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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
OR
o 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 001-33982
LIBERTY INTERACTIVE CORPORATION
(Exact name of Registrant as specified in its charter)
State of Delaware
(State or other jurisdiction of
incorporation or organization)
84-1288730
(I.R.S. Employer
Identification No.)
 
 
12300 Liberty Boulevard
Englewood, Colorado
(Address of principal executive offices)
80112
(Zip Code)
Registrant's telephone number, including area code: (720) 875-5300
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 x   No o
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 x    No o
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 x
Accelerated filer o
Non-accelerated filer o
(do not check if
smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the Registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. Yes o    No x
The number of outstanding shares of Liberty Interactive Corporation's common stock as of July 31, 2012 was:
Series A common stock
515,172,948

 
Series B common stock
28,969,735

 
 





LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited)
 
June 30,
2012
 
December 31,
2011
 
amounts in millions
Assets
 
 
 
Current assets:
 
 
 
    Cash and cash equivalents
$
790

 
847

    Trade and other receivables, net
664

 
1,054

    Inventory, net
1,096

 
1,071

    Other current assets
87

 
148

        Total current assets
2,637

 
3,120

Investments in available-for-sale securities and other cost investments (note 6)
1,384

 
1,168

Investments in affiliates, accounted for using the equity method, including $223 million pledged as collateral at June 30, 2012 (note 7)
1,213

 
1,135

Property and equipment, at cost
2,093

 
2,002

Accumulated depreciation
(925
)
 
(869
)
 
1,168

 
1,133

Intangible assets not subject to amortization (note 8):
 
 
 
    Goodwill
5,985

 
5,978

    Trademarks
2,525

 
2,518

 
8,510

 
8,496

Intangible assets subject to amortization, net (note 8)
2,045

 
2,209

Other assets, at cost, net of accumulated amortization
74

 
78

    Total assets
$
17,031

 
17,339

 
(continued)
 

See accompanying notes to condensed consolidated financial statements.
I-1



LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Continued)
(unaudited)
 
June 30,
2012
 
December 31, 2011
 
amounts in millions
Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
    Accounts payable
$
482

 
599

    Accrued liabilities
682

 
801

    Current portion of debt (note 9)
1,485

 
1,189

    Deferred income tax liabilities
836

 
851

    Other current liabilities
372

 
128

        Total current liabilities
3,857

 
3,568

Long-term debt, including $2,548 million and $2,443 million measured at fair value (note 9)
4,564

 
4,850

Deferred income tax liabilities
2,083

 
2,046

Other liabilities
218

 
248

    Total liabilities
10,722

 
10,712

Equity
 

 
 

Stockholders' equity (note 10):
 

 
 

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

 

Series A Liberty Interactive common stock, $.01 par value. Authorized 4,000,000,000 shares; issued and outstanding 515,546,332 shares at June 30, 2012 and 549,361,673 shares at December 31, 2011
5

 
6

Series B Liberty Interactive common stock, $.01 par value. Authorized 150,000,000 shares; issued and outstanding 28,969,735 shares at June 30, 2012 and 28,989,160 at December 31, 2011

 

    Additional paid-in capital
2,072

 
2,681

    Accumulated other comprehensive earnings, net of taxes
121

 
152

    Retained earnings
3,979

 
3,654

        Total stockholders' equity
6,177

 
6,493

Noncontrolling interests in equity of subsidiaries
132

 
134

    Total equity
6,309

 
6,627

Commitments and contingencies (note 11)


 


    Total liabilities and equity
$
17,031

 
17,339





See accompanying notes to condensed consolidated financial statements.
I-2




LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements Of Operations
(unaudited)

 
Three months ended
June 30,
 
Six months ended
June 30,
 
2012
 
2011
 
2012
 
2011
 
amounts in millions,
except per share amounts
Net retail sales
$
2,365

 
2,245

 
4,679

 
4,404

Cost of sales (exclusive of depreciation shown separately below)
1,488

 
1,398

 
2,954

 
2,775

    Gross Profit
877

 
847

 
1,725

 
1,629

Operating costs and expenses:
 
 
 
 
 
 
 
    Operating
199

 
209

 
407

 
412

 Selling, general and administrative, including stock-based compensation (note 3)
241

 
202

 
480

 
419

    Depreciation and amortization
147

 
148

 
290

 
297

 
587

 
559

 
1,177

 
1,128

Operating income
290

 
288

 
548

 
501

Other income (expense):
 
 
 
 
 
 
 
    Interest expense
(107
)
 
(107
)
 
(213
)
 
(221
)
    Share of earnings (losses) of affiliates, net (note 7)
35

 
37

 
46

 
57

Realized and unrealized gains (losses) on financial instruments, net (note 5)
(160
)
 
89

 
(178
)
 
30

Gains (losses) on dispositions, net (note 7)
288

 

 
288

 

Other, net
30

 
3

 
33

 
21

 
86

 
22

 
(24
)
 
(113
)
Earnings (loss) from continuing operations before income taxes
376

 
310

 
524

 
388

    Income tax (expense) benefit
(127
)
 
(115
)
 
(170
)
 
(130
)
Earnings (loss) from continuing operations
249

 
195

 
354

 
258

    Earnings (loss) from discontinued operations, net of taxes (note 2)

 
74

 

 
410

Net earnings (loss)
249

 
269

 
354

 
668

    Less net earnings (loss) attributable to the noncontrolling interests
15

 
12

 
29

 
22

Net earnings (loss) attributable to Liberty Interactive Corporation shareholders
$
234

 
257

 
325

 
646

Net earnings (loss) attributable to Liberty Interactive Corporation shareholders:
 
 
 
 
 
 
 
    Liberty Capital common stock
NA

 
8

 
NA

 
301

    Liberty Starz common stock
NA

 
67

 
NA

 
119

    Liberty Interactive common stock
$
234

 
182

 
325

 
226

 
$
234

 
257

 
325

 
646

 
 
 
 
 
 
 
 
 
(Continued)
 

See accompanying notes to condensed consolidated financial statements.
I-3




LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements Of Operations (Continued)
(unaudited)
 
Three months ended
June 30,
 
Six months ended
June 30,
 
2012
 
2011
 
2012
 
2011
 
amounts in millions,
except per share amounts
 
Basic net earnings (losses) from continuing operations attributable to Liberty Interactive Corporation shareholders per common share (note 4):
 
 
 
 
 
 
 
Series A and Series B Liberty Capital common stock
NA

 
NA

 
NA

 
0.12

Series A and Series B Liberty Starz common stock
NA

 
NA

 
NA

 

Series A and Series B Liberty Interactive common stock
$
0.42

 
0.30

 
0.58

 
0.38

Diluted net earnings (losses) from continuing operations attributable to Liberty Interactive Corporation shareholders per common share (note 4):
 
 
 
 
 
 
 
Series A and Series B Liberty Capital common stock
NA

 
NA

 
NA

 
0.12

Series A and Series B Liberty Starz common stock
NA

 
NA

 
NA

 

Series A and Series B Liberty Interactive common stock
$
0.42

 
0.30

 
0.57

 
0.37

Basic net earnings (losses) attributable to Liberty Interactive Corporation shareholders per common share (note 4):
 
 
 
 
 
 
 
Series A and Series B Liberty Capital common stock
NA

 
0.10

 
NA

 
3.72

Series A and Series B Liberty Starz common stock
NA

 
1.31

 
NA

 
2.33

Series A and Series B Liberty Interactive common stock
$
0.42

 
0.30

 
0.58

 
0.38

Diluted net earnings (losses) attributable to Liberty Interactive Corporation shareholders per common share (note 4):
 
 
 
 
 
 
 
Series A and Series B Liberty Capital common stock
NA

 
0.10

 
NA

 
3.63

Series A and Series B Liberty Starz common stock
NA

 
1.26

 
NA

 
2.25

Series A and Series B Liberty Interactive common stock
$
0.42

 
0.30

 
0.57

 
0.37



See accompanying notes to condensed consolidated financial statements.
I-4




LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements Of Comprehensive Earnings (Loss)
(unaudited)
 
Three months ended
June 30,
 
Six months ended
June 30,
 
2012
 
2011
 
2012
 
2011
 
amounts in millions
Net earnings (loss)
$
249

 
269

 
354

 
668

Other comprehensive earnings (loss), net of taxes:
 
 
 
 
 
 
 
    Foreign currency translation adjustments
(49
)
 
22

 
(36
)
 
70

 Share of other comprehensive earnings (losses) of equity affiliates
(3
)
 
1

 
(1
)
 
4

Other comprehensive earnings (loss) from discontinued operations

 
11

 

 
(18
)
        Other comprehensive earnings (loss)
(52
)
 
34

 
(37
)
 
56

Comprehensive earnings (loss)
197

 
303

 
317

 
724

Less comprehensive earnings (loss) attributable to the noncontrolling interests
19

 
15

 
23

 
22

Comprehensive earnings (loss) attributable to Liberty Interactive Corporation shareholders
$
178

 
288

 
294

 
702

Comprehensive earnings (loss) attributable to Liberty Interactive Corporation shareholders:
 
 
 
 
 
 
 
Liberty Capital common stock
NA

 
20

 
NA

 
289

Liberty Starz common stock
NA

 
66

 
NA

 
113

Liberty Interactive common stock
$
178

 
202

 
294

 
300

 
$
178

 
288

 
294

 
702


See accompanying notes to condensed consolidated financial statements.
I-5




LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements Of Cash Flows
(unaudited)
 
Six months ended
June 30,
 
2012
 
2011
 
amounts in millions
Cash flows from operating activities:
 
 
 
    Net earnings (loss)
$
354

 
668

    Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
        (Earnings) loss from discontinued operations

 
(410
)
        Depreciation and amortization
290

 
297

        Stock-based compensation
35

 
30

        Cash payments for stock-based compensation
(2
)
 
(2
)
        Noncash interest expense

 
4

        Share of (earnings) losses of affiliates, net
(46
)
 
(57
)
        Cash receipts from returns on equity investments
13

 
10

        Realized and unrealized (gains) losses on financial instruments, net
178

 
(30
)
        (Gains) losses on disposition of assets, net
(288
)
 

        Deferred income tax expense (benefit)
26

 
(44
)
        Other, net
(25
)
 
(62
)
        Changes in operating assets and liabilities
 
 
 
            Current and other assets
357

 
230

            Payables and other liabilities
(162
)
 
(302
)
                Net cash provided (used) by operating activities
730

 
332

Cash flows from investing activities:
 
 
 
Cash proceeds from dispositions
348

 

    Investments in and loans to cost and equity investees
(108
)
 
(7
)
    Capital expended for property and equipment
(151
)
 
(103
)
    Net sales (purchases) of short term investments
46

 
(48
)
    Other investing activities, net
(40
)
 
1

        Net cash provided (used) by investing activities
95

 
(157
)
Cash flows from financing activities:
 
 
 
    Borrowings of debt
666

 
192

    Repayments of debt
(873
)
 
(393
)
    Repurchases of Liberty Interactive common stock
(637
)
 

    Other financing activities, net
(26
)
 
(42
)
        Net cash provided (used) by financing activities
(870
)
 
(243
)
Effect of foreign currency exchange rates on cash
(12
)
 
11

Net cash provided (used) by discontinued operations:
 
 
 
    Cash provided (used) by operating activities

 
294

    Cash provided (used) by investing activities

 
144

    Cash provided (used) by financing activities

 
(146
)
    Change in available cash held by discontinued operations

 
(276
)
        Net cash provided (used) by discontinued operations

 
16

            Net increase (decrease) in cash and cash equivalents
(57
)
 
(41
)
            Cash and cash equivalents at beginning of period
847

 
1,353

            Cash and cash equivalents at end of period
$
790

 
1,312



See accompanying notes to condensed consolidated financial statements.
I-6




LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement Of Equity
(unaudited)
Six months ended June 30, 2012
 
Stockholders' Equity
 
 
 
 
 
 
Common stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liberty
Interactive
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive earnings
 
 
 
Noncontrolling interest in equity of subsidiaries
 
 
 
Preferred Stock
 
Series A
 
Series B
 
Additional paid-in capital
 
 
Retained Earnings
 
 
Total equity
 
amounts in millions
Balance at January 1, 2012
$

 
6

 

 
2,681

 
152

 
3,654

 
134

 
6,627

    Net earnings (loss)

 

 

 

 

 
325

 
29

 
354

    Other comprehensive earnings (loss)

 

 

 

 
(31
)
 

 
(6
)
 
(37
)
    Stock compensation

 

 

 
25

 

 

 

 
25

Issuance of common stock upon exercise of stock options

 

 

 
2

 

 

 

 
2

Series A Liberty Interactive stock repurchases

 
(1
)
 

 
(636
)
 

 

 

 
(637
)
    Distribution to noncontrolling interest

 

 

 

 

 

 
(29
)
 
(29
)
    Other

 

 

 

 

 

 
4

 
4

Balance at June 30, 2012
$

 
5

 

 
2,072

 
121

 
3,979

 
132

 
6,309


See accompanying notes to condensed consolidated financial statements.
I-7




LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(1)
Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of Liberty Interactive Corporation (formerly known as Liberty Media Corporation) and its controlled subsidiaries (collectively, "Liberty" or the "Company" unless the context otherwise requires). All significant intercompany accounts and transactions have been eliminated in consolidation.
Liberty, through its ownership of interests in subsidiaries and other companies, is primarily engaged in the video and on-line commerce industries in North America, Europe and Asia.
The accompanying (a) condensed consolidated balance sheet as of December 31, 2011, which has been derived from audited financial statements, and (b) the interim unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("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 consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in Liberty's Annual Report on Form 10-K for the year ended December 31, 2011.
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. Liberty considers (i) fair value measurement, (ii) accounting for income taxes, (iii) assessments of other-than-temporary declines in fair value of its investments and (iv) estimates of retail-related adjustments and allowances to be its most significant estimates.
Liberty holds investments that are accounted for using the equity method. Liberty does not control the decision making process or business management practices of these affiliates. Accordingly, Liberty relies on management of these affiliates to provide it with accurate financial information prepared in accordance with GAAP that Liberty uses in the application of the equity method. In addition, Liberty relies on audit reports that are provided by the affiliates' independent auditors on the financial statements of such affiliates. The Company is not aware, however, of any errors in or possible misstatements of the financial information provided by its equity affiliates that would have a material effect on Liberty's condensed consolidated financial statements.
(2)
Discontinued Operations
Prior to the Split-Off (as defined below), Liberty's equity was structured into three separate tracking stocks. A tracking stock is a type of common stock that the issuing company intends to reflect or "track" the economic performance of a particular business or "group," rather than the economic performance of the company as a whole. Liberty had three tracking stocks: Liberty Interactive common stock, Liberty Starz common stock and Liberty Capital common stock, which were intended to track and reflect the economic performance of the separate businesses, assets and liabilities attributed to each group. These attributed businesses, assets and liabilities were not separate legal entities and therefore could not own assets, issue securities or enter into legally binding agreements. Holders of the tracking stocks did not have a direct claim to the group's stock or assets and were not represented by separate boards of directors.
On September 23, 2011, Liberty completed the split-off of a wholly owned subsidiary, Liberty Media Corporation ("LMC") (formerly known as Liberty CapStarz, Inc. and prior thereto known as Liberty Splitco, Inc.) (the "Split-Off"). At the time of the Split-Off, LMC owned all the assets, businesses and liabilities attributed to our former Capital and Starz tracking stock groups immediately prior to the Split-Off. The Split-Off was effected by means of a redemption of all of the Liberty Capital common stock and Liberty Starz common stock of Liberty in exchange for the common stock of LMC. This transaction has been accounted for at historical cost due to the pro rata nature of the distribution.
Following the Split-Off, Liberty and LMC operate as separate, publicly traded companies, and neither has any stock ownership, beneficial or otherwise, in the other. In connection with the Split-Off, Liberty and LMC entered into certain agreements in order to govern certain of the ongoing relationships between the two companies after the Split-Off and to provide

I-8

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


for an orderly transition. These agreements include a Reorganization Agreement, a Services Agreement, a Facilities Sharing Agreement and a Tax Sharing Agreement.
The Tax Sharing Agreement provides for the allocation and indemnification of tax liabilities and benefits between Liberty and LMC and other agreements related to tax matters. Pursuant to the Services Agreement, LMC provides Liberty with certain general and administrative services including legal, tax, accounting, treasury and investor relations support. Liberty reimburses LMC for direct, out-of-pocket expenses incurred by LMC in providing these services and for Liberty's allocable portion of costs associated with any shared services or personnel based on an estimated percentage of time spent providing services to Liberty. Under the Facilities Sharing Agreement, Liberty shares office space with LMC and related amenities at LMC's corporate headquarters. Under these various agreements, approximately $5 million of allocated expenses were reimbursed from Liberty to LMC for the six months ended June 30, 2012.
The condensed consolidated financial statements and accompanying notes of Liberty have been prepared to reflect LMC as discontinued operations. Accordingly, the relevant financial statement balances and activities of the businesses, assets and liabilities owned by LMC at the time of Split-Off (for periods prior to the Split-Off) have been excluded from the respective captions in the accompanying condensed consolidated balance sheets, statements of operations, comprehensive earnings and cash flows in such condensed consolidated financial statements.
Certain combined financial information for LMC, which is included in earnings (loss) from discontinued operations, is as follows:
 
Three months ended
June 30, 2011
 
Six months ended
June 30, 2011
 
amounts in millions
Revenue
$
538

 
1,511

Earnings (loss) before income taxes
$
126

 
702

The per share impact from discontinued operations is as follows:
 
Three months ended
June 30, 2011
 
Six months ended
June 30, 2011
Basic earnings (losses) from discontinued operations attributable to Liberty shareholders per common share (note 4):
 
Series A and Series B Liberty Capital common stock
$
0.09

 
3.59

Series A and Series B Liberty Starz common stock
$
1.31

 
2.33

Series A and Series B Liberty Interactive common stock
$

 

Diluted earnings (losses) from discontinued operations attributable to Liberty shareholders per common share (note 4):
 
 
 
Series A and Series B Liberty Capital common stock
$
0.08

 
3.51

Series A and Series B Liberty Starz common stock
$
1.26

 
2.25

Series A and Series B Liberty Interactive common stock
$

 

The businesses, assets and liabilities that were attributed to our former Liberty Starz and Liberty Capital tracking stock groups immediately prior to the Split-Off were owned by LMC at the time of the Split-Off and have been included in discontinued operations. Certain assets and liabilities not owned by Liberty at the time of the Split-Off were attributed to the Liberty Interactive tracking stock group in prior periods and certain assets and liabilities not owned by LMC at the time of the Split-Off were attributed to the Liberty Capital tracking stock group in prior periods. This results in Liberty Interactive common stock participating in the discontinued operations for the amount attributable to Liberty Interactive common stock for those items in periods prior to the Split-Off. Additionally, certain prior period EPS calculations for Liberty Capital common stock include continuing operations due to the attribution of certain debt and equity instruments in those periods to the Liberty Capital group that remained with Liberty after the Split-Off as a result of the change in attribution of those assets and liabilities

I-9

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


prior to the Split-Off.
(3) Stock-Based Compensation
The Company has granted to certain of its directors, employees and employees of its subsidiaries stock appreciation rights ("SARs"), restricted stock grants and options to purchase shares of Liberty common stock (collectively, "Awards"). The Company measures the cost of employee services received in exchange for an equity classified Award (such as stock options and restricted stock grants) based on the grant-date fair value of the Award, and recognizes that cost over the period during which the employee is required to provide service (usually the vesting period of the Award). The Company measures the cost of employee services received in exchange for a liability classified Award (such as stock appreciation rights that will be settled in cash) based on the current fair value of the Award, and remeasures the fair value of the Award at each reporting date.
Included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations are the following amounts of stock-based compensation (amounts in millions):
Three months ended:
 
June 30, 2012
$
18

June 30, 2011
$
14

Six months ended:
 

June 30, 2012
$
35

June 30, 2011
$
30

During the six months ended June 30, 2012, Liberty granted, primarily to QVC employees, 2.7 million options to purchase shares of Series A Liberty Interactive common stock. Such options had a weighted average grant-date fair value of $8.38 per share and vest semi-annually over the 4 year vesting period.
The Company has calculated the grant-date fair value for all of its equity classified Awards and any subsequent remeasurement of its liability classified Awards using the Black-Scholes Model. The Company estimates the expected term of the Awards based on historical exercise and forfeiture data. The volatility used in the calculation for Awards is based on the historical volatility of Liberty's stock and the implied volatility of publicly traded Liberty options. The Company uses a zero dividend rate and the risk-free rate for Treasury Bonds with a term similar to that of the subject options.
Liberty—Outstanding Awards
The following table presents the number and weighted average exercise price ("WAEP") of the Awards to purchase Liberty Interactive common stock granted to certain officers, employees and directors of the Company.
 
Liberty Interactive
 
Series A (000's)
 
WAEP
 
Series B (000's)
 
WAEP
Outstanding at January 1, 2012
45,223

 
$
12.06

 
450

 
$
19.74

Granted
2,717

 
$
18.63

 

 
$

Exercised
(2,412
)
 
$
6.98

 

 
$

Forfeited/Cancelled/Exchanged
(243
)
 
$
16.39

 

 
$

Outstanding at June 30, 2012
45,285

 
$
12.70

 
450

 
$
19.74

Exercisable at June 30, 2012
16,338

 
$
12.80

 
450

 
$
19.74


I-10

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


The following table provides additional information about outstanding Awards to purchase Liberty Interactive common stock at June 30, 2012.
 
No. of
outstanding
Awards (000's)
 
WAEP of
outstanding
Awards
 
Weighted
average
remaining
life
 
Aggregate
intrinsic
value
(000's)
 
No. of
exercisable
Awards
(000's)
 
WAEP of
exercisable
Awards
 
Weighted
average
remaining
life
 
Aggregate
intrinsic
value
(000's)
Series A Liberty Interactive
45,285

 
$
12.70

 
5.1 years
 
$
248,831

 
16,338

 
$
12.80

 
2.7 years
 
$
97,816

Series B Liberty Interactive
450

 
$
19.74

 
2.9 years
 
$

 
450

 
$
19.74

 
2.9 years
 
$

As of June 30, 2012, the total unrecognized compensation cost related to unvested Liberty Interactive equity Awards was approximately $107 million. Such amount will be recognized in the Company's consolidated statements of operations over a weighted average period of approximately 2.4 years.
(4)
Earnings (Loss) 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 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.
Series A and Series B Liberty Capital Common Stock
For the three and six months ended June 30, 2011, the EPS calculation for basic EPS is based on 81 million weighted average outstanding shares and for diluted EPS 83 million weighted average shares outstanding. As discussed in more detail in note 2, Liberty Capital common stock was redeemed for shares in a subsidiary in the third quarter of 2011. Therefore, there is no Liberty Capital common stock outstanding at June 30, 2012.
Series A and Series B Liberty Starz Common Stock
For the three and six months ended June 30, 2011, the EPS calculation for basic EPS is based on 51 million weighted average outstanding shares and for diluted EPS 53 million weighted average shares outstanding. As discussed in more detail in note 2, Liberty Starz common stock was redeemed for shares in a subsidiary in the third quarter of 2011. Therefore, there is no Liberty Starz common stock outstanding at June 30, 2012.
Series A and Series B Liberty Interactive Common Stock
The basic and diluted EPS calculation is based on the following weighted average outstanding shares. Excluded from diluted EPS for the three months ended June 30, 2012 are 7 million potential common shares because their inclusion would be antidilutive.
 
Liberty Interactive Common Stock
 
Three months ended
June 30, 2012
 
Six months ended
June 30, 2012
 
Three months ended
June 30, 2011
 
Six months ended
June 30, 2011
 
numbers of shares in millions
Basic EPS
553

 
563

 
599

 
599

Stock options
9

 
9

 
8

 
7

Diluted EPS
562

 
572

 
607

 
606


I-11

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


(5)
Assets and Liabilities Measured at Fair Value
For assets and liabilities required to be reported at fair value, GAAP provides a hierarchy that prioritizes inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted market prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs, other than quoted market prices included within Level 1, that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability.
The Company's assets and liabilities measured at fair value are as follows:
 
 
 
Fair Value Measurements at June 30, 2012
Description
Total
 
Quoted prices
in active markets
for identical assets
(Level 1)
 
Significant other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
 
 
amounts in millions
Cash equivalents
$
581

 
581

 

 

Available-for-sale securities
$
1,380

 
1,380

 

 

Financial instruments, net
$
208

 
165

 
43

 

Debt
$
2,548

 

 
2,548

 

The majority of the Company's Level 2 financial assets and liabilities are debt instruments with quoted market prices that are not considered to be traded on "active markets," as defined in GAAP. Accordingly, the financial instruments are reported in the foregoing table as Level 2 fair value.
Realized and Unrealized Gains (Losses) on Financial Instruments
Realized and unrealized gains (losses) on financial instruments are comprised of changes in the fair value of the following:
 
Three months ended
June 30,
 
Six months ended
June 30,
 
2012
 
2011
 
2012
 
2011
 
amounts in millions
Non-strategic Securities
$
41

 
52

 
181

 
149

Exchangeable senior debentures
(35
)
 
22

 
(217
)
 
(165
)
Other derivatives
(166
)
 
15

 
(142
)
 
46

 
$
(160
)
 
89

 
(178
)
 
30


I-12

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


(6)
Investments in Available-for-Sale Securities and Other Cost Investments
All marketable equity and debt securities held by the Company are classified as available-for-sale ("AFS") and are carried at fair value based on quoted market prices. GAAP permits entities to choose to measure many financial instruments, such as AFS securities, and certain other items at fair value and to recognize the changes in fair value of such instruments in the entity's statement of operations (the "fair value option"). In prior years, Liberty entered into economic hedges for certain of its non-strategic AFS securities (although such instruments were not accounted for as fair value hedges by the Company). Changes in the fair value of these economic hedges were reflected in Liberty's statement of operations as unrealized gains (losses). In order to better match the changes in fair value of the subject AFS securities and the changes in fair value of the corresponding economic hedges in the Company's financial statements, Liberty elected the fair value option for those of its AFS securities which it considers to be non-strategic ("Non-strategic Securities"). Accordingly, changes in the fair value of Non-strategic Securities, as determined by quoted market prices, are reported in realized and unrealized gains (losses) on financial instruments in the accompanying condensed consolidated statements of operations.
Investments in AFS securities, the entirety of which are considered Non-strategic Securities, and other cost investments are summarized as follows:
 
June 30,
2012
 
December 31, 2011
 
amounts in millions
Time Warner Inc.
$
839

 
787

Time Warner Cable Inc.
449

 
348

Other
96

 
33

 
$
1,384

 
1,168

(7)
Investments in Affiliates Accounted for Using the Equity Method
Liberty has various investments accounted for using the equity method. The following table includes Liberty's carrying amount and percentage ownership of the more significant investments in affiliates at June 30, 2012 and the carrying amount at December 31, 2011:

 
June 30, 2012
 
December 31, 2011
 
Percentage
ownership
 
Market
value (level 1)
 
Carrying
amount
 
Carrying
amount
 
 
 
dollars in millions
Expedia, Inc. (a)
26
%
 
$
1,664

 
$
643

 
621

TripAdvisor, Inc. (b)
18
%
 
1,169

 
189

 
184

HSN, Inc.
34
%
 
808

 
233

 
217

Other
various

 
N/A

 
148

 
113

 
 

 
 

 
$
1,213

 
1,135

(a)
Liberty entered into a forward sales contract on 12 million shares of Expedia common stock in March 2012 at a per share forward price of $34.316. The forward contract may be settled, in October 2012, in stock or cash, at the election of Liberty. Liberty delivered 12 million shares of Expedia as collateral under the forward contract. The carrying value of the shares, held as collateral by the counterparty, was $223 million and the fair value was $577 million as of June 30, 2012.
(b)
In May 2012, Liberty sold approximately 8.5 million shares of TripAdvisor, Inc. for cash proceeds of $338 million. The sale resulted in a $288 million gain recorded in gain (losses) on dispositions, net in the statement of operations.

I-13

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


The following table presents Liberty's share of earnings (losses) of affiliates:
 
Three months ended
June 30,
 
Six months ended
June 30,
 
2012
 
2011
 
2012
 
2011
 
amounts in millions
Expedia (1)
$
26

 
35

 
24

 
48

TripAdvisor, Inc. (1)
12

 

 
23

 

HSN, Inc.
9

 
7

 
24

 
20

Other
(12
)
 
(5
)
 
(25
)
 
(11
)
 
$
35

 
37

 
46

 
57

(1)
During the fourth quarter of 2011 Expedia, Inc. completed the pro-rata split-off of TripAdvisor, Inc. ("TripAdvisor"), its wholly owned subsidiary. As of the TripAdvisor split-off date, the Company had a 26% economic ownership interest in each of Expedia, Inc. and TripAdvisor and, through ownership of class B common stock with 10 votes per share, had an approximate 58% voting interest in each respective company. Through a stockholders agreement, Liberty has given Barry Diller, Chairman and Senior Executive Officer of both companies, the right to vote all of the common stock owned by Liberty. Through a governance agreement, Liberty has the right to nominate up to 20% of the board members for each entity and currently two members on each company's 10 member board were nominated by Liberty. Because of Liberty's board representation, it was determined that the Company has significant influence over each respective company and the Company continues to apply the equity method of accounting to its interests in TripAdvisor. As discussed above, in May 2012 Liberty sold shares of TripAdvisor which decreased Liberty's ownership percentage below 20%. As Liberty's board representation on the TripAdvisor board continues to be 20%, subsequent to the sale of securities discussed above, it was determined that significant influence still exists and the application of the equity method of accounting is appropriate.
Expedia
Summarized unaudited financial information for Expedia is as follows:
Expedia Consolidated Balance Sheets
 
June 30,
2012
 
December 31, 2011
 
amounts in millions
Current assets
$
3,087

 
2,274

Property and equipment, net
377

 
320

Goodwill
3,001

 
2,877

Intangible assets
836

 
744

Other assets
204

 
290

Total assets
$
7,505

 
6,505

Current liabilities
$
3,450

 
2,553

Deferred income taxes
337

 
280

Long-term debt
1,249

 
1,249

Other liabilities
127

 
118

Noncontrolling interest
107

 
105

Equity
2,235

 
2,200

Total liabilities and equity
$
7,505

 
6,505



I-14

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


Expedia Consolidated Statements of Operations
 
Three months ended
June 30,
 
Six months ended
June 30,
 
2012
 
2011
 
2012
 
2011
 
amounts in millions
Revenue
$
1,040

 
913

 
1,856

 
$
1,641

Cost of revenue
(230
)
 
(195
)
 
(430
)
 
(371
)
Gross profit
810

 
718

 
1,426

 
1,270

Selling, general and administrative expenses
(644
)
 
(566
)
 
(1,208
)
 
(1,075
)
Amortization
(9
)
 
(6
)
 
(12
)
 
(12
)
Restructuring charges and other
(3
)
 
(2
)
 
(3
)
 
(4
)
Operating income (loss)
154

 
144

 
203

 
179

Interest expense
(22
)
 
(22
)
 
(43
)
 
(45
)
Other income (expense), net
3

 
(1
)
 
2

 
(4
)
Income tax (expense) benefit
(29
)
 
(33
)
 
(34
)
 
(36
)
Income (loss) from continuing operations
106

 
88

 
128

 
94

Earnings (loss) from discontinued operations

 
53

 
(24
)
 
99

Net earnings (loss)
106

 
141

 
104

 
193

Less net earnings (loss) attributable to noncontrolling interests
(1
)
 
(1
)
 
(2
)
 
(1
)
Net earnings (loss) attributable to Expedia, Inc. shareholders
$
105

 
140

 
102

 
$
192

(8) Intangible Assets
Goodwill
Changes in the carrying amount of goodwill are as follows:
 
QVC
 
E-commerce
 
Total
 
amounts in millions
Balance at January 1, 2012
$
5,354

 
624

 
5,978

Foreign currency translation adjustments
(26
)
 

 
(26
)
Acquisitions
16

 
17

 
33

Balance at June 30, 2012
$
5,344

 
641

 
5,985

Intangible Assets Subject to Amortization
Amortization expense for intangible assets with finite useful lives was $217 million and $221 million for the six month periods ended June 30, 2012 and 2011, respectively. Based on its amortizable intangible assets as of June 30, 2012, Liberty expects that amortization expense will be as follows for the next five years (amounts in millions):
Remainder of 2012
$
233

2013
$
436

2014
$
408

2015
$
366

2016
$
333


I-15

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


(9) Long-Term Debt
Debt is summarized as follows:
 
 
Outstanding principal June 30, 2012
 
Carrying value
 
 
June 30, 2012
 
December 31, 2011
 
 
amounts in millions
Senior notes and debentures
 
 
 
 
 
 
5.7% Senior Notes due 2013
309

 
308

 
308

 
8.5% Senior Debentures due 2029
287

 
285

 
285

 
8.25% Senior Debentures due 2030
504

 
501

 
501

Exchangeable Senior Debentures
 
 
 
 
 
 
3.125% Exchangeable Senior Debentures due 2023
1,138

 
1,395

 
1,275

 
4% Exchangeable Senior Debentures due 2029
469

 
275

 
258

 
3.75% Exchangeable Senior Debentures due 2030
460

 
254

 
235

 
3.5% Exchangeable Senior Debentures due 2031
373

 
263

 
341

 
3.25% Exchangeable Senior Debentures due 2031
414

 
361

 
334

QVC 7.125% Senior Secured Notes due 2017
500

 
500

 
500

QVC 7.5% Senior Secured Notes due 2019
1,000

 
987

 
986

QVC 7.375% Senior Secured Notes due 2020
500

 
500

 
500

QVC Bank Credit Facilities
302

 
302

 
434

Other subsidiary debt
118

 
118

 
82

 
Total consolidated Liberty debt
$
6,374

 
6,049

 
6,039

 
Less current maturities
 

 
(1,485
)
 
(1,189
)
 
Total long-term debt
 

 
$
4,564

 
4,850

QVC Bank Credit Facilities
The QVC Bank Credit Facilities provide for a $2 billion revolving credit facility, with a $250 million sub-limit for standby letters of credit. Availability under the QVC Bank Credit Facilities at June 30, 2012 was $1.7 billion. The $302 million outstanding principal matures in September 2015. As discussed in note 10, Liberty shareholders will decide on a recapitalization of Liberty common stock into two tracking stocks that, if approved, would require additional funds to be drawn on the QVC Bank Credit Facility in the third quarter of 2012. Those funds would be attributed to the Liberty Ventures tracking stock group.
QVC was in compliance with all of its debt covenants at June 30, 2012.
In July 2012, QVC issued $500 million principal amount of 5.125% Senior Secured Notes due 2022 at par. The net proceeds from the issuance of these instruments were used to reduce the outstanding principal under the QVC Bank Credit Facilities and for general corporate purposes.
QVC Interest Rate Swap Arrangements
During the third quarter of 2009, QVC entered into seven forward interest rate swap arrangements with an aggregate notional amount of $1.8 billion. Such arrangements provide for payments that began in March 2011 through March 2013. QVC will make fixed payments at rates ranging from 2.98% to 3.67% and receive variable payments at 3 month LIBOR (0.47% at June 30, 2012). Additionally, during 2011, QVC entered into seven additional swap arrangements with an aggregate notional amount of $1.4 billion requiring QVC to make variable payments, that began in June 2011 through March 2013, at 3 month LIBOR (0.47% at June 30, 2012) and receive fixed payments, that began in June 2011 through March 2013, ranging from 0.57% to 0.95%. These swap arrangements do not qualify as cash flow hedges under GAAP. Accordingly, changes in the fair value of the swaps are reflected in realized and unrealized gains or losses on financial instruments in the accompanying

I-16

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


condensed consolidated statements of operations.
Other Subsidiary Debt
Other subsidiary debt at June 30, 2012 is comprised of capitalized satellite transponder lease obligations and bank debt of certain subsidiaries.
Fair Value of Debt
Liberty estimates the fair value of its debt based on the quoted market prices for the same or similar issues or on the current rate offered to Liberty for debt of the same remaining maturities (level 2). The fair value of Liberty's publicly traded debt securities that are not reported at fair value in the accompanying condensed consolidated balance sheet at June 30, 2012 is as follows (amounts in millions):
Senior notes
$
317

Senior debentures
$
816

QVC senior secured notes
$
2,201

Due to the variable rate nature, Liberty believes that the carrying amount of its subsidiary debt not discussed above approximated fair value at June 30, 2012.
(10) Stockholders' Equity
As of June 30, 2012, Liberty reserved for issuance upon exercise of outstanding stock options approximately 45.3 million shares of Series A Liberty Interactive common stock and 450,000 shares of Series B Liberty Interactive common stock.
In addition to the Series A and Series B Liberty Interactive common stock there are 4 billion shares of Series C Liberty Interactive common stock authorized for issuance. As of June 30, 2012, no shares of any Series C Liberty Interactive common stock were issued or outstanding.
Liberty Interactive's board of directors has approved the recapitalization of its common stock through the creation of tracking stocks to be designated the Liberty Ventures common stock and Liberty Interactive common stock. In the recapitalization, each holder of current Liberty Interactive common stock will receive one share of the corresponding series of Liberty Interactive common stock and 0.05 of a share of the corresponding series of Liberty Ventures common stock, with cash issued in lieu of fractional shares of Liberty Ventures common stock. In addition, holders of current Liberty Interactive common stock will also receive 1/3 of a subscription right to purchase one share of Series A Liberty Ventures common stock for each share of Liberty Ventures common stock they receive in the recapitalization. The proposed recapitalization is intended to be tax-free to stockholders and its completion will be subject to various conditions, including the affirmative vote of at least a majority of the aggregate voting power of the shares of Liberty Interactive common stock outstanding and entitled to vote at the annual stockholder meeting in the third quarter of 2012, voting together as a single class, to approve a proposal to amend and restate Liberty's certificate of incorporation in order to effect the recapitalization. Subject to the satisfaction or, where applicable, waiver, of such conditions, the recapitalization is currently expected to occur in the third quarter of 2012.
(11) Commitments and Contingencies
Litigation
Liberty has contingent liabilities related to legal and tax proceedings and other matters arising in the ordinary course of business. Although it is reasonably possible Liberty 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 consolidated financial statements.

I-17

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


(12) Information About Liberty's Operating Segments
Liberty, through its ownership interests in subsidiaries and other companies, is primarily engaged in the video and on-line commerce industries. Liberty identifies its reportable segments as (A) those consolidated subsidiaries that represent 10% or more of its consolidated annual revenue, annual pre-tax earnings or total assets and (B) those equity method affiliates whose share of earnings represent 10% or more of Liberty's annual pre-tax earnings. The segment presentation for prior periods has been conformed to the current period segment presentation.
Liberty evaluates performance and makes decisions about allocating resources to its operating segments based on financial measures such as revenue, Adjusted OIBDA, gross margin, average sales price per unit, number of units shipped and revenue or sales per customer equivalent. In addition, Liberty reviews nonfinancial measures such as unique website visitors, conversion rates and active customers, as appropriate.
Liberty defines Adjusted OIBDA as revenue less cost of sales, operating expenses, and selling, general and administrative expenses (excluding stock-based compensation). Liberty 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, net income, cash flow provided by operating activities and other measures of financial performance prepared in accordance with GAAP. Liberty generally accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current prices.
For the six months ended June 30, 2012, Liberty has identified the following consolidated subsidiaries and equity method affiliates as its reportable segments:
QVC—consolidated subsidiary that markets and sells a wide variety of consumer products in the United States and several foreign countries, primarily by means of its televised shopping programs and via the Internet through its domestic and international websites and mobile applications.
Expedia, Inc.—an equity method affiliate in which we hold a 26% ownership interest (see note 7) that operates an easily accessible global travel marketplace, allowing customers to research, plan and book travel products and services from travel suppliers and allowing these travel suppliers to efficiently reach and provide their products and services to Expedia customers.
Additionally, for presentation purposes, Liberty is providing financial information of the E-commerce businesses on an aggregated basis. The consolidated businesses do not contribute significantly to the overall operations of Liberty on an individual basis; however, Liberty believes that on an aggregated basis they provide relevant information for users of these financial statements. While these businesses may not meet the aggregation criteria under relevant accounting literature Liberty believes the information is relevant and helpful for a more complete understanding of the consolidated results.
E-commerce—the aggregation of certain consolidated subsidiaries that market and sell a wide variety of consumer products via the Internet. Categories of consumer products include perishable and personal gift offerings (Provide Commerce, Inc.), active lifestyle gear and clothing (Backcountry.com, Inc.), fitness and health goods (Bodybuilding.com, LLC) and celebration offerings from invitations to costumes (Celebrate Interactive Holdings, Inc.).
Liberty's 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 consolidated subsidiaries are the same as those described in the Company's summary of significant accounting policies.

I-18

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


Performance Measures
 
Six months ended
June 30,
 
2012
 
2011
 
Revenue
 
Adjusted
OIBDA
 
Revenue
 
Adjusted
OIBDA
 
amounts in millions
QVC
$
3,906

 
828

 
3,733

 
781

E-commerce
773

 
57

 
671

 
65

Expedia, Inc.
1,856

 
325

 
1,641

 
282

Corporate and other

 
(12
)
 

 
(18
)
Total
$
6,535

 
1,198

 
6,045

 
1,110

Eliminate equity method affiliates
(1,856
)
 
(325
)
 
(1,641
)
 
(282
)
    Consolidated
$
4,679

 
873

 
4,404

 
828

 
Three months ended
June 30,
 
2012
 
2011
 
Revenue
 
Adjusted
OIBDA
 
Revenue
 
Adjusted
OIBDA
 
amounts in millions
QVC
$
1,974

 
438

 
1,898

 
418

E-commerce
391

 
23

 
347

 
36

Expedia, Inc.
1,040

 
222

 
913

 
194

Corporate and other

 
(6
)
 

 
(4
)
    Total
3,405

 
677

 
3,158

 
644

Eliminate equity method affiliates
(1,040
)
 
(222
)
 
(913
)
 
(194
)
    Consolidated
$
2,365

 
455

 
2,245

 
450

Other Information
 
June 30, 2012
 
Total
assets
 
Investments
in
affiliates
 
Capital
expenditures
 
amounts in millions
QVC
$
12,924

 
11

 
101

E-commerce
1,536

 
10

 
50

Expedia, Inc.
7,505

 

 
117

Corporate and other
2,571

 
1,192

 

    Total
24,536

 
1,213

 
268

Eliminate equity method affiliates
(7,505
)
 

 
(117
)
    Consolidated
$
17,031

 
1,213

 
151


I-19

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


The following table provides a reconciliation of segment Adjusted OIBDA to earnings (loss) from continuing operations before income taxes:
 
Three months ended
June 30,
 
Six months ended
June 30,
 
2012
 
2011
 
2012
 
2011
 
amounts in millions
Consolidated segment Adjusted OIBDA
$
455

 
450

 
873

 
828

  Stock-based compensation
(18
)
 
(14
)
 
(35
)
 
(30
)
  Depreciation and amortization
(147
)
 
(148
)
 
(290
)
 
(297
)
  Interest expense
(107
)
 
(107
)
 
(213
)
 
(221
)
  Share of earnings (loss) of affiliates, net
35

 
37

 
46

 
57

  Realized and unrealized gains (losses) on financial instruments, net
(160
)
 
89

 
(178
)
 
30

  Gains (losses) on dispositions, net
288

 

 
288

 

  Other, net
30

 
3

 
33

 
21

Earnings (loss) from continuing operations before income taxes
$
376

 
310

 
524

 
388


I-20



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; new service offerings; revenue growth at QVC, Inc.; the recoverability of our goodwill and other long-lived assets; our projected sources and uses of cash; and the anticipated non-material 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 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, and the products and services of the entities in which we have interests;
uncertainties inherent in the development and integration of new business lines and business strategies;
uncertainties associated with product and service development and market acceptance, including the development and provision of additional connections to consumers as technologies progress and shift consumer shopping behaviors;
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 ability to renew affiliate agreements on terms that are acceptable to us;
the outcome of any pending or threatened litigation;
availability of qualified personnel;
changes in, or failure or inability to comply with, government regulations, including, without limitation, regulations of the Federal Communications Commission, and adverse outcomes from regulatory proceedings;
changes in the nature of key strategic relationships with partners, vendors and joint venturers;
general economic and business conditions and industry trends including the current economic downturn;
consumer spending levels, including the availability and amount of individual consumer debt;
changes in distribution and viewing of television programming, including the expanded deployment of personal video recorders, video on demand and IP television and their impact on home shopping networks;
increased digital TV penetration and the impact on channel positioning of our channels;
rapid technological changes;
the regulatory and competitive environment of the industries in which we, and the entities in which we have interests, operate;
threatened terrorist attacks and ongoing military action in the Middle East and other parts of the world; and
fluctuations in foreign currency exchange rates and political unrest in international markets.
For additional risk factors, please see Part I, Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2011. 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 consolidated financial statements and the notes thereto and our Annual Report on Form 10-K for the year ended December 31, 2011.

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Overview
We own controlling and non-controlling interests in a broad range of video and on-line commerce companies. Our largest business, which is also our principal reportable segment, is QVC, Inc. QVC markets and sells a wide variety of consumer products in the United States and several foreign countries, primarily by means of its televised shopping programs and via the Internet through its domestic and international websites and mobile applications. Additionally, we own entire or majority interests in consolidated subsidiaries which operate on-line commerce businesses in a broad range of retail categories. The more significant of these include Backcountry.com, Inc., Bodybuilding.com, LLC, Celebrate Interactive Holdings, LLC and Provide Commerce, Inc. Backcountry operates websites offering sports gear and clothing for outdoor and active individuals in a variety of categories. Bodybuilding manages websites related to sports nutrition, body building and fitness. Celebrate operates websites that offer costumes, accessories, décor, party supplies and invitations. Provide operates an e-commerce marketplace of websites for perishable goods, including flowers, fruits and desserts, as well as upscale personalized gifts.
Our "Corporate and Other" category includes our corporate ownership interests in other unconsolidated businesses and corporate expenses. We hold ownership interests in Expedia, Inc., HSN, Inc., Interval Leisure Group, Inc. and Tree.com, Inc. which we account for as equity method investments; and we continue to maintain investments and related financial instruments in public companies such as Time Warner Inc., Time Warner Cable Inc. and AOL, Inc., which are accounted for at their respective fair market values and are included in "Corporate and Other."
Liberty Interactive's board of directors has approved the recapitalization of its common stock through the creation of a new tracking stock to be designated the Liberty Ventures common stock. In the recapitalization, each holder of Liberty Interactive common stock will receive 0.05 of a share of the corresponding series of Liberty Ventures common stock, with cash issued in lieu of fractional shares of Liberty Ventures common stock. In addition, holders of Liberty Interactive common stock will also receive 1/3 of a subscription right to purchase one share of Series A Liberty Ventures common stock for each share of Liberty Ventures common stock they receive in the recapitalization. The proposed recapitalization is intended to be tax-free to stockholders and its completion will be subject to various conditions, including the affirmative vote of at least a majority of the aggregate voting power of the shares of Liberty Interactive common stock outstanding and entitled to vote at the annual stockholder meeting in the third quarter of 2012, voting together as a single class, to approve a proposal to amend and restate Liberty's certificate of incorporation in order to effect the recapitalization. Subject to the satisfaction or, where applicable, waiver, of such conditions, the recapitalization is currently expected to occur in the third quarter of 2012.
The new Ventures Group will initially have attributed to it our interests in Expedia, Inc., TripAdvisor, Inc., Interval Leisure Group, Inc., Tree.com, Inc. and other smaller assets, investments in Time Warner Inc., Time Warner Cable Inc. and AOL, Inc., as well as cash in the amount of approximately $1,325 million (which includes proceeds from the sale of TripAdvisor, Inc. shares in May 2012 and the impact of certain other post-March 31 business activities). The Ventures Group will have attributed to it certain liabilities related to our Exchangeable Debentures and certain deferred tax liabilities. The Ventures Group will be primarily focused on the maximization of the value of these investments and investing in new business opportunities.
The Interactive Group will initially have attributed to it the remainder of our businesses and assets, including our operating subsidiaries QVC, Provide Commerce, Inc., Backcountry.com, Inc., Bodybuilding.com, LLC, and Celebrate Interactive Holdings, LLC, CommerceHub and LMC Right Start, Inc., as well as our interest in HSN, Inc. and cash in the amount of approximately $500 million. The Interactive Group will have attributed to it liabilities that reside with QVC and the other entities listed as well as our outstanding senior notes and certain deferred tax liabilities. The Interactive Group will be primarily focused on our video and e-commerce operating businesses.

Discontinued Operations
Prior to the Split-Off (as defined below), Liberty's equity was structured into three separate tracking stock groups. Tracking stock is a type of common stock that the issuing company intends to reflect or "track" the economic performance of a particular business or "group," rather than the economic performance of the company as a whole. Liberty had three tracking stocks: Liberty Interactive common stock, Liberty Starz common stock and Liberty Capital common stock, which were intended to track and reflect the economic performance of the separate businesses, assets and liabilities attributed to each group. These attributed businesses, assets and liabilities were not separate legal entities and therefore could not own assets, issue securities or enter into legally binding agreements. Holders of the tracking stocks did not have direct claim to the group's stock or assets and were not represented by separate boards of directors.
On September 23, 2011, Liberty completed the split-off of its wholly owned subsidiary, Liberty Media Corporation ("LMC") (formerly known as Liberty CapStarz, Inc. and prior thereto known as Liberty Splitco, Inc.) (the "Split-Off"). At the

I-22



time of the Split-Off, LMC owned all the assets, businesses and liabilities attributed to our former Capital and Starz tracking stock groups immediately prior to the Split-Off. The Split-Off was effected by means of a redemption of all of the Liberty Capital common stock and Liberty Starz common stock of Liberty for all of the common stock of LMC. This transaction has been accounted for at historical cost due to the pro rata nature of the distribution.
Following the Split-Off, Liberty and LMC operate as separate, publicly traded companies and neither has any stock ownership, beneficial or otherwise, in the other. In connection with the Split-Off, Liberty and LMC entered into certain agreements in order to govern certain of the ongoing relationships between the two companies after the Split-Off and to provide for an orderly transition.
The condensed consolidated financial statements of Liberty have been prepared to reflect LMC as discontinued operations. Accordingly, the assets and liabilities, revenue, costs and expenses, and cash flows of LMC (for periods prior to the Split-Off) have been excluded from the respective captions in the accompanying condensed consolidated balance sheets, statements of operations, comprehensive earnings and cash flows in such condensed consolidated financial statements.


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Results of Operations—Consolidated
General.    We provide in the tables below information regarding our Consolidated Operating Results and Other Income and Expense, as well as information regarding the contribution to those items from our reportable segment and our E-commerce businesses. The "corporate and other" category consists of those assets or businesses which we do not disclose separately. For a more detailed discussion and analysis of the financial results of the principal reporting segment, see "Results of Operations—Businesses" below.
Operating Results
 
Three months ended
June 30,
 
Six months ended
June 30,
 
2012
 
2011
 
2012
 
2011
 
amounts in millions
Revenue
 
 
 
 
 
 
 
QVC
$
1,974

 
1,898

 
3,906

 
3,733

E-commerce
391

 
347

 
773

 
671

Corporate and other

 

 

 

Consolidated
$
2,365

 
2,245

 
4,679

 
4,404

 
 
 
 
 
 
 
 
Adjusted OIBDA
 
 
 
 
 
 
 
QVC
$
438

 
418

 
828

 
781

E-commerce
23

 
36

 
57

 
65

Corporate and other
(6
)
 
(4
)
 
(12
)
 
(18
)
Consolidated
$
455

 
450

 
873

 
828

 
 
 
 
 
 
 
 
Operating Income (Loss)
 
 
 
 
 
 
 
QVC
$
301

 
281

 
559

 
506

E-commerce
(1
)
 
19

 
14

 
27

Corporate and other
(10
)
 
(12
)
 
(25
)
 
(32
)
Consolidated
$
290

 
288

 
548

 
501

Revenue.    Our consolidated revenue increased 5.3% or $120 million and 6.2% or $275 million for the three and six months ended June 30, 2012, respectively, as compared to the corresponding prior year periods. The three month increase was due to increased revenue at QVC ($76 million) and the E-commerce companies ($44 million). The six month increase was due to increased revenue at QVC ($173 million) and the E-commerce companies ($102 million). See "Results of Operations—Businesses" below for a more complete discussion of the results of operations of certain of our subsidiaries.
Adjusted OIBDA.    We define Adjusted OIBDA as revenue less cost of sales, operating expenses and selling, general and administrative ("SG&A") expenses (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 GAAP. Accordingly, Adjusted OIBDA should be considered in addition to, but not as a substitute for, operating income, net income, cash flow provided by operating activities and other measures of financial performance prepared in accordance with GAAP. See note 12 to the accompanying condensed consolidated financial statements for a reconciliation of Adjusted OIBDA to Earnings (loss) from continuing operations before income taxes.
Consolidated Adjusted OIBDA increased 1.1% or $5 million and 5.4% or $45 million for the three and six months ended June 30, 2012, respectively, as compared to the corresponding prior year periods. The overall Adjusted OIBDA growth was the result of increases at QVC of $20 million and $47 million for the three and six months ended June 30, 2012, respectively, which were offset slightly with diminished results at the E-commerce companies. See "Results of Operations—Businesses" below for a more complete discussion of the results of operations of certain of our subsidiaries.

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Stock-based compensation.    Stock-based compensation includes compensation related to (1) options and stock appreciation rights ("SARs") for shares of our common stock that are granted to certain of our officers and employees, (2) phantom stock appreciation rights ("PSARs") granted to officers and employees of certain of our subsidiaries pursuant to private equity plans and (3) amortization of restricted stock grants.
We recorded $35 million and $30 million of stock compensation expense for the six month periods ended June 30, 2012 and 2011, respectively. The stock compensation expense was fairly consistent as compared to the prior period. As of June 30, 2012, the total unrecognized compensation cost related to unvested Liberty equity awards was approximately $107 million. Such amount will be recognized in our consolidated statements of operations over a weighted average period of approximately 2.4 years.
Operating income.    Our consolidated operating income increased 0.7% or $2 million and 9.4% or $47 million for the three and six months ended June 30, 2012, respectively, as compared to the corresponding prior year periods. The three and six month increase was primarily due to improved results at QVC and offset by diminished results at the E-commerce companies. See "Results of Operations—Businesses" below for a more complete discussion of the results of operations of certain of our subsidiaries.
Other Income and Expense
Components of Other Income (Expense) are presented in the table below.
 
Three months ended
June 30,
 
Six months ended
June 30,
 
2012
 
2011
 
2012
 
2011
 
amounts in millions
Other income (expense):
 
 
 
 
 
 
 
    Interest expense
(107
)
 
(107
)
 
(213
)
 
(221
)
    Share of earnings (losses) of affiliates
35

 
37

 
46

 
57

Realized and unrealized gains (losses) on financial instruments, net
(160
)
 
89

 
(178
)
 
30

    Gains (losses) on dispositions, net
288

 

 
288

 

    Other, net
30

 
3

 
33

 
21

 
$
86

 
22

 
(24
)
 
(113
)
Interest expense.    Interest expense was flat for the three months ended June 30, 2012, as compared to the corresponding prior year period. Interest expense decreased 3.6% or $8 million for the six months ended June 30, 2012, as compared to the corresponding prior year period. The six month decrease in interest expense related to a lower average debt balance for the six months ended June 30, 2012, as compared to the corresponding prior year periods.
Share of earnings (losses) of affiliates.    The following table presents our share of earnings (losses) of affiliates:
 
Three months ended
June 30,
 
Six months ended
June 30,
 
2012
 
2011
 
2012
 
2011
 
amounts in millions
Expedia, Inc.
$
26

 
35

 
24

 
48

TripAdvisor, Inc.
12

 

 
23

 

HSN, Inc.
9

 
7

 
24

 
20

Other
(12
)
 
(5
)
 
(25
)
 
(11
)
 
$
35

 
37

 
46

 
57


During the fourth quarter of 2011, Expedia, Inc. completed the pro-rata split-off of TripAdvisor, Inc., its wholly owned subsidiary. Therefore, the Company held a 26% ownership interest in each of Expedia, Inc. and TripAdvisor, Inc. as of the TripAdvisor, Inc. split-off date. The most significant change in earnings for Expedia, Inc., other than the split-off of TripAdvisor, Inc., was the result of a one-time loss recognized in the three months ended March 31, 2012 associated with the retirement of certain debt in conjunction with the TripAdvisor, Inc. split-off.


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The additional share of losses in the other category is primarily related to our investment in alternative energy solution entities. These entities typically operate at a loss and because we account for these investments as equity method affiliates we record our share of such losses. We note these entities typically have favorable tax attributes and credits which are recorded in our tax accounts.
Realized and unrealized gains (losses) on financial instruments.    Realized and unrealized gains (losses) on financial instruments are comprised of changes in the fair value of the following:
 
Three months ended
June 30,
 
Six months ended
June 30,
 
2012
 
2011
 
2012
 
2011
 
amounts in millions
Non-strategic Securities
$
41

 
52

 
181

 
149

Exchangeable senior debentures
(35
)
 
22

 
(217
)
 
(165
)
Other derivatives
(166
)
 
15

 
(142
)
 
46

 
$
(160
)
 
89

 
(178
)
 
30


The changes in realized and unrealized gains (losses) on financial instruments is due to market activity through the period on the various financial instruments that are marked to market on a periodic basis. In the first quarter of 2012, we entered into a forward contract to sell 12 million Expedia, Inc. shares at approximately $34 per share. The derivative contract is currently in a liability position as the stock price of Expedia, Inc. shares has increased since the inception of the derivative contract and results in a recognition of unrealized losses on the contract.

Gains (losses) on dispositions, net. In May 2012, Liberty sold approximately 8.5 million shares of TripAdvisor, Inc. for cash proceeds of $338 million. The sale resulted in a $288 million gain recorded in gain (losses) on dispositions, net in the statement of operations.
        Income taxes.    Our effective tax rate for the six months ended June 30, 2012 is 32% which is less than the U.S. federal income tax rate of 35% primarily due to tax credits generated by our alternative energy investments.
Net earnings.    We had net earnings of $354 million and $668 million for the six month periods ended June 30, 2012 and 2011, respectively. Net earnings in the prior year included $410 million of earnings from discontinued operations. The remaining change in net earnings was the result of the above-described fluctuations in our revenue, expenses and other gains and losses.
Material Changes in Financial Condition
As of June 30, 2012 substantially all of our cash and cash equivalents are invested in U.S. Treasury securities, other government securities or government guaranteed funds, AAA rated money market funds and other highly rated financial and corporate debt instruments.
The following are potential sources of liquidity: available cash balances, cash generated by the operating activities of our privately-owned subsidiaries (to the extent such cash exceeds the working capital needs of the subsidiaries and is not otherwise restricted), proceeds from asset sales, monetization of our public investment portfolio, debt (including availability under the QVC Bank Credit Facility) and equity issuances, and dividend and interest receipts.
During the quarter there have been no significant changes to our corporate or subsidiary debt credit ratings.
As of June 30, 2012, Liberty had a cash balance of $790 million with $271 million held by foreign subsidiaries. We have borrowing capacity under the QVC credit facility at June 30, 2012 of $1,698 million. Additionally, our operating businesses have provided, on average, more than $1 billion in annual operating cash flow over the prior three years and we do not anticipate any significant reductions in that amount in future periods.
During the six months ended June 30, 2012, Liberty's primary uses of cash were $637 million of Liberty Interactive Series A common stock repurchases, net debt repayments of $207 million, capital expenditures of $151 million and investments in available-for-sale and equity method affiliates. These activities were funded primarily with proceeds from dispositions of $348 million (primarily the disposition of 8.5 million shares of TripAdvisor, Inc.) and cash provided by operating activities and cash on hand.

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The projected uses of Liberty cash are continued capital improvement spending of approximately $235 million for capital expenditures for the remainder of the year, approximately $220 million for interest payments on outstanding debt, the potential buyback of common stock under the approved share buyback program (subsequent to quarter end we made additional repurchases of approximately 512,500 shares for $9 million through July 31, 2012) and additional investments in existing or new businesses. We also may be required to make net payments of income tax liabilities to settle items under discussion with tax authorities.
QVC was in compliance with its debt covenants as of June 30, 2012.
Results of Operations—Businesses
Operating Results by Business
QVC.    QVC is a retailer of a wide range of consumer products, which are marketed and sold primarily by merchandise‑focused televised shopping programs, the Internet and mobile applications. In the United States, QVC's live programming is distributed via its nationally televised shopping program 24 hours a day, 364 days per year (“QVC-U.S.”). Internationally, QVC's program services are based in Japan (“QVC-Japan”), Germany (“QVC-Germany”), the United Kingdom (“QVC-U.K.”) and Italy (“QVC-Italy”). QVC-Japan and QVC-Germany each distribute live programming 24 hours a day and QVC-U.K. distributes its program 24 hours a day with 17 hours of live programming. QVC-Italy launched on October 1, 2010 and is distributing programming live for 17 hours a day on satellite and public television and an additional seven hours a day of recorded programming on satellite television.
QVC's operating results were as follows:
 
Three months ended
June 30,
 
Six months ended
June 30,
 
2012
 
2011
 
2012
 
2011
 
amounts in millions
Net revenue
$
1,974

 
1,898

 
3,906

 
3,733

Cost of sales
(1,234
)
 
(1,183
)
 
(2,464
)
 
(2,363
)
Gross profit
740

 
715

 
1,442

 
1,370

Operating expenses
(176
)
 
(181
)
 
(351
)
 
(352
)
SG&A expenses (excluding stock-based compensation)
(126
)
 
(116
)
 
(263
)
 
(237
)
Adjusted OIBDA
438

 
418

 
828

 
781

Stock-based compensation—SG&A
(8
)
 
(6
)
 
(13
)
 
(10
)
Depreciation and amortization
(129
)
 
(131
)
 
(256
)
 
(265
)
Operating income
$
301

 
281

 
559

 
506

Net revenue was generated in the following geographical areas:
 
Three months ended
June 30,
 
Six months ended
June 30,
 
2012
 
2011
 
2012
 
2011
 
amounts in millions
QVC-US
$
1,280

 
1,232

 
2,520

 
2,424

QVC-Japan
310

 
269

 
599

 
502

QVC-Germany
210

 
237

 
457

 
505

QVC-UK
156

 
154

 
296

 
292

QVC-Italy
18

 
6

 
34

 
10

 
$
1,974

 
1,898

 
3,906

 
3,733

    
QVC's consolidated net revenue increased 4.0% and 4.6% during the three and six months ended June 30, 2012, respectively, as compared to the corresponding periods in the prior year. The three month increase in net revenue was comprised of $85 million due to a 4.0% increase in the average sales price per unit ("ASP"), $36 million due to a 1.7% increase in units sold and a $16 million increase in shipping and handling and other miscellaneous revenue. These increases were offset by a $34 million impact of estimated product returns and unfavorable foreign currency exchange rates in all markets, except Japan, of $27 million. Returns as a percent of gross product revenue increased from 19.7% to 20.0% primarily due to an increase in the return rates in beauty, jewelry and apparel due to the mix of products sold within those categories. The six

I-27



month increase in net revenue was comprised of $153 million due to a 3.6% increase in ASP, $84 million due to a 2.0% increase in units sold and a $31 million increase in shipping and handling and other miscellaneous revenue. These increases were offset by a $65 million impact of estimated product returns and unfavorable foreign currency exchange rates in all markets except Japan of $30 million. Returns as a percent of gross product revenue increased from 19.6% to 19.9% primarily due to an increase in apparel sales as a percentage of the total mix of products sold.

During the three and six months ended June 30, 2012 and 2011, the changes in revenue and expenses were impacted by changes in the exchange rates for the Japanese Yen, the Euro and the U.K. Pound Sterling. In the event the U.S. Dollar strengthens against these foreign currencies in the future, QVC's revenue and operating cash flow will be negatively impacted. The percentage increase (decrease) in revenue for QVC's geographic areas in U.S. Dollars and in local currency was as follows:

 
Three months ended
June 30, 2012
 
Six months ended
June 30, 2012
 
U.S. Dollars
 
Local currency
 
U.S. Dollars
 
Local currency
QVC-US
3.9
 %
 
3.9
 %
 
4.0
 %
 
4.0
 %
QVC-Japan
15.2
 %
 
13.1
 %