Liberty Expedia Holdings, Inc.
Liberty Expedia Holdings, Inc. (Form: 10-Q, Received: 11/03/2016 17:28:04)

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 September 30, 2016

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, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting 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 ☐

 

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

 

As of October 31, 2016, Liberty Expedia Holdings, Inc. is a wholly-owned subsidiary of Liberty Interactive Corporation.

 

 

 

 

 

 

 


 

Table of Contents

Table of Contents

 

 

 

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

I-2

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

I-3

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

I-4

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

I-5

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

I-6

LIBERTY EXPEDIA HOLDINGS, INC. Notes to Condensed Combined Financial Statements  

I-7

 

 

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

I-17

Item 3. Quantitative and Qualitative Disclosures about Market Risk  

I-25

Item 4. Controls and Procedures  

I-25

 

 

Part II - Other Information  

II-1

Item 1. Legal Proceedings  

 

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

II-1

Item 6. Exhibits  

II-1

 

 

SIGNATURES  

II-2

EXHIBIT INDEX  

II-3

 

 

I-1


 

Table of Contents

LIBERTY EXPEDIA HOLDINGS, INC.

 

Condensed Combined Balance Sheets

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31,

 

 

 

2016

 

2015

 

 

 

(unaudited)

 

 

 

amounts in thousands

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

409

 

2,243

 

Accounts receivable

 

 

352

 

701

 

Inventory, net

 

 

41,116

 

53,194

 

Prepaid expenses

 

 

3,940

 

4,661

 

Other current assets

 

 

2,776

 

3,047

 

Total current assets

 

 

48,593

 

63,846

 

Investment in Expedia, Inc. (note 3)

 

 

921,852

 

927,057

 

Property and equipment, at cost

 

 

56,624

 

55,640

 

Accumulated depreciation

 

 

(30,196)

 

(26,012)

 

 

 

 

26,428

 

29,628

 

Intangible assets not subject to amortization:

 

 

 

 

 

 

Goodwill

 

 

57,462

 

57,462

 

Tradenames

 

 

19,902

 

19,902

 

 

 

 

77,364

 

77,364

 

Intangible assets subject to amortization, net

 

 

23,844

 

24,142

 

Other assets, net

 

 

3,393

 

3,556

 

Total assets

 

$

1,101,474

 

1,125,593

 

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

   

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

8,246

 

22,505

 

Accrued liabilities

 

 

12,243

 

6,805

 

Accrued stock compensation

 

 

3,604

 

5,545

 

Current portion of long-term debt and capital lease obligations (note 4)

 

 

4,758

 

4,755

 

Deferred revenue

 

 

4,544

 

4,090

 

Total current liabilities

 

 

33,395

 

43,700

 

Long-term debt and capital lease obligations, net (note 4)

 

 

22,059

 

36,449

 

Deferred income tax liabilities

 

 

300,188

 

304,483

 

Income taxes payable

 

 

73,296

 

68,842

 

Total liabilities

 

 

428,938

 

453,474

 

Equity

 

 

 

 

 

 

Parent's investment

 

 

621,532

 

639,002

 

Accumulated other comprehensive earnings (loss), net of taxes

 

 

(34,818)

 

(32,661)

 

Retained earnings

 

 

85,822

 

65,778

 

Total equity

 

 

672,536

 

672,119

 

Commitments and contingencies (note 7)

 

 

 

 

 

 

Total liabilities and equity

 

$

1,101,474

 

1,125,593

 

 

See accompanying notes to condensed combined financial statements.

I-2


 

Table of Contents

LIBERTY EXPEDIA HOLDINGS, INC.

 

Condensed Combined Statements Of Operations

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

 

 

amounts in thousands,

 

 

 

except per share amounts

 

Total revenue, net

 

$

96,802

 

115,897

 

 

325,250

 

360,849

 

Cost of retail sales (exclusive of depreciation shown separately below)

 

 

70,397

 

87,880

 

 

242,128

 

276,097

 

Gross profit

 

 

26,405

 

28,017

 

 

83,122

 

84,752

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Operating expense

 

 

7,125

 

8,032

 

 

23,712

 

24,314

 

Selling, general and administrative, including stock-based compensation expense (note 5)

 

 

12,976

 

11,271

 

 

36,805

 

35,185

 

Depreciation and amortization

 

 

4,472

 

5,076

 

 

14,305

 

15,038

 

 

 

 

24,573

 

24,379

 

 

74,822

 

74,537

 

Operating income (loss)

 

 

1,832

 

3,638

 

 

8,300

 

10,215

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(259)

 

(321)

 

 

(838)

 

(910)

 

Related party interest expense (note 6)

 

 

 —

 

(355)

 

 

 —

 

(1,129)

 

Share of earnings (losses) of Expedia, Inc. (note 3)

 

 

39,812

 

45,048

 

 

18,112

 

125,147

 

Gains (losses) on dilution of investment in affiliate (note 3)

 

 

1,097

 

4,162

 

 

(2,368)

 

4,782

 

Other, net

 

 

212

 

(102)

 

 

61

 

(467)

 

 

 

 

40,862

 

48,432

 

 

14,967

 

127,423

 

Earnings (loss) before income taxes

 

 

42,694

 

52,070

 

 

23,267

 

137,638

 

Income tax (expense) benefit

 

 

(13,808)

 

(17,729)

 

 

(3,223)

 

(47,879)

 

Net earnings (loss)

 

 

28,886

 

34,341

 

 

20,044

 

89,759

 

Less net earnings (loss) attributable to the noncontrolling interests

 

 

 —

 

278

 

 

 —

 

626

 

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

 

$

28,886

 

34,063

 

 

20,044

 

89,133

 

Unaudited Pro Forma basic net earnings (loss) attributable to Series A and Series B Liberty Expedia Holdings, Inc. shareholders per common share (note 2)

 

$

0.51

 

0.60

 

 

0.35

 

1.57

 

 

See accompanying notes to condensed combined financial statements.

I-3


 

Table of Contents

LIBERTY EXPEDIA HOLDINGS, INC.

 

Condensed Combined Statements Of Comprehensive Earnings (Loss)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

 

 

amounts in thousands

 

Net earnings (loss)

 

$

28,886

 

34,341

 

20,044

 

89,759

 

Other comprehensive earnings (loss), net of taxes:

 

 

 

 

 

 

 

 

 

 

Share of other comprehensive earnings (loss) of Expedia, Inc.

 

 

(737)

 

(3,106)

 

(2,157)

 

(16,464)

 

Other comprehensive earnings (loss)

 

 

(737)

 

(3,106)

 

(2,157)

 

(16,464)

 

Comprehensive earnings (loss)

 

 

28,149

 

31,235

 

17,887

 

73,295

 

Less comprehensive earnings (loss) attributable to the noncontrolling interest

 

 

 —

 

278

 

 —

 

626

 

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

 

$

28,149

 

30,957

 

17,887

 

72,669

 

 

See accompanying notes to condensed combined financial statements.

I-4


 

Table of Contents

LIBERTY EXPEDIA HOLDINGS, INC.

 

Condensed Combined Statements Of Cash Flows

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

September 30, 

 

 

    

2016

    

2015

 

 

 

amounts in thousands

 

Cash flows from operating activities:

 

 

 

 

 

 

Net earnings (loss)

 

$

20,044

 

89,759

 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

14,305

 

15,038

 

Stock-based compensation

 

 

(314)

 

1,510

 

Cash payments for stock-based compensation

 

 

(1,972)

 

(1,130)

 

Noncash interest expense

 

 

33

 

121

 

Share of (earnings) losses of Expedia, Inc.

 

 

(18,112)

 

(125,147)

 

Cash receipts from returns on Expedia, Inc.

 

 

17,469

 

14,118

 

Deferred income tax expense (benefit)

 

 

(1,228)

 

44,212

 

Other noncash charges (credits), net

 

 

2,497

 

(4,317)

 

Changes in operating assets and liabilities

 

 

 

 

 

 

Current and other assets

 

 

13,435

 

(13,004)

 

Payables and other liabilities

 

 

(5,659)

 

7,009

 

Net cash provided (used) by operating activities

 

 

40,498

 

28,169

 

Cash flows from investing activities:

 

 

 

 

 

 

Capital expended for property and equipment

 

 

(10,442)

 

(14,678)

 

Investment in Expedia, Inc.

 

 

 

(22,575)

 

Net cash provided (used) by investing activities

 

 

(10,442)

 

(37,253)

 

Cash flows from financing activities:

 

 

 

 

 

 

Borrowings of debt

 

 

307,939

 

391,940

 

Repayments of debt

 

 

(322,359)

 

(388,161)

 

Contribution from (distribution to) parent, net

 

 

(17,470)

 

8,458

 

Net cash provided (used) by financing activities

 

 

(31,890)

 

12,237

 

Net increase (decrease) in cash and cash equivalents

 

 

(1,834)

 

3,153

 

Cash and cash equivalents at beginning of period

 

 

2,243

 

1,631

 

Cash and cash equivalents at end of period

 

$

409

 

4,784

 

 

See accompanying notes to condensed combined financial statements.

I-5


 

Table of Contents

LIBERTY EXPEDIA HOLDINGS, INC.

 

Condensed Combined Statement Of Equity

 

(unaudited)

 

Nine months ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Accumulated

    

 

    

 

 

 

 

 

 

 

other

 

 

 

 

 

 

 

Parent's

 

comprehensive

 

Retained

 

 

 

 

 

investment

 

earnings (loss)

 

earnings

 

Total equity

 

 

 

amounts in thousands

 

Balance at January 1, 2016

 

$

639,002

 

(32,661)

 

65,778

 

672,119

 

Net earnings (loss)

 

 

 —

 

 —

 

20,044

 

20,044

 

Other comprehensive earnings (loss)

 

 

 —

 

(2,157)

 

 —

 

(2,157)

 

Contributions from (distributions to) parent, net

 

 

(17,470)

 

 —

 

 —

 

(17,470)

 

Balance at September 30, 2016

 

$

621,532

 

(34,818)

 

85,822

 

672,536

 

 

See accompanying notes to condensed combined financial statements.

I-6


 

Table of Contents

(1) Basis of Presentation

 

During November 2015, the board of directors of Liberty Interactive Corporation ("Liberty Interactive") authorized management to pursue a plan to distribute to holders of its 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 will be comprised of, among other things, Liberty Interactive's ownership interest in Expedia, Inc. ("Expedia"), as well as Liberty Interactive's wholly-owned subsidiary Bodybuilding.com, LLC ("Bodybuilding"). Bodybuilding became a wholly owned subsidiary of Liberty Interactive in October 2015 when Liberty Interactive purchased the remaining ownership interest in Bodybuilding. The Expedia Holdings Split-Off is intended to be tax-free to Liberty Interactive and stockholders of Liberty Ventures. In the Expedia Holdings Split-Off, (i) 0.4 of each outstanding share of Liberty Interactive’s Series A Liberty Ventures common stock will be redeemed for 0.4 of a share of Expedia Holdings’ Series A common stock, and (ii) 0.4 of each outstanding share of Liberty Interactive’s Series B Liberty Ventures common stock will be redeemed for 0.4 of a share of Expedia Holdings’ Series B common stock, with cash to be paid in lieu of any fractional shares of Liberty Interactive’s Series A and Series B Liberty Ventures common stock and Expedia Holdings’ Series A and Series B common stock.   In contemplation of the proposed Expedia Holdings Split-Off, the Company filed with the Securities and Exchange Commission a registration statement that became effective during the third quarter of 2016. By virtue of the registration statement having gone effective, the Company is required to file a Form 10-Q for the quarter ended September 30, 2016. The Expedia Holdings Split-Off is currently expected to occur at 5:00 p.m., New York City time, on November 4, 2016, subject to the satisfaction or waiver (as applicable) of certain conditions.

 

These financial statements represent a combination of the historical financial information of Bodybuilding and Liberty Interactive's interest in Expedia. These financial statements refer to the combination of the aforementioned subsidiary and investment as "Expedia Holdings," "the Company," "us," "we" and "our" in the notes to the condensed combined financial statements. The Expedia Holdings Split-Off will be accounted for at historical cost due to the pro rata nature of the redemption of shares of Liberty Ventures common stock in exchange for shares of Expedia Holdings common stock.  All significant intercompany accounts and transactions have been eliminated in the condensed combined financial statements.

 

Expedia Holdings does not control the decision making process or business management practices of its affiliate Expedia. Accordingly, the Company relies on management of its affiliate to provide it with accurate financial information prepared in accordance with U.S. generally accepted accounting principles ("GAAP") that the Company uses in the application of the equity method. In addition, Expedia Holdings relies on audit reports that are provided by the affiliate's independent auditors on the financial statements of such affiliate. The Company is not aware, however, of any errors in or possible misstatements of the financial information provided by its equity affiliate that would have a material effect on Expedia Holdings' condensed combined financial statements. As further discussed in note 3, the Company expects to begin consolidating Expedia upon completion of the Expedia Holdings Split-Off.

 

The accompanying (a) condensed combined balance sheet as of December 31, 2015, which has been derived from audited financial statements, and (b) the interim unaudited condensed combined financial statements have been prepared in accordance with GAAP for interim financial information and the instructions to 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. These condensed combined financial statements should be read in conjunction with the combined financial statements and notes thereto for the year ended December 31, 2015.

 

In May 2014, the Financial Accounting Standards Board ("FASB") issued new accounting guidance on revenue from contracts with customers. The new guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In March 2016, the FASB issued additional guidance which clarifies principal versus agent considerations, and in April 2016, the FASB issued further guidance which clarifies the identification of performance obligations and the

I-7


 

Table of Contents

implementation guidance for licensing. The updated guidance will replace most existing revenue recognition guidance in GAAP when it becomes effective and permits the use of either a full retrospective or modified retrospective transition method. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and early adoption is permitted only for fiscal years beginning after December 15, 2016. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on its combined financial statements and related disclosures.

 

In February 2015, the FASB issued new accounting guidance which amends the consolidation guidance in Accounting Standards Codification Topic 810,  Consolidation . The new guidance requires an entity to reconsider and re-document the basis for previous consolidation conclusions. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. The Company adopted this guidance during the first quarter of 2016. The adoption of this guidance did not change the conclusions reached for any previous consolidation analyses.

 

In July 2015, the FASB issued new accounting guidance that changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. The new principle applies to entities that measure inventory using a method other than last-in, first-out or the retail inventory method. The new standard is effective for the Company for fiscal years and interim periods beginning after December 15, 2016. The Company is currently evaluating the effect that the updated standard will have on its combined financial statements, but does not believe that the standard will significantly impact its combined financial statements and related disclosures.

 

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. The Company has not yet determined the effect of the standard on its ongoing financial reporting.

 

In March 2016, the FASB issued new guidance which simplifies several aspects of the accounting for share-based payment award transactions, including the income tax consequences, forfeitures, classification of awards as either equity or liabilities and classification on the statement of cash flows. The new standard is effective for the Company for fiscal years and interim periods beginning after December 15, 2016, with early adoption permitted. The Company adopted this guidance in the third quarter of 2016 .   In accordance with the new guidance, excess tax benefits and tax deficiencies are recognized as income tax benefit or expense rather than as additional paid-in capital. The Company has elected to recognize forfeitures as they occur rather than continue to estimate expected forfeitures. In addition, pursuant to the new guidance, excess tax benefits are classified as an operating activity on the condensed combined statements of cash flows. The recognition of excess tax benefits and deficiencies are applied prospectively from January 1, 2016. The Company considered whether there were any tax benefits that were not previously recognized and for adjustments to compensation cost based on actual forfeitures, noting none. Accordingly, no cumulative-effect adjustment has been recorded in retained earnings as of January 1, 2016. No changes have been made to the condensed combined statements of cash flows, as excess tax benefits were insignificant for all periods presented.

 

Split-Off of Expedia Holdings from Liberty Interactive

 

Following the Expedia Holdings Split-Off, Liberty Interactive and Expedia Holdings will operate as separate, publicly traded companies, and neither will have any stock ownership, beneficial or otherwise, in the other. In connection with the Expedia Holdings Split-Off, Expedia Holdings will enter into certain agreements with Liberty Interactive and/or Liberty Media Corporation (“Liberty Media”) and 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 Liberty Interactive and Expedia Holdings will provide 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 Liberty Interactive with respect to and resulting from the Expedia Holdings Split-Off. The tax sharing agreement

I-8


 

Table of Contents

between Liberty Interactive and Expedia Holdings will provide for the allocation and indemnification of tax liabilities and benefits between Liberty Interactive and Expedia Holdings and other agreements related to tax matters. Pursuant to the services agreement, Liberty Media will provide 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 will share office space with Liberty Interactive 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.

 

(2) Pro Forma Earnings (Loss) per Share

 

Unaudited pro forma earnings (loss) per common share for all periods presented is computed by dividing net earnings (loss) for the respective period by 56,943,468 common shares, which is the aggregate number of shares of Series A and Series B common stock that would have been issued upon completion of the Expedia Holdings Split-Off as if it had happened on September 30, 2016.

 

(3) Investment in Expedia, Inc.

 

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—including over 321,000 properties in approximately 200 countries, 475 airlines, packages, rental cars, cruises, as well as destination services and activities.

 

Effective August 9, 2005, IAC/InterActiveCorp ("IAC") completed the spin-off of substantially all of its travel and travel-related businesses by way of the distribution of all outstanding shares of Expedia to IAC stockholders. Subsequent to the spin-off of Expedia from IAC, Liberty Interactive owned approximately 20% of the outstanding Expedia common stock and 52% of the voting interest in Expedia. As of September 30, 2016, the Company owns an approximate 15.7% equity interest and 52.3% voting interest in Expedia.

 

Historically, Liberty Interactive has been a party to a Stockholders Agreement with Mr. Barry Diller, Chairman of the Board and Senior Executive Officer of Expedia, pursuant to which Mr. Diller holds an irrevocable proxy (the “Diller Proxy”) over all the shares of Expedia common stock ("EXPE") and Expedia class B common stock owned by Liberty Interactive. Liberty Interactive is also subject to a Governance Agreement with Expedia which provides for the right to nominate approximately 20% of the members of Expedia's board of directors, which is currently comprised of 13 members (three of which were nominated by Liberty Interactive). The Governance Agreement also provides for registration and other rights, and imposes certain restrictions on the ownership of shares of Expedia class B common stock. Pursuant to the Governance Agreement, Liberty Interactive has (and, following the completion of the Expedia Holdings Split-Off, the Company will have) preemptive rights that entitle it to purchase a number of shares of Expedia common stock (excluding certain issuances related to options, warrants or convertible securities) so that Liberty Interactive or the Company, as applicable, will maintain the identical ownership interest in Expedia (subject to certain adjustments) that it had immediately prior to such issuance or proposed issuance (but not in excess of 20.01%). Any purchase by Liberty Interactive or the Company, as applicable, will be allocated between EXPE and Expedia class B common stock in the same proportion as the issuance or issuances giving rise to the preemptive right, except to the extent that Liberty Interactive or the Company, as applicable, opts to acquire shares of EXPE in lieu of shares of Expedia class B common stock. Based on the Stockholders Agreement and the Governance Agreement, the Company determined that, prior to the Expedia Holdings Split-Off, it does not control Expedia but instead has significant influence with respect to Expedia and accordingly, accounts for its investment in Expedia as an equity method affiliate.

 

In connection with the Expedia Holdings Split-Off, (a), the Governance Agreement and Stockholders Agreement will be assigned by Liberty Interactive to the Company and (b) Diller will cease to directly control a majority voting interest in Expedia by irrevocably assigning the Diller Proxy to the Company for a period of time up to 18 months following completion of the Expedia Holdings Split-Off, subject to certain termination events. By virtue of (i) certain governance rights with respect to the Company as set forth in the Company’s restated charter, an amendment to the Stockholders

I-9


 

Table of Contents

Agreement and an Amended and Restated Transaction Group among Mr. Diller, John C. Malone (“Malone”), Leslie Malone (“Mrs. Malone” and together with Malone, the “Malone Group”), Liberty Interactive and the Company and (ii) the grant by the Malone Group of an irrevocable proxy to vote, subject to certain exceptions, shares of the Company’s common stock beneficially owned by the Malone Group upon the completion of the Expedia Holdings Split-Off or thereafter for a period of time ending upon termination of Diller's assignment of the Diller Proxy (the arrangements described in clauses (i) and (ii), the “proxy arrangements”), Diller will be able to elect and replace the directors of the Company who will determine how the Company will exercise certain rights and vote the shares of EXPE and Expedia class B common stock owned by the Company in the election of Expedia directors, though Malone will retain the ability to remove such directors of the Company. The rights under the Governance Agreement and Stockholders Agreement, each as assigned and amended, will be maintained even upon termination of the proxy arrangements. As a result, Expedia Holdings expects to begin consolidating Expedia as of the completion of the Expedia Holdings Split-Off, as Expedia Holdings will then control a majority of the voting interest in Expedia. In conjunction with application of acquisition accounting, we anticipate a full step up in basis of Expedia along with a gain related to a difference between our historical basis and the fair value of our interest in Expedia.

 

As of September 30, 2016, the carrying value of Expedia Holdings' ownership in Expedia was approximately $922 million. The market value of Expedia Holdings' ownership in Expedia as of September 30, 2016 was approximately $2,755 million (Level 1).

 

Expedia Holdings recognized gains on dilution of its investment in Expedia of $1.1 million and $4.2 million for the three months ended September 30, 2016 and 2015, respectively, and a loss on dilution of its investment of $2.4 million and a gain on dilution of its investment of $4.8 million during the nine months ended September 30, 2016 and 2015, respectively. In addition, Expedia paid dividends which were recorded as reductions to the investment aggregating approximately $6.1 million and $5.6 million during the three months ended September 30, 2016 and 2015, respectively, and $17.5 million and $14.1 million during the nine months ended September 30, 2016 and 2015, respectively.

 

During the three months ended September 30, 2016 and 2015 the Company recorded other comprehensive losses of $737 thousand and $3.1 million, respectively, and during the nine months ended September 30, 2016 and 2015, the Company recorded other comprehensive losses of $2.2 million and $16.5 million, respectively, of its share of Expedia's other comprehensive earnings (losses), net of income taxes. Expedia records gains and losses related to foreign currency translation adjustments in other comprehensive income (loss). The pre-tax portion of the Company's share of Expedia's other comprehensive earnings (losses) was losses of $1.2 million and $5.0 million for the three months ended September 30, 2016 and 2015, respectively, and losses of $3.5 million and $26.6 million for the nine months ended September 30, 2016 and 2015, respectively.

 

Upon acquisition and due to subsequent repurchases of Expedia stock by Expedia, the Company allocated excess basis between the Company’s carrying value of Expedia and Expedia’s carrying value. The Company determined the initial applicable useful life of amortizable intangibles to be approximately four years. As a result of Expedia's 2015 acquisitions of Orbitz Worldwide, Inc. ("Orbitz") and HomeAway, Inc. ("HomeAway"), the Company determined the applicable useful life of amortizable intangibles to be approximately six years in connection with excess costs added subsequent to December 31, 2015. Amortization related to intangible assets with identifiable useful lives is included in the Company's share of earnings (losses) of Expedia, Inc. line item in the accompanying condensed combined statements of operations and aggregated $4.2 million and $6.1 million for the three months ended September 30, 2016 and 2015, respectively, and $13.8 million and $17.1 million, for the nine months ended September 30, 2016 and 2015, respectively. At September 30, 2016, the excess basis allocated to amortizable intangibles, net of accumulated amortization was $51.5 million and the non-amortizable excess basis was $254.0 million.

 

I-10


 

Table of Contents

Expedia, Inc.

 

Summarized financial information for Expedia is as follows:

 

Expedia, Inc. Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31,

 

 

 

2016

 

2015

 

 

 

amounts in millions

 

Current assets

 

$

3,620

 

2,976

 

Property and equipment, net

 

 

1,340

 

1,064

 

Goodwill

 

 

8,027

 

7,993

 

Intangible assets, net

 

 

2,574

 

2,794

 

Other assets

 

 

571

 

659

 

Total assets

 

$

16,132

 

15,486

 

Current liabilities

 

$

6,619

 

5,926

 

Deferred income taxes

 

 

418

 

474

 

Long-term debt

 

 

3,204

 

3,183

 

Other liabilities

 

 

1,938

 

973

 

Equity

 

 

3,953

 

4,930

 

Total liabilities and equity

 

$

16,132

 

15,486

 

 

Expedia, Inc. Consolidated Statements of Operations  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

 

 

amounts in millions

 

Revenue

 

$

2,581

 

1,938

 

6,681

 

4,974

 

Cost of revenue

 

 

(417)

 

(328)

 

(1,226)

 

(971)

 

Gross profit

 

 

2,164

 

1,610

 

5,455

 

4,003

 

Selling, general and administrative expenses

 

 

(1,701)

 

(1,234)

 

(4,890)

 

(3,536)

 

Amortization

 

 

(77)

 

(31)

 

(251)

 

(83)

 

Operating income (loss)

 

 

386

 

345

 

314

 

384

 

Interest expense

 

 

(43)

 

(33)

 

(130)

 

(90)

 

Other income (expense), net

 

 

(3)

 

30

 

(23)

 

638

 

Income tax (expense) benefit

 

 

(61)

 

(66)

 

15

 

(196)

 

Net income (loss)

 

 

279

 

276

 

176

 

736

 

Net (income) loss attributable to noncontrolling interests

 

 

 —

 

7

 

26

 

41

 

Net income (loss) attributable to Expedia, Inc. shareholders

 

$

279

 

283

 

202

 

777

 

 

 

 

I-11


 

Table of Contents

(4) Long-Term Debt and Capital Lease Obligations

 

Outstanding debt and capital leases at September 30, 2016 and December 31, 2015 are summarized as follows:

 

 

 

 

 

 

 

 

 

September 30, 

    

December 31, 

 

 

2016

 

2015

 

 

amounts in thousands

 

Bodybuilding secured notes

$

14,050

 

17,738

 

Revolving line of credit due 2020

 

9,813

 

19,538

 

Deferred loan costs

 

(69)

 

(102)

 

Capital lease obligations

 

3,023

 

4,030

 

Total obligations

 

26,817

 

41,204

 

Less portion classified as current

 

(4,758)

 

(4,755)

 

Total long-term debt and capital lease obligations

$

22,059

 

36,449

 

 

Bodybuilding Secured Notes

 

As of September 30, 2016, Bodybuilding has various outstanding secured notes. Principal and interest payments on the secured notes are payable monthly based on the date of issuance. The secured notes are comprised of both fixed and variable rate notes with an interest rate of 4.14% on the fixed rate note and an interest rate of LIBOR plus 250 basis points on the variable rate notes (3.06% on the two variable rate notes at September 30, 2016). The maturity dates on the secured notes range from 2019 to 2022. The land and building purchased by Bodybuilding in March 2012 for its corporate headquarters are secured as collateral under the terms of the master term loan agreement for a portion of the outstanding secured notes. As of September 30, 2016, the total outstanding balance of the secured notes is $14.1 million.

 

Revolving Line of Credit

 

As of September 30, 2016, Bodybuilding had a revolving line of credit (the "Revolver") which is secured by Bodybuilding's inventory and accounts receivable. The maximum amount allowed under the Revolver is $50 million. The outstanding balance accrues interest at LIBOR plus 150 basis points, with a rate option balance that accrues interest at the CB Floating Rate less 125 basis points. The Revolver matures on January 20, 2020. Bodybuilding periodically borrows and repays amounts outstanding under the Revolver depending on its cash needs. As of September 30, 2016, the outstanding balance on the Revolver is $9.8 million subject to an interest rate of 2% on the first $7 million, and 2.25% on the remaining balance.

 

Fair Value of Debt

 

The Company estimates the fair value of its secured notes and term loan based on the current rate offered to the Company for debt of the same remaining maturities (level 3). The Company believes that the carrying amount of its Revolver and secured notes approximated fair value at September 30, 2016 and December 31, 2015.

 

Covenant Compliance

 

As of September 30, 2016, the Company was in compliance with its debt covenants which consist of both financial and nonfinancial covenants.

 

Subsequent Borrowings

 

During November 2016, prior to and in conjunction with the Expedia Holdings Split-Off, the Company entered into a $400 million margin loan, secured by shares of Expedia, which is scheduled to mature during November 2018 (“Expedia Margin Loan”). Borrowings under the Expedia Margin Loan bear interest at the rate of LIBOR plus 1.60% with the undrawn portion carrying a fee of 0.75%. The Company borrowed $350 million under the Expedia Margin Loan and plans to distribute $300 million to Liberty Interactive.

 

I-12


 

Table of Contents

 

(5) Stock-Based Compensation

 

Liberty Incentive Plan

 

Liberty Interactive has granted to certain directors, officers, employees and consultants of Liberty Interactive and certain of its subsidiaries stock options to purchase shares of Liberty Ventures common stock and restricted stock awards of Liberty Ventures common stock pursuant to applicable incentive plans in place at Liberty. Each holder of an outstanding option to purchase shares of Liberty Ventures common stock on the date of the Expedia Holdings Split-Off (an "original Ventures option award") will receive an option to purchase shares of the corresponding series of Company common stock (a "new Company option award") and an adjustment to the exercise price and number of shares subject to the original Ventures option award (as so adjusted, an "adjusted Ventures option award"). The exercise prices of and number of shares subject to the new Company option award and the related adjusted Ventures option award will be determined based on the exercise price and number of shares subject to the original Ventures option award, the redemption ratios being used in the Expedia Holdings Split-Off, the pre-Expedia Holdings Split-Off trading price of Liberty Ventures common stock (determined using the volume weighted average price of the applicable series of Liberty Ventures common stock over the three consecutive trading days immediately preceding the Expedia Holdings Split-Off) and the relative post-Expedia Holdings Split-Off trading prices of Liberty Ventures common stock and Company common stock (determined using the volume weighted average price of the applicable series of common stock over the three consecutive trading days beginning on the first trading day following the Expedia Holdings Split-Off on which both the Liberty Ventures common stock and the Company common stock trade in the "regular way" (meaning once the common stock trades using a standard settlement cycle)), such that the pre-Expedia Holdings Split-Off value of the original Ventures option award is allocated between the new Company option award and the adjusted Ventures option award.

 

Except as described above, all other terms of an adjusted Ventures option award and a new Company option award (including, for example, the vesting terms thereof) will in all material respects, be the same as those of the corresponding original Ventures option award. The terms of the adjusted Ventures option award will be determined and the new Company option award will be granted as soon as practicable following the determination of the pre- and post-Expedia Holdings Split-Off trading prices of Liberty Ventures and Company common stock, as applicable. The compensation expense relating to employees of Liberty Interactive will continue to be recorded at Liberty Interactive. Liberty Interactive had outstanding approximately 3.5 million Liberty Ventures Series A and 1.7 million Liberty Ventures Series B options at September 30, 2016 with a weighted average exercise price of $21.93 and $34.75 per share, respectively. Approximately 2.7 million and 112 thousand of those options, respectively, were exercisable at September 30, 2016 with a weighted average exercise price of $17.76 and $38.63 per share, respectively.

 

Bodybuilding Stock Appreciation Rights Plans

 

There were approximately 660 thousand stock appreciation rights ("SARs") granted during the nine months ended September 30, 2016 under the Bodybuilding 2011 Stock Appreciation Rights Plan. The weighted average grant date fair value of the SARs granted during the nine months ended September 30, 2016 was $13.15 per share. As of September 30, 2016, the total unrecognized compensation cost related to 854 thousand unvested Bodybuilding SARs was approximately $8.6 million and will be recognized over a weighted average period of approximately 3.1 years. Accrued stock compensation was $3.6 million at September 30, 2016.

 

Included in selling, general and administrative expenses in the accompanying condensed combined statements of operations is stock-based compensation expense of $770 thousand and $597 thousand for the three months ended   September 30, 2016 and 2015, respectively, and a benefit from stock-based compensation of $314 thousand and stock-based compensation expense of $1.5 million for the nine months ended September 30, 2016 and 2015, respectively, which relates to Bodybuilding. The benefit recognized during the nine months ended September 30, 2016 was primarily due to a change in the per unit valuation of outstanding stock appreciation rights.

 

 

I-13


 

Table of Contents

(6) Related Party Transactions

 

As of September 30, 2015, Bodybuilding had an outstanding note with its parent company, Liberty Interactive (the "Liberty Note"), in the amount of $12.9 million. The Liberty Note required Bodybuilding to make interest only payments at a 10% interest rate on a quarterly basis with the final payment due January 31, 2020. Bodybuilding voluntarily made principal payments on the outstanding debt of $3.0 million during the nine months ended September 30, 2015. As part of a contribution agreement entered into by Liberty Interactive and Bodybuilding on October 26, 2015, the balance of the note and accrued interest which aggregated $13.0 million was considered contributed equity. During the nine months ended September 30, 2015, Bodybuilding recognized $1.1 million in interest expense related to the Liberty Note.

 

The Company paid $225 thousand and $80 thousand during the three months ended September 30, 2016 and 2015, respectively, and $480 thousand and $176 thousand during the nine months ended September 30, 2016 and 2015, respectively, to Liberty Interactive for legal and tax expenses that Liberty Interactive remitted on behalf of the Company.

 

(7) Commitments and Contingencies

 

Leases

 

The Company leases certain warehouse and office space, equipment, furniture and computer software under both capital and noncancelable operating leases that expire at various dates through 2020. The Company is responsible, under all leases, for related building maintenance and property taxes. Total rental expense was $470 thousand and $641 thousand for the three months ended September 30, 2016 and 2015, respectively, and $1.6 million and $1.9 million for the nine months ended September 30, 2016 and 2015, respectively.

 

Litigation

 

The Company is subject to legal proceedings and other matters arising in the ordinary course of business. Although it is reasonably possible the Company may incur losses upon conclusion of such matters, an estimate of any loss or range of loss cannot be made. In the opinion of management, it is expected that amounts, if any, which may be required to satisfy such contingencies will not be material in relation to the accompanying condensed combined financial statements.

 

Bodybuilding is engaged in litigation arising from a dispute with Mr. Stoppani and his company PhD Fitness, LLC ("PhD Fitness") over the ownership of trademarks relating to JYM brand supplement products. Mr. Stoppani has demanded that Bodybuilding discontinue manufacturing and selling JYM products. Bodybuilding filed an action against Mr. Stoppani and PhD Fitness for declaratory relief in U.S. Federal Court seeking a judicial declaration that Bodybuilding is the owner of the JYM trademark, and asserting trademark infringement claims. Mr. Stoppani and PhD Fitness have filed counterclaims, including claims for trademark infringement and false advertising, seeking a declaratory judgment that Mr. Stoppani and PhD Fitness own the JYM mark, actual damages in excess of $50 million (actual amount to be proven at trial), punitive damages of not less than $10 million, injunctive relief and attorneys' fees. Bodybuilding and Mr. Stoppani and PhD Fitness have each filed competing motions seeking a preliminary injunction. On October 31, 2016, the Court granted Bodybuilding permission to file an amended complaint to add General Nutrition Center ("GNC") as a defendant and to add a claim for trade dress infringement, due to Mr. Stoppani and PhD Fitness' launch of a competing supplement line through GNC utilizing the JYM mark.

 

Certain Risks and Concentrations

 

Bodybuilding is subject to certain risks and concentrations including dependence on relationships with its vendors. Bodybuilding's largest vendors, which accounted for greater than 10% of purchases, aggregated 30% of total purchases for each of the three months ended September 30, 2016 and 2015 and 31% and 29% of total purchases for the nine months ended September 30, 2016 and 2015, respectively.

 

I-14


 

Table of Contents

Off-Balance Sheet Arrangements

 

Expedia Holdings did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the Company's financial condition, results of operations, liquidity, capital expenditures or capital resources.

 

(8) Segment Information

 

Expedia Holdings identifies its reportable segments as (A) those combined companies that represent 10% or more of its combined annual revenue, annual Adjusted OIBDA or total assets and (B) those equity method affiliates whose share of earnings or losses represent 10% or more of Expedia Holding's annual pre-tax earnings (losses).

 

Expedia Holdings evaluates performance and makes decisions about allocating resources to its operating segments based on financial measures such as revenue and Adjusted OIBDA. In addition, Expedia Holdings reviews nonfinancial measures such as unique visitors, customer acquisition and conversion rates.

 

Expedia Holdings defines Adjusted OIBDA as revenue less cost of sales, operating expenses, and selling, general and administrative expenses (excluding stock-based compensation). Expedia Holdings believes this measure is an important indicator of the operational strength and performance of its businesses, including each business's ability to service debt and fund capital expenditures. In addition, this measure allows management to view operating results and perform analytical comparisons and benchmarking between businesses and identify strategies to improve performance. This measure of performance excludes depreciation and amortization, stock-based compensation, separately reported litigation settlements and restructuring and impairment charges that are included in the measurement of operating income pursuant to GAAP. Accordingly, Adjusted OIBDA should be considered in addition to, but not as a substitute for, operating income (loss), net earnings (loss), cash flow provided by operating activities and other measures of financial performance prepared in accordance with GAAP. Expedia Holdings generally accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current prices.

 

For the nine months ended September 30, 2016, Expedia Holdings has identified the following combined company and equity method investment as its reportable segments:

 

·

Bodybuilding—a wholly-owned Internet retailer of sports, fitness and nutritional supplements. Bodybuilding also hosts an online health-and-fitness publication, offering free fitness content, workout programs, video trainers, recipes, health advice and motivational stories. Bodybuilding's revenue primarily consists of sales of health and wellness products.

 

·

Expedia—an equity method investment of the Company that provides travel and services to leisure and corporate travelers in the United States and abroad as well as various media and advertising offerings to travel and non-travel advertisers. Expedia's revenue primarily consists of sales of travel services.

 

Expedia Holdings' operating segments are strategic business units that offer different products and services. They are managed separately because each segment requires different technologies, distribution channels and marketing strategies. The accounting policies of the segments that are also combined companies are the same as those described in the Company's summary of significant accounting policies in the Company's annual financial statements.

 

I-15


 

Table of Contents

Performance Measures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

 

 

2016

 

2015

 

 

 

 

 

Adjusted

 

 

 

Adjusted

 

 

 

Revenue

 

OIBDA

 

Revenue

 

OIBDA

 

 

 

amounts in thousands

 

Bodybuilding

 

$

96,802

 

7,074

 

115,897

 

9,311

 

Expedia

 

 

2,580,905

 

662,973

 

1,937,753

 

455,109

 

Corporate and other

 

 

 —

 

 —

 

 —

 

 —

 

 

 

 

2,677,707

 

670,047

 

2,053,650

 

464,420

 

Eliminate Expedia

 

 

(2,580,905)

 

(662,973)

 

(1,937,753)

 

(455,109)

 

Combined Expedia Holdings

 

$

96,802

 

7,074

 

115,897

 

9,311

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

 

 

2016

 

2015

 

 

    

Revenue from

    

 

    

Revenue from

    

 

 

 

 

external

 

Adjusted

 

external

 

Adjusted

 

 

 

customers

 

OIBDA

 

customers

 

OIBDA

 

 

 

amounts in thousands

 

Bodybuilding

 

$

325,250

 

22,291

 

360,849

 

26,763

 

Expedia

 

 

6,680,735

 

1,170,445

 

4,973,750

 

788,585

 

Corporate and Other

 

 

 —

 

 —

 

 —

 

 —

 

 

 

 

7,005,985

 

1,192,736

 

5,334,599

 

815,348

 

Eliminate Expedia

 

 

(6,680,735)

 

(1,170,445)

 

(4,973,750)

 

(788,585)

 

Combined Expedia Holdings

 

$

325,250

 

22,291

 

360,849

 

26,763

 

 

Other Information

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

 

    

Total

    

Investment

    

Capital

 

 

 

assets

 

in Expedia

 

expenditures

 

 

 

amounts in thousands

 

Bodybuilding

 

$

179,622

 

 —

 

10,442

 

Expedia

 

 

16,131,766

 

 —

 

567,044

 

Corporate and other

 

 

921,852

 

921,852

 

 —

 

 

 

 

17,233,240

 

921,852

 

577,486

 

Eliminate Expedia

 

 

(16,131,766)

 

 —

 

(567,044)

 

Combined Expedia Holdings

 

$

1,101,474

 

921,852

 

10,442

 

 

The following table provides a reconciliation of segment Adjusted OIBDA to earnings (loss) before income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

 

 

amounts in thousands

 

Combined segment Adjusted OIBDA

 

$

7,074

 

9,311

 

22,291

 

26,763

 

Stock-based compensation

 

 

(770)

 

(597)

 

314

 

(1,510)

 

Depreciation and amortization

 

 

(4,472)

 

(5,076)

 

(14,305)

 

(15,038)

 

Interest expense

 

 

(259)

 

(321)

 

(838)

 

(910)

 

Related party interest expense

 

 

 —

 

(355)

 

 —

 

(1,129)

 

Share of earnings (loss) of Expedia

 

 

39,812

 

45,048

 

18,112

 

125,147

 

Gain (loss) on dilution of Expedia

 

 

1,097

 

4,162

 

(2,368)

 

4,782

 

Other, net

 

 

212

 

(102)

 

61

 

(467)

 

Earnings (loss) before income taxes

 

$

42,694

 

52,070

 

23,267

 

137,638

 

 

 

I-16


 

Table of Contents

 

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

 

Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our business, product and marketing strategies; the proposed Expedia Holdings Split-Off; new service offerings; the recoverability of our goodwill and other long-lived assets; our projected sources and uses of cash; and the anticipated impact of certain contingent liabilities related to legal and tax proceedings and other matters arising in the ordinary course of business. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. The following include some but not all of the factors (as they relate to our consolidated subsidiaries and equity affiliates) that could cause actual results or events to differ materially from those anticipated:

·

customer demand for our products and services and our ability to adapt to changes in demand;

·

competitor responses to our products and services;

·

the levels of online traffic to our businesses' websites and our ability to convert visitors into customers or contributors;

·

uncertainties inherent in the development and integration of new business lines and business strategies;

·

our future financial performance, including availability, terms and deployment of capital;

·

our ability to successfully integrate and recognize anticipated efficiencies and benefits from the businesses we acquire;

·

the ability of suppliers and vendors to deliver products, equipment, software and services;

·

the outcome of any pending or threatened litigation;

·

availability of qualified personnel;

·

changes in the nature of key strategic relationships with partners, distributors, suppliers and vendors;

·

domestic and international economic and business conditions and industry trends, including the impact the United Kingdom’s referendum in which British citizens approved an exit from the European Union;

·

consumer spending levels, including the availability and amount of individual consumer debt;

·

rapid technological changes;

·

failure to protect the security of personal information, subjecting us to potentially costly government enforcement actions and/or private litigation and reputational damage;

·

the regulatory and competitive environment of the industries in which we operate;

·

threatened terrorist attacks, political and economic unrest in international markets and ongoing military action around the world; and

·

fluctuations in foreign currency exchange rates.

 

For additional risk factors, please see Amendment No. 5 to the Registration Statement on Form S-4 (File No. 333-210377) filed on September 30, 2016 (the “Registration Statement”). These forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Quarterly Report, and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based.

 

The following discussion and analysis provides information concerning our results of operations and financial condition. This discussion should be read in conjunction with our accompanying condensed combined financial statements

I-17


 

Table of Contents

and the notes thereto and our audited combined financial statements for the year ended December 31, 2015 in the Registration Statement. See note 1 in the accompanying condensed consolidated financial statements for an overview of new accounting standards that we have adopted or that we plan to adopt that have had or may have an impact on our financial statements.

 

Explanatory Note

 

During November 2015, the board of directors of Liberty Interactive Corporation ("Liberty Interactive") authorized management to pursue a plan to distribute to holders of its 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 will be comprised of, among other things, Liberty Interactive's ownership interest in Expedia, Inc. ("Expedia"), as well as Liberty Interactive's wholly-owned subsidiary Bodybuilding.com, LLC ("Bodybuilding"). Bodybuilding became a wholly owned subsidiary of Liberty Interactive in October 2015 when Liberty Interactive purchased the remaining ownership interest in Bodybuilding. The Expedia Holdings Split-Off is intended to be tax-free to Liberty Interactive and stockholders of Liberty Ventures. In the Expedia Holdings Split-Off, (i) 0.4 of each outstanding share of Liberty Interactive’s Series A Liberty Ventures common stock will be redeemed for 0.4 of a share of Expedia Holdings’ Series A common stock, and (ii) 0.4 of each outstanding share of Liberty Interactive’s Series B Liberty Ventures common stock will be redeemed for 0.4 of a share of Expedia Holdings’ Series B common stock, with cash to be paid in lieu of any fractional shares of Liberty Interactive’s Series A and Series B Liberty Ventures common stock and Expedia Holdings’ Series A and Series B common stock.   In contemplation of the proposed Expedia Holdings Split-Off, the Company filed with the Securities and Exchange Commission the Registration Statement that became effective during the third quarter of 2016. By virtue of the Registration Statement having gone effective, the Company is required to file a Form 10-Q for the quarter ended September 30, 2016. The Expedia Holdings Split-Off is currently expected to occur at 5:00 p.m., New York City time, on November 4, 2016, subject to the satisfaction or waiver (as applicable) of certain conditions.

 

Overview

 

We own an approximate 15.7% equity interest and 52.3% voting interest in Expedia as of September 30, 2016.

 

Historically, Liberty Interactive has been a party to a Stockholders Agreement with Mr. Barry Diller, Chairman of the Board and Senior Executive Officer of Expedia, pursuant to which Mr. Diller holds an irrevocable proxy (the “Diller Proxy”) over all the shares of Expedia common stock ("EXPE") and Expedia class B common stock owned by Liberty Interactive. Liberty Interactive is also subject to a Governance Agreement with Expedia which provides for the right to nominate approximately 20% of the members of Expedia's board of directors, which is currently comprised of 13 members (three of which were nominated by Liberty Interactive). The Governance Agreement also provides for registration and other rights, and imposes certain restrictions on the ownership of shares of Expedia class B common stock. Pursuant to the Governance Agreement, Liberty Interactive has (and, following the completion of the Expedia Holdings Split-Off, the Company will have) preemptive rights that entitle it to purchase a number of shares of Expedia common stock (excluding certain issuances related to options, warrants or convertible securities) so that Liberty Interactive or the Company, as applicable, will maintain the identical ownership interest in Expedia (subject to certain adjustments) that it had immediately prior to such issuance or proposed issuance (but not in excess of 20.01%). Any purchase by Liberty Interactive or the Company, as applicable, will be allocated between EXPE and Expedia class B common stock in the same proportion as the issuance or issuances giving rise to the preemptive right, except to the extent that Liberty Interactive or the Company, as applicable, opts to acquire shares of EXPE in lieu of shares of Expedia class B common stock. Based on the Stockholders Agreement and the Governance Agreement, the Company determined that, prior to the Expedia Holdings Split-Off, it does not control Expedia but instead has significant influence with respect to Expedia and accordingly, accounts for its investment in Expedia as an equity method affiliate.

 

In connection with the Expedia Holdings Split-Off, (a), the Governance Agreement and Stockholders Agreement will be assigned by Liberty Interactive to the Company and (b) Diller will cease to directly control a majority voting interest in Expedia by irrevocably assigning the Diller Proxy to the Company for a period of time up to 18 months following completion of the Expedia Holdings Split-Off, subject to certain termination events. By virtue of (i) certain governance rights with respect to the Company as set forth in the Company’s restated charter, an amendment to the Stockholders

I-18


 

Table of Contents

Agreement and an Amended and Restated Transaction Group among Mr. Diller, John C. Malone (“Malone”), Leslie Malone (“Mrs. Malone” and together with Malone, the “Malone Group”), Liberty Interactive and the Company and (ii) the grant by the Malone Group of an irrevocable proxy to vote, subject to certain exceptions, shares of the Company’s common stock beneficially owned by the Malone Group upon the completion of the Expedia Holdings Split-Off or thereafter for a period of time ending upon termination of Diller's assignment of the Diller Proxy (the arrangements described in clauses (i) and (ii), the “proxy arrangements”), Diller will be able to elect and replace the directors of the Company who will determine how the Company will exercise certain rights and vote the shares of EXPE and Expedia class B common stock owned by the Company in the election of Expedia directors, though Malone will retain the ability to remove such directors of the Company. The rights under the Governance Agreement and Stockholders Agreement, each as assigned and amended, will be maintained even upon termination of the proxy arrangements. As a result, Expedia Holdings expects to begin consolidating Expedia as of the completion of the Expedia Holdings Split-Off, as Expedia Holdings will then control a majority of the voting interest in Expedia. In conjunction with application of acquisition accounting, we anticipate a full step up in basis of Expedia along with a gain related to a difference between our historical basis and the fair value of our interest in Expedia.

 

The financial information represents a combination of the historical financial information of Bodybuilding and Liberty Interactive's interest in Expedia. This financial information refers to the combination of the aforementioned subsidiary and investment as "Expedia Holdings," "the Company," "us," "we" and "our" here and in the notes to the condensed combined financial statements.

 

Bodybuilding is an Internet retailer of sports, fitness, dietary supplements, and other health and wellness products. It is also a large publisher of online health and fitness content, offering complimentary fitness content, workout programs, video trainers, articles, recipes, health advice and motivational stories. The online model also includes a combination of detailed product information and real-time user reviews to help its visitors achieve their health and fitness goals. Visitors include gym-goers, athletes, weightlifters and bodybuilders, and any individual wanting to improve their mental and physical well-being through diet and exercise. Bodybuilding launched its website in 1999 and now includes more than 30,000 pages of editorial content, 10,000 videos, 16,000 pages of store content and over 6.5 million forum threads. Its properties encompass more than 30 million monthly unique visitors and 11 million members of BodySpace, an inclusive fitness community within Bodybuilding that allows people of all health and fitness levels to track their progress and discuss goals, techniques, supplementation and achievements.

 

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 a broad supply portfolio—including over 321,000 properties in approximately 200 countries, 475 airlines, packages, rental cars, cruises, as well as destination services and activities. Travel suppliers distribute and market products via its traditional desktop offerings, as well as through alternative distribution channels including mobile and social media, its private label business and its call centers in order to reach its extensive, global audience.

 

I-19


 

Table of Contents

Results of Operations—Combined

 

Combined Operating Results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

 

 

amounts in thousands

 

Revenue

 

$

96,802

 

115,897

 

325,250

 

360,849

 

Cost of sales (exclusive of depreciation and amortization included below)

 

 

70,397

 

87,880

 

242,128

 

276,097

 

Gross profit

 

 

26,405

 

28,017

 

83,122

 

84,752

 

Operating expenses, excluding stock-based compensation

 

 

 

 

 

 

 

 

 

 

Operating expense

 

 

7,125

 

8,032

 

23,712

 

24,314

 

Selling, general and administrative

 

 

12,206

 

10,674

 

37,119

 

33,675

 

Adjusted OIBDA

 

 

7,074

 

9,311

 

22,291

 

26,763

 

Stock-based compensation expense (benefit)

 

 

770

 

597

 

(314)

 

1,510

 

Depreciation and amortization

 

 

4,472

 

5,076

 

14,305

 

15,038

 

Operating income (loss)

 

$

1,832

 

3,638

 

8,300

 

10,215

 

 

Revenue

 

Revenue decreased $19.1 million and $35.6 million for the three and nine months ended September 30, 2016, respectively, as compared to the corresponding periods in the prior year. The decrease was primarily driven by a 4% and 1% decrease in Bodybuilding store visitors for the three and nine months ended September 30, 2016, respectively, and a 5% and 6% reduction in the average order value for the three and nine months ended September 30, 2016, respectively, due to increased mobile sales and changes to promotional strategies. In addition, order volumes decreased from the prior year by approximately 15% and 7% for the three and nine months ended September 30, 2016, respectively, due in part to lower conversion rates, changes in consumer behavior from price sensitivity, and increased competition and competitive pricing strategies. Bodybuilding evaluates promotions and reprices products continuously in order to present a compelling and competitive offering to customers. These changes to prices and Bodybuilding's ability to source products cost effectively impact margins. Private label and exclusive offerings typically have higher margins and continue to make up a larger portion of total sales compared to prior periods.

 

Cost of sales

 

Cost of sales decreased $17.5 million and $34.0 million for the three and nine months ended September 30, 2016, respectively, as compared to the corresponding periods in the prior year. The decrease was a result of a decrease in product sales and Bodybuilding's ability to source products cost effectively, an increased sales mix to private label and exclusive offerings, as discussed above, a reduction in overall shipping costs and expired product recovery optimization.

 

Operating expenses

 

Operating expenses decreased $907 thousand and $602 thousand for the three and nine months ended September 30, 2016, respectively, as compared to the corresponding periods in the prior year. The decrease in operating expenses was primarily driven by reduced freight audit fees and trade filing fees, lower personnel costs and lower merchant processing fees.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses increased $1.5 million and $3.4 million for the three and nine months ended September 30, 2016, respectively, as compared to the corresponding periods in the prior year. The increase was driven by costs incurred in connection with the closure of a Bodybuilding fulfillment center in the fourth quarter of 2015 and a second fulfillment center in the second quarter of 2016, as well as additional product listing, display retargeting,

I-20


 

Table of Contents

television ad spend, legal and compliance fees primarily related to product compliance and consulting fees. In addition, selling, general and administrative costs for the nine months ended September 30, 2015 were driven down by legal claim settlements and a credit due to the release of the paid time-off accrual as a result of a corporate policy change.

 

Stock-based compensation expense (benefit)

 

Stock-based compensation expense increased $173 thousand and decreased $1.8 million for the three and nine months ended September 30, 2016, respectively, as compared to the corresponding periods in the prior year. The increase for the three month period was primarily due to new grants of Bodybuilding stock appreciation rights during 2016. The benefit for the nine months ended September 30, 2016 is primarily due to a decrease in the per unit valuation of outstanding stock appreciation rights at Bodybuilding.

 

Depreciation and amortization expense

 

Depreciation and amortization expense decreased $604 thousand and $733 thousand for the three and nine months ended September 30, 2016, respectively, as compared to the corresponding periods in the prior year. The decrease was due to fewer capital expenditures and certain assets becoming fully depreciated during the year.

 

Operating Income (Loss)

 

Operating income decreased $1.8 million and $1.9 million for the three and nine months ended September 30, 2016, respectively, as compared to the corresponding periods in the prior year due to the items discussed above.

 

Adjusted OIBDA

 

We define Adjusted OIBDA as revenue less cost of sales, operating expenses and selling, general and administrative expense (excluding stock compensation). Our chief operating decision maker and management team use this measure of performance in conjunction with other measures to evaluate our businesses and make decisions about allocating resources among our businesses. We believe this is an important indicator of the operational strength and performance of our businesses, including each business's ability to service debt and fund capital expenditures. In addition, this measure allows us to view operating results, perform analytical comparisons and benchmarking between businesses and identify strategies to improve performance. This measure of performance excludes such costs as depreciation and amortization, stock-based compensation, separately reported litigation settlements and restructuring and impairment charges that are included in the measurement of operating income pursuant to U.S. generally accepted accounting principles (“GAAP”). Accordingly, Adjusted OIBDA should be considered in addition to, but not as a substitute for operating income (loss), net earnings (loss), cash flow provided by operating activities and other measures of financial performance prepared in accordance with GAAP. See note 8 to the accompanying condensed combined financial statements for a reconciliation of Adjusted OIBDA to earnings (loss) before income taxes.

 

Adjusted OIBDA decreased $2.2 million and $4.5 million for the three and nine months ended September 30, 2016, respectively, as compared to the corresponding periods in the prior year. The decrease in Adjusted OIBDA was a result of a decrease in revenue as well as an increase in selling, general and administrative costs, partially offset by a decrease in cost of sales and operating expense, as discussed above.

 

I-21


 

Table of Contents

Other Income and Expense

 

Components of Other income (expense) are presented in the table below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

September 30, 

 

September 30, 

 

    

2016

    

2015

    

2016

    

2015

 

 

 

amounts in thousands

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

(259)

 

(321)

 

(838)

 

(910)

 

Related party interest expense

 

 

 —

 

(355)

 

 —

 

(1,129)

 

Share of earnings (losses) of Expedia, Inc.

 

 

39,812

 

45,048

 

18,112

 

125,147

 

Gains (losses) on dilution of investment in affiliate

 

 

1,097

 

4,162

 

(2,368)

 

4,782

 

Other, net

 

 

212

 

(102)

 

61

 

(467)

 

 

 

$

40,862

 

48,432

 

14,967

 

127,423

 

 

Interest expense

 

Interest expense decreased $62 thousand and $72 thousand for the three and nine months ended September 30, 2016, respectively, as compared to the corresponding periods in the prior year. The decrease was due to overall lower debt outstanding during the three and nine month periods ended September 30, 2016, as compared to the corresponding periods in the prior year.

 

Related party interest expense

 

Related party interest expense recognized during the three and nine months ended September 30, 2015 related to a note with Liberty Interactive that was contributed to equity in the fourth quarter of 2015.

 

Share of earnings (losses) of Expedia, Inc.

 

Share of losses of Expedia decreased $5.2 million and $107.0 million for the three and nine months ended September 30, 2016, respectively, as compared to the corresponding periods in the prior year. The change in our share of Expedia's earnings (losses) is primarily due to a gain recognized by Expedia on the sale of its ownership stake in eLong, Inc. ("eLong") as well as a one-time gain recognized in connection with the acquisition of additional interest in one of its equity method investments during the nine months ended September 30, 2015.

 

See note 3 in the accompanying notes to the condensed combined financial statements for additional discussion of the Company's investment in Expedia.

 

I-22


 

Table of Contents

The following is a discussion of Expedia's results of operations. In order to provide a better understanding of Expedia's operations, we have included a summarized presentation of Expedia's results of operations. Expedia is a separate publicly traded company and additional information about Expedia can be obtained through its website and public filings. The amounts included in the table below represent Expedia's results for the three and nine months ended September 30, 2016 and 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

 

 

amounts in millions

 

Revenue

 

$

2,581

 

1,938

 

6,681

 

4,974

 

Operating expenses, excluding stock-based compensation

 

 

(1,918)

 

(1,483)

 

(5,511)

 

(4,185)

 

Adjusted OIBDA

 

 

663

 

455

 

1,170

 

789

 

Depreciation and amortization

 

 

(201)

 

(119)

 

(596)

 

(324)

 

Stock-based compensation

 

 

(48)

 

(63)

 

(198)

 

(134)

 

Legal reserves, occupancy tax and other

 

 

(22)

 

115

 

(29)

 

106

 

Restructuring and related reorganization charges

 

 

(6)

 

(43)

 

(33)

 

(53)

 

Operating income (loss)

 

 

386

 

345

 

314

 

384

 

Other income (expense), net

 

 

(46)

 

(3)

 

(153)

 

548

 

Earnings (loss) before income taxes

 

 

340

 

342

 

161

 

932

 

Income tax benefit (expense)

 

 

(61)

 

(66)

 

15

 

(196)

 

Net earnings (loss)

 

$

279

 

276

 

176

 

736

 

 

Expedia had net earnings of approximately $279 million and $276 million for the three months ended September 30, 2016 and 2015, respectively, and net earnings of approximately $176 million and $736 million for the nine months ended September 30, 2016 and 2015, respectively.

 

Expedia's revenue increased $643 million and $1,707 million during the three and nine months ended September 30, 2016, respectively, as compared to the corresponding periods in the prior year. The increase was primarily driven by the impact of acquisitions, including HomeAway and Orbitz (which added 20% and 22% to the growth rate in total revenue for the three and nine months ended September 30, 2016, respectively), and growth in the Core online travel agencies segment, including growth at Brand Expedia and Hotels.com, as well as growth at trivago.

 

The increases in revenue (described above) for the three and nine months ended September 30, 2016 were offset by the impact of a $435 million and $1,326 million increase in operating expenses, respectively, an $82 million and $272 million increase in depreciation and amortization expense, respectively, a $15 million and $64 million increase in stock-based compensation and a $43 million and a $701 million increase in other expense. In addition, during the nine months ended September 30, 2015, Expedia recognized a pre-tax gain of $509 million on the sale of its ownership stake in eLong and a $77 million gain in connection with the acquisition of additional interest in one of its equity method investments.

 

The increase in operating expenses was primarily driven by an increase in overall costs as a result of acquisitions, increased personnel costs due to an accelerated pace of hiring in the lodging supply organization and additional headcount at HomeAway and Orbitz and higher net credit card processing costs related to growth of its merchant bookings and higher data center costs