Home Shopping Network 2012 Annual Report Download - page 34

Table of Contents
Income Taxes
Estimates of deferred income taxes and the significant items giving rise to the deferred tax assets and liabilities are shown in Note 12 of
Notes to Consolidated Financial Statements, and reflect management's assessment of actual future taxes to be paid on items reflected in the
consolidated financial statements, giving consideration to both timing and the probability of realization. Actual income taxes could vary from
these 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 HSNi's historical experience and 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, 2012, HSNi’s outstanding long-term debt was $250.0 million, all of which pays interest at a variable rate, generally tied
to LIBOR. Changes in interest rates on our variable rate debt could affect our earnings. We are managing our future interest rate exposure
through a forward-starting interest rate swap with a notional amount of $187.5 million and a fixed rate of 0.8525% that will take effect January
2014. A hypothetical 100 basis point increase in interest rates on our variable rate obligations would increase our annual interest expense by $2.5
million excluding the effect of the interest rate swap which does not take effect until January 2014.
At December 31, 2011, HSNi's outstanding long-term debt consisted of $240.0 million of Senior Notes which paid interest at fixed rates.
As market rates declined, the required interest payments on this fixed rate debt would exceed those based on market rates. A hypothetical 100
basis point increase or decrease in interest rates would have decreased or increased, respectively, the fair value of the fixed-rate debt by
approximately $6.5 million. The Senior Notes were fully redeemed in August 2012.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK