lexe_Current_Folio_10Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

FORM 10-Q

 

    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2018

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 Number 001-37938

 

LIBERTY EXPEDIA HOLDINGS, INC.

 

(Exact name of Registrant as specified in its charter)

 

State of Delaware

    

81-1838757

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

12300 Liberty Boulevard
Englewood, Colorado

 

80112

(Address of principal executive offices)

 

(Zip Code)

 

Registrant's telephone number, including area code: (720) 875-5800

 

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 ☒    No ☐

 

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

 

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

 

 

 

 

 

 

 

 

 

 

Large accelerated filer ☒

   

Accelerated filer ☐

   

Non-accelerated filer ☐
(do not check if smaller
reporting company)

   

Smaller reporting company ☐

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

 

The number of outstanding shares of Liberty Expedia Holdings, Inc. common stock as of April 16, 2018 was:

 

 

 

 

 

 

 

 

Series A

 

Series B

 

Liberty Expedia Holdings, Inc. Common Stock

 

54,445,529

 

2,830,174

 

 

 

 

 

 

 


 

Table of Contents

Table of Contents

 

 

 

Part I - Financial Information

 

Item 1. Financial Statements 

 

LIBERTY EXPEDIA HOLDINGS, INC. Condensed Consolidated Balance Sheets (unaudited) 

I-2

LIBERTY EXPEDIA HOLDINGS, INC. Condensed Consolidated Statements of Operations (unaudited) 

I-3

LIBERTY EXPEDIA HOLDINGS, INC. Condensed Consolidated Statements of Comprehensive Earnings (Loss) (unaudited) 

I-4

LIBERTY EXPEDIA HOLDINGS, INC. Condensed Consolidated Statements of Cash Flows (unaudited) 

I-5

LIBERTY EXPEDIA HOLDINGS, INC. Condensed Consolidated Statement of Equity (unaudited) 

I-6

LIBERTY EXPEDIA HOLDINGS, INC. Notes to Condensed Consolidated Financial Statements (unaudited) 

I-7

 

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 

I-31

Item 3. Quantitative and Qualitative Disclosures about Market Risk 

I-41

Item 4. Controls and Procedures 

I-43

 

 

Part II - Other Information 

 

Item 1. Legal Proceedings 

II-1

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

II-1

Item 6. Exhibits 

II-1

 

 

SIGNATURES 

II-2

 

 

I-1


 

Table of Contents

LIBERTY EXPEDIA HOLDINGS, INC.

 

Condensed Consolidated Balance Sheets

 

(unaudited)

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

 

2018

 

2017

 

 

 

amounts in millions

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,543

 

2,961

 

Accounts receivable, net

 

 

2,257

 

1,871

 

Short-term marketable securities

 

 

1,031

 

469

 

Prepaid expenses

 

 

301

 

257

 

Other current assets

 

 

452

 

113

 

Total current assets

 

 

7,584

 

5,671

 

Property and equipment, at cost

 

 

1,249

 

1,254

 

Accumulated depreciation

 

 

(343)

 

(303)

 

 

 

 

906

 

951

 

Intangible assets not subject to amortization:

 

 

 

 

 

 

Goodwill

 

 

15,310

 

15,251

 

Tradename

 

 

6,288

 

6,256

 

 

 

 

21,598

 

21,507

 

Intangible assets subject to amortization, net

 

 

4,809

 

5,010

 

Other assets, net

 

 

863

 

829

 

Total assets

 

$

35,760

 

33,968

 

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

   

 

Current liabilities:

 

 

 

 

 

 

Accounts payable, merchant

 

$

1,713

 

1,838

 

Accounts payable, other

 

 

854

 

713

 

Accrued liabilities

 

 

621

 

1,285

 

Deferred merchant bookings

 

 

5,866

 

3,219

 

Deferred revenue

 

 

471

 

329

 

Current portion of debt (note 7)

 

 

533

 

538

 

Other current liabilities

 

 

14

 

30

 

Total current liabilities

 

 

10,072

 

7,952

 

Long-term debt and capital lease obligations, net, including $386 million and $398 million measured at fair value (note 7)

 

 

4,330

 

4,329

 

Deferred income tax liabilities

 

 

2,202

 

2,155

 

Other long term liabilities

 

 

454

 

430

 

Total liabilities

 

 

17,058

 

14,866

 

Equity

 

 

 

 

 

 

Preferred stock, $.01 par value. Authorized 50,000,000 shares; no shares issued

 

 

 —

 

 —

 

Series A common stock, $.01 par value. Authorized 160,000,000 shares; issued and outstanding 54,445,529 and 54,438,883 at March 31, 2018 and December 31, 2017, respectively

 

 

 1

 

 1

 

Series B common stock, $.01 par value. Authorized 6,000,000 shares; issued and outstanding 2,830,174 and 2,830,174 at March 31, 2018 and December 31, 2017, respectively

 

 

 —

 

 —

 

Additional paid-in capital

 

 

369

 

370

 

Accumulated other comprehensive earnings (loss), net of taxes

 

 

69

 

59

 

Retained earnings

 

 

2,136

 

2,179

 

Total stockholders' equity

 

 

2,575

 

2,609

 

Noncontrolling interests in equity of subsidiaries

 

 

16,127

 

16,493

 

Total equity

 

 

18,702

 

19,102

 

Commitments and contingencies (note 9)

 

 

 

 

 

 

Total liabilities and equity

 

$

35,760

 

33,968

 

 

See accompanying notes to condensed consolidated financial statements.

 

I-2


 

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LIBERTY EXPEDIA HOLDINGS, INC.

 

Condensed Consolidated Statements Of Operations

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

March 31, 

 

 

    

2018

    

2017

 

 

 

amounts in millions,

 

 

 

except per share amounts

 

Service revenue

 

$

2,508

 

2,139

 

Product revenue

 

 

66

 

91

 

Total revenue, net (note 2)

 

 

2,574

 

2,230

 

Operating costs and expenses:

 

 

 

 

 

 

Selling and marketing, including stock-based compensation (note 8)

 

 

1,513

 

1,276

 

Cost of service revenue

 

 

460

 

400

 

Technology and content, including stock-based compensation (note 8)

 

 

277

 

228

 

Cost of goods sold (exclusive of depreciation shown separately below)

 

 

48

 

65

 

General and administrative, including stock-based compensation (note 8)

 

 

199

 

172

 

Other operating expense (note 8)

 

 

 5

 

 6

 

Depreciation and amortization

 

 

479

 

529

 

Legal reserves, occupancy tax and other

 

 

 4

 

21

 

Restructuring and related reorganization charges

 

 

 —

 

 2

 

 

 

 

2,985

 

2,699

 

Operating income (loss)

 

 

(411)

 

(469)

 

Other income (expense):

 

 

 

 

 

 

Interest expense

 

 

(36)

 

(29)

 

Other, net

 

 

58

 

(13)

 

 

 

 

22

 

(42)

 

Earnings (loss) before income taxes

 

 

(389)

 

(511)

 

Income tax (expense) benefit

 

 

65

 

154

 

Net earnings (loss)

 

 

(324)

 

(357)

 

Less net earnings (loss) attributable to the noncontrolling interests

 

 

(280)

 

(299)

 

Net earnings (loss) attributable to Liberty Expedia Holdings, Inc. shareholders

 

$

(44)

 

(58)

 

Basic net earnings (loss) attributable to Series A and Series B Liberty Expedia Holdings, Inc. shareholders per common share (note 3)

 

$

(0.77)

 

(1.02)

 

Diluted net earnings (loss) attributable to Series A and Series B Liberty Expedia Holdings, Inc. shareholders per common share (note 3)

 

$

(0.77)

 

(1.02)

 

 

See accompanying notes to condensed consolidated financial statements.

I-3


 

Table of Contents

LIBERTY EXPEDIA HOLDINGS, INC.

 

Condensed Consolidated Statements Of Comprehensive Earnings (Loss)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

March 31, 

 

 

    

2018

    

2017

 

 

 

amounts in millions

 

Net earnings (loss)

 

$

(324)

 

(357)

 

Other comprehensive earnings (loss), net of taxes:

 

 

 

 

 

 

Currency translation adjustments and other

 

 

102

 

95

 

Other comprehensive earnings (loss)

 

 

102

 

95

 

Comprehensive earnings (loss)

 

 

(222)

 

(262)

 

Less comprehensive earnings (loss) attributable to the noncontrolling interest

 

 

(189)

 

(218)

 

Comprehensive earnings (loss) attributable to Liberty Expedia Holdings, Inc. shareholders

 

$

(33)

 

(44)

 

 

See accompanying notes to condensed consolidated financial statements.

I-4


 

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LIBERTY EXPEDIA HOLDINGS, INC.

 

Condensed Consolidated Statements Of Cash Flows

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

March 31, 

 

 

    

2018

    

2017

 

 

 

amounts in millions

 

Cash flows from operating activities:

 

 

 

 

 

 

Net earnings (loss)

 

$

(324)

 

(357)

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

479

 

529

 

Stock-based compensation

 

 

51

 

77

 

Realized (gain) loss on foreign currency forwards

 

 

(8)

 

 7

 

(Gain) loss on equity securities

 

 

(37)

 

 —

 

Deferred income tax expense (benefit)

 

 

44

 

(93)

 

Other noncash charges (credits), net

 

 

(35)

 

(3)

 

Changes in operating assets and liabilities

 

 

 

 

 

 

Current and other assets

 

 

(400)

 

(279)

 

Payables and other liabilities

 

 

1,906

 

1,810

 

Net cash provided (used) by operating activities

 

 

1,676

 

1,691

 

Cash flows from investing activities:

 

 

 

 

 

 

Capital expended for property and equipment and capitalized software

 

 

(194)

 

(170)

 

Purchases of short-term marketable securities and other investments

 

 

(867)

 

(780)

 

Sales of short-term marketable securities

 

 

317

 

 7

 

Net settlement of foreign currency forward contracts

 

 

 —

 

(7)

 

Other, net

 

 

14

 

(2)

 

Net cash provided (used) by investing activities

 

 

(730)

 

(952)

 

Cash flows from financing activities:

 

 

 

 

 

 

Borrowings of debt

 

 

67

 

92

 

Repayments of debt

 

 

(66)

 

(97)

 

Shares issued by subsidiary

 

 

20

 

58

 

Shares repurchased by subsidiary

 

 

(202)

 

(45)

 

Dividends paid by subsidiary

 

 

(39)

 

(36)

 

Proceeds from exercise of equity awards and employee stock purchase plan

 

 

 —

 

 4

 

Taxes paid in lieu of shares issued for stock-based compensation

 

 

(2)

 

(5)

 

Other financing activities, net

 

 

(6)

 

(14)

 

Net cash provided (used) by financing activities

 

 

(228)

 

(43)

 

Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash

 

 

17

 

31

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

735

 

727

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

3,031

 

1,872

 

Cash, cash equivalents and restricted cash at end of period

 

$

3,766

 

2,599

 

 

See accompanying notes to condensed consolidated financial statements.

 

I-5


 

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LIBERTY EXPEDIA HOLDINGS, INC.

 

Condensed Consolidated Statement Of Equity

 

(unaudited)

 

Three months ended March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

other

 

 

 

 

 

 

 

 

 

Preferred

 

Common stock

 

paid-in

 

comprehensive

 

Retained

 

Noncontrolling

 

 

 

 

    

stock

    

Series A

    

Series B

    

capital

    

earnings (loss)

    

earnings

    

interests

    

Total equity

 

 

 

amounts in millions

 

Balance at January 1, 2018

 

$

 —

 

 1

 

 —

 

370

 

59

 

2,179

 

16,493

 

19,102

 

Net earnings (loss)

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

(44)

 

(280)

 

(324)

 

Other comprehensive income (loss)

 

 

 —

 

 —

 

 —

 

 —

 

11

 

 —

 

91

 

102

 

Stock compensation

 

 

 —

 

 —

 

 —

 

 8

 

 —

 

 —

 

43

 

51

 

Proceeds from exercise of equity instruments in subsidiary

 

 

 —

 

 —

 

 —

 

(25)

 

 —

 

 —

 

45

 

20

 

Stock repurchases by subsidiary

 

 

 —

 

 —

 

 —

 

18

 

 —

 

 —

 

(220)

 

(202)

 

Dividends paid by subsidiary

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

(39)

 

(39)

 

Taxes paid in lieu of shares issued for stock-based compensation

 

 

 —

 

 —

 

 —

 

(2)

 

 —

 

 —

 

 —

 

(2)

 

Adoption of new accounting guidance

 

 

 —

 

 —

 

 —

 

 —

 

(1)

 

 1

 

(10)

 

(10)

 

Other  

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 4

 

 4

 

Balance at March 31, 2018

 

$

 —

 

 1

 

 —

 

369

 

69

 

2,136

 

16,127

 

18,702

 

 

See accompanying notes to condensed consolidated financial statements.

 

I-6


 

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(1) Basis of Presentation

 

During November 2015, the board of directors of Liberty Interactive Corporation ("Liberty Interactive"), now known as Qurate Retail, Inc. (“Qurate Retail”) authorized management to pursue a plan to distribute to holders of its then-outstanding Liberty Ventures common stock shares of a newly formed entity, Liberty Expedia Holdings, Inc. ("Expedia Holdings" or the "Company" as discussed below) ("Expedia Holdings Split-Off"). Following the Expedia Holdings Split-Off, Expedia Holdings is comprised of, among other things, Qurate Retail's former ownership interest in Expedia Group, Inc. (formerly “Expedia, Inc.”) ("Expedia"), as well as Qurate Retail's former wholly-owned subsidiary Vitalize, LLC (which we refer to as “Bodybuilding”).  

 

The Expedia Holdings Split-Off occurred on November 4, 2016. Following the Expedia Holdings Split-Off, Expedia Holdings and Qurate  Retail operate as separate, publicly traded companies. The Expedia Holdings Split-Off was intended to be tax-free to Qurate Retail and the former stockholders of Liberty Ventures. In February 2017, the Internal Revenue Service (the “IRS”) completed its review of the Expedia Holdings Split-Off and informed Qurate Retail that it agreed with the nontaxable characterization of the transactions. Qurate Retail received an Issue Resolution Agreement from the IRS documenting this conclusion.

The accompanying condensed consolidated financial statements represent the consolidation of the historical financial information of Bodybuilding and Expedia. These financial statements refer to the consolidation of the aforementioned subsidiaries as "Expedia Holdings," "the Company," "us," "we" and "our" in the notes to the condensed consolidated financial statements. The Expedia Holdings Split-Off is accounted for at historical cost due to the pro rata nature of the distribution to the former holders of Liberty Ventures common stock. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements.

The accompanying (a) condensed consolidated balance sheet as of December 31, 2017, which has been derived from audited financial statements, and (b) the interim unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP") for interim financial information and the instructions on Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for such periods have been included. The results of operations for any interim period are not necessarily indicative of results for the full year. Additionally, certain prior period amounts have been reclassified for comparability with current period presentation. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2017. 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company considers (i) fair value measurement of non-financial instruments, (ii) accounting for certain merchant revenue, (iii) loyalty program accruals, (iv) valuation of other long-term liabilities, (v) measurement of stock-based compensation and (vi) income taxes to be its most significant estimates.

Split-Off of Expedia Holdings from Qurate Retail

 

Following the Expedia Holdings Split-Off, Qurate Retail and Expedia Holdings operate as separate, publicly traded companies, and neither has any stock ownership, beneficial or otherwise, in the other. In connection with the Expedia Holdings Split-Off, Expedia Holdings entered into certain agreements with Qurate Retail and/or Liberty Media Corporation (“Liberty Media”) (or certain of their subsidiaries) in order to govern certain of the ongoing relationships

I-7


 

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

between these companies after the Expedia Holdings Split-Off and to provide for an orderly transition. These agreements include a reorganization agreement, a services agreement, a facilities sharing agreement and a tax sharing agreement.

 

The reorganization agreement between Qurate Retail and Expedia Holdings provides for, among other things, the principal corporate transactions (including the internal restructuring) required to effect the Expedia Holdings Split-Off, certain conditions to the Expedia Holdings Split-Off and provisions governing the relationship between Expedia Holdings and Qurate Retail with respect to and resulting from the Expedia Holdings Split-Off. The tax sharing agreement between Qurate Retail and Expedia Holdings provides for the allocation and indemnification of tax liabilities and benefits between Qurate Retail and Expedia Holdings and other agreements related to tax matters. Pursuant to the services agreement, Liberty Media provides Expedia Holdings with general and administrative services including legal, tax, accounting, treasury and investor relations support. Under the facilities sharing agreement among Liberty Media, a subsidiary of Liberty Media and Expedia Holdings, Expedia Holdings shares office space with Qurate Retail and Liberty Media and related amenities at Liberty Media's corporate headquarters. Expedia Holdings will reimburse Liberty Media for direct, out-of-pocket expenses incurred by Liberty Media in providing these services and for costs that will be negotiated semi-annually. Under these various agreements, approximately $1 million and $1 million was reimbursable to Liberty Media for the three months ended March 31, 2018 and 2017, respectively.

 

Seasonality

 

Expedia generally experiences seasonal fluctuations in the demand for its travel products and services. For example, traditional leisure travel bookings are generally the highest in the first three quarters as travelers plan and book their spring, summer and winter holiday travel. The number of bookings typically decreases in the fourth quarter. Because revenue for most of Expedia’s travel products, including merchant and agency hotel, is recognized as the travel takes place rather than when it is booked, revenue typically lags bookings by several weeks for its hotel business and can be several months for its vacation rental business. The seasonal revenue impact is exacerbated with respect to income by the nature of Expedia’s variable cost of revenue and direct sales and marketing costs, which it typically realizes in closer alignment to booking volumes, and the more stable nature of its fixed costs. Furthermore, operating profits for Expedia’s primary advertising business, trivago N.V. (“trivago”),  have typically been experienced in the second half of the year, particularly the fourth quarter, as selling and marketing costs offset revenue in the first half of the year as they aggressively market during the busy booking period for spring, summer and winter holiday travel. As a result on a consolidated basis, revenue and income are typically the lowest in the first quarter and highest in the third quarter. The continued growth of Expedia’s international operations, advertising business or a change in its product mix, including the growth of HomeAway, Inc. (“HomeAway”), may influence the typical trend of the seasonality in the future, and there may also be business or market driven dynamics that result in short-term impacts to revenue or profitability that differ from the typical seasonal trends.  As HomeAway continues its shift to more of a transaction-based business model for vacation rental listings and its booking window elongates, its seasonal trends are more pronounced than Expedia’s other traditional leisure businesses. Historically, HomeAway has seen seasonally stronger bookings in the first quarter of the year, with the relevant stays occurring during the peak summer travel months.

 

The Tax Cuts and Jobs Act (the “Tax Act”) was enacted in December 2017. The Tax Act significantly changed U.S. tax law by, among other things, lowering U.S. corporate income tax rate, implementing a territorial tax system and imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries.  In the prior year, we recognized the provisional tax impacts related to the one-time transition tax and the revaluation of deferred tax balances and included these estimates in our consolidated financial statements for the year ended December 31, 2017. We are still in the process of analyzing the impact of the various provisions of the Tax Act. The ultimate impact may materially differ from these provisional amounts due to, among other things, continued analysis of the estimates and further guidance and interpretations on the application of the law. We expect to complete our analysis by December 2018.

 

 

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(2) Recent Accounting Pronouncements

 

Recently Adopted Accounting Policies

 

Revenue from Contracts with Customers.  As of January 1, 2018, the Company adopted the Accounting Standards Updates ("ASU") amending revenue recognition guidance using the modified retrospective method for all contracts reflecting the aggregate effect of modifications prior to the date of adoption. Results for reporting periods beginning after January 1, 2018 are presented under the new guidance, while prior period amounts were not adjusted and continue to be reported under the accounting standards in effect for those periods.

 

The new guidance impacted Expedia’s loyalty program accounting as it is no longer permitted to use the incremental cost method when recording the financial impact of rewards earned in conjunction with its traveler loyalty programs. Instead, Expedia re-values its liability using a relative fair value approach and now records its loyalty liability as a component of deferred merchant bookings. Additionally, due to the new definition of variable consideration, Expedia is required to estimate and record certain variable payments, primarily supplier overrides, earlier than previously recorded. Both modifications resulted in cumulative-effect adjustments to opening retained earnings, with an insignificant change to revenue on a go-forward basis. The new guidance also results in insignificant changes in the timing and classification of certain other revenue streams, including the reclassification of certain air fees from net revenue to cost of revenue. For a comprehensive discussion of our updated revenue recognition policy, refer to the Significant Accounting Policies-Revenue Recognition disclosure below.

 

The impact of the new guidance to our consolidated financial statements was not meaningful as of and for the three months ended March 31, 2018.

 

The cumulative effect of the revenue accounting changes made to our consolidated balance sheet as of January 1, 2018 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at

 

 

 

 

Balance at

 

 

December 31,

 

 

 

 

January 1,

 

 

2017

 

 

Adjustments

 

2018

 

(in millions)

Current and long-term assets:

 

 

 

 

 

 

 

 

 

Accounts receivable, net

$

1,871

 

$

(40)

 

$

1,831

 

  Prepaid expenses and other current assets

 

370

 

 

(1)

 

 

369

 

Long-term investments and other assets

 

829

 

 

(3)

 

 

826

 

Current and long-term liabilities:

 

 

 

 

 

 

 

 

 

  Deferred merchant bookings

 

3,219

 

 

619

 

 

3,838

 

Accrued expenses and other current liabilities

 

1,315

 

 

(564)

 

 

751

 

Deferred income taxes

 

2,155

 

 

(3)

 

 

2,152

 

Stockholders' equity:

 

 

 

 

 

 

 

 

 

  Retained earnings

 

2,179

 

 

(1)

 

 

2,178

 

Noncontrolling interests in equity of subsidiaries

 

16,493

 

 

(7)

 

 

16,486

 

 

Recognition and Measurement of Financial Instruments. As of January 1, 2018, the Company adopted new guidance related to accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. The most significant impact for the Company is with respect to the requirement that minority equity investments with readily determinable fair values, must be carried at fair value with

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Table of Contents

LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

changes in fair value recorded through net income. Previously such investments designated as available for sale were recorded at fair value with changes in fair value recorded through other comprehensive income. The Company elected to prospectively account for minority investments without readily determinable fair values at cost, with observable price changes reflected through net income. In addition, a portion of the unrealized gain (loss) recognized on the Company’s exchangeable debt accounted for at fair value is now presented in other comprehensive income as it relates to instrument specific credit risk, however this impact was not material to the overall financial statements for the three month period ended March 31, 2018.  The Company recorded an immaterial decrease to non-controlling interest in equity of subsidiaries, and increase to accumulated other comprehensive income (loss) (“AOCI”) related to an unrealized loss, net of tax.

 

Statement of Cash Flows. As of January 1, 2018, the Company adopted the new guidance related to the statement of cash flows which clarifies how companies present and classify certain cash receipts and cash payments as well as amends current guidance to address the classification and presentation of changes in restricted cash in the statement of cash flows. Upon adoption, we retrospectively adjusted the prior periods presented in our consolidated statement of cash flows, which resulted in a slight working capital benefit in prepaid expenses and other assets within operating activities in the three months ended March 31, 2017. Restricted cash includes cash and cash equivalents that is restricted through legal contracts, regulations or the Company’s intention to use the cash for a specific purpose. Expedia’s restricted cash primarily relates to certain traveler deposits and to a lesser extent collateral for office leases. The following table reconciles cash, cash equivalents and restricted cash reported in our condensed consolidated balance sheets to the total amount presented in our condensed consolidated statements of cash flows:

 

 

 

 

 

 

 

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

(in millions)

Cash and cash equivalents

$

3,543

 

$

2,961

 

Restricted cash included within other current assets

 

219

 

 

69

 

Restricted cash included within other assets

 

4

 

 

1

 

Total cash, cash equivalents and restricted cash and cash equivalents in the condensed consolidated statement of cash flows

$

3,766

 

$

3,031

 

 

Intra-entity Transfers of Assets Other Than Inventory. As of January 1, 2018, the Company adopted the new guidance amending the accounting for income taxes associated with intra-entity transfers of assets other than inventory. This new guidance requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory in earnings when the transfer occurs rather than our historical practice to defer and amortize the tax consequences over a specific period of time.  As a result of the adoption, the Company recorded an immaterial reduction to retained earnings and non-controlling interest in equity of subsidiaries, a  reduction to long-term investments and other assets and an increase to deferred tax assets related to the unrecognized income tax effects of asset transfers that occurred prior to adoption.

 

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. In February 2018, the Financial Accounting Standards Board (“FASB”) issued new guidance that allows an entity to elect to reclassify “stranded” tax effects in AOCI to retained earnings to address concerns related to accounting for certain provisions of the Tax Act. The guidance is effective for annual and interim reporting periods beginning after December 15, 2018, with early adoption permitted.

 

The Company elected to early adopt the new guidance during the first quarter of 2018, which resulted in the reclassification of the income tax effect of the Tax Act from AOCI to retained earnings in order to reflect the tax effects of items within AOCI at the appropriate tax rate. As a result, the Company recorded an immaterial increase to retained

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Table of Contents

LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

earnings and non-controlling interest in equity of subsidiaries, and a  reduction to AOCI as of January 1, 2018. Our policy is to release income tax effects from AOCI based on the tax effects of amounts reclassified from AOCI to pre-tax income (loss) from continuing operations. Any remaining tax effect in AOCI is released following a portfolio approach.

 

Definition of a Business. As of January 1, 2018, the Company adopted the new guidance clarifying the definition of a business for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Upon adoption, the standard impacts how the Company assesses acquisitions (or disposals) of assets or businesses.

Recent Accounting Pronouncements Not Yet Adopted

Leases. In February 2016, the FASB issued new guidance which revises the accounting for leases. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases. The new guidance also simplifies the accounting for sale and leaseback transactions. The new standard, to be applied via a modified retrospective transition approach, is effective for the Company for fiscal years and interim periods beginning after December 15, 2018, with early adoption permitted. Companies are required to use a modified retrospective approach to adopt this guidance. The Company is currently working with its consolidated subsidiaries to evaluate the impact of the adoption of this new guidance on our consolidated financial statements, including identifying the population of leases, evaluating technology solutions and collecting lease data.

 

Measurement of Credit Losses on Financial Instruments. In June 2016, the FASB issued new guidance on the measurement of credit losses for financial assets measured at amortized cost, which includes accounts receivable, and available-for-sale debt securities. The new guidance replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. This update is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted for annual periods beginning after December 15, 2018, including interim periods within those annual periods. We are in the process of evaluating the impact of adopting this new guidance on our consolidated financial statements.

 

Hedge Accounting.    In August 2017, the FASB amended the existing accounting guidance for hedge accounting. The amendments require expanded hedge accounting for both non-financial and financial risk components and refine the measurement of hedge results to better reflect an entity's hedging strategies. The new guidance also amends the presentation and disclosure requirements and changes how entities assess hedge effectiveness. The new guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018 with early adoption permitted. The new guidance must be adopted using a modified retrospective transition method with a cumulative effect adjustment recorded to opening retained earnings as of the initial adoption date. We are in the process of evaluating the impact of adopting this new guidance on our consolidated financial statements.

 

Significant Accounting Policies

Below are the significant accounting policies updated during 2018 as a result of the recently adopted accounting policies noted above. For a comprehensive description of our accounting policies, refer to our Annual Report on Form 10-K for the year ended December 31, 2017.

Revenue Recognition

Expedia recognizes revenue upon transfer of control of its promised products or services in an amount that reflects the consideration it expects to be entitled to in exchange for those products or services.

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

For Expedia’s primary transaction-based revenue sources, discussed below, it has determined net presentation (that is, the amount billed to a traveler less the amount paid to a supplier) is appropriate for the majority of its revenue transactions as the supplier is primarily responsible for providing the underlying travel services and Expedia does not control the service provided by the supplier prior to its transfer to the traveler.

The following table disaggregates our revenue by major source:

 

 

 

 

 

 

Three months ended

 

 

March 31, 2018

 

 

(in millions)

Business Model:

 

Merchant

$

1,334

 

Agency

 

658

 

Advertising and media

 

282

 

HomeAway

 

234

 

Other (1)

 

66

 

Total revenue

$

2,574

 

 

 

Product and Service Type:

 

Lodging

 

1,612

 

Air

 

242

 

Advertising and media

 

282

 

Other (2)

 

438

 

Total revenue

$

2,574

 

______________________________

(1)

Other is comprised of Bodybuilding revenue.

(2)

Other includes car rental, insurance, destination services, cruise and fee revenue related to Expedia’s corporate travel business, among other revenue streams, none of which are individually material, as well as Bodybuilding revenue.

 

Expedia offers traditional travel products and services on a stand-alone and package basis generally either through the merchant or the agency business model. Under the merchant model, Expedia facilitates the booking of hotel rooms, airline seats, car rentals and destination services from its travel suppliers and Expedia is the merchant of record for such bookings. Under the agency model, Expedia acts as the agent in the transaction, passing reservations booked by the traveler to the relevant travel supplier. Expedia receives commissions or ticketing fees from the travel supplier and/or traveler. For certain agency airline, hotel and car transactions, Expedia also receives fees through global distribution systems (“GDS”) that provide the computer systems through which the travel supplier inventory is made available and through which reservations are booked. Under the advertising model, Expedia offers travel and non-travel advertisers access to a potential source of incremental traffic and transactions through its various media and advertising offerings on trivago and its transaction-based websites. Expedia’s HomeAway business facilitates vacation rental bookings and provides listing and other ancillary services to property owners and managers.

 

The nature of Expedia’s travel booking service performance obligations vary based on the travel service with differences primarily related to the degree to which Expedia provides post booking services to the traveler and the timing when rights and obligations are triggered in Expedia’s underlying supplier agreements. 

 

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Table of Contents

LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Lodging. Expedia’s lodging revenue is comprised of revenue recognized under the merchant, agency and HomeAway business models.

 

Merchant Hotel. Expedia provides travelers access to book hotel room reservations through its contracts with lodging suppliers, which provide Expedia with rates and availability information for rooms but for which Expedia has no control over the rooms and does not bear inventory risk. Expedia’s travelers pay them for merchant hotel transactions prior to departing on their trip, generally when they book the reservation. Expedia records the payment in deferred merchant bookings until the stayed night occurs, at which point it recognizes the revenue, net of amounts paid to suppliers, as this is when its performance obligation is satisfied. In certain nonrefundable, nonchangeable transactions where Expedia has no significant post booking services (primarily opaque hotel offerings), Expedia records revenue when the traveler completes the transaction on its website, less a reserve for chargebacks and cancellations based on historical experience. Payments to suppliers are generally due within 30 days of check-in or stay. In certain instances when a supplier invoices Expedia for less than the cost it accrued, it generally reduces its accrued supplier payable and the supplier costs within net revenue six months in arrears, net of an allowance, when Expedia determines it is not probable that it will be required to pay the supplier, based on historical experience. Cancellation fees are collected and remitted to the supplier, if applicable.

 

Agency Hotel. Expedia generally records agency revenue from the hotel when the stayed night occurs as Expedia provides post booking services to the traveler and thus considers the stay as when its performance obligation is satisfied. Expedia records an allowance for cancellations on this revenue based on historical experience.

 

HomeAway. HomeAway’s lodging revenue is generally earned on a pay-per-booking or pay-per-subscription basis. Pay-per-booking arrangements are commission-based where rental property owners and managers bear the inventory risk, have latitude in setting the price and compensate HomeAway for facilitating bookings with travelers. Under pay-per booking arrangements, each booking is a separate contract as listings are typically cancelable at any time and the related revenue, net of amounts paid to property owners, is recognized at check in, which is the point in time when HomeAway’s service to the traveler is complete. In pay-per-subscription contracts, property owners or managers purchase in advance online advertising services related to the listing of their properties for rent over a fixed term (typically one year). As the performance obligation is the listing service and is provided to the property owner or manager over the life of the listing period, the pay-per-subscription revenue is recognized on a straight-line basis over the listing period. HomeAway also charges a traveler service fee at the time of booking. The service fee charged to travelers covers HomeAway’s services, including but not limited to the use of HomeAway’s website and a “Book with Confidence Guarantee” providing travelers with comprehensive payment protection and 24/7 traveler support. The performance obligation is to facilitate the booking of a property and assist travelers through their check-in process and, as such, the traveler service fee revenue is recognized at check-in. Revenue from other ancillary vacation rental services or products are recorded either upon delivery or when Expedia provides the service.

 

Merchant and Agency Air. Expedia records revenue on air transactions when the traveler books the transaction, as it does not provide significant post booking services to the traveler and payments due to and from air carriers are typically due at the time of ticketing. Expedia records a reserve for chargebacks and cancellations at the time of the transaction based on historical experience. In certain transactions, the GDS collects commissions from Expedia’s suppliers and passes these commissions to Expedia, net of their fees. Therefore, Expedia views payments through the GDS as commissions from suppliers and records these commissions in net revenue. Fees paid to the GDS as compensation for their role in processing transactions are recorded as cost of revenue.

 

Advertising and Media.  Expedia records revenue from click-through fees charged to its travel partners for leads sent to the travel partners’ websites. Expedia records revenue from click-through fees after the traveler makes the click-through to the related travel partners’ websites. Expedia records revenue for advertising placements ratably over the advertising period or upon delivery of advertising impressions, depending on the terms of the contract. Payments from advertisers are generally due within 30 days of invoicing.

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Table of Contents

LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Other. Other primarily includes transaction revenue for booking services related to products such as car, cruise and destination services under the agency business model. Expedia generally records the related revenue when the travel occurs, as in most cases Expedia provides post booking services and this is when its performance obligation is complete. Additionally, no rights or obligations are triggered in Expedia’s supplier agreements until the travel occurs. Expedia records an allowance for cancellations on this revenue based on historical experience. In addition, other also includes travel insurance products primarily under the merchant model, for which revenue is recorded at the time the transaction is booked.

 

Packages. Packages assembled by travelers through the packaging functionality on Expedia’s websites generally include a merchant hotel component and some combination of an air, car or destination services component. The individual package components are accounted for as separate performance obligations and recognized in accordance with Expedia’s revenue recognition policies stated above.

 

Deferred Merchant Bookings. Expedia classifies cash payments received in advance of its performance obligations as deferred merchant bookings. At January 1, 2018, $3.2 billion of cash advance cash payments was reported within deferred merchant bookings, $2.1 billion of which was recognized resulting in $314 million of revenue during the quarter ended March 31, 2018. At March 31, 2018, the related balance was $5.2 billion.

 

Travelers enrolled in Expedia’s internally administered traveler loyalty rewards programs earn points for each eligible booking made which can be redeemed for free or discounted future bookings. Hotels.com Rewards offers travelers one free night at any Hotels.com partner property after that traveler stays 10 nights, subject to certain restrictions. Expedia Rewards enables participating travelers to earn points on all hotel, flight, package and activities made on over 30 Brand Expedia websites. Orbitz Rewards allows travelers to earn OrbucksSM, the currency of Orbitz Rewards, on flights, hotels and vacation packages and instantly redeem those Orbucks on future bookings at various hotels worldwide. As travelers accumulate points towards free travel products, Expedia defers the relative standalone selling price of earned points, net of expected breakage, as deferred loyalty rewards within deferred merchant bookings on the consolidated balance sheet. In order to estimate the standalone selling price for all loyalty programs, Expedia uses an adjusted market assessment approach and considers the redemption values expected from the traveler. Expedia then estimates the number of rewards that will not be redeemed based on historical activity in its members' accounts as well as statistical modeling techniques. Revenue is recognized when Expedia has satisfied its performance obligation relating to the points, that is when the travel service purchased with the loyalty award is satisfied. The majority of rewards expected to be redeemed are recognized within one to two years of being earned. At January 1, 2018, $619 million of deferred loyalty rewards was reported within deferred merchant bookings, $148 million of which was recognized as revenue during the quarter ended March 31, 2018. At March 31, 2018, the related balance was $649 million.

 

Deferred Revenue. Deferred revenue primarily consists of HomeAway's traveler service fees received on bookings where Expedia is not merchant of record due to the use of a third party payment processor, unearned subscription revenue as well as deferred advertising revenue. At January 1, 2018, $326 million was recorded as deferred revenue, $152 million of which was recognized as revenue during the quarter ended March 31, 2018. At March 31, 2018, the related balance was $469 million.

 

Bodybuilding Revenue. The Company’s wholly owned subsidiary, Bodybuilding, is primarily an Internet retailer of dietary supplements, sports nutrition products, and other health and wellness products.  In addition to product sales revenue, Bodybuilding generates a limited amount of revenue from shipping and handling, advertising, and through All Access, its exclusive subscription service that gives its customers access to expert-designed, gym-proven fitness plans.

 

Practical Expedients and Exemptions. Expedia has used the portfolio approach to account for its loyalty points as the rewards programs share similar characteristics within each program in relation to the value provided to the traveler and their breakage patterns. Using this portfolio approach is not expected to differ materially from applying the guidance to

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Table of Contents

LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

individual contracts. However, Expedia will continue to assess and refine, if necessary, how a portfolio within each awards program is defined.

 

Expedia does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which Expedia recognizes revenue at the amount to which it has the right to invoice for services performed.

 

 

(3)  Earnings (Loss) Attributable to Expedia Holdings Shareholders per Common Share

 

Basic earnings (loss) per common share (“EPS”) is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding (“WASO”) for the period. Diluted EPS presents the dilutive effect on a per share basis of potential common shares as if they had been converted at the beginning of the periods presented.

 

 

 

 

 

 

 

 

Three months ended

 

 

 

March 31, 

 

 

 

2018

 

2017

 

 

 

number of shares in millions

 

Basic WASO

 

57

 

57

 

Potentially dilutive shares (1)

 

 1

 

 —

 

Diluted WASO

 

58

 

57

 


(1)

Potentially dilutive shares are excluded from the computation of diluted EPS during periods in which losses are reported since the result would be antidilutive.

 

Excluded from diluted EPS for both of the three months ended March 31, 2018 and 2017, are less than a million potential common shares, because their inclusion would be anti-dilutive.

 

(4) Expedia Ownership

 

Expedia is an online travel company, empowering business and leisure travelers with the tools and information they need to efficiently research, plan, book and experience travel. Expedia seeks to grow its business through a dynamic portfolio of travel brands, including its majority owned subsidiaries that feature the world's broadest supply portfolio as well as destination services and activities. Historically, Qurate Retail was (and, following the completion of the Expedia Holdings Split-Off, the Company is) a party to the Stockholders Agreement with Mr. Diller, pursuant to which Mr. Diller held an irrevocable proxy (the “Diller Proxy”) over all the shares of EXPE and Expedia class B common stock owned by Qurate Retail. In connection with the Expedia Holdings Split-Off and the proxy arrangements, the Stockholders Agreement was assigned to us and amended to permit the assignment of the Diller Proxy to our company for a period of time up to 18 months following completion of the Expedia Holdings Split-Off (the “Outside Date”), subject to certain termination events as described in the Amended and Restated Transaction Agreement, dated as of September 22, 2016, among Mr. Diller, John C. Malone, Leslie Malone, Qurate Retail and the Company. On March 6, 2018, the Company, Qurate Retail, Mr. Malone, Mrs. Malone and Mr. Diller entered into a letter agreement (the “Letter Agreement”), which amended the termination provisions of the Transaction Agreement to extend the Outside Date for an additional one year period.  As a result, unless sooner terminated upon the occurrence of certain events or the taking of certain actions, in either case, as set forth in the Transaction Agreement, as amended by the Letter Agreement, the Proxy Arrangement Termination Date will occur, and the Transaction Agreement together with certain Subject Instruments (as defined in the Transaction Agreement) will terminate, on May 4, 2019.

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Table of Contents

LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

We began consolidating Expedia as of the completion of the Expedia Holdings Split-Off on November 4, 2016, as we then controlled a majority of the voting interest in Expedia for accounting purposes. Additionally, in conjunction with the application of acquisition accounting, we recorded a full step up in basis of Expedia along with a gain between our historical basis and the fair value of our interest in Expedia. As of March 31, 2018, Expedia Holdings beneficially owned approximately 15.7% of the outstanding Expedia common stock which represents a 52.2% voting interest in Expedia.

 

Dividends declared by Expedia

 

During the three months ended March 31, 2018, Expedia has declared a quarterly cash dividend, and has paid in cash an aggregate amount of $46 million to stockholders of record on each respective record date, of which the Company has received $7 million.  In addition, in April 2018, Expedia declared a quarterly cash dividend of $0.30 per share of outstanding common stock payable on June 14, 2018 to stockholders of record as of the close of business on May 24, 2018.  

 

Expedia share repurchases

 

In February 2015, Expedia’s Executive Committee, acting on behalf of the Board of Directors, authorized a repurchase of up to 10 million shares of its common stock. There is no fixed termination date for the repurchases. As of March 31, 2018,  3.2 million shares remain authorized for repurchase under the 2015 authorization. During the three months ended March 31, 2018, Expedia repurchased 1.8 million shares for a total cost of $191 million, excluding transaction costs and the impact of share repurchases as a result of the vesting of equity instruments. Subsequent to the end of the first quarter of 2018 and through April 26, 2018, Expedia repurchased an additional 0.7 million shares for a total cost of $77 million, excluding transactions costs. On April 26, 2018 Expedia announced that its Executive Committee, acting on behalf of its Board of Directors, authorized a repurchase of up to an additional 15 million shares of its common stock and as of that date 17.4 million shares remain authorized for repurchase under the 2015 and 2018 authorizations. There is no fixed termination date for the repurchases.

 

 

 

(5) Assets and Liabilities Measured at Fair Value

 

For assets and liabilities required to be reported at fair value, GAAP provides a hierarchy that prioritizes inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted market prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs, other than quoted market prices included within Level 1, that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. The Company does not have any recurring assets or liabilities measured at fair value that would be considered Level 3.

 

The Company’s assets and liabilities measured at fair value are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

December 31, 2017

 

 

    

 

 

    

Quoted prices

    

Significant other

    

 

    

Quoted prices

    

Significant other

 

 

 

 

 

 

in active markets

 

observable

 

 

 

in active markets

 

observable

 

 

 

 

 

 

for identical assets

 

inputs

 

 

 

for identical assets

 

inputs

 

Description

 

Total

 

(Level 1)

 

(Level 2)

 

Total

 

(Level 1)

 

(Level 2)

 

 

 

amounts in millions

 

Cash equivalents

    

$

1,340

    

130

    

1,210

    

682

    

130

    

552

  

Short-term marketable securities

 

$

1,031

    

 —

    

1,031

 

469

    

 —

    

469

 

Equity securities (1)

 

$

300

 

300

 

 —

 

264

 

264

 

 —

 

Debt

 

$

386

 

 —

 

386

 

398

 

 —

 

398

 


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Table of Contents

LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(1)

Equity securities are included in the Other assets, net line item in the condensed consolidated balance sheet.

Cash equivalents are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs and are accordingly classified within Level 1 or Level 2. As of March 31, 2018, Cash equivalents consisted primarily of prime institutional money market funds with maturities of three months or less, time deposits as well as bank account balances.

Expedia holds time deposit investments with financial institutions. Time deposits with original maturities of less than three months are classified as Cash equivalents and those with remaining maturities of less than one year are classified within Short-term marketable securities.

   During the first quarter of 2018, we recognized gross unrealized gains related to equity securities of approximately $36 million within Other, net in our condensed consolidated statements of operations. As of December 31, 2017, prior to our adoption of the new guidance for recognition and measurement of financial instruments, the gross unrealized loss was $9 million and was recognized in other comprehensive income.

 

 

(6) Goodwill and Other Intangible Assets

 

Goodwill

 

Changes in the carrying amount of goodwill are as follows (amounts in millions):

 

 

 

 

 

 

 

 

 

 

 

 

Expedia

 

Corporate and other

 

Total

 

Balance as of January 1, 2018

 

$

15,194

 

57

 

15,251

 

Foreign exchange translation

 

 

59

 

 —

 

59

 

Balance as of March 31, 2018

 

$

15,253

 

57

 

15,310

 

 

Other Indefinite-lived Intangible Assets

Other indefinite-lived intangible assets relate principally to Expedia trademarks and tradenames recognized in acquisition accounting.

 

Intangible Assets Subject to Amortization

 

Amortization expense for intangible assets with finite useful lives was $416 million and $466 million for the three months ended March 31, 2018 and 2017, respectively. Based on its amortizable intangible assets as of March 31, 2018, the Company expects that amortization expense will be as follows for the next five years (amounts in millions):

 

 

 

 

 

 

Remainder of 2018

    

$

1,221

 

2019

 

 

1,214

 

2020

 

 

732

 

2021

 

 

491

 

2022

 

 

372

 

Total

 

$

4,030

 

 

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(7) Long-Term Debt and Capital Lease Obligations

 

Outstanding debt and capital leases at March 31, 2018 and December 31, 2017 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding

 

Carrying value

 

 

 

Principal

 

March 31, 

    

December 31, 

 

 

 

March 31, 2018

 

2018

 

2017

 

 

 

amounts in millions

 

Expedia Holdings 1% Exchangeable Senior Debentures due 2047

 

 

400

 

 

386

 

398

 

Expedia 7.456% senior notes due 2018

 

 

500

 

 

512

 

519

 

Expedia 5.95% senior notes due 2020

 

 

750

 

 

808

 

814

 

Expedia 2.5% (€650 million) senior notes due 2022

 

 

801

 

 

843

 

823

 

Expedia 4.5% senior notes due 2024

 

 

500

 

 

520

 

520

 

Expedia 5.0% senior notes due 2026

 

 

750

 

 

783

 

784

 

Expedia 3.8% senior notes due 2028

 

 

1,000

 

 

990

 

990

 

Bodybuilding secured notes

 

 

 8

 

 

 8

 

 8

 

Bodybuilding revolving line of credit due 2020

 

 

12

 

 

12

 

10

 

Capital lease obligations

 

 

 1

 

 

 1

 

 1

 

Total debt and capital lease obligations

 

$

4,722

 

 

4,863

 

4,867

 

Less portion classified as current

 

 

 

 

 

(533)

 

(538)

 

Total long-term debt and capital lease obligations

 

 

 

 

$

4,330

 

4,329

 

 

1.0% Exchangeable Senior Debentures

 

On June 13, 2017, the Company closed a private offering of $400 million of 1.0% Exchangeable Senior Debentures due 2047 (the “debentures”).  Upon exchange of the debentures, the Company, at its option, may deliver registered shares of Expedia common stock (“EXPE”), cash or a combination of EXPE and cash. Initially, 5.1566 shares of EXPE (the “EXPE Reference Shares”) are attributable to each $1,000 original principal amount of the debentures, representing an initial exchange price of approximately $193.93 for each share of EXPE. A total of approximately 2.1 million shares of Expedia common stock are attributable to the debentures. Interest is payable quarterly on March 31, June 30, September 30 and December 31 of each year, commencing September 30, 2017. The debentures may be redeemed by the Company, in whole or in part, on or after July 5, 2022. Holders of the debentures also have the right to require the Company to purchase their debentures on July 5, 2022.  The redemption and purchase price will generally equal 100% of the adjusted principal amount of the debentures plus accrued and unpaid interest, plus any final period distribution. The Company has elected to account for the debentures using the fair value option.  The Company estimates the fair value of its debt based on the quoted market price for the same or similar issues or on the current rate offered to it for debt of the same remaining maturities not considered to be trading on active markets (level 2). Accordingly, changes in the fair value of these instruments of $11 million and zero for the three months ended March 31, 2018 and 2017, respectively, are recognized as unrealized gains in the Other, net line item in the condensed consolidated statements of operations.  The Company will make an additional distribution on the debentures if Expedia makes a distribution of cash (an “Excess Regular Cash Dividend”) in excess of $0.28, currently paid by Expedia on the EXPE Reference Shares. Expedia began paying Excess Regular Cash Dividends during the third quarter of 2017. The Company will make additional distributions on the debentures under certain circumstances.

 

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Table of Contents

LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Expedia Outstanding Debt

 

Expedia 7.456% senior notes due 2018

Expedia has $500 million in registered senior unsecured notes outstanding at March 31, 2018 that are due in August 2018 and bear interest at 7.456% (the “Expedia 7.456% Notes”). Interest is payable semi-annually in February and August of each year. At any time Expedia may redeem the Expedia 7.456% Notes, in whole or in part, at a redemption price of 100% of the principal plus accrued interest, plus a “make-whole” premium. The premium associated with the Expedia 7.456% Notes was recorded in acquisition accounting as the difference between fair value and the outstanding principal amount at the date of acquisition. This premium is being amortized over the remaining period to maturity through interest expense using the effective interest rate method. As the Expedia 7.456% Notes are due within one year, they have been classified as current as of March 31, 2018.  

 

Expedia 5.95% senior notes due 2020

Expedia has $750 million in registered senior unsecured notes outstanding at March 31, 2018 that are due in August 2020 and bear interest at 5.95% (the “Expedia 5.95% Notes”). The Expedia 5.95% Notes were issued at 99.893% of par. Interest is payable semi-annually in February and August of each year. Expedia may redeem the Expedia 5.95% Notes, in whole or in part, at a redemption price of 100% of the principal plus accrued interest, plus a “make-whole” premium. The premium associated with the Expedia 5.95% Notes was recorded in acquisition accounting as the difference between fair value and the outstanding principal amount at the date of acquisition. This premium is being amortized over the remaining period to maturity through interest expense using the effective interest rate method.

 

Expedia 2.5% senior notes due 2022

Expedia has €650 million of registered senior unsecured notes outstanding at March 31, 2018 that are due in June 2022 and bear interest at 2.5% (the “Expedia 2.5% Notes”). The Expedia 2.5% Notes were issued at 99.525% of par. Interest is payable annually in arrears in June of each year. Expedia may redeem the Expedia 2.5% Notes at its option, in whole or in part, at any time or from time to time. If Expedia elects to redeem the Expedia 2.5% Notes prior to March 3, 2022, it may redeem them at a specified “make-whole” premium. If Expedia elects to redeem the Expedia 2.5% Notes on or after March 3, 2022, it may redeem them at a redemption price of 100% of the principal plus accrued and unpaid interest. Subject to certain limited exceptions, all payments of interest and principal for the Expedia 2.5% Notes will be made in Euros. The premium associated with the Expedia 2.5% Notes was recorded in acquisition accounting as the difference between fair value and the outstanding principal amount at the date of acquisition. This premium is being amortized over the remaining period to maturity through interest expense using the effective interest rate method.

 

Expedia 4.5% senior notes due 2024

Expedia has $500 million in registered senior unsecured notes outstanding at March 31, 2018 that are due in August 2024 and bear interest at 4.5% (the “Expedia 4.5% Notes”). The Expedia 4.5% Notes were issued at 99.444% of par. Interest is payable semi-annually in February and August of each year. Expedia may redeem the Expedia 4.5% Notes at its option at any time in whole or from time to time in part. If Expedia elects to redeem the Expedia 4.5% Notes prior to May 15, 2024, it may redeem them at a redemption price of 100% of the principal plus accrued interest, plus a “make-whole” premium. If Expedia elects to redeem the Expedia 4.5% Notes on or after May 15, 2024, it may redeem them at a redemption price of 100% of the principal plus accrued interest. The premium associated with the Expedia 4.5% Notes was recorded in acquisition accounting as the difference between fair value and the outstanding principal amount at the date of acquisition. This premium is being amortized over the remaining period to maturity through interest expense using the effective interest rate method.

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Table of Contents

LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Expedia 5.0% senior notes due 2026

Expedia has $750 million in registered senior unsecured notes outstanding at March 31, 2018 that are due in February 2026 and bear interest at 5.0% (the "Expedia 5.0% Notes"). The Expedia 5.0% Notes were issued at 99.535% of par. Interest is payable semi-annually in arrears in February and August of each year. Expedia may redeem the Expedia 5.0% Notes at its option at any time in whole or from time to time in part. If Expedia elects to redeem the Expedia 5.0% Notes prior to November 12, 2025, it may redeem them at a redemption price of 100% of the principal plus accrued interest, plus a “make-whole” premium. If Expedia elects to redeem the Expedia 5.0% Notes on or after November 12, 2025, it may redeem them at a redemption price of 100% of the principal plus accrued interest. The premium associated with the Expedia 5.0% Notes was recorded in acquisition accounting as the difference between fair value and the outstanding principal amount at the date of acquisition. This premium is being amortized over the remaining period to maturity through interest expense using the effective interest rate method.

Expedia 3.8% senior notes due 2028

Expedia has $1 billion in senior unsecured notes outstanding at March 31, 2018 that are due in February 2028 and bear interest at 3.8% (the "Expedia 3.8% Notes"). The Expedia 3.8% Notes were issued at 99.747% of par resulting in a discount, which is being amortized over their life. Interest is payable semi-annually in arrears in February and August of each year, beginning February 15, 2018. Expedia may redeem the Expedia 3.8% Notes at its option at any time in whole or from time to time in part. If Expedia elects to redeem the Expedia 3.8% Notes prior to November 15, 2027, it may redeem them at a redemption price of 100% of the principal plus accrued interest, plus a “make-whole” premium. If Expedia elects to redeem the Expedia 3.8% Notes on or after November 15, 2027, it may redeem them at a redemption price of 100% of the principal plus accrued interest.

The Expedia 7.456%, 5.95%, 2.5%, 4.5%, 5.0% and 3.8% Notes (collectively the “Notes”) are senior unsecured obligations issued by Expedia and guaranteed by certain domestic Expedia subsidiaries. The Notes rank equally in right of payment with all existing and future unsecured and unsubordinated obligations of Expedia and the guarantor subsidiaries. In addition, the Notes include covenants that limit Expedia’s ability to (i) create certain liens, (ii) enter into sale/leaseback transactions and (iii) merge or consolidate with or into another entity or transfer substantially all of its assets. The Expedia 5.95%, 2.5%, 4.5%, 3.8% and 5.0% Notes are redeemable in whole or in part, at the option of the holders thereof, upon the occurrence of certain change of control triggering events at a purchase price in cash equal to 101% of the principal plus accrued and unpaid interest.

Expedia Credit Facility

As of March 31, 2018, Expedia maintained a $1.5 billion unsecured revolving credit facility with a group of lenders, which is unconditionally guaranteed by certain domestic Expedia subsidiaries that are the same as under the Notes, and expires in February 2021. As of March 31, 2018, Expedia did not have any revolving credit facility borrowings outstanding. The facility bears interest based on Expedia’s credit ratings, with drawn amounts bearing interest at LIBOR plus 1.375% and the commitment fee on undrawn amounts at 0.175% as of March 31, 2018. The facility contains covenants including maximum leverage and minimum interest coverage ratios. The amount of stand-by letters of credit (“LOCs”) issued under the facility reduces the credit amount available. As of March 31, 2018, there were $15 million of outstanding stand-by LOCs issued under the facility.

In addition, one of Expedia’s international subsidiaries maintains a €50 million uncommitted credit facility, which is guaranteed by Expedia and may be terminated at any time by the lender. As of March 31, 2018, there were no borrowings outstanding under this facility.

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Bodybuilding Secured Notes

 

As of March 31, 2018,  Bodybuilding has two outstanding secured notes. Principal and interest payments on the secured notes are payable monthly. One of the secured notes has an interest rate of 4.14% and the other is variable at LIBOR plus 2.50%  (4.19% at March 31, 2018). The maturity dates on the secured notes range from 2019 to 2022. As of March 31, 2018, the total outstanding balance of the secured notes is $8 million.

 

As of March 31, 2018, Bodybuilding was not in compliance with its financial covenants on its outstanding secured notes.  As a result, the secured notes were classified as current as of March 31, 2018. 

 

Bodybuilding Revolving Line of Credit

 

As of March 31, 2018,  Bodybuilding has a revolving line of credit (the "Revolver") which is secured by substantially all of Bodybuilding’s assets. The maximum amount allowed under the Revolver was  $50 million. Bodybuilding periodically borrows and repays amounts outstanding under the Revolver depending on its cash needs. The Revolver matures on January 20, 2020. The outstanding balance accrued interest at the CB Floating Rate less 1.25%, with a rate option balance that accrued interest at LIBOR plus 1.50%. As of March 31, 2018, the outstanding balance on the Revolver was approximately $12 million subject to an interest rate of 3.30%.  Bodybuilding entered into an amendment with the counterparty on April 9, 2018 whereby the maximum amount allowed under the Revolver was reduced to $25 million and the interest rate was changed to the CB Floating Rate less 1.0%, with a rate option balance that accrues interest at LIBOR plus 1.75%. Additionally, pursuant to the amendment, Bodybuilding does not need to comply with the fixed charge coverage ratio covenant until January 31, 2019.   

 

As of March 31, 2018, Bodybuilding was not in compliance with its fixed charge coverage ratio covenant on the Revolver, but the Company obtained a waiver of default from its lending institution.

 

Fair Value of Debt

 

The fair value, based on quoted market prices in less active markets (Level 2), of Expedia’s publicly traded debt securities is as follows (amounts in millions):

 

 

 

 

 

 

 

    

March 31, 

 

 

 

2018

 

Expedia 7.456% senior notes due 2018

 

$

509

 

Expedia 5.95% senior notes due 2020

 

$

795

 

Expedia 2.5% (€650 million) senior notes due 2022 (1)

 

$

843

 

Expedia 4.5% senior notes due 2024

 

$

507

 

Expedia 5.0% senior notes due 2026

 

$

775

 

Expedia 3.8% senior notes due 2028

 

$

933

 


(1)

Approximately 684 million Euro as of March 31, 2018.

 

The Company believes that the carrying value of its Revolver and secured notes approximated fair value at March 31,  2018 and December 31, 2017.

 

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Covenant Compliance

 

Expedia Holdings and Expedia were in compliance with their debt covenants which consist of both financial and non-financial covenants as of March 31, 2018.    See discussion above related to Bodybuilding debt covenant compliance.

 

(8) Stock-Based Compensation

 

Included in the accompanying condensed consolidated statements of operations are the following amounts of stock-based compensation, a portion of which relates to Expedia for the three months ended March 31, 2018 and 2017:

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

March 31, 

 

 

    

2018

    

2017

 

 

 

amounts in millions

 

Operating costs and expenses:

 

 

 

 

 

 

Operating expense

 

$

 2

 

 5

 

Selling and marketing

 

 

11

 

18

 

Technology and content

 

 

15

 

22

 

General and administrative

 

 

23

 

32

 

 

 

$

51

 

77

 

Expedia Holdings Incentive Plan

 

The Company has granted to certain of its directors and employees restricted stock units (“RSUs”) and options to purchase shares of Expedia Holdings common stock (“Awards”). The Company measures the cost of employee services received in exchange for an equity classified Award based on the grant-date fair value (“GDFV”) of the Award, and recognizes that cost over the period during which the employee is required to provide service (usually the vesting period of the Award).

The Company has calculated the GDFV for all of its equity classified Awards using the Black-Scholes-Merton Model. The Company estimates the expected term of the Awards based on historical exercise and forfeiture data. The volatility used in the calculation for Awards is based on the historical volatility of Expedia Holdings common stock and the implied volatility of publicly traded Expedia Holdings options. The Company uses a zero dividend rate and the risk-free rate for Treasury Bonds with a term similar to that of the subject options.

There were no options to purchase shares of Series A or Series B common stock granted and no exercise,  forfeiture or cancellation activity for Series B common stock during the three months ended March 31, 2018.

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Expedia Holdings – Outstanding Awards

The following table presents the number and weighted average exercise price (“WAEP”) of Awards to purchase Expedia Holdings common stock granted to certain officers, employees and directors of the Company, as well as the weighted average remaining life and aggregate intrinsic value of the Awards.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Weighted

    

 

 

 

 

 

 

 

 

 

average

 

Aggregate

 

 

 

 

 

 

 

 

remaining

 

intrinsic

 

 

 

Series A

 

WAEP

 

contractual life

 

value

 

 

 

(in thousands)