-the-year deferred taxes in future years is recognized in the interim period in which the change occurs.

The computation of the annual expected effective tax rate at each interim period requires certain estimates and assumptions including, but not limited to, the expected operating income for the year, permanent and temporary differences, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is acquired, additional information is obtained or the tax environment changes. To the extent that the estimated annual effective tax rate changes during a quarter, the effect of the change on prior quarters is included in tax expense for the current quarter.

For the three and nine months ended September 30, 2013, HSNi recorded a tax provision of $17.4 million and $63.1 million, respectively, which represents effective tax rates of 29.3% and 35.1%, respectively. For the three and nine months ended September 30, 2012, HSNi recorded a tax provision of $9.8 million and $48.3 million, respectively, which represents effective tax rates of 35.7% and 37.5%, respectively. The change in the effective tax rates from the prior periods was primarily due to discrete tax benefits of $3.7 million realized in the current quarter. 

The Internal Revenue Service ("IRS") has concluded its examination of HSNi's consolidated federal income tax return for the year ended December 31, 2010 and its limited scope examination of HSNi's consolidated federal income tax return for the year ended December 31, 2011. No material adjustments resulted from these IRS examinations. Various state income tax examinations are in process. HSNi does not anticipate any material adjustments to its tax liabilities resulting from any of these examinations.

HSNi and several companies previously owned by IAC/InterActiveCorp, or IAC, were spun-off from IAC on August 20, 2008. In connection with the spin-off, HSNi entered into a Tax Sharing Agreement with IAC pursuant to which, among other things, each of the companies included in the spin-off (the "Spincos") has indemnified IAC and the other Spincos for any taxes resulting from the spin-off of such Spinco (and any related interest, penalties, legal and professional fees, and all costs and damages associated with related shareholder litigation or controversies) to the extent such amounts result from (i) any act or failure to act by such Spinco described in the covenants in the Tax Sharing Agreement, (ii) any acquisition of equity securities or assets of such Spinco or a member of its group, and (iii) any breach by such Spinco or any member of its group of any representation or covenant contained in the separation documents or in the documents relating to the IRS private letter ruling and/or tax opinions. In the event an adjustment with respect to a pre-spin-off period for which IAC is responsible results in a tax benefit to HSNi in a post-spin-off period, HSNi will be required to pay such tax benefit to IAC. In general, IAC controls all audits and administrative matters and other tax proceedings relating to the consolidated federal income tax return of the IAC group and any other tax returns for which the IAC group is responsible. The provisions set forth in the Tax Sharing Agreement could subject HSNi to future tax contingencies.

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The IRS has substantially completed its review of the IAC consolidated tax returns for the years ended December 31, 2001 through 2008, which includes the operations of HSNi. The settlement for these years has been submitted to and approved by the Joint Committee on Taxation. Various IAC consolidated tax returns filed with state, local and foreign jurisdictions are currently under examination, the most significant of which are California, New York and New York City, for various tax years beginning with 2006. By virtue of the Tax Sharing Agreement with IAC, HSNi is indemnified with respect to additional tax liabilities for consolidated or combined federal and state tax returns prepared and filed by IAC prior to the spin-off, but is liable for any additional tax liabilities for HSNi separately filed state income tax returns.

NOTE 10—STOCK-BASED AWARDS

Stock-based compensation expense is included in the following line items in the accompanying consolidated statements of operations (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Selling and marketing	$	818		$	932		$	2,674		$	2,744
General and administrative	2,206			3,696			7,605			12,534
Stock-based compensation expense before income taxes	3,024			4,628			10,279			15,278
Income tax benefit	(1,108		)	(1,574		)	(3,697		)	(5,220		)
Stock-based compensation expense after income taxes	$	1,916		$	3,054		$	6,582		$	10,058

As of September 30, 2013, there was approximately $25.7 million of unrecognized compensation cost, net of estimated forfeitures, related to all equity-based awards which is currently expected to be recognized on a straight-line basis over a weighted average period of approximately 2.6 years.

The Second Amended and Restated 2008 Stock and Annual Incentive Plan, as amended (the “Plan”), authorizes the issuance of 8.0 million shares of HSNi common stock for new awards granted by HSNi. The purpose of the Plan is to assist HSNi in attracting, retaining and motivating officers, employees, directors and

consultants, and to provide HSNi with the ability to provide incentives more directly linked to the profitability of HSNi’s business and increases in shareholder value. As of September 30, 2013, there were approximately 2.7 million shares of common stock available for grants under the Plan.

HSNi can grant restricted stock units ("RSUs"), market stock units ("MSUs"), stock options, stock appreciation rights (“SARs”), dividend equivalents and other stock-based awards under the Plan. Stock-based awards have a maximum term of 10 years. The exercise price of options and SARs granted under the Plan is required to be at, or above, the fair market value of HSNi’s stock on the date of grant. RSUs have rights to receive dividend equivalents that vest at the same time as the underlying RSUs once the requisite service has been rendered. HSNi elects to issue shares of its common stock for RSU vestings and SAR exercises net of the employees’ minimum tax withholding obligation. The payments made by HSNi to the taxing authorities for these taxes for the nine months ended September 30, 2013 and 2012 were $13.9 million and $15.5 million, respectively.

A summary of the stock-based awards granted during the nine months ended September 30, 2013 is as follows:

	Nine Months Ended September 30, 2013
	Number of Awards Granted	Weighted Average per Share Fair Value
Stock appreciation rights	346,301	$22.57
Restricted stock units	200,940	$58.31
Market stock units	100,723	$82.67
Employee stock purchase plan options	43,521	$11.75

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The fair values of the options granted under the HSN, Inc. 2010 Employee Stock Purchase Plan and the SARs are estimated on the grant date using the Black-Scholes option pricing model. The fair values of the MSUs were measured on the grant date by applying a Monte Carlo simulation pricing model. The weighted average assumptions used in each valuation model for the nine months ended September 30, 2013 are as follows:

	Nine Months Ended September 30, 2013
	Monte Carlo		Black-Scholes
	Market Stock Units		Stock Appreciation Rights		Employee Stock Purchase Plan Options
Volatility factor	39.7	%	49.1	%	23.4	%
Risk-free interest rate	1.00	%	0.85	%	0.10	%
Expected term	4.0		4.8		0.5
Dividend yield	1.1	%	1.2	%	1.3	%

Performance-Based Awards

During the first quarter of 2010, HSNi implemented a performance-based equity compensation program for certain key members of Cornerstone’s management. The amount payable was based on the extent to which certain pre-established performance goals for Cornerstone were achieved during the three-year period ended December 31, 2012. These equity awards were accounted for as liabilities which were remeasured each reporting period based on the probability of achievement of the performance conditions. The amount earned pursuant to the award at the end of the December 31, 2012 service period was $16.8 million which was settled in shares of HSNi common stock in the first quarter of 2013.

During the third quarter of 2013, HSNi granted MSUs to its Chief Executive Officer based upon the total shareholder return of HSNi's common stock over a three years and five years period. Payout percentages range between 0% and 200% of the target award depending on the awards' market condition, the future price of HSNi's stock. The fair values of the MSUs were $8.3 million and were measured on the grant date by applying a Monte Carlo simulation pricing model which estimates the potential outcome of reaching the market condition based on simulated future stock prices and is recognized over the performance period.

NOTE 11—SHAREHOLDERS’ EQUITY

Share Repurchase Program

On September 27, 2011, HSNi’s Board of Directors approved a share repurchase program which allows HSNi to purchase 10 million shares of its common stock from time to time through privately negotiated and/or open market transactions. The timing of repurchases and actual number of shares repurchased depends on a variety of factors, including the stock price, corporate and regulatory requirements, restrictions under HSNi’s debt obligations and other market and economic conditions. The repurchase program may be suspended or discontinued by HSNi at any time. For the nine months ended September 30, 2013, HSNi acquired under the program approximately 2.5 million shares of its outstanding common stock for $137.0 million at an average price of $53.79. For the nine months ended September 30, 2012, HSNi acquired under the program approximately 4.8 million shares of its outstanding common stock for $187.4 million at an average price of $39.15. As of September 30, 2013, approximately 1.2 million shares remained authorized for repurchase under the plan.

Shares repurchased pursuant to HSNi’s share repurchase program are immediately retired upon purchase. Repurchased common stock is reflected as a reduction of stockholders’ equity. HSNi’s accounting policy related to its share repurchases is to reduce its common stock based on the par value of the shares and to reduce its capital surplus for the excess of the repurchase price over the par value. Since the inception of its share repurchase program in September 2011, HSNi has had an accumulated deficit balance; therefore, the excess over the par value has been applied to additional paid-in capital. Once HSNi has retained earnings, the excess will be charged entirely to retained earnings.

Dividend Policy

Effective August 1, 2013, HSNi's Board of Directors approved a quarterly cash dividend of $0.18 per common share. The dividend was paid on September 18, 2013 to HSNi's shareholders of record as of September 4, 2013.

Effective November 6, 2013, HSNi's Board of Directors approved a quarterly cash dividend of $0.25 per common share. This represents an increase over the prior quarterly dividend of 39% or $.07 per common share. The dividend will be paid on December 18, 2013 to HSNi's shareholders of record as of December 4, 2013.

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NOTE 12—DISCONTINUED OPERATIONS

In May 2012, substantially all of the assets and certain liabilities of Smith+Noble, a Cornerstone brand specializing in window treatments, were sold for $5.5 million. HSNi does not expect to have any significant continuing involvement or cash flows from Smith+Noble; therefore, the results of operations for Smith+Noble are presented separately as “Loss from discontinued operations, net of tax” in the consolidated statements of operations for all periods presented, and the cash flows from Smith+Noble are presented separately as discontinued operations in the consolidated statements of cash flows for all periods presented.

In July 2012, substantially all of the assets and certain liabilities of The Territory Ahead, a Cornerstone brand specializing in casual apparel for men and women, were sold for approximately $1.1 million. HSNi does not expect to have any significant continuing involvement or cash flows from The Territory Ahead; therefore, the results of operations for The Territory Ahead are presented separately as “Loss from discontinued operations, net of tax” in the consolidated statements of operations for all periods presented, and the cash flows from The Territory Ahead are presented separately as discontinued operations in the consolidated statements of cash flows for all periods presented. An impairment charge of $5.9 million, or $3.7 million net of taxes, was recorded in the second quarter of 2012 to reduce the carrying value of the net assets to their estimated net realizable value and is included in "Loss from discontinued operations, net of tax" in the accompanying consolidated statement of operations.

The following table reflects the results of HSNi's discontinued operations for all periods presented (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2013		2012			2013		2012
Net sales	$	—	$	—		$	—	$	40,153
Income (loss) from discontinued operations	$	—	$	228		$	—	$	(9,398	)
Income tax (expense) benefit	—		(100		)	—		3,544
Income (loss) from discontinued operations, net of tax	$	—	$	128		$	—	$	(5,854	)

NOTE 13—COMMITMENTS AND CONTINGENCIES

In cooperation with the United States Consumer Product Safety Commission (“CPSC), Frontgate, one of the Cornerstone brands, announced in January 2011 a voluntary recall of a product sold from December 2005 through July 2010.  In June 2013, the CPSC notified the company that the CPSC is investigating whether the company complied with certain reporting requirements of the Consumer Product Safety Act.  At this time it is not yet possible to determine what, if any, actions will be taken by the CPSC, whether a civil penalty will be assessed or, if assessed, the amount thereof.

In the ordinary course of business, HSNi is a party to various audits and lawsuits. These audits or litigation may relate to claims involving property, personal injury, contract, intellectual property (including patent infringement), sales tax, product recalls, regulatory compliance and other claims. HSNi has established reserves for specific legal or tax compliance matters that it has determined the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable. Management has also identified certain other legal matters where it believes an unfavorable outcome is not probable and, therefore, no reserve is established. Although management currently believes that an unfavorable resolution of claims against HSNi, including claims where an unfavorable outcome is reasonably possible, will not have a material impact on its liquidity, results of operations, financial condition or cash flows, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future and an unfavorable resolution of such a proceeding could have a material impact. Moreover, any claims or regulatory actions against HSNi, whether meritorious or not, could be time-consuming, result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources.

HSNi also evaluates other contingent matters, including tax contingencies, to assess the probability and estimated extent of potential loss. See Note 9 for discussion related to income tax contingencies.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this quarterly report. Historical results and trends which might appear should not be taken as indicative of future operations. Our results of operations and financial condition, as reflected in the accompanying statements and related notes, are subject to management’s evaluation and interpretations of business conditions, changing market conditions and other factors.

FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), which are based on management’s exercise of business judgment, as well as assumptions made by and information currently available to management. When used in this document, the words “may,” “will,” “anticipate,” “believe,” “estimate,” “expect,” “intend” and words of similar import, are intended to identify any forward-looking statements. These forward-looking statements include, among other things, statements relating to the following: HSNi’s future financial performance, HSNi’s business prospects and strategy, anticipated trends and prospects in the various markets in which HSNi’s businesses operate and other similar matters. These forward-looking statements relate to expectations concerning matters that are not historical fact and are based on management’s current expectations and assumptions about future events, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. Although we believe our expectations are based on reasonable estimates and assumptions, they are not guarantees of performance.

Should one or more of these uncertainties, risks or changes in circumstances materialize, or should underlying assumptions prove incorrect, our actual results could differ materially from those anticipated in these forward-looking statements. Factors that could cause or contribute to such differences include but are not limited to those described under “Risk Factors,” included in HSNi's Annual Report on Form 10-K for the year ended December 31, 2012 and the following:

• our ability to attract new and retain existing customers in a cost-effective manner;

• changes in our relationships with pay television operators, vendors, manufacturers and other third parties;

• the influence of the macroeconomic environment and its impact on consumer confidence and spending levels;

• changes in product shipping and handling costs particularly if we are unable to offset them;

• any technological or regulatory developments that could negatively impact the way we do business, including developments requiring us to collect and remit state and local sales and use taxes;

• risks associated with possible systems failures and/or security breaches, including, any security breach that results in the theft, transfer or unauthorized disclosure of customer, employee or company information, or the failure to comply with various laws applicable to HSNi in the event of such a breach;

• HSNi’s business prospects and strategy, including whether HSNi’s initiatives will be effective;

• our ability to offer new or innovative products and services through various platforms in a cost effective manner and consumer acceptance of these products and services; and

• the loss of any key member of our senior management team.

Other unknown or unpredictable factors that could also adversely affect HSNi’s business, financial condition and results of operations may arise from time to time.

You should not place undue reliance on these forward-looking statements. All written or oral forward-looking statements that are made or are attributable to us are expressly qualified in their entirety by this cautionary notice. Such forward-looking statements speak only to the date such statements are made and we do not undertake to update, revise or otherwise publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof, or to reflect the occurrence of any unanticipated events. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our expectations will materialize. Historical results should not be considered an indication of future performance.

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Results of Operations

Net Sales

Net sales primarily relate to the sale of merchandise, including shipping and handling fees, and are reduced by incentive discounts and actual and estimated sales returns. Sales taxes collected are not included in net sales. Digital sales include sales placed through our internet websites and our mobile applications, including tablets and smart phones.

Revenue is recorded when delivery to the customer has occurred. Delivery is considered to have occurred when the customer takes title and assumes the risks and rewards of ownership, which is generally on the date of shipment. HSNi’s sales policy allows customers to return virtually all merchandise for a full refund or exchange, subject to pre-established time restrictions.

	Three Months Ended September 30,					Nine Months Ended September 30,
	2013		Change	2012		2013		Change	2012
	(Dollars in thousands)					(Dollars in thousands)
HSN	$	538,639	—%	$	537,393	$	1,614,949	2%	$	1,581,268
Cornerstone	260,251		8%	241,376		769,198		9%	702,596
Total HSNi net sales	$	798,890	3%	$	778,769	$	2,384,147	4%	$	2,283,864

HSNi net sales in the third quarter of 2013 increased 3%, or $20.1 million, primarily due to 8% sales growth at Cornerstone. Digital sales grew 8% with penetration increasing 230 basis points to 46.5%, up from 44.2% in the prior year. The gross units shipped in the third quarter of 2013 increased 1% to 15.0 million while the average price point decreased by less than 1% to $60.33.

HSNi net sales in the nine months ended September 30, 2013 increased 4%, or $100.3 million, due to 2% sales growth at HSN and 9% sales growth at Cornerstone. Digital sales grew 9% with penetration increasing 200 basis points to 45.4%, up from 43.4% in the prior year. The number of units shipped in the first nine months of 2013 increased 6% to 43.8 million while the average price point decreased 2% to $61.84.

HSN

HSN net sales in the third quarter of 2013 were relatively unchanged at $538.6 million. Digital sales grew 7% and penetration increased 220 basis points to 36.8%, up from 34.6% in the prior year. Sales grew in home design and household, offset by lower sales in jewelry, apparel & accessories and culinary. The return rate decreased 180 basis points to 18.7% from 20.5% in the prior year primarily due to the shift in product mix to categories with historically lower return rates as well as experiencing overall lower return rates in many product categories. The gross units shipped increased 3% to 11.3 million while average price point decreased 5% to $55.70 primarily due to changes in product mix.

HSN net sales in the nine months ended September 30, 2013 increased 2%, or $33.7 million. Sales grew in home design and beauty, offset by lower sales in jewelry and culinary. Digital sales grew 7% and penetration increased 160 basis points to 36.0%, up from 34.4% in the prior year. Digital sales were tempered in the first quarter by the launch of the digital site redesign across all HSN digital platforms that occurred early in the year. The return rate decreased 60 basis points to 19.3% from 19.9% in the prior year primarily due to the shift in product mix to categories with lower return rates as well as experiencing lower return rates in many of its product categories. The gross units shipped increased 7% to 33.7 million while average price point decreased 6% to $56.68 primarily due to an increase in clearance activity and changes in product mix.

Divisional product sales mix at HSN is provided in the table below:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Jewelry	11.6	%	13.8	%	12.2	%	14.3	%
Fashion (apparel & accessories)	14.1	%	15.2	%	14.9	%	14.3	%
Beauty & Wellness	18.3	%	17.9	%	19.1	%	18.6	%
Home & Other (including household, home design, electronics, culinary, fitness and other)	56.0	%	53.1	%	53.8	%	52.8	%
Total	100.0	%	100.0	%	100.0	%	100.0	%

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Cornerstone

Cornerstone net sales in the third quarter of 2013 increased 8%, or $18.9 million. The increase in net sales was driven by sales growth in the home brands. Digital sales grew 10% with penetration increasing 100 basis points to 66.5%, up from 65.5% in the prior year. The return rate decreased 40 basis points to 13.2% due to changes in product mix. Catalog circulation increased 6% compared to the prior year.

Cornerstone net sales in the nine months ended September 30, 2013 increased 9%, or $66.6 million. The increase in net sales was driven by sales growth in the home brands. Digital sales grew 12% with penetration increasing 170 basis points to 65.3%, up from 63.6% in the prior year. The return rate decreased 60 basis points to 13.1% due to changes in product mix. Catalog circulation increased 6% compared to the prior year.

The brand mix at Cornerstone is provided in the table below (based on net sales):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Home brands (Ballard Designs, Frontgate, Grandin Road and Improvements)	71.8	%	67.9	%	74.4	%	72.2	%
Apparel brands (Chasing Fireflies, Garnet Hill and TravelSmith) (a)	28.2	%	32.1	%	25.6	%	27.8	%
Total	100.0	%	100.0	%	100.0	%	100.0	%
(a) Chasing Fireflies was acquired in April 2012.

Cost of Sales and Gross Profit

Cost of sales consists primarily of the cost of products sold, shipping and handling costs and compensation and other employee-related costs for personnel engaged in warehouse functions. Cost of products sold includes merchandise cost, inbound freight and duties and certain allocable general and administrative costs, including certain warehouse costs.

	Three Months Ended September 30,							Nine Months Ended September 30,
	2013			Change	2012			2013			Change	2012
	(Dollars in thousands)							(Dollars in thousands)
Gross profit:
HSN	$	186,240		(3)%	$	191,786		$	566,059		1%	$	561,890
HSN gross margin percentage	34.6		%	(110 bp)	35.7		%	35.1		%	(40 bp)	35.5		%
Cornerstone	$	102,350		9%	$	93,730		$	311,455		10%	$	283,988
Cornerstone gross margin percentage	39.3		%	50 bp	38.8		%	40.5		%	10 bp	40.4		%
HSNi	$	288,590		1%	$	285,516		$	877,514		4%	$	845,878
HSNi gross margin percentage	36.1		%	(60 bp)	36.7		%	36.8		%	(20 bp)	37.0		%

bp = basis points

HSN

Gross profit for HSN in the third quarter of 2013 decreased 3%, or $5.5 million, compared to the prior year. Gross margin decreased 110 basis points to 34.6% primarily due to the product mix shift and increased promotional activity.

Gross profit for HSN in the nine months ended September 30, 2013 increased 1%, or $4.2 million, compared to the prior year. Gross margin decreased 40 basis points to 35.1% primarily due to lower shipping margins driven by an increase in shipping and handling promotions.

Cornerstone

Gross profit for Cornerstone in the third quarter of 2013 increased 9%, or $8.6 million, compared to the prior year. Gross margin increased 50 basis points to 39.3% primarily due to higher product margins. Net shipping margins also improved primarily due to lower shipping costs.

Gross profit for Cornerstone in the nine months ended September 30, 2013 increased 10%, or $27.5 million, compared to the prior year. Gross margin increased 10 basis points to 40.5% primarily due to an increase in product margins, offset by an increase in shipping and handling promotions.

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Selling and Marketing Expense

Selling and marketing expense consists primarily of advertising and promotional expenditures, compensation and other employee-related costs (including stock-based compensation) for personnel engaged in customer service, sales and merchandising, production and programming functions and on-air distribution costs. Advertising and promotional expenditures primarily include catalog production and distribution costs and online marketing, including fees paid to search engines and third-party distribution partners.

	Three Months Ended September 30,							Nine Months Ended September 30,
	2013			Change	2012			2013			Change	2012
	(Dollars in thousands)							(Dollars in thousands)
HSN	$	93,656		(3)%	$	96,853		$	287,652		1%	$	283,853
As a percentage of HSN net sales	17.4		%	(60 bp)	18.0		%	17.8		%	(20 bp)	18.0		%
Cornerstone	$	71,739		8%	$	66,316		$	217,160		10%	$	197,498
As a percentage of Cornerstone net sales	27.6		%	10 bp	27.5		%	28.2		%	10 bp	28.1		%
HSNi	$	165,395		1%	$	163,169		$	504,812		5%	$	481,351
As a percentage of HSNi net sales	20.7		%	(30 bp)	21.0		%	21.2		%	10 bp	21.1		%

HSNi's selling and marketing expense in the third quarter of 2013 increased 1%, or $2.2 million, and was 20.7% of net sales compared to 21.0% in the prior year. The increase was primarily due to additional catalog costs associated with a 6% increase in Cornerstone's catalog circulation; an increase in employee-related costs; and investments in digital and brand marketing; offset by the timing of marketing events and lower on-air distribution costs at HSN.

HSNi's selling and marketing expense in the nine months ended September 30, 2013 increased 5%, or $23.5 million, and was 21.2% of net sales compared to 21.1% in the prior year. The increase was primarily due to additional catalog costs associated with a 6% increase in Cornerstone's catalog circulation; an increase in employee-related costs; and investments in digital and brand marketing, partially offset by lower on-air distribution costs at HSN.

General and Administrative Expense

General and administrative expense consists primarily of compensation and other employee-related costs (including stock-based compensation) for personnel engaged in finance, legal, tax, human resources, information technology and executive management functions, bad debts, facilities costs and fees for professional services.

	Three Months Ended September 30,							Nine Months Ended September 30,
	2013			Change	2012			2013			Change	2012
	(Dollars in thousands)							(Dollars in thousands)
HSN	$	37,587		(9)%	$	41,288		$	113,942		(5)%	$	120,444
As a percentage of HSN net sales	7.0		%	(70 bp)	7.7		%	7.1		%	(50 bp)	7.6		%
Cornerstone	$	14,121		(36)%	$	22,053		$	43,553		(13)%	$	49,920
As a percentage of Cornerstone net sales	5.4		%	(370 bp)	9.1		%	5.7		%	(140 bp)	7.1		%
HSNi	$	51,708		(18)%	$	63,341		$	157,495		(8)%	$	170,364
As a percentage of HSNi net sales	6.5		%	(160 bp)	8.1		%	6.6		%	(90 bp)	7.5		%

HSNi’s general and administrative expense in the third quarter of 2013 decreased 18%, or $11.6 million, and was 6.5% of net sales compared to 8.1% in the prior year. The decrease was primarily due to a $7.8 million sales tax settlement at Cornerstone that occurred in the prior year and lower bad debt expense related to HSN's Flexpay program in the current year. Additionally, there was an increase in severance-related costs and a decrease in stock-based compensation expense.

HSNi’s general and administrative expense in the nine months ended September 30, 2013 decreased 8%, or $12.9 million, and was 6.6% of net sales compared to 7.5% in the prior year. The decrease in expense was primarily due to a $7.8 million sales tax settlement at Cornerstone that occurred in the prior year and lower bad debt expense related to HSN's Flexpay program, partially offset by an increase in employee-related costs and the incremental expenses from the addition of Chasing Fireflies to the portfolio in April 2012. Additionally, there was an increase in severance-related costs that was offset by a decrease in stock-based compensation expense.

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Depreciation and Amortization

	Three Months Ended September 30,							Nine Months Ended September 30,
	2013			Change	2012			2013			Change	2012
	(Dollars in thousands)							(Dollars in thousands)
HSN	$	7,367		11%	$	6,665		$	21,226		7%	$	19,839
Cornerstone	3,035			—%	3,029			9,079			8%	8,411
HSNi	$	10,402		7%	$	9,694		$	30,305		7%	$	28,250
As a percentage of HSNi net sales	1.3		%	10 bp	1.2		%	1.3		%	10 bp	1.2		%

Depreciation and amortization in the third quarter of 2013 increased 7%, or $0.7 million, compared to the prior year. The increase was primarily due to the incremental depreciation associated with recent capital expenditures. Depreciation and amortization for the nine months ended September 30, 2013 increased 7%, or $2.1 million, compared to the prior year. The increase was primarily due to the incremental depreciation associated with recent capital expenditures and the amortization of intangibles acquired in the second quarter of 2012 related to the Chasing Fireflies acquisition.

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP measure and is defined in Note 4 of Notes to Consolidated Financial Statements.

	Three Months Ended September 30,							Nine Months Ended September 30,
	2013			Change	2012			2013			Change	2012
	(Dollars in thousands)							(Dollars in thousands)
HSN	$	57,136		1%	$	56,790		$	173,205		4%	$	166,821
As a percentage of HSN net sales	10.6		%	0 bp	10.6		%	10.7		%	20 bp	10.5		%
Cornerstone	$	17,426		16%	$	14,969		$	53,350		5%	$	50,819
As a percentage of Cornerstone net sales	6.7		%	50 bp	6.2		%	6.9		%	(30 bp)	7.2		%
HSNi	$	74,562		4%	$	71,759		$	226,555		4%	$	217,640
As a percentage of HSNi net sales	9.3		%	10 bp	9.2		%	9.5		%	0 bp	9.5		%

HSNi's Adjusted EBITDA in the third quarter of 2013 increased 4%, or $2.8 million, and was 9.3% of net sales compared to 9.2% in the prior year. The increase in Adjusted EBITDA was mainly due to a 3% increase in net sales, partially offset by a 60 basis point decline in gross margin. HSN's Adjusted EBITDA increased 1%, or $0.3 million, primarily due to a 4% decrease in operating expenses (excluding non-cash charges), offset by a 110 basis point decline in gross margin. The decrease in operating expenses is primarily due to the timing of marketing events, lower bad debt expense related to the Flexpay program and lower on-air distribution costs, partially offset by an increase in employee-related costs and digital marketing expense. Cornerstone's Adjusted EBITDA increased 16%, or $2.5 million, primarily due to the 8% increase in net sales and 50 basis point improvement in gross margin, partially offset by an 8% increase in operating expenses (excluding non-cash charges and a $7.8 million sales tax settlement in the prior year) primarily for catalog production and distribution costs.

HSNi's Adjusted EBITDA in the nine months ended September 30, 2013 increased 4%, or $8.9 million, and remained flat as a percentage of net sales at 9.5%. The increase in Adjusted EBITDA was due to a 4% increase in net sales, partially offset by a 4% increase in operating expenses (excluding non-cash charges and $7.8 million sales tax settlement in the prior year). HSN's Adjusted EBITDA increased 4%, or $6.4 million, primarily due to a 2% increase in net sales, partially offset by a 40 basis point decline in gross margin. Cornerstone's Adjusted EBITDA increased 5%, or $2.5 million, primarily due to a 9% increase in net sales, partially offset by an 11% increase in operating expenses (excluding non-cash charges and a $7.8 million sales tax settlement in the prior year). The increase in operating expenses was largely due to catalog production and distribution costs; employee-related costs; and the incremental expenses from the addition of Chasing Fireflies to the portfolio in April 2012.

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Operating Income

	Three Months Ended September 30,							Nine Months Ended September 30,
	2013			Change	2012			2013			Change	2012
	(Dollars in thousands)							(Dollars in thousands)
HSN	$	47,630		1%	$	46,980		$	143,239		4%	$	137,754
As a percentage of HSN net sales	8.8		%	10 bp	8.7		%	8.9		%	20 bp	8.7		%
Cornerstone	$	13,455		477%	$	2,332		$	41,663		48%	$	28,159
As a percentage of Cornerstone net sales	5.2		%	420 bp	1.0		%	5.4		%	140 bp	4.0		%
HSNi	$	61,085		24%	$	49,312		$	184,902		11%	$	165,913
As a percentage of HSNi net sales	7.6		%	130 bp	6.3		%	7.8		%	50 bp	7.3		%

HSNi's operating income in the third quarter of 2013 increased 24%, or $11.8 million, and was 7.6% of net sales compared to 6.3% in the prior year. The increase was primarily due to a 3% increase in net sales and a 4% decrease in operating expenses, partially offset by a 60 basis point decrease in gross margin. The decrease in operating expenses was primarily due to a $7.8 million sales tax settlement at Cornerstone in the prior year and the timing of marketing programs at HSN, partially offset by an increase in catalog costs at Cornerstone, employee-related costs, and investments in digital marketing.

HSNi's operating income in the nine months ended September 30, 2013 increased 11%, or $19.0 million, and was 7.8% of net sales compared to 7.3% in the prior year. The increase was primarily due to a 4% increase in net sales, partially offset by a 2% increase in operating expenses. Operating expenses increased primarily for Cornerstone's catalog circulation, employee-related costs, digital marketing and the incremental expenses from the addition of Chasing Fireflies, partially offset by a $7.8 million sales tax settlement in the prior year.

Other Income (Expense)

	Three Months Ended September 30,							Nine Months Ended September 30,
	2013			Change	2012			2013			Change	2012
	(Dollars in thousands)							(Dollars in thousands)
Interest income	$	48		(19)%	$	59		$	150		(52)%	$	313
Interest expense	(1,673		)	(55)%	(3,738		)	(5,078		)	(73)%	(18,858		)
Loss on debt extinguishment	—			(100)%	(18,309		)	—			(100)%	(18,627		)
Total other expense, net	$	(1,625	)	(93)%	$	(21,988	)	$	(4,928	)	(87)%	$	(37,172	)
As a percentage of HSNi net sales	0.2		%	(260 bp)	2.8		%	0.2		%	(140 bp)	1.6		%

Interest Expense

Interest expense in the current year periods was related to the term loan outstanding under the Credit Agreement. Interest expense in the prior year periods was primarily related to the Senior Notes which bore interest at 11.25% through the August 1, 2012 redemption date.

Loss on debt extinguishment

On August 1, 2012, HSNi fully redeemed $240 million of its Senior Notes. The Senior Notes were redeemed for $253.5 million, or 105.625% of the principal amount.  HSNi reported approximately $18.3 million in “loss on debt extinguishment” associated with redemption of the Senior Notes in the third quarter of 2012.  These charges resulted from the redemption premium of $13.5 million and $4.8 million related to the write-off of unamortized issuance costs and original issue discount.

Income Tax Provision

For the three and nine months ended September 30, 2013, HSNi recorded a tax provision of $17.4 million and $63.1 million, respectively, which represents effective tax rates of 29.3% and 35.1%, respectively. For the three and nine months ended September 30, 2012, HSNi recorded a tax provision of $9.8 million and $48.3 million, respectively, which represents effective tax rates of 35.7% and 37.5%, respectively. The change in the effective tax rates from the prior periods was primarily due to discrete tax benefits of $3.7 million realized in the current quarter.  Excluding the impact of these items,

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the third quarter effective tax rate for continuing operations would have been 35.5%. HSNi expect its annual 2013 effective tax rate to be approximately 36%.

Discontinued Operations

Discontinued operations in the accompanying consolidated statements of operations include Smith+Noble and The Territory Ahead, two brands that were divested from the Cornerstone portfolio in May 2012 and July 2012, respectively.

Liquidity and Capital Resources

As of September 30, 2013, HSNi had $108.3 million of cash and cash equivalents compared to $222.1 million as of December 31, 2012 and $129.9 million as of September 30, 2012.

Net cash provided by operating activities attributable to continuing operations for the nine months ended September 30, 2013 was $95.1 million compared to $5.1 million in the prior year period, an improvement of $90.0 million primarily due to improved operating performance and changes in working capital. Cash used to fund inventory decreased compared to prior year due to lower inventory receipts and an increase in sales. Working capital was also positively impacted by the cash collected from HSN's Flexpay program. HSN had significantly increased its Flexpay offerings in the fourth quarter of 2012 resulting in the increase in cash collected during the current year. 

Net cash used in investing activities attributable to continuing operations for the nine months ended September 30, 2013 was $34.1 million for capital expenditures. The capital expenditures were primarily at HSN and were for investments in information technology, facilities and digital-related initiatives.

Net cash used in financing activities attributable to continuing operations for the nine months ended September 30, 2013 was $174.8 million. HSNi paid $137.0 million for approximately 2.5 million shares of common stock repurchased during the nine months ended September 30, 2013. HSNi also paid three cash dividends of $0.18 per common share resulting in payments totaling $29.0 million. HSNi repaid $6.3 million of its term loan during 2013. HSNi had a cash inflow of $5.9 million from the proceeds of stock option exercises and a cash outflow of $13.9 million used to cover withholding taxes for stock-based awards. Additionally, HSNi had an inflow of $7.8 million for excess tax benefits from stock-based awards. This decreased from the inflow of $16.2 million in the prior period primarily due to a lower volume of stock-based awards that vested or were exercised in the nine months ended September 30, 2013.

HSNi's $600 million Credit Agreement is secured by 100% of the voting equity securities of HSNi's U.S. subsidiaries and 65% of the voting equity securities of HSNi's first-tier foreign subsidiaries. This Credit Agreement replaced the credit agreement that was set to expire in July 2013. Certain HSNi subsidiaries have unconditionally guaranteed HSNi's obligations under the Credit Agreement.  The Credit Agreement, which includes a $350 million revolving credit facility and a $250 million delayed draw term loan, may be increased up to $850 million subject to certain conditions and expires April 24, 2017. HSNi drew $250 million from its term loan on July 31, 2012 to fund the redemption of the $240 million of 11.25% Senior Notes due 2016. As of September 30, 2013, the balance of the term loan was $243.8 million.

The Credit Agreement contains various covenants, limitations and events of default customary for similar facilities including a maximum leverage ratio of 3.00x and a minimum interest coverage ratio of 3.00x. HSNi was in compliance with all such covenants as of September 30, 2013, with a leverage ratio of 0.75x and an interest coverage ratio of 58.72x.

Loans under the Credit Agreement bear interest at a per annum rate equal to LIBOR plus a predetermined margin that ranges from 1.50% to 2.25% or the Base Rate (as defined in the Credit Agreement) plus a predetermined margin that ranges from 0.50% to 1.25%.  HSNi can elect to borrow at either LIBOR or the Base Rate and the predetermined margin is based on HSNi's leverage ratio. The term loan interest rate as of September 30, 2013 was 1.68%.  HSNi pays a commitment fee ranging from 0.25% to 0.40% (based on the leverage ratio) on the unused portion of the revolving credit facility. 

The amount available under the Credit Agreement is reduced by the amount of commercial and standby letters of credit issued under the revolving credit facility, which totaled $36.7 million as of September 30, 2013. The ability to draw funds under the revolving credit facility is dependent upon meeting the aforementioned financial covenants, which may limit HSNi’s ability to draw the full amount of the facility. As of September 30, 2013, the additional amount that could be borrowed under the revolving credit facility, in consideration of the financial covenants and outstanding letters of credit, was approximately $313.3 million.

To reduce our future exposure to rising interest rates under our credit facility, we entered into a forward-starting swap in December 2012 that effectively converts $187.5 million of our variable rate term loan to a fixed-rate basis beginning January

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2014 through April 2017. For additional information related to our interest rate swap, refer to Note 7 of Notes to Consolidated Financial Statements.

HSNi does not currently have any material commitments for capital expenditures; however, management does anticipate that HSNi will need to make capital and other expenditures in connection with the development and expansion of its operations. HSNi’s ability to fund its cash and capital needs will be affected by its ongoing ability to generate cash from operations, the overall capacity and terms of its financing arrangements as discussed above, and access to the capital markets. HSNi believes that its cash on hand, its anticipated operating cash flows, its available unused portion of the revolving credit facility and its access to capital markets will be sufficient to fund its operating needs, capital, investing and other commitments and contingencies for the foreseeable future.

On September 27, 2011, HSNi’s Board of Directors approved a share repurchase program which allows HSNi to purchase 10 million shares of its common stock from time to time through privately negotiated and/or open market transactions. The timing of repurchases and the actual number of shares repurchased depends on a variety of factors, including the stock price, corporate and regulatory requirements, restrictions under HSNi’s debt obligations and other market and economic conditions. The repurchase program may be suspended or discontinued by HSNi at any time. For the nine months ended September 30, 2013, HSNi repurchased approximately 2.5 million shares at a cost of $137.0 million, or an average cost of $53.79 per share. As of September 30, 2013, approximately 1.2 million shares remained authorized for repurchase under the program.

Effective November 6, 2013, HSNi's Board of Directors approved a cash dividend of $0.25 per common share. This represents an increase over the prior quarterly dividend of 39% or $0.07 per common share. The dividend will be paid on December 18, 2013 to HSNi's record holders as of December 4, 2013.

Seasonality

HSNi is affected by seasonality, although historically our business has exhibited less seasonality than many other retail businesses. Our sales levels are generally higher in the fourth quarter.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For a description of HSNi's market risks, see “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in HSNi's Annual Report on Form 10-K for the year ended December 31, 2012. No material changes have occurred in HSNi's market risks since December 31, 2012.

ITEM 4. CONTROLS AND PROCEDURES

Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) promulgated under the Exchange Act) as of September 30, 2013. Based on that evaluation, management has concluded that the disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and to ensure that information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2013 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II

ITEM 1. LEGAL PROCEEDINGS

In the ordinary course of business, we are involved in various legal matters arising out of our operations. These matters may relate to claims involving property, personal injury, contract, intellectual property (including patent infringement), sales tax, product recalls, regulatory compliance and other claims. As of the date of this filing, we are not a party to any legal proceedings that are reasonably expected to have a material adverse effect on our business, results of operations, financial condition or cash flows; however, litigation matters are subject to inherent uncertainties and the results of these matters cannot be predicted with certainty. An unfavorable resolution of one or more of these matters could have a material adverse effect on our business, results of operations, financial condition or cash flows. Moreover, any claims or regulatory actions against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources. 

See Part I. Item 1.  Financial Statements - Note 13 - Commitments and Contingencies, for additional information regarding legal matters in which we are involved.  

ITEM 1A. RISK FACTORS

See Part I. Item 1A., “Risk Factors,” of HSNi's Annual Report on Form 10-K for the year ended December 31, 2012, for a detailed discussion of the risk factors affecting HSNi. There have been no material changes from the risk factors described in the annual report.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Security

On September 27, 2011, our Board of Directors authorized us to repurchase up to 10 million shares of our common stock. Under the terms of the share repurchase program, HSNi will repurchase its common stock from time to time through privately negotiated or open market transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 and Rule 10b-18 under the Securities Exchange Act of 1934, as amended, or by any combination of such methods. The timing of repurchases and the actual number of shares repurchased depends on a variety of factors, including the stock price, corporate and regulatory requirements, restrictions under the company’s debt obligations and other market and economic conditions. The repurchase program may be suspended or discontinued by HSNi at any time.

For the quarter ended September 30, 2013, we repurchased approximately 0.4 million shares at an average price of $55.79 per share. Below is a summary of our common stock repurchases during the third quarter of 2013, as well as the number of shares still available for purchase as of September 30, 2013:

Period	Number of Shares Purchased	Average Price Paid Per Share		Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased under the Plans or Programs
July 1, 2013 - July 31, 2013	32,400	$	54.31	32,400	1,561,315
August 1, 2013 - August 31, 2013	262,904	$	56.63	262,904	1,298,411
September 1, 2013 - September 30, 2013	97,652	$	54.03	97,652	1,200,759
	392,956	$	55.79	392,956

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

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ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

Exhibit No.	Description of Document	Method of Filing
10.1	Form of Deferred Restricted Stock Unit Agreement *	Filed herewith
10.2	Form of Market Stock Unit Agreement *	Filed herewith
31.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act.	Filed herewith
31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act	Filed herewith
32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act	Filed herewith
32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act	Filed herewith
101	The following financial information from HSNi’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2013, formatted in XBRL (eXtensible Business Reporting Language) and filed electronically herewith: (i) Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2013 and 2012, (ii) Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2013 and 2012, (iii) Consolidated Balance Sheets as of September 30, 2013, December 31, 2012 and September 30, 2012, (iv) Consolidated Statements of Shareholders’ Equity for the Nine Months Ended September 30, 2013 and Year Ended December 31, 2012, (v) Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012, and (vi) Notes to the Consolidated Financial Statements.	Filed herewith

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SIGNATURES

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.

Date: November 6, 2013	By:	/S/  JUDY A. SCHMELING
		Judy A. Schmeling, Chief Operating Officer and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)

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