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EX-31.2 - SECTION 302 CHIEF FINANCIAL OFFICER CERTIFICATION - HSN, Inc.exhibit312chieffinancialof.htm


 
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 June 30, 2014
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 Website, 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 August 6, 2014, the registrant had 52,316,697 shares of common stock, $0.01 par value per share, outstanding.

 






 
 
TABLE OF CONTENTS
 
 
 
Page
 
PART I-FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements (Unaudited)
 
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2014 and 2013
 
Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2014 and 2013
 
Consolidated Balance Sheets as of June 30, 2014, December 31, 2013 and June 30, 2013
 
Consolidated Statements of Shareholders' Equity for the Six Months Ended June 30, 2014 and Year Ended December 31, 2013
 
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013
 
Notes to Consolidated Financial Statements
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
 
 
 
 
PART II-OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.
Defaults Upon Senior Securities
Item 4.
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
Signatures
 
 
 
 






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 June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Net sales
 
$
855,204

 
$
812,606

 
$
1,632,624

 
$
1,585,257

Cost of sales
 
542,069

 
503,829

 
1,043,715

 
996,333

Gross profit
 
313,135

 
308,777

 
588,909

 
588,924

Operating expenses:
 
 
 
 
 
 
 
 
Selling and marketing
 
182,747

 
174,875

 
349,986

 
339,417

General and administrative
 
52,218

 
52,652

 
108,129

 
105,786

Depreciation and amortization
 
10,803

 
9,951

 
21,559

 
19,904

Total operating expenses
 
245,768

 
237,478

 
479,674

 
465,107

Operating income
 
67,367

 
71,299

 
109,235

 
123,817

Other income (expense):
 
 
 
 
 
 
 
 
Interest income
 
44

 
30

 
114

 
83

Interest expense
 
(1,854
)
 
(1,691
)
 
(3,623
)
 
(3,384
)
Total other expense, net
 
(1,810
)
 
(1,661
)
 
(3,509
)
 
(3,301
)
Income from continuing operations before income taxes
 
65,557

 
69,638

 
105,726

 
120,516

Income tax provision
 
(24,617
)
 
(26,367
)
 
(40,604
)
 
(45,692
)
Income from continuing operations
 
40,940

 
43,271

 
65,122


74,824

Income from discontinued operations, net of tax
 

 
9

 

 

Net income
 
$
40,940

 
$
43,280

 
$
65,122

 
$
74,824

 
 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
 
Basic
 
$
0.77

 
$
0.81

 
$
1.23

 
$
1.38

Diluted
 
$
0.76

 
$
0.79

 
$
1.21

 
$
1.35

Shares used in computing earnings per share:
 
 
 
 
 
 
 
 
Basic
 
52,916

 
53,541

 
53,037

 
54,161

Diluted
 
53,745

 
54,728

 
53,954

 
55,500

Dividends declared per share
 
$
0.25

 
$
0.18

 
$
0.50

 
$
0.36


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 June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
40,940

 
$
43,280

 
$
65,122

 
$
74,824

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Change in fair value of derivative instrument, net of tax
(469
)
 
1,563

 
(489
)
 
1,618

Other comprehensive (loss) income, net of tax
(469
)
 
1,563

 
(489
)
 
1,618

Comprehensive income
$
40,471

 
$
44,843

 
$
64,633

 
$
76,442

 
 
 
 
 
 
 
 

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)
 
 
June 30,
 
December 31,
 
June 30,
 
 
2014
 
2013
 
2013
ASSETS
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
122,332

 
$
196,433

 
$
91,976

Accounts receivable, net of allowance of $15,663, $16,863 and $13,869, respectively
 
199,897

 
265,115

 
183,940

Inventories
 
382,696

 
327,319

 
355,879

Deferred income taxes
 
26,849

 
29,761

 
29,585

Prepaid expenses and other current assets
 
63,350

 
48,630

 
62,667

Total current assets
 
795,124

 
867,258

 
724,047

Property and equipment, net
 
173,912

 
178,720

 
171,019

Intangible assets, net
 
262,159

 
262,460

 
266,023

Goodwill
 
9,858

 
9,858

 
9,858

Other non-current assets
 
18,367

 
19,627

 
8,348

TOTAL ASSETS
 
$
1,259,420

 
$
1,337,923

 
$
1,179,295

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 

Current liabilities:
 
 
 
 
 

Accounts payable, trade
 
$
219,728

 
$
255,627

 
$
212,530

Current maturities of long-term debt
 
14,063

 
12,500

 
12,500

Accrued expenses and other current liabilities
 
187,237

 
207,984

 
156,193

Total current liabilities
 
421,028

 
476,111

 
381,223

Long-term debt, less current maturities
 
220,312

 
228,125

 
234,375

Deferred income taxes
 
80,733

 
88,034

 
85,495

Other long-term liabilities
 
15,368

 
16,572

 
11,346

Total liabilities
 
737,441

 
808,842

 
712,439

Commitments and contingencies (Note 12)
 

 

 

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; 52,390,665, 53,002,368 and 53,227,448 issued shares at June 30, 2014, December 31, 2013 and June 30, 2013, respectively
 
524

 
530

 
532

Additional paid-in capital
 
1,738,343

 
1,810,072

 
1,850,677

Accumulated deficit
 
(1,216,753
)
 
(1,281,875
)
 
(1,385,500
)
Accumulated other comprehensive (loss) income
 
(135
)
 
354

 
1,147

Total shareholders’ equity
 
521,979

 
529,081

 
466,856

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
1,259,420

 
$
1,337,923

 
$
1,179,295


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, 2012
 

 
$

 
54,854

 
$
549

 
$
1,964,760

 
$
(1,460,324
)
 
$
(471
)
 
$
504,514

Net income
 

 

 

 

 

 
178,449

 

 
178,449

Other comprehensive income
 

 

 

 

 

 

 
825

 
825

Stock-based compensation expense for equity awards
 

 

 

 

 
14,043

 

 

 
14,043

Cash dividend declared on common stock
 

 

 

 

 
(42,281
)
 

 

 
(42,281
)
Issuance of common stock from stock-based compensation awards, including tax benefit of $9,788
 

 

 
885

 
9

 
20,416

 

 

 
20,425

Repurchases of common stock
 

 

 
(2,737
)
 
(28
)
 
(146,866
)
 

 

 
(146,894
)
Balance as of December 31, 2013
 

 

 
53,002

 
530

 
1,810,072

 
(1,281,875
)
 
354


529,081

Net income
 

 

 

 

 

 
65,122

 

 
65,122

Other comprehensive loss
 

 

 

 

 

 

 
(489
)
 
(489
)
Stock-based compensation expense for equity awards
 

 

 

 

 
7,810

 

 

 
7,810

Cash dividend declared on common stock
 

 

 

 

 
(26,429
)
 

 

 
(26,429
)
Issuance of common stock from stock-based compensation awards, including tax benefit of $4,981
 

 

 
320

 
3

 
(2,140
)
 

 

 
(2,137
)
Repurchases of common stock
 

 

 
(931
)
 
(9
)
 
(50,970
)
 

 

 
(50,979
)
Balance as of June 30, 2014
 

 
$

 
52,391

 
$
524

 
$
1,738,343

 
$
(1,216,753
)
 
$
(135
)
 
$
521,979


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)
 
 
Six Months Ended June 30,
 
 
2014
 
2013
Cash flows from operating activities attributable to continuing operations:
 
 
 
 
Net income
 
$
65,122

 
$
74,824

Adjustments to reconcile income from continuing operations to net cash provided by operating activities attributable to continuing operations:
 
 
 
 
Depreciation and amortization
 
21,559

 
19,904

Stock-based compensation expense
 
7,810

 
7,254

Amortization of debt issuance costs
 
552

 
563

Deferred income taxes
 
(4,115
)
 
3,536

Bad debt expense
 
9,225

 
10,018

Excess tax benefits from stock-based awards
 
(4,981
)
 
(5,295
)
Other
 
135

 
1,019

Changes in current assets and liabilities:
 
 
 
 
Accounts receivable
 
55,993

 
55,719

Inventories
 
(55,377
)
 
(24,943
)
Prepaid expenses and other assets
 
(14,035
)
 
(16,345
)
Accounts payable, accrued expenses and other current liabilities
 
(53,690
)
 
(92,683
)
Net cash provided by operating activities attributable to continuing operations
 
28,198

 
33,571

Cash flows from investing activities attributable to continuing operations:
 
 
 
 
Capital expenditures
 
(15,901
)
 
(22,741
)
Other
 
(491
)
 

Net cash used in investing activities attributable to continuing operations
 
(16,392
)
 
(22,741
)
Cash flows from financing activities attributable to continuing operations:
 
 
 
 
Repayment of long-term debt
 
(6,250
)
 
(3,125
)
Repurchase of common stock
 
(50,979
)
 
(112,683
)
Cash dividends paid
 
(26,429
)
 
(19,486
)
Proceeds from issuance of common stock
 
1,441

 
3,272

Tax withholdings related to stock-based awards
 
(8,653
)
 
(11,900
)
Excess tax benefits from stock-based awards
 
4,981

 
5,295

Payment of contingent consideration obligation
 

 
(2,172
)
Net cash used in financing activities attributable to continuing operations
 
(85,889
)
 
(140,799
)
Total cash used in continuing operations
 
(74,083
)
 
(129,969
)
Total cash used in discontinued operations
 
(18
)
 
(147
)
Net decrease in cash and cash equivalents
 
(74,101
)
 
(130,116
)
Cash and cash equivalents at beginning of period
 
196,433

 
222,092

Cash and cash equivalents at end of period
 
$
122,332

 
$
91,976


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 proprietary merchandise directly to consumers through various platforms including (i) television home shopping programming broadcast on the HSN television networks; (ii) catalogs, consisting 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) mobile devices; and (v) retail and outlet stores. 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 & health, and home & other (including household, home design, electronics and culinary). Merchandise offered by Cornerstone primarily consists of home furnishings (including indoor/outdoor furniture, home décor, tabletop, textiles 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 normal recurring adjustments 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, 2013. The consolidated balance sheet as of December 31, 2013 and the consolidated statement of shareholders' equity for the year ended December 31, 2013 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.

Recent Accounting Developments

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"). It outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that revenue is recognized when a customer obtains control of a good or service. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the good or service. ASU 2014-09 is effective for annual periods beginning after December 15, 2016, including interim periods within that annual period. HSNi is in the process of assessing the impact of the adoption of ASU 2014-09 to its consolidated financial statements.

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

6



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.
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):
 
 
June 30,
 
December 31,
 
June 30,
 
 
2014
 
2013
 
2013
Capitalized software
 
$
223,346

 
$
215,893

 
$
208,732

Computer and broadcast equipment
 
87,377

 
85,521

 
86,985

Buildings and leasehold improvements
 
103,332

 
102,437

 
99,687

Furniture and other equipment
 
88,110

 
83,779

 
81,370

Projects in progress
 
10,139

 
12,528

 
9,907

Land and land improvements
 
10,458

 
10,460

 
10,223

 
 
522,762

 
510,618

 
496,904

Less: accumulated depreciation and amortization
 
(348,850
)
 
(331,898
)
 
(325,885
)
Total property and equipment, net
 
$
173,912

 
$
178,720

 
$
171,019


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 and/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, 2013. 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; including stock-based compensation, amortization of intangibles, depreciation, gains and losses on asset dispositions, asset impairment charges, acquisition-related accounting expenses and other significant items.


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 June 30, 2014
 
Three Months Ended June 30, 2013
 
HSN
 
Cornerstone
 
Total
 
HSN
 
Cornerstone
 
Total
Adjusted EBITDA
$
62,657

 
$
19,435

 
$
82,092

 
$
57,135

 
$
28,017

 
$
85,152

Stock-based compensation expense
(3,053
)
 
(731
)
 
(3,784
)
 
(2,761
)
 
(784
)
 
(3,545
)
Depreciation and amortization
(7,423
)
 
(3,380
)
 
(10,803
)
 
(7,037
)
 
(2,914
)
 
(9,951
)
Loss on disposition of fixed assets
(104
)
 
(34
)
 
(138
)
 
(357
)
 

 
(357
)
Operating income
$
52,077

 
$
15,290

 
67,367

 
$
46,980

 
$
24,319

 
71,299

Total other expense, net
 
 
 
 
(1,810
)
 
 
 
 
 
(1,661
)
Income from continuing operations before income taxes
 
 
 
 
65,557

 
 
 
 
 
69,638

Income tax provision
 
 
 
 
(24,617
)
 
 
 
 
 
(26,367
)
Income from continuing operations
 
 
 
 
40,940

 
 
 
 
 
43,271

Income from discontinued operations, net of tax
 
 
 
 

 
 
 
 
 
9

Net income
 
 
 
 
$
40,940

 
 
 
 
 
$
43,280

 
 
Six Months Ended June 30, 2014
 
Six Months Ended June 30, 2013
 
HSN
 
Cornerstone
 
Total
 
HSN
 
Cornerstone
 
Total
Adjusted EBITDA
$
121,799

 
$
20,051

 
$
141,850

 
$
116,069

 
$
35,925

 
$
151,994

Stock-based compensation expense
(6,197
)
 
(1,613
)
 
(7,810
)
 
(5,584
)
 
(1,670
)
 
(7,254
)
Depreciation and amortization
(14,860
)
 
(6,699
)
 
(21,559
)
 
(13,858
)
 
(6,046
)
 
(19,904
)
CPSC settlement (a)

 
(3,100
)
 
(3,100
)
 

 

 

Loss on disposition of fixed assets
(104
)
 
(42
)
 
(146
)
 
(1,018
)
 
(1
)
 
(1,019
)
Operating income
$
100,638

 
$
8,597

 
109,235

 
$
95,609

 
$
28,208

 
123,817

Total other expense, net
 
 
 
 
(3,509
)
 
 
 
 
 
(3,301
)
Income from continuing operations before income taxes
 
 
 
 
105,726

 
 
 
 
 
120,516

Income tax provision
 
 
 
 
(40,604
)
 
 
 
 
 
(45,692
)
Income from continuing operations
 
 
 
 
65,122

 
 
 
 
 
74,824

Income from discontinued operations, net of tax
 
 
 
 

 
 
 
 
 

Net income
 
 
 
 
$
65,122

 
 
 
 
 
$
74,824

 
 
 
 
 
 
 
 
 
 
 
 
(a) The company reached a $3.1 million settlement related to a civil penalty assessed by the Consumer Product Safety Commission. For further discussion, see Note 12-Commitments and Contingencies.
 
The net sales for each of HSNi's reportable segments are as follows (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Net sales:
 
 
 
 
 
 
 
 
HSN
 
$
556,488

 
$
526,181

 
$
1,100,975

 
$
1,076,310

Cornerstone
 
298,716

 
286,425

 
531,649

 
508,947

Total
 
$
855,204

 
$
812,606

 
$
1,632,624

 
$
1,585,257

 


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 June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Net income:
 
 
 
 


 


Continuing operations
$
40,940

 
$
43,271

 
$
65,122

 
$
74,824

Discontinued operations

 
9

 

 

Net income
$
40,940

 
$
43,280

 
$
65,122

 
$
74,824

 
 
 
 
 
 
 
 
Weighted average number of shares outstanding:
 
 
 
 
 
 
 
Basic
52,916

 
53,541

 
53,037

 
54,161

Dilutive effect of stock-based compensation awards
829

 
1,187

 
917

 
1,339

Diluted
53,745

 
54,728

 
53,954

 
55,500

 
 
 
 
 
 
 
 
Net income per share - basic:
 
 
 
 
 
 
 
Continuing operations
$
0.77

 
$
0.81

 
$
1.23

 
$
1.38

Discontinued operations

 

 

 

Net income
$
0.77

 
$
0.81

 
$
1.23

 
$
1.38

 
 
 
 
 
 
 
 
Net income per share - diluted:
 
 
 
 
 
 
 
Continuing operations
$
0.76

 
$
0.79

 
$
1.21

 
$
1.35

Discontinued operations

 

 

 

Net income
$
0.76

 
$
0.79

 
$
1.21

 
$
1.35

 
 
 
 
 
 
 
 
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
842

 
350

 
794

 
432


NOTE 6—LONG-TERM DEBT
The balance of long-term debt, including current maturities, is as follows (in thousands):
 
 
June 30,
 
December 31,
 
June 30,
 
 
2014
 
2013
 
2013
Secured credit agreement expiring April 24, 2017:
 
 
 
 
 
 
Term loan
 
$
234,375

 
$
240,625

 
$
246,875

Revolving credit facility
 

 

 

Total long-term debt
 
234,375

 
240,625

 
246,875

Less: current maturities
 
(14,063
)
 
(12,500
)
 
(12,500
)
Long-term debt, less current maturities
 
$
220,312

 
$
228,125

 
$
234,375


On April 24, 2012, HSNi entered into a $600 million five-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. 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 term loan, may be increased up to $850 million subject to certain conditions and expires April 24, 2017. 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 term.


9



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 June 30, 2014 with a leverage ratio of 0.74x and an interest coverage ratio of 56.55x. 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. Dividends, 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 June 30, 2014 was 1.65%.  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 $12.5 million as of June 30, 2014. The ability to draw funds under the revolving credit facility is dependent upon meeting the aforementioned financial covenants. As of June 30, 2014, 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 $337.5 million. As of June 30, 2014, there was no outstanding balance due under the revolving credit facility.


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 June 30, 2014. The interest rate swap took e
ffect 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 (loss). Any ineffective portions of the changes in fair value of the interest rate swap will be immediately recognized directly to earnings in the consolidated statements of operations. The change in fair value of the interest rate swap (inclusive of reclassifications to net income) for the three and six months ended June 30, 2014 was a loss of approximately $0.5 million for both periods, net of tax, included in other comprehensive (loss) income.

As of June 30, 2014, the fair value of the interest rate swap was a liability of $0.2 million and was recorded in "Other long-term liabilities" in the consolidated balance sheets. As of December 31, 2013 and June 30, 2013, the fair value of the interest rate swap was an asset of $0.6 million and $1.8 million, respectively, and was recorded in "Other non-current assets" in the consolidated balance sheets. HSNi estimates that approximately $1.2 million of unrealized losses included in accumulated other comprehensive loss related to this swap will be realized and reported in earnings within the next twelve months. See Note 8 for discussion of the fair value measurements concerning this interest rate swap.


10



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):
 
June 30, 2014
 
 
Total Fair Value and Carrying Value on Balance Sheet
 
Fair Value Measurement Category
Level 1
 
Level 2
 
Level 3
Liabilities:
 
 
 
 
 
 
 
 
Interest rate swap
 
$
218

 
$

 
$
218

 
$

Contingent consideration
 
$
1,072

 
$

 
$

 
$
1,072

 
December 31, 2013
 
 
Total Fair Value and Carrying Value on Balance Sheet
 
Fair Value Measurement Category
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Interest rate swap
 
$
574

 
$

 
$
574

 
$

Liabilities:
 
 
 
 
 
 
 
 
Contingent consideration
 
$
1,032

 
$

 
$

 
$
1,032

 
June 30, 2013
 
 
Total Fair Value and Carrying Value on Balance Sheet
 
Fair Value Measurement Category
Level 1
 
Level 2
 
Level 3
Asset:
 
 
 
 
 
 
 
 
Interest rate swap
 
$
1,839

 
$

 
$
1,839

 
$

Liabilities:
 
 
 
 
 
 
 
 
Contingent consideration
 
$
4,492

 
$

 
$

 
$
4,492

HSNi's interest rate swap was carried on the balance sheet at fair value as of June 30, 2014, December 31, 2013 and June 30, 2013. 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. The fair value is based on a valuation model which utilizes interest rate yield curves and credit spreads as the significant inputs to the 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.

11



In connection with the 2012 acquisition of Chasing Fireflies, the purchase price included contingent consideration that is based on achieving specific annual performance targets or a cumulative three-year performance target. The fair value of the contingent consideration is based on a probability-weighted discounted cash flow approach (level 3 criteria). Key inputs used in this calculation include estimates related to the operating performance over the remaining performance period and discount rates. HSNi reassessed its current estimates of performance relative to the stated targets as of June 30, 2014 and June 30, 2013 and determined there was no fair value adjustment to be recorded.

The change in the fair value of the contingent consideration liability is summarized as follows (in thousands):
 
 
2014
 
2013
As of January 1,
 
$
1,032

 
$
6,832

Accretion
 
40

 
243

Payments
 

 
(2,583
)
Fair value adjustments
 

 

As of June 30,
 
$
1,072

 
$
4,492

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

 
 
June 30, 2014
 
 
Carrying
Value
 
Fair Value
 
Fair Value Measurement Category
Level 1
 
Level 2
 
Level 3
Term Loan
 
$
234,375

 
$
234,375

 
$

 
$
234,375

 
$

 
 
December 31, 2013
 
 
Carrying
Value
 
Fair Value
 
Fair Value Measurement Category
Level 1
 
Level 2
 
Level 3
Term Loan
 
$
240,625

 
$
240,625

 
$

 
$
240,625

 
$

 
 
June 30, 2013
 
 
Carrying
Value
 
Fair Value
 
Fair Value Measurement Category
Level 1
 
Level 2
 
Level 3
Term Loan
 
$
246,875

 
$
246,875

 
$

 
$
246,875

 
$

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 (level 2 criteria).
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 six months ended June 30, 2014 and 2013, there were no assets evaluated for impairment as there were no events or changes in circumstances indicating their carrying amounts may not be recoverable.
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.

12



For the three and six months ended June 30, 2014, HSNi recorded a tax provision of $24.6 million and $40.6 million, respectively which represents effective tax rates of 37.6% and 38.4%, respectively. For the three and six months ended June 30, 2013, HSNi recorded a tax provision of $26.4 million and $45.7 million, respectively, which represents an effective tax rate of 37.9% . The change in the year to date effective tax rate from the prior period was primarily due to the non-deductibility of the $3.1 million civil penalty accrued for the Consumer Product Safety Commission settlement. See further discussion of the settlement in Note 12-Commitments and Contingencies. 
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.

The IRS has completed its review of the IAC consolidated tax returns for the years ended December 31, 2001 through 2009, 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 June 30,
 
Six Months Ended June 30,
2014
 
2013
2014
 
2013
Selling and marketing
$
1,096

 
$
894

 
$
2,289

 
$
1,856

General and administrative
2,688

 
2,651

 
5,521

 
5,398

Stock-based compensation expense before income taxes
3,784

 
3,545

 
7,810

 
7,254

Income tax benefit
(1,386
)
 
(1,283
)
 
(2,822
)
 
(2,589
)
Stock-based compensation expense after income taxes
$
2,398

 
$
2,262

 
$
4,988

 
$
4,665

 
 
 
 
 
 
 
 
 
As of June 30, 2014, there was approximately $29.7 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 2.4 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 June 30, 2014, there were approximately 2.4 million shares of common stock available for grants under the Plan.

13



HSNi can grant restricted stock, restricted stock units ("RSUs"), 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 six months ended June 30, 2014 and 2013 were $8.7 million and $11.9 million, respectively.
A summary of the stock-based awards granted during the six months ended June 30, 2014 is as follows:
 
Six Months Ended June 30, 2014
 
Number of Awards Granted

Weighted Average per Share Fair Value
Stock appreciation rights
404,141


$15.17
Restricted stock units
227,830


$55.10
Employee stock purchase plan options
21,776


$12.85
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 weighted average assumptions used in the valuation of each for the six months ended June 30, 2014 are as follows: 
 
 
Six Months Ended June 30, 2014
 
 
 
Black-Scholes
 
 
 
Stock Appreciation Rights
 
Employee Stock Purchase Plan Options
Volatility factor
 
 
36.4
%
 
22.1
%
Risk-free interest rate
 
 
1.54
%
 
0.09
%
Expected term
 
 
4.7

 
0.5

Dividend yield
 
 
1.8
%
 
1.6
%

NOTE 11—SHAREHOLDERS’ EQUITY
Share Repurchase Program
On September 27, 2011, HSNi’s Board of Directors approved a share repurchase program which allowed 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 depended 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. For the six months ended June 30, 2014, HSNi acquired under the program approximately 931,000 shares of its outstanding common stock for $51.0 million at an average price of $54.76. In July 2014, HSNi completed its 10 million share repurchase program at an aggregate cost of $451.0 million, representing an average cost of $45.10 per share. All shares were immediately retired upon purchase.
Dividend Policy
In the second quarter of 2014, HSNi's Board of Directors approved a quarterly cash dividend of $0.25 per common share. The dividend was paid on June 18, 2014 to HSNi's shareholders of record as of June 4, 2014.
In the third quarter of 2014, HSNi's Board of Directors approved a quarterly cash dividend of $0.25 per common share. The dividend will be paid on September 17, 2014 to HSNi's shareholders of record as of September 3, 2014.


14



Accumulated Other Comprehensive (Loss) Income
Accumulated other comprehensive (loss) income includes the cumulative gains and losses of derivative instruments that qualify as cash flow hedges. The following table provides a rollforward of accumulated other comprehensive (loss) income for the six months ended June 30, 2014 and 2013 (in thousands):

 
 
2014
 
2013
Accumulated other comprehensive (loss) income as of January 1,
 
$
354

 
$
(471
)
Other comprehensive (loss) income before reclassifications
 
(1,338
)
 
2,593

Amounts reclassified from accumulated other comprehensive income (loss) to interest expense in the consolidated statements of operations
 
546

 

Income tax benefit (expense)
 
303

 
(975
)
Other comprehensive (loss) income, net of tax
 
(489
)
 
1,618

Accumulated other comprehensive (loss) income as of June 30,
 
$
(135
)
 
$
1,147


NOTE 12—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 was investigating whether the company complied with certain reporting requirements of the Consumer Product Safety Act.  Based on a tentative settlement with the CPSC, the company accrued $3.1 million in the first quarter of 2014 in “general and administrative” expenses in its consolidated statements of operations. A final settlement of $0.0 million was reached in the second quarter of 2014 and paid in the third quarter of 2014.
In the ordinary course of business, HSNi is a party to various audits, claims 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, employment matters 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.


15



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, 2013 and the following:
the influence of the macroeconomic environment and its impact on consumer confidence and spending levels;
our ability to attract new and retain existing customers in a cost-effective manner;
our exposure to intense competition and our ability to effectively compete for customers;
changes in our relationships with pay television operators, vendors, manufacturers and other third parties;
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;
risks associated with acquisitions including the ability to successfully integrate new businesses and achieve expected benefits and results; 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.

16



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 June 30,

Six Months Ended June 30,
 
2014
 
Change
 
2013
 
2014
 
Change
 
2013
 
(Dollars in thousands)
 
(Dollars in thousands)
HSN
$
556,488

 
6%
 
$
526,181

 
$
1,100,975

 
2%
 
$
1,076,310

Cornerstone
298,716

 
4%
 
286,425

 
531,649

 
4%
 
508,947

Total HSNi net sales
$
855,204

 
5%
 
$
812,606

 
$
1,632,624

 
3%
 
$
1,585,257

HSNi net sales in the second quarter of 2014 increased 5%, or $42.6 million, due to 6% sales growth at HSN and 4% sales growth at Cornerstone. Digital sales grew 9% with penetration increasing 150 basis points to 46.6%. The gross units shipped in the second quarter of 2014 increased 4% to 14.7 million and the average price point increased 1% to $65.15.
HSNi net sales in the six months ended June 30, 2014 increased 3%, or $47.4 million, due to 2% sales growth at HSN and 4% sales growth at Cornerstone. Digital sales grew 7% with penetration increasing 180 basis points to 46.7%. The gross units shipped increased 3% to 29.3 million while the average price point remained relatively flat at $62.56.
HSN
HSN net sales in the second quarter of 2014 increased 6%, or $30.3 million. Digital sales grew 11% and penetration increased 180 basis points to 37.2%. Sales grew in Beauty & Health, offset by lower sales in the Jewelry and Home & Other divisions. Within Home & Other, there were increases in the home design and culinary categories, offset by a significant decrease in electronics. The return rate decreased 50 basis points to 18.7% from 19.2% in the prior year primarily due to the shift to merchandise with historically lower return rates. Gross units shipped increased 4% to 11.2 million. Average price point increased 2% to $57.62 primarily due to a decrease in clearance sales, offset by changes in product mix to categories with lower price points.
HSN net sales in the six months ended June 30, 2014 increased 2%, or $24.7 million. Digital sales grew 8% and penetration increased 210 basis points to 37.6%. Sales grew in all divisions with the exception of Jewelry. Within Home & Other, there was a significant increase in the home design category, offset by a decrease in electronics. The return rate decreased 110 basis points to 18.5% from 19.6% in the prior year primarily due to the shift to merchandise with historically lower return rates. Gross units shipped increased 2% to 22.4 million while average price point decreased less than 1% to $57.00 primarily due to changes in product mix to categories with lower price points, offset by a decrease in clearance sales.
Divisional product sales mix at HSN is provided in the table below:
 
Three Months Ended June 30,

Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Jewelry
11.6
%
 
13.4
%
 
11.1
%
 
12.5
%
Fashion (apparel & accessories)
16.0
%
 
15.9
%
 
15.6
%
 
15.3
%
Beauty & Health
26.9
%
 
24.0
%
 
26.5
%
 
25.9
%
Home & Other (including household, home design, electronics and culinary)
45.5
%
 
46.7
%
 
46.8
%
 
46.3
%
Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Cornerstone
Cornerstone net sales in the second quarter of 2014 increased 4%, or $12.3 million. The increase in net sales was driven by sales growth in the home brands, partially offset by lower sales in the apparel brands, particularly Garnet Hill. Digital sales grew 6% with penetration increasing 130 basis points to 64.2%, up from 62.9% in the prior year. Catalog circulation increased 6% compared to the prior year.

17



Cornerstone net sales in the six months ended June 30, 2014 increased 4%, or $22.7 million. The increase in net sales was driven by sales growth in the home brands, partially offset by lower sales in the apparel brands, particularly Garnet Hill. Digital sales grew 6% with penetration increasing 100 basis points to 65.7%, up from 64.7% in the prior year. Catalog circulation increased 7% compared to the prior year.

The brand mix at Cornerstone is provided in the table below (as a percentage of net sales):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Home brands (Ballard Designs, Frontgate, Grandin Road and Improvements)
 
82.0
%
 
79.5
%
 
78.2
%
 
75.8
%
Apparel brands (Chasing Fireflies, Garnet Hill and TravelSmith)
 
18.0
%
 
20.5
%
 
21.8
%
 
24.2
%
Total
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
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 June 30,

Six Months Ended June 30,
 
 
2014
 
Change
 
2013
 
2014
 
Change
 
2013
 
 
(Dollars in thousands)
 
(Dollars in thousands)
Gross profit:
 
 
 
 
HSN
 
$
196,486

 
5%
 
$
187,460

 
$
387,075

 
2%
 
$
379,819

HSN gross margin percentage
 
35.3
%
 
(30 bp)
 
35.6
%
 
35.2
%
 
(10 bp)
 
35.3
%
Cornerstone
 
$
116,649

 
(4)%
 
$
121,317

 
$
201,834

 
(3)%
 
$
209,106

Cornerstone gross margin percentage
 
39.1
%
 
(330 bp)
 
42.4
%
 
38.0
%
 
(310 bp)
 
41.1
%
HSNi
 
$
313,135

 
1%
 
$
308,777

 
$
588,909

 
—%
 
$
588,924

HSNi gross margin percentage
 
36.6
%
 
(140 bp)
 
38.0
%
 
36.1
%
 
(110 bp)
 
37.2
%
bp = basis points

HSN
Gross profit for HSN in the second quarter of 2014 increased 5%, or $9.0 million. Gross margin was 35.3% compared to 35.6% in the prior year. The gross margin was unfavorably impacted by an increase in shipping promotions, partially offset by changes in product mix (primarily from electronics to beauty).
Gross profit for HSN in the six months ended June 30, 2014 increased 2%, or $7.3 million. Gross margin was 35.2% compared to 35.3% in the prior year. The gross margin was unfavorably impacted by an increase in promotional activity, offset by less clearance sales and changes in product mix (primarily from electronics to home design and beauty).
Cornerstone
Gross profit for Cornerstone in the second quarter of 2014 decreased 4%, or $4.7 million, compared to the prior year. Gross margin decreased 330 basis points to 39.1% due to increased promotional activity primarily in response to competitive market conditions in both the home and apparel brands.
Gross profit for Cornerstone in the six months ended June 30, 2014 decreased 3%, or $7.3 million, compared to the prior year. Gross margin decreased 310 basis points to 38.0% primarily due to increased promotional activity in response to competitive market conditions and liquidations to sell through year end inventory positions in the apparel brands, particularly Garnet Hill.


18



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 June 30,

Six Months Ended June 30,
 
 
2014
 
Change
 
2013
 
2014
 
Change
 
2013
 
 
(Dollars in thousands)
 
(Dollars in thousands)
HSN
 
$
99,096

 
3%
 
$
95,786

 
$
195,920

 
1%
 
$
193,996

As a percentage of HSN net sales
 
17.8
%
 
(40 bp)
 
18.2
%
 
17.8
%
 
(20 bp)
 
18.0
%
Cornerstone
 
$
83,651

 
6%
 
$
79,089

 
$
154,066

 
6%
 
$
145,421

As a percentage of Cornerstone net sales
 
28.0
%
 
40 bps
 
27.6
%
 
29.0
%
 
40 bp
 
28.6
%
HSNi
 
$
182,747

 
5%
 
$
174,875

 
$
349,986

 
3%
 
$
339,417

As a percentage of HSNi net sales
 
21.4
%
 
(10 bp)
 
21.5
%
 
21.4
%
 
0 bp
 
21.4
%
HSNi's selling and marketing expense in the second quarter of 2014 increased 5%, or $7.9 million, and was 21.4% of net sales compared to 21.5% 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 HSN's on-air distribution costs related to the expansion of HSN2; an increase in digital marketing; and an increase in call center costs at Cornerstone.
HSNi's selling and marketing expense in the six months ended June 30, 2014 increased 3%, or $10.6 million, and was 21.4% of net sales, consistent with the prior year. The increase was primarily due to additional catalog costs associated with a 7% increase in Cornerstone's catalog circulation; an increase in digital marketing; an increase in HSN's on-air distribution costs related to the expansion of HSN2; and an increase in call center costs at Cornerstone; offset by a decrease in brand marketing 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 June 30,

Six Months Ended June 30,
 
 
2014
 
Change
 
2013
 
2014
 
Change
 
2013
 
 
(Dollars in thousands)
 
(Dollars in thousands)
HSN
 
$
37,890

 
1%
 
$
37,656

 
$
75,657

 
(1)%
 
$
76,355

As a percentage of HSN net sales
 
6.8
%
 
(40 bp)
 
7.2
%
 
6.9
%
 
(20 bp)
 
7.1
%
Cornerstone
 
$
14,328

 
(4)%
 
$
14,996

 
$
32,472

 
10%
 
$
29,431

As a percentage of Cornerstone net sales
 
4.8
%
 
(40 bp)
 
5.2
%
 
6.1
%
 
30 bp
 
5.8
%
HSNi
 
$
52,218

 
(1)%
 
$
52,652

 
$
108,129

 
2%
 
$
105,786

As a percentage of HSNi net sales
 
6.1
%
 
(40 bp)
 
6.5
%
 
6.6
%
 
(10 bp)
 
6.7
%
HSNi’s general and administrative expense in the second quarter of 2014 decreased 1%, or $0.4 million, and was 6.1% of net sales compared to 6.5% in the prior year. The decrease was primarily due to a decrease in severance-related costs, partially offset by a legal settlement.
HSNi’s general and administrative expense in the six months ended June 30, 2014 increased 2%, or $2.3 million, and was 6.6% of net sales compared to 6.7% in the prior year. The increase was primarily due to two legal settlements and associated legal fees (including a $3.1 million settlement with the Consumer Product Safety Commission ("CPSC")), partially offset by decreases in severance-related costs and losses from the disposition of fixed assets.
In June 2013, the CPSC notified the Company that the CPSC was investigating whether the Company complied with certain reporting requirements of the Consumer Product Safety Act related to a product sold from December 2005 through July 2010 at one of the Cornerstone brands.  In June 2014, the Company reached a $3.1 million settlement for the civil penalty assessed by the CPSC which was accrued in the first quarter of 2014 in "general and administrative" expense in its consolidated statements of operations. Excluding the impact of the CPSC settlement, Cornerstone's general and administrative expense for

19



the six months ended June 30, 2014 would have been consistent with the prior year and would have been 5.5% of net sales, compared to 5.8% in the prior year. See further discussion of the settlement in Note 12-Commitments and Contingencies of the Notes to Consolidated Financial Statements. 
Depreciation and Amortization
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
Change
 
2013
 
2014
 
Change
 
2013
 
 
(Dollars in thousands)
 
(Dollars in thousands)
HSN
 
$
7,423

 
5%
 
$
7,037

 
$
14,860

 
7%
 
$
13,858

Cornerstone
 
3,380

 
16%
 
2,914

 
6,699

 
11%
 
6,046

HSNi
 
$
10,803

 
9%
 
$
9,951

 
$
21,559

 
8%
 
$
19,904

As a percentage of HSNi net sales
 
1.3
%
 
 10 bp
 
1.2
%
 
1.3
%
 
0 bp
 
1.3
%

Depreciation and amortization in the second quarter of 2014 increased 9%, or $0.9 million, compared to the prior year. The increase was primarily due to the incremental depreciation associated with recent capital expenditures.

Depreciation and amortization in the six months ended June 30, 2014 increased 8%, or $1.7 million, compared to the prior year. The increase was primarily due to the incremental depreciation associated with recent capital expenditures.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP measure and is defined in Note 4 of Notes to Consolidated Financial Statements.

 
 
Three Months Ended June 30,

Six Months Ended June 30,
 
 
2014
 
Change
 
2013
 
2014
 
Change
 
2013
 
 
(Dollars in thousands)
 
(Dollars in thousands)
HSN
 
$
62,657

 
10%
 
$
57,135

 
$
121,799

 
5%
 
$
116,069

As a percentage of HSN net sales
 
11.3
%
 
40 bp
 
10.9
%
 
11.1
%
 
30 bp
 
10.8
%
Cornerstone
 
$
19,435

 
(31)%
 
$
28,017

 
$
20,051

 
(44)%
 
$
35,925

As a percentage of Cornerstone net sales
 
6.5
%
 
(330 bp)
 
9.8
%
 
3.8
%
 
(330 bp)
 
7.1
%
HSNi
 
$
82,092

 
(4)%
 
$
85,152

 
$
141,850

 
(7)%
 
$
151,994

As a percentage of HSNi net sales
 
9.6
%
 
(90 bp)
 
10.5
%
 
8.7
%
 
(90 bp)
 
9.6
%
HSNi's Adjusted EBITDA in the second quarter of 2014 decreased 4%, or $3.1 million, and was 9.6% of net sales compared to 10.5% in the prior year. The decrease in HSNi's Adjusted EBITDA is due to a 140 basis point decline in the gross margin due primarily to increased promotional activity, partially offset by a 50 basis point improvement in operating expense leverage (excluding non-cash charges). HSN's Adjusted EBITDA increased 10%, or $5.5 million, due to a 6% growth in net sales and 80 basis point improvement in operating expense leverage (excluding non-cash charges). HSN’s improved operating expense leverage is primarily due to lower employee compensation-related costs as a result of lower headcount, a decrease in severance costs and efficiencies in its call center. Cornerstone's Adjusted EBITDA decreased 31%, or $8.6 million, primarily due to a 330 basis point decline in the gross margin due to increased promotional activity.
HSNi's Adjusted EBITDA in the six months ended June 30, 2014 decreased 7%, or $10.1 million, and was 8.7% of net sales compared to 9.6% in the prior year. The decrease in HSNi's Adjusted EBITDA was primarily due to a 110 basis point decline in the gross margin primarily due to increased promotional activity at Cornerstone. HSN's Adjusted EBITDA increased 5%, or $5.7 million, primarily due to a 2% growth in net sales and 40 basis point improvement in operating expense leverage (excluding non-cash charges). HSN’s improved operating expense leverage is primarily due to lower employee compensation-related costs as a result of lower headcount, a decrease in severance costs and efficiencies in its call center. Cornerstone's Adjusted EBITDA decreased 44%, or $15.9 million, primarily due to a gross margin decline of 310 basis points due to increased promotional activity.


20



Operating Income
 
 
Three Months Ended June 30,

Six Months Ended June 30,
 
 
2014
 
Change
 
2013
 
2014
 
Change
 
2013
 
 
(Dollars in thousands)
 
(Dollars in thousands)
HSN
 
$
52,077

 
11%
 
$
46,981

 
$
100,638

 
5%
 
$
95,609

As a percentage of HSN net sales
 
9.4
%
 
50 bp
 
8.9
%
 
9.1
%
 
20 bp
 
8.9
%
Cornerstone
 
$
15,290

 
(37)%
 
$
24,318

 
$
8,597

 
(70)%
 
$
28,208

As a percentage of Cornerstone net sales
 
5.1
%
 
(340 bp)
 
8.5
%
 
1.6
%
 
(390 bp)
 
5.5
%
HSNi
 
$
67,367

 
(6)%
 
$
71,299

 
$
109,235

 
(12)%
 
$
123,817

As a percentage of HSNi net sales
 
7.9
%
 
(90 bp)
 
8.8
%
 
6.7
%
 
(110 bp)
 
7.8
%
HSNi's operating income in the second quarter of 2014 decreased 6%, or $3.9 million, and was 7.9% of net sales compared to 8.8% in the prior year. The decrease was primarily due to a 140 basis point decline in the gross margin due primarily to increased promotional activity, partially offset by a 50 basis point improvement in operating expense leverage.
HSNi's operating income in the six months ended June 30, 2014 decreased 12%, or $14.6 million, and was 6.7% of net sales compared to 7.8% in the prior year. The decrease was primarily due to a 110 basis point decline in gross margin and the $3.1 million CPSC settlement at Cornerstone.
Other Income (Expense)

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
Change
 
2013
 
2014
 
Change
 
2013
 
 
(Dollars in thousands)
 
(Dollars in thousands)
Interest income
 
$
44

 
47%
 
$
30

 
$
114

 
38%
 
$
83

Interest expense
 
(1,854
)
 
10%
 
(1,691
)
 
(3,623
)
 
7%
 
(3,384
)
Total other expense, net
 
$
(1,810
)
 
9%
 
$
(1,661
)
 
$
(3,509
)
 
6%
 
$
(3,301
)
As a percentage of HSNi net sales
 
0.2
%
 
0 bp
 
0.2
%
 
0.2
%
 
0 bp
 
0.2
%

Interest expense is primarily related to the term loan outstanding under the Credit Agreement. The change in interest expense between periods is primarily due to a higher average interest rate (including the impact of the interest rate swap), partially offset by a lower average outstanding balance. HSNi executed an interest rate swap with a notional amount of $187.5 million that took effect on January 31, 2014. The interest rate swap effectively fixes the floating LIBOR-based interest on $187.5 million of the outstanding term loan resulting in a fixed rate of 2.3525% (based on HSNi's leverage ratio as of June 30, 2014) on the hedged portion of the term loan.
Income Tax Provision
For the three and six months ended June 30, 2014, HSNi recorded tax provisions of $24.6 million and $40.6 million, respectively, which represents effective tax rates of 37.6% and 38.4%. For the three and six months ended June 30, 2013, HSNi recorded tax provisions of $26.4 million and $45.7 million, respectively, which represents an effective tax rate of 37.9%. The change in the effective tax rate for the six-month period ended June 30, 2014 compared to the prior year was primarily due to the non-deductibility of the $3.1 million CPSC settlement. 
Liquidity and Capital Resources
As of June 30, 2014, HSNi had $122.3 million of cash and cash equivalents compared to $196.4 million as of December 31, 2013 and $92.0 million million as of June 30, 2013.
Net cash provided by operating activities for the six months ended June 30, 2014 was $28.2 million compared to $33.6 million in the prior year, a decline of $5.4 million due to a decrease in operating performance, partially offset by a decrease in working capital. Working capital decreased primarily as a result of increased inventory receipts being more than offset by the timing of payments of current liabilities, including income taxes.
Net cash used in investing activities attributable to continuing operations for the six months ended June 30, 2014 was $16.4 million and was primarily related to capital expenditures. The capital expenditures were primarily for investments in information technology and infrastructure.

21



Net cash used in financing activities attributable to continuing operations for the six months ended June 30, 2014 was $85.9 million. HSNi paid $51.0 million for approximately 931,000 shares of common stock repurchased during the six months ended June 30, 2014. HSNi also paid cash dividends of $0.25 per common share resulting in payments totaling $26.4 million, representing a 39% increase in the dividend declared in the prior year. HSNi repaid $6.3 million of its term loan during the six months ended June 30, 2014. HSNi had a cash outflow of $8.7 million used to cover withholding taxes for stock-based awards. Additionally, HSNi had $5.0 million of excess tax benefits from stock-based awards.

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. 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 term loan, may be increased up to $850 million subject to certain conditions and expires April 24, 2017. As of June 30, 2014, the balance of the term loan was $234.4 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 June 30, 2014, with a leverage ratio of 0.74x and an interest coverage ratio of 56.55x.

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 June 30, 2014 was 1.65%.  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 $12.5 million as of June 30, 2014. 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 June 30, 2014, 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 $337.5 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 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. Our capital expenditures for fiscal 2014 are planned at approximately $50 to $60 million and primarily relate to our investments in our distribution centers, information technology and digital commerce. 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 allowed 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 depended 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. For the six months ended June 30, 2014, HSNi acquired under the program and subsequently retired approximately 931,000 shares of its outstanding common stock for $51.0 million at an average price of $54.76. In July 2014, HSNi completed its 10 million share repurchase program at an aggregate cost of $451.0 million, representing an average cost of $45.10 per share.
HSNi's Board of Directors approved a cash dividend of $0.25 per common share. The dividend will be paid on September 17, 2014 to HSNi's record holders as of September 3, 2014.

22



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, 2013. No material changes have occurred in HSNi's market risks since December 31, 2013.

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 June 30, 2014. 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 June 30, 2014 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



23



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, employment matters 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 Note 12 - Commitments and Contingencies in Part I, Item 1 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, 2013, 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 Securities
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 repurchased 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 depended 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. In July 2014, HSNi completed its 10 million share repurchase program at an aggregate cost of $451.0 million, representing an average cost of $45.10 per share.
Below is a summary of our common stock repurchases during the second quarter of 2014, as well as the number of shares still available for purchase as of June 30, 2014:

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
April 1, 2014 - April 30, 2014
 

 
$

 

 
983,822

May 1, 2014 - May 31, 2014
 
781,287

 
$
54.60

 
781,287

 
202,535

June 1, 2014 - June 30, 2014
 
122,612

 
$
55.86

 
122,612

 
79,923

 
 
903,899

 
$
54.78

 
903,899

 
 

ITEM 3.
DEFAULTS UPON SENIOR SECURITIES

None


24



ITEM 4.
MINE SAFETY DISCLOSURES

Not applicable
ITEM 5.
OTHER INFORMATION
None

ITEM 6.
EXHIBITS
Exhibit No.
  
Description of Document
  
Method of Filing
 
 
 
 
 
 
 
 
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 June 30, 2014, formatted in XBRL (eXtensible Business Reporting Language) and filed electronically herewith: (i) Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2014 and 2013, (ii) Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2014 and 2013, (iii) Consolidated Balance Sheets as of June 30, 2014, December 31, 2013 and June 30, 2014, (iv) Consolidated Statements of Shareholders’ Equity for the Six Months Ended June 30, 2014 and Year Ended December 31, 2013, (v) Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013, and (vi) Notes to the Consolidated Financial Statements.
 
Filed herewith


25



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: August 7, 2014
 
 
 
By:
 
/S/  JUDY A. SCHMELING
 
 
 
 
 
 
Judy A. Schmeling,
Chief Operating Officer and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)


26