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 June 30, 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 July 16, 2018 was:

 

 

 

 

 

 

 

 

Series A

 

Series B

 

Liberty Expedia Holdings, Inc. Common Stock

 

54,446,795

 

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-28

Item 3. Quantitative and Qualitative Disclosures about Market Risk 

I-39

Item 4. Controls and Procedures 

I-40

 

 

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)

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31,

 

 

 

2018

 

2017

 

 

 

amounts in millions

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,193

 

2,961

 

Accounts receivable, net

 

 

2,363

 

1,871

 

Short-term marketable securities

 

 

1,491

 

469

 

Prepaid expenses

 

 

304

 

257

 

Other current assets

 

 

584

 

113

 

Total current assets

 

 

7,935

 

5,671

 

Property and equipment, at cost

 

 

1,319

 

1,254

 

Accumulated depreciation

 

 

(389)

 

(303)

 

 

 

 

930

 

951

 

Intangible assets not subject to amortization:

 

 

 

 

 

 

Goodwill

 

 

15,190

 

15,251

 

Tradenames

 

 

6,228

 

6,256

 

 

 

 

21,418

 

21,507

 

Intangible assets subject to amortization, net

 

 

4,510

 

5,010

 

Other assets, net

 

 

761

 

829

 

Total assets

 

$

35,554

 

33,968

 

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

   

 

Current liabilities:

 

 

 

 

 

 

Accounts payable, merchant

 

$

1,811

 

1,838

 

Accounts payable, other

 

 

922

 

713

 

Accrued liabilities

 

 

714

 

1,285

 

Deferred merchant bookings

 

 

6,106

 

3,219

 

Deferred revenue

 

 

462

 

329

 

Current portion of debt (note 7)

 

 

523

 

538

 

Other current liabilities

 

 

 9

 

30

 

Total current liabilities

 

 

10,547

 

7,952

 

Long-term debt and capital lease obligations, net, including $396 million and $398 million measured at fair value (note 7)

 

 

4,291

 

4,329

 

Deferred income tax liabilities

 

 

2,049

 

2,155

 

Other long term liabilities

 

 

462

 

430

 

Total liabilities

 

 

17,349

 

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 54,446,638 and 54,438,883 at June 30, 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 June 30, 2018 and December 31, 2017, respectively

 

 

 —

 

 —

 

Additional paid-in capital

 

 

364

 

370

 

Accumulated other comprehensive earnings (loss), net of taxes

 

 

43

 

59

 

Retained earnings

 

 

2,108

 

2,179

 

Total stockholders' equity

 

 

2,516

 

2,609

 

Noncontrolling interests in equity of subsidiaries

 

 

15,689

 

16,493

 

Total equity

 

 

18,205

 

19,102

 

Commitments and contingencies (note 8)

 

 

 

 

 

 

Total liabilities and equity

 

$

35,554

 

33,968

 

 

See accompanying notes to condensed consolidated financial statements.

 

I-2


 

Table of Contents

LIBERTY EXPEDIA HOLDINGS, INC.

 

Condensed Consolidated Statements Of Operations

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2018

    

2017

    

2018

    

2017

 

 

 

amounts in millions,

 

 

 

except per share amounts

 

Service revenue

 

$

2,880

 

2,573

 

5,388

 

4,712

 

Product revenue

 

 

60

 

73

 

126

 

164

 

Total revenue, net (note 2)

 

 

2,940

 

2,646

 

5,514

 

4,876

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

Selling and marketing (1)

 

 

1,537

 

1,439

 

3,050

 

2,715

 

Cost of service revenue

 

 

472

 

414

 

932

 

814

 

Technology and content (1) 

 

 

276

 

231

 

553

 

459

 

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

 

 

45

 

56

 

93

 

121

 

General and administrative (1)

 

 

194

 

172

 

393

 

344

 

Other operating expense (1)

 

 

 5

 

 6

 

10

 

12

 

Depreciation and amortization

 

 

474

 

557

 

953

 

1,086

 

Legal reserves, occupancy tax, restructuring and related reorganization charges and other

 

 

 1

 

13

 

 5

 

36

 

 

 

 

3,004

 

2,888

 

5,989

 

5,587

 

Operating income (loss)

 

 

(64)

 

(242)

 

(475)

 

(711)

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(35)

 

(30)

 

(71)

 

(59)

 

Other, net

 

 

(79)

 

(35)

 

(21)

 

(48)

 

 

 

 

(114)

 

(65)

 

(92)

 

(107)

 

Earnings (loss) before income taxes

 

 

(178)

 

(307)

 

(567)

 

(818)

 

Income tax (expense) benefit

 

 

46

 

82

 

111

 

236

 

Net earnings (loss)

 

 

(132)

 

(225)

 

(456)

 

(582)

 

Less net earnings (loss) attributable to the noncontrolling interests

 

 

(105)

 

(172)

 

(385)

 

(471)

 

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

 

$

(27)

 

(53)

 

(71)

 

(111)

 

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

 

$

(0.47)

 

(0.93)

 

(1.22)

 

(1.95)

 

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

 

$

(0.47)

 

(0.93)

 

(1.22)

 

(1.95)

 

 

 

 

 

 

 

 

 

 

 

 

(1) Includes stock compensation as follows:

 

 

 

 

 

 

 

 

 

 

Selling and marketing

 

$

13

 

 8

 

24

 

26

 

Technology and content

 

 

17

 

12

 

32

 

34

 

General and administrative

 

 

20

 

18

 

43

 

50

 

Other operating expense

 

 

 3

 

 2

 

 5

 

 7

 

 

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

 

Six months ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2018

    

2017

    

2018

    

2017

 

 

 

amounts in millions

 

Net earnings (loss)

 

$

(132)

 

(225)

 

(456)

 

(582)

 

Other comprehensive earnings (loss), net of taxes:

 

 

 

 

 

 

 

 

 

 

Currency translation adjustments and other

 

 

(209)

 

393

 

(107)

 

488

 

Other comprehensive earnings (loss)

 

 

(209)

 

393

 

(107)

 

488

 

Comprehensive earnings (loss)

 

 

(341)

 

168

 

(563)

 

(94)

 

Less comprehensive earnings (loss) attributable to the noncontrolling interest

 

 

(288)

 

218

 

(477)

 

(54)

 

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

 

$

(53)

 

(50)

 

(86)

 

(40)

 

 

See accompanying notes to condensed consolidated financial statements.

I-4


 

Table of Contents

LIBERTY EXPEDIA HOLDINGS, INC.

 

Condensed Consolidated Statements Of Cash Flows

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Six months ended

 

 

 

June 30, 

 

 

    

2018

    

2017

 

 

 

amounts in millions

 

Cash flows from operating activities:

 

 

 

 

 

 

Net earnings (loss)

 

$

(456)

 

(582)

 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

953

 

1,086

 

Stock-based compensation

 

 

104

 

117

 

Realized (gain) loss on foreign currency forwards

 

 

(16)

 

(7)

 

(Gain) loss on equity securities

 

 

61

 

 —

 

Deferred income tax expense (benefit)

 

 

(92)

 

(188)

 

Other noncash charges (credits), net

 

 

70

 

(21)

 

Changes in operating assets and liabilities

 

 

 

 

 

 

Current and other assets

 

 

(570)

 

(499)

 

Payables and other liabilities

 

 

2,434

 

2,486

 

Net cash provided (used) by operating activities

 

 

2,488

 

2,392

 

Cash flows from investing activities:

 

 

 

 

 

 

Capital expended for property and equipment and capitalized software

 

 

(414)

 

(362)

 

Purchases of short-term marketable securities and other investments

 

 

(1,669)

 

(991)

 

Sales of short-term marketable securities

 

 

624

 

175

 

Net settlement of foreign currency forward contracts

 

 

 —

 

 7

 

Other, net

 

 

22

 

(136)

 

Net cash provided (used) by investing activities

 

 

(1,437)

 

(1,307)

 

Cash flows from financing activities:

 

 

 

 

 

 

Borrowings of debt

 

 

128

 

562

 

Repayments of debt

 

 

(127)

 

(525)

 

Shares issued by subsidiary

 

 

67

 

137

 

Shares repurchased by subsidiary

 

 

(426)

 

(114)

 

Dividends paid by subsidiary

 

 

(77)

 

(72)

 

Proceeds from exercise of equity awards and employee stock purchase plan

 

 

 —

 

 5

 

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

 

 

 —

 

(8)

 

Other financing activities, net

 

 

(8)

 

(11)

 

Net cash provided (used) by financing activities

 

 

(443)

 

(26)

 

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

 

 

(106)

 

97

 

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

 

 

502

 

1,156

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

3,031

 

1,872

 

Cash, cash equivalents and restricted cash at end of period

 

$

3,533

 

3,028

 

 

See accompanying notes to condensed consolidated financial statements.

 

I-5


 

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LIBERTY EXPEDIA HOLDINGS, INC.

 

Condensed Consolidated Statement Of Equity

 

(unaudited)

 

Six months ended June 30, 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)

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

(71)

 

(385)

 

(456)

 

Other comprehensive income (loss)

 

 

 —

 

 —

 

 —

 

 —

 

(15)

 

 —

 

(92)

 

(107)

 

Stock compensation

 

 

 —

 

 —

 

 —

 

17

 

 —

 

 —

 

91

 

108

 

Proceeds from exercise of equity instruments in subsidiary

 

 

 —

 

 —

 

 —

 

(38)

 

 —

 

 —

 

105

 

67

 

Stock repurchases by subsidiary

 

 

 —

 

 —

 

 —

 

17

 

 —

 

 —

 

(443)

 

(426)

 

Dividends paid by subsidiary

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

(77)

 

(77)

 

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

 

 

 —

 

 —

 

 —

 

(2)

 

 —

 

 —

 

 —

 

(2)

 

Adoption of new accounting guidance

 

 

 —

 

 —

 

 —

 

 —

 

(1)

 

 —

 

(12)

 

(13)

 

Other  

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 9

 

 9

 

Balance at June 30, 2018

 

$

 —

 

 1

 

 —

 

364

 

43

 

2,108

 

15,689

 

18,205

 

 

See accompanying notes to condensed consolidated financial statements.

 

I-6


 

Table of Contents

(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 was 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 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

I-7


 

Table of Contents

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 for the three months ended June 30, 2018 and 2017, respectively, and $2 million and $2 million for the six months ended June 30, 2018 and 2017, respectively, was reimbursable to Liberty Media.

 

Seasonality

 

Expedia generally experiences seasonal fluctuations in the demand for its travel 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 services, 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 or more for its vacation rental business. Historically, HomeAway, Inc. (“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 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 typically increase marketing 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, 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, including trivago’s recent changing marketplace dynamics.  

 

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.

 

 

(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

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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 and six months ended June 30, 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 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 and six month periods ended June 30, 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 six months ended June 30, 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

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equivalents and restricted cash reported in our condensed consolidated balance sheets to the total amount presented in our condensed consolidated statements of cash flows:

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

(in millions)

Cash and cash equivalents

$

3,193

 

$

2,961

 

Restricted cash included within other current assets

 

336

 

 

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

$

3,533

 

$

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 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.

 

Non-employee Share-Based Payment Arrangements. In June 2018, the FASB issued new guidance related to accounting for share-based payments with non-employees. The updated guidance substantially aligns the accounting requirements of share-based payment awards to non-employees with those of employees. 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 in the second quarter of 2018, which requires us to reflect any adjustments as of January 1, 2018, the beginning of the annual period that includes the interim period of adoption. The primary impact of adoption was the change in the measurement objective and the associated measurement date for all non-employee share-based payment awards to the grant-date fair value. Prior to adoption, non-employee awards were measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever could be more reliably measured. Additionally, the measurement date was previously determined by the earlier of the date at which either (1) a commitment for performance by the non-employee to earn the equity instruments was reached or (2) the non-employee’s performance was complete. Typically, the measurement date was delayed until performance was complete, which led to the non-employee awards being remeasured or “marked to market” each reporting period until they were vested. The adoption of this new guidance did not have a material impact on the Company’s consolidated financial statements for the three and six

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months ended June 30, 2018, and had no impact on the Company’s previously reported quarterly results for the three months ended March 31, 2018.

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 is effective for the Company for fiscal years and interim periods beginning after December 15, 2018, with early adoption permitted. We plan to adopt this guidance on January 1, 2019. Companies are required to use a modified retrospective approach to adopt this guidance and have an option not to adjust the comparative periods presented.  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 on a prospective basis as well as 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 services in an amount that reflects the consideration it expects to be entitled to in exchange for those services.

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 to the traveler.

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The following table disaggregates revenue by major source:

 

 

 

 

 

 

 

 

 

Three months ended

 

 

Six months ended

 

 

 

June 30, 2018

 

 

June 30, 2018

 

 

(in millions)

 

Business Model:

 

 

 

 

Merchant

$

1,532

 

 

2,866

 

Agency

 

777

 

 

1,435

 

Advertising and media

 

274

 

 

556

 

HomeAway

 

297

 

 

531

 

Other (1)

 

60

 

 

126

 

Total revenue

$

2,940

 

 

5,514

 

 

 

 

 

 

 

 

Product and Service Type:

 

 

 

 

 

 

Lodging

 

1,992

 

 

3,604

 

Air

 

223

 

 

465

 

Advertising and media

 

274

 

 

556

 

Other (2)

 

451

 

 

889

 

Total revenue

$

2,940

 

 

5,514

 

______________________________

(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 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 passes reservations booked by the traveler to the relevant travel supplier and the travel supplier serves as the merchant of record for such bookings. 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.

 

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

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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 provides compensation for 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.

 

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.

 

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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, of which $2.7 billion was recognized, resulting in $391 million of revenue during the six months ended June 30, 2018. At June 30, 2018, the related balance was $5.4 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 of the underlying services on which points can be redeemed 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, $324 million of which was recognized as revenue during the six months ended June 30, 2018. At June 30, 2018, the related balance was $663 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, $230 million of which was recognized as revenue during the six months ended June 30, 2018. At June 30, 2018, the related balance was $460 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 individual contracts. However, Expedia will continue to assess and refine, if necessary, how a portfolio within each rewards 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.

 

 

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(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

 

Six months ended

 

 

 

June 30, 

 

June 30, 

 

 

 

2018

 

2017

    

2018

    

2017

 

 

 

number of shares in millions

 

Basic WASO

 

57

 

57

 

58

 

57

 

Potentially dilutive shares (1)

 

 —

 

 1

 

 —

 

 1

 

Diluted WASO

 

57

 

58

 

58

 

58

 


(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 the three and six months ended June 30, 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.

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 June 30, 2018, Expedia Holdings beneficially owned approximately 15.8% of the outstanding Expedia common stock which represents a 52.4% voting interest in Expedia.

 

Dividends declared by Expedia

 

During the six months ended June 30, 2018, Expedia has declared quarterly cash dividends, and has paid in cash an aggregate amount of $91 million to stockholders of record on each respective record date, of which the Company has received $14 million. In addition, in July 2018, Expedia declared a quarterly cash dividend of $0.32 per share of outstanding common stock payable on September 13, 2018 to stockholders of record as of the close of business on August  23, 2018.

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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. In April 2018, Expedia’s Executive Committee, acting on behalf of the Board of Directors, authorized a repurchase of an additional 15 million shares of its common stock. During the six months ended June 30, 2018, Expedia repurchased through open market transactions, 3.7 million shares for a total cost of $409 million, excluding transaction costs and the impact of share repurchases as a result of the vesting of equity instruments. As of June 30, 2018 there were approximately 16.2 million shares remaining authorized for repurchase under the 2015 and 2018 authorizations. There is no fixed termination date for the repurchases. Subsequent to the end of the second quarter, Expedia repurchased an additional 0.3 million shares for a total cost of $42 million, excluding transactions costs.  

 

 

 

(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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 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

    

$

995

    

158

    

837

    

682

    

130

    

552

  

Short-term marketable securities

 

$

1,491

    

 —

    

1,491

 

469

    

 —

    

469

 

Equity securities (1)

 

$

201

 

201

 

 —

 

264

 

264

 

 —

 

Debt

 

$

396

 

 —

 

396

 

398

 

 —

 

398

 


(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 June 30, 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 six months ended June 30, 2018, we recognized gross unrealized losses related to equity securities of approximately $62 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.

 

 

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Table of Contents

(6) Goodwill and Other Intangible Assets

 

Goodwill and Other Indefinite-lived Intangible Assets

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

 

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

 

 

(61)

 

 —

 

(61)

 

Balance as of June 30, 2018

 

$

15,133

 

57

 

15,190

 

At December 31, 2017 a goodwill impairment was recognized for trivago, one of the Company’s reporting units, which resulted in the carrying value approximating fair value as of that date. As of June 30, 2018, the carrying value of the trivago reporting unit goodwill and tradenames was approximately $1.4 billion and $1.1 billion, respectively. trivago’s business environment is a highly competitive and volatile market and based on current results they may not realize their long-term forecast. The Company continues to monitor the performance of the business versus the long-term forecast, among other relevant considerations, to determine if any impairments exist. During the second quarter, trivago announced negative guidance related to revenue and profitability goals which resulted in a decrease in its trading value. As a result of these pressures,  trivago’s management has continued to refine their business strategy throughout the quarter in order to address the highly competitive and volatile business environment but there are no guarantees that such efforts will result in trivago meeting their long-term forecast or recovering the decreases in its trading value.  Accordingly, the Company believes the reporting unit is at an elevated risk of impairment.  Management of trivago is currently working through an annual budgeting and planning process.  Declines in the future revenue outlook, cash flows, or other factors could result in a sustained decrease in trading value that may result in a determination that an impairment adjustment is required, which could be material. If an impairment charge is necessary, the impact to Liberty Expedia shareholders is diminished as a large portion would be attributable to the non-controlling interest due to the ownership structure of Expedia and their ownership structure of trivago.

 

Intangible Assets Subject to Amortization

 

Amortization expense for intangible assets with finite useful lives was $427 million and $493 million for the three months ended June 30, 2018 and 2017, respectively, and $843 million and $959 million for the six months ended June 30, 2018 and 2017, respectively.  Based on its amortizable intangible assets as of June 30, 2018, the Company expects that amortization expense will be as follows for the next five years (amounts in millions):

 

 

 

 

 

 

Remainder of 2018

    

$

817

 

2019

 

 

1,214

 

2020

 

 

732

 

2021

 

 

491

 

2022

 

 

372

 

 

 

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(7) Long-Term Debt and Capital Lease Obligations

 

Outstanding debt and capital leases at June 30, 2018 and December 31, 2017 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding

 

Carrying value

 

 

 

Principal

 

June 30, 

    

December 31, 

 

 

 

June 30, 2018

 

2018

 

2017

 

 

 

amounts in millions

 

Expedia Holdings 1% Exchangeable Senior Debentures due 2047

 

 

400

 

 

396

 

398

 

Expedia 7.456% senior notes due 2018

 

 

500

 

 

506

 

519

 

Expedia 5.95% senior notes due 2020

 

 

750

 

 

802

 

814

 

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

 

 

759

 

 

797

 

823

 

Expedia 4.5% senior notes due 2024

 

 

500

 

 

519

 

520

 

Expedia 5.0% senior notes due 2026

 

 

750

 

 

782

 

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

 

 

13

 

 

13

 

10

 

Capital lease obligations

 

 

 1

 

 

 1

 

 1

 

Total debt and capital lease obligations

 

$

4,681

 

 

4,814

 

4,867