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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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2011, HSNi’s outstanding long-term debt was approximately $240.0 million, all of which
pays interest at fixed rates. As market rates decline, the required interest payments on this fixed rate debt will
exceed those based on market rates. A hypothetical 100 basis point increase or decrease in interest rates would,
respectively, decrease or increase the fair value of the fixed-rate debt by approximately $6.5 million.
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