Liberty Expedia Holdings, Inc.
Liberty Expedia Holdings, Inc. (Form: 10-Q, Received: 11/01/2017 16:23:11)

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, 2017

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 October 16, 2017 was:

 

 

 

 

 

 

 

 

Series A

 

Series B

 

Liberty Expedia Holdings, Inc. Common Stock

 

54,422,350

 

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-29

Item 3. Quantitative and Qualitative Disclosures about Market Risk  

I-41

Item 4. Controls and Procedures  

I-42

 

 

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)

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

 

2017

 

2016

 

 

 

amounts in millions

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,350

 

1,851

 

Accounts receivable, net

 

 

1,839

 

1,345

 

Short-term marketable securities

 

 

541

 

72

 

Prepaid expenses

 

 

279

 

201

 

Other current assets

 

 

95

 

66

 

Total current assets

 

 

6,104

 

3,535

 

Property and equipment, at cost

 

 

1,148

 

898

 

Accumulated depreciation

 

 

(239)

 

(54)

 

 

 

 

909

 

844

 

Intangible assets not subject to amortization:

 

 

 

 

 

 

Goodwill

 

 

17,405

 

16,617

 

Tradename

 

 

6,247

 

6,123

 

 

 

 

23,652

 

22,740

 

Intangible assets subject to amortization, net

 

 

5,414

 

6,363

 

Other assets, net

 

 

873

 

500

 

Total assets

 

$

36,952

 

33,982

 

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

   

 

Current liabilities:

 

 

 

 

 

 

Accounts payable, merchant

 

$

1,780

 

1,509

 

Accounts payable, other

 

 

835

 

589

 

Accrued liabilities

 

 

1,194

 

1,114

 

Deferred merchant bookings

 

 

3,644

 

2,590

 

Deferred revenue

 

 

319

 

248

 

Current portion of debt (note 6)

 

 

547

 

 7

 

Other current liabilities

 

 

21

 

36

 

Total current liabilities

 

 

8,340

 

6,093

 

Long-term debt and capital lease obligations, net, including $427 million and $0 measured at fair value (note 6)

 

 

4,354

 

3,788

 

Deferred income tax liabilities

 

 

3,098

 

3,477

 

Other long term liabilities

 

 

423

 

332

 

Total liabilities

 

 

16,215

 

13,690

 

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 54,422,406 and 54,114,882 at September 30, 2017 and December 31, 2016, respectively

 

 

 1

 

 1

 

Series B common stock, $.01 par value. Authorized 6,000,000 shares; issued and outstanding 2,830,174 and 2,847,971 at September 30, 2017 and December 31, 2016, respectively

 

 

 —

 

 —

 

Additional paid-in capital

 

 

361

 

423

 

Accumulated other comprehensive earnings (loss), net of taxes

 

 

72

 

(32)

 

Retained earnings

 

 

2,274

 

2,371

 

Total stockholders' equity

 

 

2,708

 

2,763

 

Non-redeemable noncontrolling interests in equity of subsidiaries

 

 

18,029

 

17,529

 

Total equity

 

 

20,737

 

20,292

 

Commitments and contingencies (note 8)

 

 

 

 

 

 

Total liabilities and equity

 

$

36,952

 

33,982

 

 

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

 

Nine months ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2017

    

2016

    

2017

    

2016

 

 

 

amounts in millions,

 

 

 

except per share amounts

 

Service revenue

 

$

2,963

 

 —

 

7,675

 

 —

 

Product revenue

 

 

66

 

96

 

230

 

325

 

Total revenue, net

 

 

3,029

 

96

 

7,905

 

325

 

Cost of service revenue

 

 

434

 

 —

 

1,248

 

 —

 

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

 

 

51

 

70

 

172

 

242

 

Gross profit

 

 

2,544

 

26

 

6,485

 

83

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

Operating expense, including stock-based compensation (note 7)

 

 

 4

 

 7

 

16

 

24

 

Selling and marketing, including stock-based compensation (note 7)

 

 

1,461

 

 6

 

4,176

 

19

 

Technology and content, including stock-based compensation (note 7)

 

 

242

 

 —

 

701

 

 —

 

General and administrative, including stock-based compensation (note 7)

 

 

99

 

 7

 

443

 

18

 

Depreciation and amortization

 

 

583

 

 4

 

1,669

 

14

 

Legal reserves, occupancy tax and other

 

 

(1)

 

 —

 

23

 

 —

 

Restructuring and related reorganization charges

 

 

 4

 

 —

 

16

 

 —

 

 

 

 

2,392

 

24

 

7,044

 

75

 

Operating income (loss)

 

 

152

 

 2

 

(559)

 

 8

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(29)

 

(1)

 

(88)

 

(1)

 

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

 

 

 —

 

40

 

 —

 

18

 

Other, net

 

 

(23)

 

 2

 

(71)

 

(2)

 

 

 

 

(52)

 

41

 

(159)

 

15

 

Earnings (loss) before income taxes

 

 

100

 

43

 

(718)

 

23

 

Income tax (expense) benefit

 

 

23

 

(14)

 

259

 

(3)

 

Net earnings (loss)

 

 

123

 

29

 

(459)

 

20

 

Less net earnings (loss) attributable to the noncontrolling interests

 

 

109

 

 —

 

(362)

 

 —

 

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

 

$

14

 

29

 

(97)

 

20

 

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

 

$

0.25

 

0.51

 

(1.70)

 

0.35

 

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

 

$

0.24

 

0.51

 

(1.70)

 

0.35

 

 

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

 

Nine months ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2017

    

2016

    

2017

    

2016

 

 

 

amounts in millions

 

Net earnings (loss)

 

$

123

 

29

 

(459)

 

20

 

Other comprehensive earnings (loss), net of taxes:

 

 

 

 

 

 

 

 

 

 

Currency translation adjustments and other

 

 

208

 

(1)

 

696

 

(2)

 

Unrealized holding gains (losses) arising during the period, net of taxes

 

 

21

 

 —

 

21

 

 —

 

Other comprehensive earnings (loss)

 

 

229

 

(1)

 

717

 

(2)

 

Comprehensive earnings (loss)

 

 

352

 

28

 

258

 

18

 

Less comprehensive earnings (loss) attributable to the noncontrolling interest

 

 

305

 

 —

 

251

 

 —

 

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

 

$

47

 

28

 

 7

 

18

 

 

See accompanying notes to condensed consolidated financial statements.

I-4


 

Table of Contents

LIBERTY EXPEDIA HOLDINGS, INC.

 

Condensed Consolidated Statements Of Cash Flows

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

September 30, 

 

 

    

2017

    

2016

 

 

 

amounts in millions

 

Cash flows from operating activities:

 

 

 

 

 

 

Net earnings (loss)

 

$

(459)

 

20

 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

1,669

 

14

 

Stock-based compensation

 

 

92

 

 —

 

Cash payments for stock-based compensation

 

 

 —

 

(2)

 

Share of (earnings) losses of Expedia

 

 

 —

 

(18)

 

Cash receipts from returns on investment in Expedia

 

 

 —

 

17

 

Realized (gain) loss on foreign currency forwards

 

 

(1)

 

 —

 

Deferred income tax expense (benefit)

 

 

(369)

 

(1)

 

Other noncash charges (credits), net

 

 

(110)

 

 3

 

Changes in operating assets and liabilities

 

 

 

 

 

 

Current and other assets

 

 

(525)

 

13

 

Payables and other liabilities

 

 

1,623

 

(6)

 

Net cash provided (used) by operating activities

 

 

1,920

 

40

 

Cash flows from investing activities:

 

 

 

 

 

 

Capital expended for property and equipment

 

 

(532)

 

(10)

 

Purchases of short-term marketable securities and other investments

 

 

(1,713)

 

 —

 

Sales of short-term marketable securities

 

 

921

 

 —

 

Acquisitions by subsidiary, net of cash acquired

 

 

(170)

 

 —

 

Other, net

 

 

 8

 

 —

 

Net cash provided (used) by investing activities

 

 

(1,486)

 

(10)

 

Cash flows from financing activities:

 

 

 

 

 

 

Borrowings of debt

 

 

1,624

 

308

 

Repayments of debt

 

 

(594)

 

(322)

 

Shares issued by subsidiary

 

 

180

 

 —

 

Shares repurchased by subsidiary

 

 

(154)

 

 —

 

Dividends paid by subsidiary

 

 

(110)

 

 —

 

Proceeds from exercise of equity awards and employee stock purchase plan

 

 

 5

 

 —

 

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

 

 

(9)

 

 —

 

Contribution from (distribution to) parent, net

 

 

 —

 

(18)

 

Other financing activities, net

 

 

(18)

 

 —

 

Net cash provided (used) by financing activities

 

 

924

 

(32)

 

Effect of foreign exchange rate changes on cash and cash equivalents

 

 

141

 

 —

 

Net increase (decrease) in cash and cash equivalents

 

 

1,499

 

(2)

 

Cash and cash equivalents at beginning of period

 

 

1,851

 

 2

 

Cash and cash equivalents at end of period

 

$

3,350

 

 —

 

 

See accompanying notes to condensed consolidated financial statements.

 

I-5


 

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LIBERTY EXPEDIA HOLDINGS, INC.

 

Condensed Consolidated Statement Of Equity

 

(unaudited)

 

Nine months ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2017

 

$

 —

 

 1

 

 —

 

423

 

(32)

 

2,371

 

17,529

 

20,292

 

Net earnings (loss)

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

(97)

 

(362)

 

(459)

 

Other comprehensive earnings (loss)

 

 

 —

 

 —

 

 —

 

 —

 

104

 

 —

 

613

 

717

 

Stock-based compensation

 

 

 —

 

 —

 

 —

 

17

 

 —

 

 —

 

78

 

95

 

Proceeds from exercise of Liberty Expedia  Holdings, Inc. equity instruments

 

 

 —

 

 —

 

 —

 

 5

 

 —

 

 —

 

 —

 

 5

 

Proceeds from exercise of Expedia equity instruments and employee stock purchase plan

 

 

 —

 

 —

 

 —

 

(66)

 

 —

 

 —

 

246

 

180

 

Minimum withholding taxes on net share settlements of stock-based compensation

 

 

 —

 

 —

 

 —

 

(9)

 

 —

 

 —

 

 —

 

(9)

 

Shares repurchased by subsidiary

 

 

 —

 

 —

 

 —

 

(11)

 

 —

 

 —

 

(143)

 

(154)

 

Dividends paid by subsidiary

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

(110)

 

(110)

 

Change in ownership of noncontrolling interest

 

 

 —

 

 —

 

 —

 

 1

 

 —

 

 —

 

11

 

12

 

Additional non-controlling interest in connection with business combination (note 3)

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

167

 

167

 

Other

 

 

 —

 

 —

 

 —

 

 1

 

 —

 

 —

 

 —

 

 1

 

Balance at September 30, 2017

 

$

 —

 

 1

 

 —

 

361

 

72

 

2,274

 

18,029

 

20,737

 

 

See accompanying notes to condensed consolidated financial statements.

 

I-6


 

Table of Contents

LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(1) Basis of Presentation

 

During November 2015, the board of directors of Liberty Interactive Corporation ("Liberty Interactive") 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 is comprised of, among other things, Liberty Interactive's former ownership interest in Expedia, Inc. ("Expedia"), as well as Liberty Interactive's former wholly-owned subsidiary Bodybuilding.com, LLC. Bodybuilding.com, LLC became a wholly owned subsidiary of Liberty Interactive in October 2015 when Liberty Interactive purchased the remaining ownership interest in Bodybuilding.com, LLC. In 2016, Bodybuilding.com, LLC underwent a corporate restructuring, which resulted in Bodybuilding.com, LLC becoming a wholly-owned subsidiary of Vitalize, LLC (“Vitalize”). Subsequent to the restructuring, Vitalize is a wholly-owned subsidiary of the Company.

 

The Expedia Holdings Split-Off was accomplished by the redemption by Liberty Interactive on a per share basis of (i) 0.4 of each outstanding share of Liberty Interactive’s Series A Liberty Ventures common stock as of 5:00 p.m., New York City time, on November 4, 2016 (such date and time, the “Redemption Date”) 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 as of the Redemption Date for 0.4 of a share of Expedia Holdings’ Series B common stock, with cash 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. Following the Expedia Holdings Split-Off, Expedia Holdings and Liberty Interactive operate as separate, publicly traded companies. The Expedia Holdings Split-Off was intended to be tax-free to Liberty Interactive and stockholders of Liberty Ventures. In February 2017, the Internal Revenue Service (the “IRS”) completed its review of the Expedia Holdings Split-Off and informed Liberty Interactive that it agreed with the nontaxable characterization of the transactions. Liberty Interactive 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 Vitalize and Expedia, an equity method affiliate until the date of the Expedia Holdings Split-Off. Although the combination of Vitalize and Expedia was reported as a combined company until the date of the Expedia Holdings Split-Off, these financial statements present all periods as consolidated by the Company. These financial statements refer to the consolidation of the aforementioned subsidiaries as "Expedia Holdings," "the Company," "us," "we" and "our" in the notes to the condensed consolidated financial statements. The Expedia Holdings Split-Off is accounted for at historical cost due to the pro rata nature of the distribution to 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, 2016, 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, 2016.

 

Expedia Holdings did not control the decision making process or business management practices of Expedia prior to the Expedia Holdings Split-Off. Accordingly, the Company historically relied on management of this affiliate to provide

I-7


 

Table of Contents

LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

it with accurate financial information prepared in accordance with GAAP that the Company used in the application of the equity method. In addition, prior to the consolidation of Expedia, Expedia Holdings relied 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’ consolidated financial statements.

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) revenue recognition, (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 Liberty Interactive

 

Following the Expedia Holdings Split-Off, Liberty Interactive 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 Liberty Interactive 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 Liberty Interactive 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 Liberty Interactive with respect to and resulting from the Expedia Holdings Split-Off. The tax sharing agreement between Liberty Interactive and Expedia Holdings provides 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 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 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. Under these various agreements, approximately $1 million and $3 million was reimbursable to Liberty Media for the three and nine months ended September 30, 2017, respectively.

 

Seasonality

 

Expedia generally experiences seasonal fluctuations in the demand for its travel products and services. For example, traditional leisure travel bookings are generally the highest in the first three quarters as travelers plan and book their spring, summer and winter holiday travel. The number of bookings typically decreases in the fourth quarter. Because revenue for most of Expedia’s travel products, including merchant and agency hotel, is recognized when the travel takes place rather than when it is booked, revenue typically lags bookings by several weeks or longer. 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 are typically realized in closer alignment to booking volumes, and the more stable nature of Expedia’s 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 Expedia aggressively markets 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

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

highest in the third quarter. The continued growth of Expedia’s international operations, advertising business or a change in its product mix, including the assimilation and growth of HomeAway, Inc. (“HomeAway”), may influence the typical trend of the seasonality in the future, and there may also be business or market driven dynamics that result in short-term impacts to revenue or profitability that differ from the typical seasonal trends. Expedia expects that as HomeAway continues its shift to more of a transaction-based business model for vacation rental listings its seasonal trends may be somewhat more pronounced than Expedia’s other traditional leisure businesses.

 

Acquisitions by Subsidiary

 

During the nine months ended September 30, 2017, Expedia completed several business combinations, including one that Expedia had initially invested in during 2015.  The preliminary aggregate purchase price allocation, including a minority investment prior to consolidation for the acquisitions are as follows: Goodwill of $126 million, net assets including redeemable non-controlling interest of $12 million, including $5 million of acquired cash, intangible assets with definite lives of $76 million and a deferred tax liability of $21 million. The redeemable non-controlling interest was recorded in other long-term liabilities in our condensed consolidated balance sheet. In addition, on July 27, 2017, Expedia expanded its partnership with Traveloka Holding Limited (“Traveloka”) to include deeper cooperation on hotel supply and made a $350 million investment in Traveloka, which is included in the Other assets, net line item of the condensed consolidated balance sheet as of September 30, 2017.

Recent Accounting Policies

In May 2014, the Financial Accounting Standards Board (the “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 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. The Company currently anticipates that it will adopt the new guidance effective the first quarter of 2018 using the modified retrospective method, however, the decision is not final and is subject to the completion of our subsidiaries’ analysis of the guidance. We are currently working with our subsidiaries to evaluate the quantitative effect that the new accounting guidance will have on the Company’s condensed consolidated financial statements and related disclosures.  Expedia has determined that the new guidance will not change its previous conclusions on net presentation, and it will impact its loyalty program accounting. Expedia will be required to re-value its liability using a relative fair value approach. Additionally, due to the new guidance’s definition of variable consideration, Expedia will be required to estimate and record certain variable payments earlier than currently recorded. Both changes are expected to result in a cumulative-effect adjustment to opening retained earnings, with an immaterial change to revenue on a go-forward basis. As the Company completes our overall assessment, we will identify and implement changes to our accounting policies and practices, business processes, and controls to support the new revenue recognition standard and disclosure requirements .  

 

In January 2016, the FASB issued new guidance related to accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The most significant impact for the Company is with respect to the requirement that equity investments with readily determinable fair values, must be carried at fair value with

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

changes in fair value recorded through net income. Today, the Company has an investment that is designated as available for sale and is recorded at fair value with changes in fair value recorded through other comprehensive income. Upon adoption in the first quarter of 2018, the Company will record a cumulative-effect adjustment to the consolidated balance sheet as of the beginning of the annual period of adoption related to unrealized gains/losses, net of tax, previously classified within other comprehensive income and will begin recording fair value changes within other, net on its consolidated statements of operations. Fair value changes could vary significantly period to period. In addition, the Company intends to elect to measure minority equity investments that do not have a readily determinable fair value at cost less impairment, adjusted by observable price changes as permitted by the new guidance with changes recorded within other, net on our consolidated statement of operations.

 

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

 

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.

 

In August and November 2016, the FASB issued 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. The new guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted. We plan to adopt this new guidance on January 1, 2018 retrospectively and currently anticipate the most significant impact will be to include in our cash and cash-equivalent balances in the consolidated statement of cash flow those amounts that are deemed to be restricted cash and restricted cash equivalents.

 

In October 2016, the FASB issued new guidance amending the accounting for income taxes associated with intra-entity transfers of assets other than inventory. This accounting update, which is part of the FASB's simplification initiative, is intended to reduce diversity in practice and the complexity of tax accounting, particularly for those transfers involving intellectual property. 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. The new standard is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted. We are in the process of evaluating the impact of adopting this new guidance on our consolidated financial statements.

 

In January 2017, the FASB issued new guidance clarifying the definition of a business for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new standard is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted for transactions that occurred before the issuance date or effective date of the standard if the transactions were not reported in financial statements that have been issued or made available for issuance. The standard must be applied

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

prospectively. Upon adoption, the standard will impact how the Company assesses acquisitions (or disposals) of assets or businesses.

 

In January 2017, the FASB issued new guidance simplifying subsequent goodwill measurement by eliminating Step 2 from the goodwill impairment test. Under this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The new standard is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019 with early adoption permitted for annual goodwill impairment tests performed after January 1, 2017. The standard must be applied prospectively. Upon adoption, the standard will impact how we assess goodwill for impairment. We are in the process of evaluating the impact of adopting this new guidance on our consolidated financial statements.

 

In August 2017, the FASB amended the existing accounting guidance for hedge accounting. The amendments require expanded hedge accounting for both non-financial and financial risk components and refine the measurement of hedge results to better reflect an entity's hedging strategies. The new guidance also amends the presentation and disclosure requirements and changes how entities assess hedge effectiveness. The new guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018 with early adoption permitted. The new guidance must be adopted using a modified retrospective transition 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.

 

(2) 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.

The Company issued 56,946,673 common shares, which is the aggregate number of shares of Series A and Series B common stock outstanding upon the completion of the Expedia Holdings Split-Off on November 4, 2016. The number of shares issued upon completion of the Expedia Holdings Split-Off was used to determine both basic and diluted earnings (loss) per share for the three and nine months ended September 30, 2016, as no Company equity awards were outstanding prior to the Expedia Holdings Split-Off.

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30, 

 

September 30, 

 

 

 

2017

 

2016

    

2017

    

2016

 

 

 

number of shares in millions

 

Basic WASO

 

57

 

NA

 

57

 

NA

 

Potentially dilutive shares (1)

 

 1

 

NA

 

 1

 

NA

 

Diluted WASO

 

58

 

NA

 

58

 

NA

 


(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 nine months ended September 30, 2017 are less than a million potential common shares because their inclusion would be anti-dilutive.

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

(3) Investment in Expedia

 

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. Expedia Holdings began consolidating Expedia as of November 4, 2016, the completion date of the Expedia Holdings Split-Off, as Expedia Holdings then controlled a majority of the voting interest in Expedia. As of September 30, 2017, Expedia Holdings beneficially owned approximately 15.5% of the outstanding Expedia common stock which represents a 51.9% voting interest in Expedia.

 

In conjunction with the application of acquisition accounting, we recorded a full step up in basis of Expedia which resulted in an approximate $2.0 billion gain during the fourth quarter of 2016. The gain on the transaction was excluded from taxable income. Additionally, the deferred income tax liability that had historically resulted from the difference between the book basis and tax basis of the Company’s ownership in Expedia shares was reversed as a result of the transaction. As control of Expedia was achieved without the exchange of consideration, in order to apply acquisition accounting, we used the sum of the fair value (including an applicable control premium) of our ownership interest previously held (approximately $3.0 billion) and the fair value of the initial noncontrolling interest ($16.5 billion), as determined based on the trading price of Expedia (Level 1) at the time control was obtained and the fair value of Expedia’s vested options (Level 2) on November 4, 2016. Following the Expedia Holdings Split-Off, Expedia is a consolidated subsidiary with an approximate 85% noncontrolling interest as of September 30, 2017.

 

The preliminary acquisition price allocation for Expedia is as follows (amounts in millions):

 

 

 

 

 

 

Fair value of Expedia equity interests

 

$

2,991

 

Noncontrolling interest

 

 

16,462

 

 

 

$

19,453

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,725

 

Receivables

 

 

1,487

 

Property, plant and equipment

 

 

780

 

Goodwill

 

 

16,922

 

Other nonamortizable intangible assets

 

 

6,152

 

Intangible assets subject to amortization

 

 

6,774

 

Other assets

 

 

815

 

Debt

 

 

(3,472)

 

Deferred merchant bookings

 

 

(2,810)

 

Deferred income tax liabilities, net

 

 

(3,602)

 

Other liabilities assumed

 

 

(5,318)

 

 

 

$

19,453

 

 

Goodwill is calculated as the excess of the consideration transferred over the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce, value associated with future customers, continued innovation and noncontractual relationships. Acquired Expedia nonamortizable intangible assets consist of trademarks and tradenames. Expedia amortizable intangible assets were comprised of customer relationships of $4,233 million with a weighted average

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

life of approximately 9 years, developed technology of $1,480 million with a weighted average life of approximately 5 years, supplier relationships of $980 million with a weighted average life of approximately 4 years and other intangible assets of $81 million with useful lives of 1 to 6 years. None of the acquired goodwill is expected to be deductible for tax purposes. The Company made measurement period adjustments to the fair value of certain assets acquired and liabilities assumed in the Expedia transaction during the second quarter of 2017, including an increase to the initial noncontrolling interest of $167 million and a corresponding increase to goodwill of $126 million, and decrease to deferred income tax liabilities, net of $41 million.  As of September 30, 2017, the valuation related to the acquisition of a controlling interest in Expedia is not final, and the acquisition price allocation is preliminary and subject to revision. The primary areas of the acquisition price allocation that are not yet finalized are related to certain intangible assets, liabilities and tax balances. 

 

Included in the Company’s net earnings (loss) for the three and nine months ended September 30, 2017 are acquisition accounting-related adjustments of $221 million and $747 million, respectively, primarily related to amortization on the fair value step-up of amortizable intangible assets acquired.

 

The following unaudited pro forma presentation of revenue and net earnings of Expedia Holdings for the three and nine months ended September 30, 2016, was prepared utilizing the historical financial statements of Expedia, giving effect to acquisition accounting related adjustments made at the time of acquisition, as if the transaction discussed above occurred on January 1, 2016, and utilizing 57 million common shares for the calculation of basic and diluted EPS, which is the aggregate number of shares of Series A and Series B common stock outstanding upon the completion of the Expedia Holdings Split-Off on November 4, 2016.

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30, 2016

 

September 30, 2016

 

 

 

amounts in millions

 

Revenue

 

$

2,667

 

6,858

 

Net earnings (loss)

 

$

69

 

(624)

 

Net earnings (loss) attributable to Expedia Holdings shareholders

 

$

11

 

(119)

 

Basic net earnings (loss) attributable to Expedia Holdings shareholders per common share

 

$

0.18

 

(2.10)

 

Diluted net earnings (loss) attributable to Expedia Holdings shareholders per common share

 

$

0.18

 

(2.10)

 

 

The pro forma results include adjustments primarily related to amortization of acquired intangible assets, amortization of the premiums related to the step-up to fair value of Expedia’s debt, the amortization of the step-up to fair value of Expedia’s deferred revenue and incremental stock-based compensation for the step-up to fair value of Expedia’s outstanding options and restricted stock units (“RSUs”) on the date of acquisition. The pro forma information is not representative of the Company’s future results of operations nor does it reflect what the Company’s results of operations would have been if the transaction had happened previously and the Company consolidated Expedia during the period presented.

 

Dividends declared by Expedia

 

During the nine months ended September 30, 2017, Expedia has declared a quarterly cash dividend each quarter, and has paid in cash an aggregate amount of $130 million to stockholders of record on each respective record date, of which the Company has received $20 million. In addition, in October 2017, Expedia declared a quarterly cash dividend of $0.30 per share of outstanding common stock payable on December 7, 2017 to stockholders of record as of the close of business on November 16, 2017.

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Expedia share repurchases

 

In February 2015, Expedia’s Executive Committee, acting on behalf of the Board of Directors, authorized a repurchase of up to 10 million shares of its common stock. There is no fixed termination date for the repurchases. As of September 30, 2017, 6.2 million shares remain authorized for repurchase under the 2015 authorization. During the nine months ended September 30, 2017, Expedia repurchased 1.0 million shares for a total cost of $139 million, excluding transaction costs.

 

 

 

(4) 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

December 31, 2016

 

 

    

 

 

    

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

    

$

892

    

159

    

733

    

464

    

164

    

300

  

Short-term marketable securities

 

$

541

    

 —

    

541

 

72

    

 —

    

72

 

Available for sale securities (1)

 

$

313

 

307

 

 6

 

16

 

 —

 

16

 

Debt

 

$

427

 

427

 

 —

 

 —

 

 —

 

 —

 


(1)

Available for sale 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 September 30, 2017, 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. Additionally, Expedia has approximately $ 2 million time deposits classified as restricted cash for certain traveler deposits which are included in Other current assets.

Corporate debt securities are investment grade, all of which are classified as available for sale. As of September 30, 2017, Expedia had approximately $37 million of short-term available for sale securities, classified in Other current assets, and approximately $6 million of long-term available for sale investments, classified in Other assets. As of December 31, 2016, Expedia had approximately $48 million of short-term available for sale securities, classified in Other current assets, and approximately $16 million of long-term available for sale investments, classified in Other assets. As of September 30,

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

2017 and December 31, 2016, the amortized cost basis of the investments approximated their fair value with both gross unrealized gains and gross unrealized losses of less than $1 million.

 As of September 30, 2017 and December 31, 2016 the gross unrealized gains related to available for sale securities were $34 million and zero, respectively. There were no unrealized holding losses related to available for sale securities for the periods presented.

 

 

 

(5) Goodwill and Other Intangible Assets

 

Goodwill

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Expedia

 

Corporate and other

 

Total

 

Balance as of January 1, 2017

 

$

16,560

 

57

 

16,617

 

Acquisitions (1)

 

 

126

 

 —

 

126

 

Foreign exchange translation

 

 

554

 

 —

 

554

 

Other (2)

 

 

108

 

 —

 

108

 

Balance as of September 30, 2017

 

$

17,348

 

57

 

17,405

 


(1)

As discussed in note 1, Expedia completed several acquisitions during the nine months ended September 30, 2017, which resulted in a $126 million increase to goodwill. 

(2)

As discussed in note 3, during the second quarter of 2017, the preliminary purchase price allocation for the Expedia acquisition was adjusted, resulting in a $126 million increase to goodwill.

Other Indefinite-lived Intangible Assets

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

 

Intangible Assets Subject to Amortization

 

Amortization expense for intangible assets with finite useful lives was $517 million and $3 million for the three months ended September 30, 2017 and 2016, respectively, and $1,476 million and $9 million for the nine months ended September 30, 2017 and 2016, respectively. Based on its amortizable intangible assets as of September 30, 2017, the Company expects that amortization expense will be as follows for the next five years (amounts in millions):

 

 

 

 

 

 

Remainder of 2017

    

$

489

 

2018

 

 

1,555

 

2019

 

 

1,143

 

2020

 

 

662

 

2021

 

 

482

 

Total

 

$

4,331

 

 

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(6) Long-Term Debt and Capital Lease Obligations

 

Outstanding debt and capital leases at September 30, 2017 and December 31, 2016 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding

 

Carrying value

 

 

 

Principal

 

September 30, 

    

December 31, 

 

 

 

September 30, 2017

 

2017

 

2016

 

 

 

amounts in millions

 

Expedia Holdings margin loan

 

$

 —

 

$

 —

 

350

 

Expedia Holdings 1% Exchangeable Senior Debentures due 2047

 

 

400

 

 

427

 

 —

 

Expedia 7.456% senior notes due 2018

 

 

500

 

 

525

 

544

 

Expedia 5.95% senior notes due 2020

 

 

750

 

 

820

 

837

 

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

 

 

768

 

 

812

 

727

 

Expedia 4.5% senior notes due 2024

 

 

500

 

 

521

 

523

 

Expedia 5.0% senior notes due 2026

 

 

750

 

 

785

 

787

 

Expedia 3.8% senior notes due 2028

 

 

1,000

 

 

990

 

 —

 

Vitalize secured notes

 

 

 8

 

 

 8

 

13

 

Vitalize revolving line of credit due 2020

 

 

11

 

 

11

 

11

 

Capital lease obligations

 

 

 2

 

 

 2

 

 3

 

Total debt and capital lease obligations

 

$

4,689

 

 

4,901

 

3,795

 

Less portion classified as current

 

 

 

 

 

(547)

 

(7)

 

Total long-term debt and capital lease obligations

 

 

 

 

$

4,354

 

3,788

 

 

1.0% Exchangeable Senior Debentures

 

On June 13, 2017, the Company closed a private offering of $400 million of 1.0% Exchangeable Senior Debentures due 2047 (the “debentures”).  Upon exchange of the debentures, the Company, at its option, may deliver registered shares of Expedia common stock (“EXPE”), cash or a combination of EXPE and cash. Initially, 5.1566 shares of EXPE are attributable to each $1,000 original principal amount of the debentures, representing an initial exchange price of approximately $193.93 for each share of EXPE. A total of approximately 2.1 million shares of Expedia common stock are attributable to the debentures. Interest is payable quarterly on March 31, June 30, September 30 and December 31 of each year, commencing September 30, 2017. The debentures may be redeemed by the Company, in whole or in part, on or after July 5, 2022. Holders of the debentures also have the right to require the Company to purchase their debentures on July 5, 2022.  The redemption and purchase price will generally equal 100% of the adjusted principal amount of the debentures plus accrued and unpaid interest, plus any final period distribution. Liberty has elected to account for the debentures using the fair value option. Accordingly, changes in the fair value of these instruments of less than $1 million and $33 million for the three and nine months ended September 30, 2017, respectively, are recognized as unrealized gains (losses) in the Other, net line item in the condensed consolidated statements of operations.

 

The net proceeds from the offering of the debentures were used to pay down outstanding borrowings of $350 million on the $400 million margin loan due 2018.

 

$400 Million Margin Loan due 2018

 

On November 1, 2016, LEXE Marginco, LLC (“SplitSPV”), a wholly-owned subsidiary of Expedia Holdings, entered into a margin loan agreement with an availability of $400 million with various lender parties. This margin loan had a term of two years and bore interest at a rate of LIBOR plus 1.60% and contained an undrawn commitment fee of 0.75% per

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Table of Contents

LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

annum. Interest on the term loan was payable on the last business day of each calendar quarter, beginning on December 31, 2016. The margin loan contained various affirmative and negative covenants that restricted the activities of the borrower. The loan agreement did not include any financial covenants. On November 2, 2016, Expedia Holdings drew $350 million under the margin loan, and on November 4, 2016, Expedia Holdings distributed approximately $299 million of the proceeds to Liberty Interactive as a dividend. In connection with the offering of the debentures in June 2017 (discussed above), the outstanding borrowings under the margin loan were repaid, the margin loan was terminated, and shares of EXPE held as collateral for the loan were released.

 

Expedia Outstanding Debt

 

Expedia 7.456% senior notes due 2018

Expedia has $500 million in registered senior unsecured notes outstanding at September 30, 2017 that are due in August 2018 and bear interest at 7.456% (the “Expedia 7.456% Notes”). Interest is payable semi-annually in February and August of each year. At any time Expedia may redeem the Expedia 7.456% Notes, in whole or in part, at a redemption price of 100% of the principal plus accrued interest, plus a “make-whole” premium. The premium associated with the Expedia 7.456% Notes was recorded in acquisition accounting as the difference between fair value and the outstanding principal amount at the date of acquisition. This premium is being amortized over the remaining period to maturity through interest expense using the effective interest rate method. As the Expedia 7.456% Notes are due within one year they have been classified as current as of September 30, 2017.

 

Expedia 5.95% senior notes due 2020

Expedia has $750 million in registered senior unsecured notes outstanding at September 30, 2017 that are due in August 2020 and bear interest at 5.95% (the “Expedia 5.95% Notes”). The Expedia 5.95% Notes were issued at 99.893% of par. Interest is payable semi-annually in February and August of each year. Expedia may redeem the Expedia 5.95% Notes, in whole or in part, at a redemption price of 100% of the principal plus accrued interest, plus a “make-whole” premium. The premium associated with the Expedia 5.95% Notes was recorded in acquisition accounting as the difference between fair value and the outstanding principal amount at the date of acquisition. This premium is being amortized over the remaining period to maturity through interest expense using the effective interest rate method.

 

Expedia 2.5% senior notes due 2022

Expedia has €650 million of registered senior unsecured notes outstanding at September 30, 2017 that are due in June 2022 and bear interest at 2.5% (the “Expedia 2.5% Notes”). The Expedia 2.5% Notes were issued at 99.525% of par. Interest is payable annually in arrears in June of each year. Expedia may redeem the Expedia 2.5% Notes at its option, in whole or in part, at any time or from time to time. If Expedia elects to redeem the Expedia 2.5% Notes prior to March 3, 2022, it may redeem them at a specified “make-whole” premium. If Expedia elects to redeem the Expedia 2.5% Notes on or after March 3, 2022, it may redeem them at a redemption price of 100% of the principal plus accrued and unpaid interest. Subject to certain limited exceptions, all payments of interest and principal for the Expedia 2.5% Notes will be made in Euros. The premium associated with the Expedia 2.5% Notes was recorded in acquisition accounting as the difference between fair value and the outstanding principal amount at the date of acquisition. This premium is being amortized over the remaining period to maturity through interest expense using the effective interest rate method.

 

Expedia 4.5% senior notes due 2024

Expedia has $500 million in registered senior unsecured notes outstanding at September 30, 2017 that are due in August 2024 and bear interest at 4.5% (the “Expedia 4.5% Notes”). The Expedia 4.5% Notes were issued at 99.444% of par. Interest is payable semi-annually in February and August of each year. Expedia may redeem the Expedia 4.5% Notes

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Table of Contents

LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

at its option at any time in whole or from time to time in part. If Expedia elects to redeem the Expedia 4.5% Notes prior to May 15, 2024, it may redeem them at a redemption price of 100% of the principal plus accrued interest, plus a “make-whole” premium. If Expedia elects to redeem the Expedia 4.5% Notes on or after May 15, 2024, it may redeem them at a redemption price of 100% of the principal plus accrued interest. The premium associated with the Expedia 4.5% Notes was recorded in acquisition accounting as the difference between fair value and the outstanding principal amount at the date of acquisition. This premium is being amortized over the remaining period to maturity through interest expense using the effective interest rate method.

 

Expedia 5.0% senior notes due 2026

Expedia has $750 million in registered senior unsecured notes outstanding at September 30, 2017 that are due in February 2026 and bear interest at 5.0% (the "Expedia 5.0% Notes"). The Expedia 5.0% Notes were issued at 99.535% of par. Interest is payable semi-annually in arrears in February and August of each year. Expedia may redeem the Expedia 5.0% Notes at its option at any time in whole or from time to time in part. If Expedia elects to redeem the Expedia 5.0% Notes prior to November 12, 2025, it may redeem them at a redemption price of 100% of the principal plus accrued interest, plus a “make-whole” premium. If Expedia elects to redeem the Expedia 5.0% Notes on or after November 12, 2025, it may redeem them at a redemption price of 100% of the principal plus accrued interest. The premium associated with the Expedia 5.0% Notes was recorded in acquisition accounting as the difference between fair value and the outstanding principal amount at the date of acquisition. This premium is being amortized over the remaining period to maturity through interest expense using the effective interest rate method.

Expedia 3.8% senior notes due 2028

Expedia has $1 billion in senior unsecured notes outstanding at September 30, 2017 that are due in February 2028 and bear interest at 3.8% (the "Expedia 3.8% Notes"). The Expedia 3.8% Notes were issued at 99.747% of par resulting in a discount, which is being amortized over their life. Interest is payable semi-annually in arrears in February and August of each year, beginning February 15, 2018. Expedia may redeem the Expedia 3.8% Notes at its option at any time in whole or from time to time in part. If Expedia elects to redeem the Expedia 3.8% Notes prior to November 15, 2027, it may redeem them at a redemption price of 100% of the principal plus accrued interest, plus a “make-whole” premium. If Expedia elects to redeem the Expedia 3.8% Notes on or after November 15, 2027, it may redeem them at a redemption price of 100% of the principal plus accrued interest. Expedia also entered into a registration rights agreement with respect to the Expedia 3.8% Notes, under which it agreed to use commercially reasonable best efforts to file a registration statement to permit the exchange of the Expedia 3.8% Notes for registered notes having the same financial terms and covenants as the Expedia 3.8% Notes, and cause such registration statement to become effective and complete the related exchange offer within 365 days of the issuance of the Expedia 3.8% Notes. If Expedia fails to satisfy certain of its obligations under the registration rights agreement, it will be required to pay additional interest of 0.25% per annum to the holders of the Expedia 3.8% Notes until such registrations right default is cured.

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

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Expedia Credit Facility

As of September 30, 2017, Expedia maintained a $1.5 billion unsecured revolving credit facility with a group of lenders, which is unconditionally guaranteed by certain domestic Expedia subsidiaries that are the same as under the Notes, and expires in February 2021. As of September 30, 2017, Expedia did not have any revolving credit facility borrowings outstanding. The facility bears interest based on Expedia’s credit ratings, with drawn amounts bearing interest at LIBOR plus 1.375% and the commitment fee on undrawn amounts at 0.175% as of September 30, 2017. The facility contains covenants including maximum leverage and minimum interest coverage ratios. The amount of stand-by letters of credit (“LOCs”) issued under the facility reduces the credit amount available. As of September 30, 2017, there were $16 million of outstanding stand-by LOCs issued under the facility.

In addition, one of Expedia’s international subsidiaries maintains a €50 million uncommitted credit facility, which is guaranteed by Expedia and may be terminated at any time by the lender. As of September 30, 2017, there were no borrowings outstanding under this facility.

 

Vitalize Secured Notes

 

As of September 30, 2017, Vitalize 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 2.50% on one of the variable rate notes and an interest rate at the CB Floating Rate, with a rate option balance that accrues interest at LIBOR plus 2.50%, on the other variable rate note (3.79% on the two variable rate notes at September 30, 2017). The maturity dates on the secured notes range from 2019 to 2022. The land and building purchased by Vitalize in March 2012 for its corporate headquarters are pledged as collateral under the terms of the master term loan agreement for a portion of the outstanding secured notes. As of September 30, 2017, the total outstanding balance of the secured notes is $8 million.

 

Vitalize Revolving Line of Credit

 

As of September 30, 2017, Vitalize has a revolving line of credit (the "Revolver") which is secured by Vitalize's inventory and accounts receivable. The maximum amount allowed under the Revolver is $50 million. Vitalize periodically borrows and repays amounts outstanding under the Revolver depending on its cash needs. The Revolver matures on January 20, 2020. The outstanding balance accrues interest at the CB Floating Rate less 1.25%, with a rate option balance that accrues interest at LIBOR plus 1.50%. As of September 30, 2017, the outstanding balance on the Revolver is approximately $11 million subject to an interest rate of 2.85%.

 

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LIBERTY EXPEDIA HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Fair Value of Debt

 

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

 

 

 

 

 

 

 

    

September 30, 

 

 

 

2017

 

Expedia 7.456% senior notes due 2018

 

$

524

 

Expedia 5.95% senior notes due 2020

 

$

822

 

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

 

$

820

 

Expedia 4.5% senior notes due 2024

 

$

531

 

Expedia 5.0% senior notes due 2026

 

$

819

 

Expedia 3.8% senior notes due 2028

 

$

992

 


(1)

Approximately 694 million Euro as of September 30, 2017.

 

The Company estimates the fair value of its margin loan, secured notes and Revolver based on the current rate offered to the Company for debt of the same remaining maturities (level 3). The Company believes that the carrying value of its margin loan, Revolver and secured notes approximated fair value at September 30, 2017 and December 31, 2016.

 

Covenant Compliance

 

As of September 30, 2017, Vitalize was not in compliance with one of its financial covenants related to its fixed charge coverage ratio on approximately $2 million of the Vitalize Secured Notes outstanding and the $11 million outstanding on the Vitalize Revolving Credit Line. In addition, Vitalize was not in compliance with its funded debt ratio covenant on $8 million of the Vitalize Secured Notes.  Subsequent to September 30, 2017, Vitalize obtained a waiver of default from the lending institution related to its Revolving Credit Line. The Vitalize Secured Notes were reclassified to current as of September 30, 2017.

 

Expedia Holdings and Expedia were in compliance with their debt covenants which consist of both financial and non-financial covenants as of September 30, 2017.

 

(7) Stock-Based Compensation

 

Included in the accompanying condensed consolidated statements of operations are the following amounts of stock-based compensation, a portion of which relates to Expedia for the three and nine months ended September 30, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2017

    

2016

    

2017

    

2016

 

 

 

amounts in millions

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

Operating expense

 

$

 3

 

 —

 

10

 

 —

 

Selling and marketing

 

 

13

 

 —

 

39

 

 —