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estimates due to future changes in income tax law, state income tax apportionment, as well as actual operating results of HSNi that vary
significantly from anticipated results. Valuation allowances are related to items for which it is more likely than not that the tax benefit will not be
realized. In assessing the adequacy of a recorded valuation allowance, we consider all positive and negative information and a variety of factors
including the scheduled reversal of deferred tax liabilities, historical and projected future taxable income and feasible tax planning strategies.
HSNi recognizes liabilities for uncertain tax positions based on a two-
step process. The first step is to evaluate the tax position for recognition by
determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on its technical merits. The
second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. This
measurement step is inherently difficult and requires subjective estimations of such amounts to determine the probability of various possible
outcomes. HSNi considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic
adjustments and which may not accurately anticipate actual outcomes.
Inventory Valuation
Inventories are valued at the lower of cost or market, cost being determined based upon the first-in, first-out method. Market is determined
on the basis of net realizable value, giving consideration to obsolescence and other factors. Net realizable value is estimated by HSNi based upon
historical sales data, the age of inventory, the quantity of goods on hand and the ability to return merchandise to vendors. The actual net
realizable value may vary from estimates due to changes in customer tastes or viewing habits, or judgmental decisions made by merchandising
personnel when ordering new products.
Stock-Based Compensation
We measure compensation cost for stock-based awards at fair value and recognize compensation over the service period for awards
expected to vest. We consider many factors when estimating expected forfeitures, including types of awards, employee class and historical
experience. HSNi grants performance-based equity awards whose value is based on the extent to which certain pre-established performance
goals are achieved during a three-year period. Each reporting period prior to the vesting of these awards, management must apply significant
judgment when estimating the expected future achievement of the designated performance metrics The estimation of stock awards that will
ultimately vest and the estimation of the value of the performance-based awards require judgment, and to the extent actual results or updated
estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. The
fair value of restricted stock units is determined based on the number of shares granted and the closing price of our common stock at the grant
date. The fair value of stock options, stock appreciation rights and options granted under our employee stock purchase plan are estimated on the
grant date using the Black-Scholes option pricing model. This model incorporates various assumptions, including expected volatility and
expected term. Expected stock price volatilities are estimated based on the historical and implied volatilities of comparable publicly-traded
companies. The expected term of awards granted is based on analyses of historical employee termination rates and option exercise patterns,
giving consideration to expectations of future employee behavior. Actual results and future estimates may differ substantially from our current
estimates.
At December 31, 2010, approximately 22.6% of our $308.8 million of outstanding long-term debt bore interest at variable rates, generally
tied to a reference rate such as the LIBOR rate or the prime rate of interest of certain banks. Changes in interest rates on loans from these
financial institutions could affect our earnings as a result of interest rates charged on certain underlying obligations that are variable. A
hypothetical 100 basis point increase in interest rates on our variable rate obligations would have resulted in an increase of approximately
$0.7 million and $1.0 million in annual pre-tax interest expense for the years ended December 31, 2010 and 2009, respectively.
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ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK