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 001-33982

LIBERTY INTERACTIVE CORPORATION

(Exact name of Registrant as specified in its charter)

 


incorporation or organization)

 


Identification No.)

 

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 ☒   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 Interactive Corporation's common stock as of October 31, 2017 was:

 

 

 

 

 

 

 

 

 

Series A

 

Series B

 

 

 

 

 

 

 

QVC Group

 

401,097,375

 

29,217,195

 

Liberty Ventures

 

81,351,297

 

4,245,314

 

 

 

 

 

 

 

 

 

 


 

Table of Contents

Table of Contents

 

 

 

 

PART I – FINANCIAL INFORMATION 

 

 

Item 1. Financial Statements. 

 

 

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (unaudited) 

    

I-3

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

 

I-5

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements Of Comprehensive Earnings (Loss) (unaudited) 

 

I-7

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

 

I-8

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES Condensed Consolidated Statement Of Equity (unaudited) 

 

I-9

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

 

I-10

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-44

Item 4. Controls and Procedures. 

 

I-45

 

 

 

PART II—OTHER INFORMATION 

 

II-1

Item 1. Legal Proceedings 

 

II-1

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

 

II-1

Item 6. Exhibits 

 

II-2

 

 

 

SIGNATURES 

 

II-3

 

I-2


 

Table of Contents

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(unaudited)

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

 

2017

 

2016

 

 

 

amounts in millions

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

895

 

825

 

Trade and other receivables, net of allowance for doubtful accounts of $87 million and $99 million, respectively

 

 

945

 

1,308

 

Inventory, net

 

 

1,197

 

968

 

Other current assets

 

 

81

 

68

 

Total current assets

 

 

3,118

 

3,169

 

Investments in available-for-sale securities and other cost investments (note 7)

 

 

2,481

 

1,922

 

Investments in affiliates, accounted for using the equity method (note 8)

 

 

573

 

581

 

Investment in Liberty Broadband measured at fair value (note 8)

 

 

4,068

 

3,161

 

Property and equipment, net

 

 

1,117

 

1,131

 

Intangible assets not subject to amortization (note 9):

 

 

 

 

 

 

Goodwill

 

 

6,123

 

6,052

 

Trademarks

 

 

3,302

 

3,302

 

 

 

 

9,425

 

9,354

 

Intangible assets subject to amortization, net (note 9)

 

 

635

 

1,005

 

Other assets, at cost, net of accumulated amortization

 

 

30

 

32

 

Total assets

 

$

21,447

 

20,355

 

 

(continued)

 

See accompanying notes to condensed consolidated financial statements.

I-3


 

Table of Contents

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Continued)

(unaudited)

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

2017

 

2016

 

 

 

amounts in millions,

 

 

 

except share amounts

 

Liabilities and Equity

    

 

    

    

    

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

833

 

790

 

Accrued liabilities

 

 

641

 

706

 

Current portion of debt, including $994 million and $862 million measured at fair value (note 10)

 

 

1,011

 

876

 

Other current liabilities

 

 

161

 

162

 

Total current liabilities

 

 

2,646

 

2,534

 

Long-term debt, including $892 million and $805 million measured at fair value (note 10)

 

 

7,050

 

7,166

 

Deferred income tax liabilities

 

 

4,015

 

3,636

 

Other liabilities

 

 

177

 

158

 

Total liabilities

 

 

13,888

 

13,494

 

Equity

 

 

 

 

 

 

Stockholders' equity (note 11):

 

 

 

 

 

 

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

 

 

 —

 

 —

 

Series A QVC Group common stock, $.01 par value. Authorized 4,000,000,000 shares; issued and outstanding 408,826,790 shares at September 30, 2017 and 429,005,932 shares at December 31, 2016

 

 

 5

 

 5

 

Series B QVC Group common stock, $.01 par value. Authorized 150,000,000 shares; issued and outstanding 29,217,195 shares at September 30, 2017 and 29,358,638 shares at December 31, 2016

 

 

 —

 

 —

 

Series A Liberty Ventures common stock, $.01 par value. Authorized 400,000,000 shares; issued and outstanding 81,351,302 shares at September 30, 2017 and 81,150,711 shares at December 31, 2016

 

 

 1

 

 1

 

Series B Liberty Ventures common stock, $.01 par value. Authorized 15,000,000 shares; issued and outstanding 4,245,314 shares at September 30, 2017 and 4,271,958 shares at December 31, 2016

 

 

 —

 

 —

 

Additional paid-in capital

 

 

 —

 

 —

 

Accumulated other comprehensive earnings (loss), net of taxes

 

 

(157)

 

(266)

 

Retained earnings

 

 

7,605

 

7,032

 

Total stockholders' equity

 

 

7,454

 

6,772

 

Noncontrolling interests in equity of subsidiaries

 

 

105

 

89

 

Total equity

 

 

7,559

 

6,861

 

Commitments and contingencies (note 12)

 

 

 

 

 

 

Total liabilities and equity

 

$

21,447

 

20,355

 

 

See accompanying notes to condensed consolidated financial statements.

I-4


 

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LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements Of Operations

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

 

 

amounts in millions

 

Total revenue, net

 

$

2,381

 

2,412

 

 

7,060

 

7,485

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of sales (exclusive of depreciation shown separately below)

 

 

1,554

 

1,575

 

 

4,553

 

4,822

 

Operating

 

 

160

 

165

 

 

461

 

512

 

Selling, general and administrative, including stock-based compensation (note 4)

 

 

279

 

290

 

 

777

 

892

 

Depreciation and amortization

 

 

180

 

225

 

 

594

 

663

 

 

 

 

2,173

 

2,255

 

 

6,385

 

6,889

 

Operating income (loss)

 

 

208

 

157

 

 

675

 

596

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(88)

 

(92)

 

 

(267)

 

(277)

 

Share of earnings (losses) of affiliates, net (note 8)

 

 

(86)

 

(22)

 

 

(122)

 

(21)

 

Realized and unrealized gains (losses) on financial instruments, net (note 6)

 

 

369

 

606

 

 

1,186

 

942

 

Other, net

 

 

 7

 

(8)

 

 

 1

 

130

 

 

 

 

202

 

484

 

 

798

 

774

 

Earnings (loss) from continuing operations before income taxes

 

 

410

 

641

 

 

1,473

 

1,370

 

Income tax (expense) benefit

 

 

(102)

 

(190)

 

 

(462)

 

(440)

 

Earnings (loss) from continuing operations

 

 

308

 

451

 

 

1,011

 

930

 

Earnings (loss) from discontinued operations, net of taxes

 

 

 —

 

27

 

 

 —

 

14

 

Net earnings (loss)

 

 

308

 

478

 

 

1,011

 

944

 

Less net earnings (loss) attributable to the noncontrolling interests

 

 

12

 

 9

 

 

33

 

28

 

Net earnings (loss) attributable to Liberty Interactive Corporation shareholders

 

$

296

 

469

 

 

978

 

916

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) attributable to Liberty Interactive Corporation shareholders:

 

 

 

 

 

 

 

 

 

 

 

QVC Group common stock

 

$

119

 

61

 

 

321

 

285

 

Liberty Ventures common stock

 

 

177

 

408

 

 

657

 

631

 

 

 

$

296

 

469

 

 

978

 

916

 

 

 

 

 

 

 

 

 

 

 

(Continued)

 

 

See accompanying notes to condensed consolidated financial statements.

I-5


 

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LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements Of Operations (Continued)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2017

    

2016

    

2017

    

2016

 

Basic net earnings (losses) from continuing operations attributable to Liberty Interactive Corporation shareholders per common share (note 5):

 

 

 

 

 

 

 

 

 

 

 

Series A and Series B QVC Group common stock

 

$

0.27

 

0.13

 

 

0.71

 

0.59

 

Series A and Series B Liberty Ventures common stock

 

$

2.06

 

2.68

 

 

7.73

 

4.35

 

Diluted net earnings (losses) from continuing operations attributable to Liberty Interactive Corporation shareholders per common share (note 5):

 

 

 

 

 

 

 

 

 

 

 

Series A and Series B QVC Group common stock

 

$

0.26

 

0.13

 

 

0.71

 

0.59

 

Series A and Series B Liberty Ventures common stock

 

$

2.03

 

2.65

 

 

7.64

 

4.28

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net earnings (losses) attributable to Liberty Interactive Corporation shareholders per common share (note 5):

 

 

 

 

 

 

 

 

 

 

 

Series A and Series B QVC Group common stock

 

$

0.27

 

0.13

 

 

0.71

 

0.59

 

Series A and Series B Liberty Ventures common stock

 

$

2.06

 

2.87

 

 

7.73

 

4.44

 

Diluted net earnings (losses) attributable to Liberty Interactive Corporation shareholders per common share (note 5):

 

 

 

 

 

 

 

 

 

 

 

Series A and Series B QVC Group common stock

 

$

0.26

 

0.13

 

 

0.71

 

0.59

 

Series A and Series B Liberty Ventures common stock

 

$

2.03

 

2.84

 

 

7.64

 

4.38

 

 

See accompanying notes to condensed consolidated financial statements.

 

I-6


 

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LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

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)

 

$

308

 

478

 

1,011

 

944

 

Other comprehensive earnings (loss), net of taxes:

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

28

 

(3)

 

111

 

36

 

Share of other comprehensive earnings (losses) of equity affiliates

 

 

 —

 

(1)

 

 3

 

(5)

 

Other comprehensive earnings (loss) from discontinued operations

 

 

 —

 

(1)

 

 —

 

(2)

 

Other

 

 

 —

 

 —

 

 —

 

 6

 

Other comprehensive earnings (loss)

 

 

28

 

(5)

 

114

 

35

 

Comprehensive earnings (loss)

 

 

336

 

473

 

1,125

 

979

 

Less comprehensive earnings (loss) attributable to the noncontrolling interests

 

 

12

 

11

 

38

 

46

 

Comprehensive earnings (loss) attributable to Liberty Interactive Corporation shareholders

 

$

324

 

462

 

1,087

 

933

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive earnings (loss) attributable to Liberty Interactive Corporation shareholders:

 

 

 

 

 

 

 

 

 

 

QVC Group common stock

 

$

147

 

56

 

428

 

303

 

Liberty Ventures common stock

 

 

177

 

406

 

659

 

630

 

 

 

$

324

 

462

 

1,087

 

933

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

I-7


 

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LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

 

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)

 

$

1,011

 

944

 

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

 

 

 

 

 

 

(Earnings) loss from discontinued operations

 

 

 —

 

(14)

 

Depreciation and amortization

 

 

594

 

663

 

Stock-based compensation

 

 

59

 

75

 

Cash payments for stock-based compensation

 

 

 —

 

(92)

 

Share of (earnings) losses of affiliates, net

 

 

122

 

21

 

Cash receipts from returns on equity investments

 

 

21

 

24

 

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

 

 

(1,186)

 

(942)

 

Deferred income tax expense (benefit)

 

 

356

 

422

 

Other, net

 

 

 8

 

(46)

 

Changes in operating assets and liabilities

 

 

 

 

 

 

Current and other assets

 

 

161

 

349

 

Payables and other liabilities

 

 

(67)

 

(384)

 

Net cash provided (used) by operating activities

 

 

1,079

 

1,020

 

Cash flows from investing activities:

 

 

 

 

 

 

Cash proceeds from dispositions of investments

 

 

 —

 

350

 

Investments in and loans to cost and equity investees

 

 

(140)

 

(67)

 

Capital expended for property and equipment

 

 

(126)

 

(177)

 

Purchases of short term and other marketable securities

 

 

 —

 

(264)

 

Sales of short term and other marketable securities

 

 

 —

 

1,174

 

Investment in Liberty Broadband

 

 

 —

 

(2,400)

 

Other investing activities, net

 

 

(36)

 

(14)

 

Net cash provided (used) by investing activities

 

 

(302)

 

(1,398)

 

Cash flows from financing activities:

 

 

 

 

 

 

Borrowings of debt

 

 

1,689

 

2,688

 

Repayments of debt

 

 

(1,917)

 

(3,629)

 

Repurchases of QVC Group common stock

 

 

(452)

 

(603)

 

Withholding taxes on net settlements of stock-based compensation

 

 

(14)

 

(16)

 

Other financing activities, net

 

 

(26)

 

(28)

 

Net cash provided (used) by financing activities

 

 

(720)

 

(1,588)

 

Effect of foreign currency exchange rates on cash

 

 

13

 

 7

 

Net cash provided (used) by discontinued operations:

 

 

 

 

 

 

Cash provided (used) by operating activities

 

 

 —

 

15

 

Cash provided (used) by investing activities

 

 

 —

 

 —

 

Cash provided (used) by financing activities

 

 

 —

 

 —

 

Change in available cash held by discontinued operations

 

 

 —

 

 —

 

Net cash provided (used) by discontinued operations

 

 

 —

 

15

 

Net increase (decrease) in cash and cash equivalents

 

 

70

 

(1,944)

 

Cash and cash equivalents at beginning of period

 

 

825

 

2,449

 

Cash and cash equivalents at end of period

 

$

895

 

505

 

 

See accompanying notes to condensed consolidated financial statements.

 

I-8


 

Table of Contents

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statement Of Equity

(unaudited)

Nine months ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

QVC

 

Liberty

 

Additional

 

other

 

 

 

Noncontrolling

 

 

 

 

 

Preferred

 

Group

 

Ventures

 

paid-in

 

comprehensive

 

Retained

 

interest in equity

 

Total

 

 

  

stock

  

Series A

  

Series B

  

Series A

  

Series B

  

capital

  

earnings (loss)

  

earnings

  

of subsidiaries

  

equity

 

 

 

amounts in millions

 

Balance at January 1, 2017

 

$

 —

 

 5

 

 —

 

 1

 

 —

 

 —

 

(266)

 

7,032

 

89

 

6,861

 

Net earnings

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

978

 

33

 

1,011

 

Other comprehensive loss

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

109

 

 —

 

 5

 

114

 

Stock compensation

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

59

 

 —

 

 —

 

 —

 

59

 

Series A QVC Group common stock repurchases

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

(452)

 

 —

 

 —

 

 —

 

(452)

 

Distribution to noncontrolling interest

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

(22)

 

(22)

 

Option exercises

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 1

 

 —

 

 —

 

 —

 

 1

 

Withholding taxes on net settlements of stock-based compensation

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

(14)

 

 —

 

 —

 

 —

 

(14)

 

Reclassification

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

405

 

 —

 

(405)

 

 —

 

 —

 

Other  

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 1

 

 —

 

 —

 

 —

 

 1

 

Balance at September 30, 2017

 

$

 —

 

 5

 

 —

 

 1

 

 —

 

 —

 

(157)

 

7,605

 

105

 

7,559

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

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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 and its controlled subsidiaries (collectively, "Liberty," the "Company," “Consolidated Liberty,” “us,” “we,” or “our” 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 online commerce industries in North America, Europe and Asia and the cable industry in North America. The Company’s wholly-owned subsidiary, QVC, Inc.’s (“QVC”) business is seasonal due to a higher volume of sales in the fourth calendar quarter related to year-end holiday shopping.

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 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. 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 Liberty's Annual Report on Form 10-K for the year ended December 31, 2016.

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.   

On May 18, 2016, Liberty completed a $2.4 billion investment in Liberty Broadband Corporation (“Liberty Broadband”) (for accounting purposes, a related party of the Company) in connection with the merger of Charter Communications, Inc. ("Charter") and Time Warner Cable Inc. ("TWC"). The proceeds of this investment were used by Liberty Broadband to fund, in part, its acquisition of $5 billion of stock in the new public parent company (“New Charter”) of the combined enterprises. Liberty, along with third party investors, all of whom invested on the same terms as Liberty, purchased newly issued shares of Liberty Broadband Series C common stock at a per share price of $56.23, which was determined based upon the fair value of Liberty Broadband's net assets on a sum-of-the parts basis at the time the investment agreements were executed. Liberty's investment in Liberty Broadband was funded using cash on hand and is attributed to the Ventures Group (as defined in note 2). See note 8 for additional information related to this investment.

Liberty also exchanged, in a tax-free transaction, its shares of TWC common stock for shares of New Charter Class A common stock, on a one-for-one basis, and Liberty has granted to Liberty Broadband a proxy and a right of first refusal with respect to the shares of New Charter Class A common stock held by Liberty in the exchange.

On July 22, 2016, Liberty completed its previously announced spin-off (the “CommerceHub Spin-Off”) of its former wholly-owned subsidiary CommerceHub, Inc. (“CommerceHub”).  The CommerceHub Spin-Off was accomplished by the distribution by Liberty of a dividend of (i) 0.1 of a share of CommerceHub’s Series A common stock for each outstanding share of Liberty’s Series A Liberty Ventures common stock as of 5:00 p.m., New York City time, on July 8, 2016 (such date and time, the “Record Date”), (ii) 0.1 of a share of CommerceHub’s Series B common stock for each outstanding share of Liberty’s Series B Liberty Ventures common stock as of the Record Date and (iii) 0.2 of a share of CommerceHub’s Series C common stock for each outstanding share of Series A and Series B Liberty Ventures common stock as of the Record Date, in each case, with cash paid in lieu of fractional shares. In September 2016, the Internal

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Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

Revenue Service (“IRS”) completed its review of the CommerceHub Spin-Off and informed Liberty that it agreed with the nontaxable characterization of the transaction. Liberty received an Issue Resolution Agreement from the IRS documenting this conclusion. See the discussion in note 3 regarding discontinued operations treatment for the CommerceHub Spin-Off.

On November 4, 2016, Liberty completed its previously announced split-off (the “Expedia Holdings Split-Off”) of its former wholly-owned subsidiary Liberty Expedia Holdings, Inc. (“Expedia Holdings”). At the time of the Expedia Holdings Split-Off, Expedia Holdings was comprised of, among other things, Liberty’s former interest in Expedia, Inc. (“Expedia”) and Liberty’s former wholly-owned subsidiary Bodybuilding.com, LLC (“Bodybuilding”). On November 2, 2016, Expedia Holdings borrowed $350 million under a new margin loan and distributed $299 million, net of certain debt related costs, to Liberty on November 4, 2016. The Expedia Holdings Split-Off was accomplished by the redemption of (i) 0.4 of each outstanding share of Liberty’s Series A Liberty Ventures common stock for 0.4 of a share of Expedia Holdings Series A common stock at 5:00 p.m., New York City time, on November 4, 2016 (such date and time, the “Redemption Date”) and (ii) 0.4 of each outstanding share of Liberty’s Series B Liberty Ventures common stock for 0.4 of a share of Expedia Holdings Series B common stock on the Redemption Date, in each case, with cash paid in lieu of any fractional shares of Liberty Ventures common stock or Expedia Holdings common stock (after taking into account all of the shares owned of record by each holder thereof, as applicable). In February 2017, the IRS completed its review of the Expedia Holdings Split-Off and informed Liberty that it agreed with the nontaxable characterization of the transaction. Liberty received an Issue Resolution Agreement from the IRS documenting this conclusion. See the discussion in note 3 regarding discontinued operations treatment for the Expedia Holdings Split-Off.

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 has reviewed the applicable Accounting Standard Update (“ASU”) and has selected the modified retrospective transition method. In addition, the Company expects to elect the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component when its payment terms are less than one year, as well as the practical expedient to exclude from the measurement of the transaction price sales and similar taxes collected from customers. To date, the Company has concluded it will recognize revenue at the time of shipment to its customers consistent with when title passes. This is a change from the current practice whereby the Company recognizes revenue at the time of delivery to the customers and deferred revenue is recorded to account for the shipments in-transit. At the current time, the Company is continuing to evaluate the impact of the standard including its determination of whether the Company acts as principal or agent in certain vendor arrangements. The Company is also evaluating the impact of the standard on the presentation and timing of credit card income for its QVC-branded credit card and its financial statement disclosures, among other areas. The Company has not quantified the effects of this pronouncement, but it is working through the relevant aspects to evaluate the quantitative effects of the new guidance. The Company plans to be able to quantify the effects of these ASUs no later than the fourth quarter of 2017 in its annual report for the year ending December 31, 2017.

In July 2015, the FASB issued new accounting guidance that changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. The new principle is part of the FASB’s simplification initiative and applies to entities that measure inventory using a method other than last-in, first-out or the retail inventory method. The new standard is effective for the Company for fiscal years and interim periods beginning after December 15, 2016. The Company has adopted this guidance as of January 1, 2017, and there was no significant effect of the standard on its financial reporting.

 

In January 2016, the FASB issued new accounting guidance that is intended to improve the recognition and measurement of financial instruments.  The new guidance requires equity investments with readily determinable fair values

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Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

(except those accounted for under the equity method of accounting or those that result in consolidation) to be measured at fair value with changes in fair value recognized in net income and simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. The new standard is effective for the Company for fiscal years and interim periods beginning after December 15, 2017, with early adoption permitted under certain circumstances. The Company has not yet determined the effect of the standard on its ongoing financial reporting.

 

In February 2016, the FASB issued new guidance which revises the accounting for leases. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases. The new guidance also simplifies the accounting for sale and leaseback transactions. The new standard, to be applied via a modified retrospective transition approach, is effective for the Company for fiscal years and interim periods beginning after December 15, 2018, with early adoption permitted. The Company 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 October 2016, the FASB issued new accounting guidance which requires an entity to recognize at the transaction date the income tax consequences of intercompany asset transfers. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted.  We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures. 

In January 2017, the FASB issued new accounting guidance to simplify the measurement of goodwill impairment. Under the new guidance, an entity will no longer perform a Step 2 Test to measure goodwill impairment.  Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted for goodwill impairment tests with measurement dates after January 1, 2017. The Company plans to adopt the standard during the fourth quarter of 2017, and does not expect the standard to have a material impact.

 

As a result of repurchases of Series A QVC Group common stock, the Company’s additional paid-in capital balance was in a deficit position as of September 30, 2017.  In order to ensure that the additional paid-in capital account is not negative, we reclassified the amount of the deficit ($405 million) at September 30, 2017 to retained earnings.

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.

 

Liberty has entered into certain agreements with Liberty Media Corporation ("LMC") (for accounting purposes, a related party of the Company), a separate publicly traded company, neither of which has any stock ownership, beneficial or otherwise, in the other, in order to govern relationships between the companies. These agreements include a reorganization agreement, services agreement, facilities sharing agreement and tax sharing agreement.

 

The reorganization agreement provides for, among other things, provisions governing the relationship between Liberty and LMC, including certain cross-indemnities. 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, LMC shares office space and related amenities at its corporate headquarters with Liberty. Under these various agreements, approximately $3 million and $2 million was reimbursable to LMC for the three months ended September 30, 2017 and 2016, respectively, and approximately $8 million and $8 million was reimbursable to LMC for the nine months ended September 30, 2017 and 2016, respectively.  Additionally, the tax

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Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

sharing agreement provides for the allocation and indemnification of tax liabilities and benefits between Liberty and LMC and other agreements related to tax matters.

 

(2)   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 has two tracking stocks—QVC Group common stock and Liberty Ventures common stock, which are intended to track and reflect the economic performance of the Liberty QVC Group and the Ventures Group, respectively (as defined below).

While the QVC Group and the Ventures Group have separate collections of businesses, assets and liabilities attributed to them, no group is a separate legal entity and therefore cannot own assets, issue securities or enter into legally binding agreements. Holders of tracking stock have no direct claim to the group's stock or assets and are not represented by separate boards of directors. Instead, holders of tracking stock are stockholders of the parent corporation, with a single board of directors and subject to all of the risks and liabilities of the parent corporation.

The term “QVC Group” does not represent a separate legal entity, rather it represents those businesses, assets and liabilities that have been attributed to that group. As of September 30, 2017, the QVC Group is primarily comprised of our merchandise-focused televised-shopping programs, Internet and mobile application businesses and has attributed to it our wholly-owned subsidiaries, QVC and zulily, llc (“zulily”), our approximate 38% interest in HSN, Inc. (“HSN”), and cash and cash equivalents of approximately $383 million, which includes subsidiary cash. The QVC Group also has attributed to it liabilities that reside with QVC and zulily, certain liabilities related to our corporate level indebtedness (see note 10) and certain deferred tax liabilities.

On July 6, 2017, Liberty announced that it had entered into an Agreement and Plan of Merger, dated as of July 5, 2017 (the “HSN Merger Agreement”), by and among Liberty, Liberty Horizon, Inc., a Delaware corporation and a direct, wholly-owned subsidiary of Liberty (“Merger Sub”), and HSN. Pursuant to the terms of the HSN Merger Agreement, Merger Sub will merge with and into HSN, with HSN surviving as a wholly-owned subsidiary of Liberty (the “HSN Merger”). As a result of the HSN Merger, Liberty will acquire the approximately 62% of HSN it does not already own in an all-stock transaction making HSN a wholly-owned subsidiary, attributed to the QVC Group tracking stock group. Liberty currently owns approximately 38% of HSN. HSN shareholders (other than Liberty) will receive fixed consideration of 1.65 shares of Series A QVC Group common stock for each share of HSN common stock. Based on the Series A QVC Group common stock’s closing price as of July 5, 2017 and the number of HSN undiluted shares outstanding as of May 1, 2017, this equates to a total enterprise value for HSN of $2.6 billion, an equity value of $2.1 billion, and consideration of $40.36 per HSN share, representing a premium of approximately 29% to HSN shareholders, based on HSN’s closing price on July 5, 2017. Liberty intends to issue 53.4 million shares of Series A QVC Group common stock to HSN shareholders.

The HSN Merger is expected to be completed by the fourth quarter of 2017.  The completion of the acquisition is subject to certain customary conditions, including approval by a majority of the outstanding voting power of HSN shareholders. A voting agreement has been obtained from Liberty to vote its HSN shares in-favor of the transaction.  Approval of the Liberty stockholders is not required, and is not being sought, for the HSN Merger.  Upon closing, Liberty’s board of directors will be expanded by one to include a director from HSN’s board of directors; this director will be selected by Liberty.

The term “Ventures Group” does not represent a separate legal entity, rather it represents those businesses, assets and liabilities that have been attributed to that group. As of September 30, 2017, the Ventures Group is comprised primarily of our interests in Evite, Inc. (“Evite”), FTD Companies, Inc. (“FTD”), LendingTree, Inc. (“LendingTree”), Liberty Broadband, investments in Charter, ILG, Inc. (“ILG”), and Time Warner Inc. (“Time Warner”), and cash and cash equivalents of approximately $512 million. The Ventures Group also has attributed to it certain liabilities related to our Exchangeable Debentures (see note 10) and certain deferred tax liabilities. The Ventures Group is primarily focused on the maximization of the value of these investments and investing in new business opportunities. 

On April 4, 2017, Liberty entered into an Agreement and Plan of Reorganization (the “GCI Reorganization Agreement” and the transactions contemplated thereby, the “Transactions”) with General Communication, Inc. (“GCI”), an Alaska corporation, and Liberty Interactive LLC, a Delaware limited liability company and a direct wholly-owned

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LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

subsidiary of Liberty (“LI LLC”), whereby Liberty will acquire GCI through a reorganization in which certain Ventures Group assets and liabilities will be contributed to GCI in exchange for a controlling interest in GCI.  Liberty and LI LLC will contribute to GCI Liberty (as defined below) its entire equity interest in Liberty Broadband and Charter, along with, subject to certain exceptions, Liberty’s entire equity interests in FTD and LendingTree, together with the Evite operating business and certain other assets and liabilities, in exchange for (a) the issuance to LI LLC of (i) a number of shares of reclassified GCI Class A Common Stock and a number of shares of reclassified GCI Class B Common Stock equal to the number of outstanding shares of Series A Liberty Ventures common stock and Series B Liberty Ventures common stock outstanding on the closing date of the Contribution, respectively, and (ii) cash and (b) the assumption of certain liabilities by GCI Liberty (the “Contribution”).

Liberty will then effect a tax-free separation of its controlling interest in the combined company (to be named GCI Liberty, Inc. (“GCI Liberty”)) to the holders of Liberty Ventures common stock in full redemption of all outstanding shares of such stock, leaving QVC Group common stock as the only outstanding common stock of Liberty.  Holders of GCI Class A Common Stock and GCI Class B Common Stock each will receive (i) 0.63 of a share of reclassified GCI Class A Common Stock and (ii) 0.20 of a share of new GCI Series A preferred stock in exchange for each share of their existing GCI stock.   The exchange ratios were determined based on total consideration of $32.50 per share for existing GCI common stock, comprised of $27.50 per share in reclassified GCI Class A Common Stock and $5.00 per share in newly issued GCI Preferred Stock, and a Liberty Ventures reference price of $43.65 (with no additional premium paid for shares of GCI Class B Common Stock). The Series A preferred shares will accrue dividends at an initial rate of 5% per annum (which would increase to 7% in connection with a future reincorporation of GCI Liberty in Delaware) and will be redeemable upon the 21st anniversary of the closing.

At the closing of the Transactions, Liberty will reattribute certain assets and liabilities from the Ventures Group to the QVC Group (the “Reattribution”).  The reattributed assets and liabilities, if effected as of the date hereof, would include cash, Liberty’s interest in ILG, certain green energy investments, LI LLC’s exchangeable debentures, and certain tax benefits. Pursuant to a recent amendment to the reorganization agreement, LI LLC’s 1.75% Exchangeable Debentures due 2046 (the “1.75% Exchangeable Debentures”) will not be subject to a pre-closing exchange offer and will instead be reattributed to the QVC Group, along with (i) an amount of cash equal to the net present value of the adjusted principal amount of such 1.75% Exchangeable Debentures (determined as if paid on October 5, 2023) and stated interest payments on the 1.75% Exchangeable Debentures to October 5, 2023 and (ii) an indemnity obligation from GCI Liberty with respect to any payments made by LI LLC in excess of stated principal and interest to any holder that exercises its exchange right under the terms of the debentures through October 5, 2023. The cash reattributed to the QVC Group will be funded by available cash attributed to Liberty’s Ventures Group and the proceeds of a margin loan facility in an initial principal amount of up to $1 billion.  Within six months of the closing, Liberty, LI LLC and GCI Liberty will cooperate with, and reasonably assist each other with respect to, the commencement and consummation of a purchase offer (the “Purchase Offer”) whereby LI LLC will offer to purchase, either pursuant to privately negotiated transactions or a tender offer, the 1.75% Exchangeable Debentures on terms and conditions (including maximum offer price) reasonably acceptable to GCI Liberty. GCI Liberty will indemnify LI LLC for each 1.75% Exchangeable Debenture repurchased by LI LLC in the Purchase Offer in an amount equal to the difference between (x) the purchase price paid by LI LLC to acquire such 1.75% Exchangeable Debenture in the Purchase Offer and (y) the sum of the amount of cash reattributed with respect to such purchased 1.75% Exchangeable Debenture in the reattribution plus the amount of certain tax benefits attributable to such 1.75% Exchangeable Debenture so purchased. GCI Liberty’s indemnity obligation with respect to payments made upon a holder’s exercise of its exchange right will be eliminated as to any 1.75% Exchangeable Debentures purchased in the Purchase Offer.

Liberty will complete the Reattribution using similar valuation methodologies to those used in connection with its previous reattributions, including taking into account the advice of its financial advisor. The Transactions are expected to be consummated during the first quarter of 2018, subject to the satisfaction of customary closing conditions and the requisite stockholder approvals. Simultaneous with that closing, QVC Group, including wholly-owned subsidiaries QVC, Inc., zulily and HSN (or, if the HSN Merger has not yet closed, following such closing), will become an asset-backed stock and Liberty will be renamed QVC Group, Inc.  Neither the Transactions nor the HSN Merger is conditioned on the completion of the other, and no assurance can be given as to which of these transactions will be completed first.

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LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

See Exhibit 99.1 to this Quarterly Report on Form 10-Q for unaudited attributed financial information for Liberty's tracking stock groups.

 

(3)    Disposals

On July 22, 2016, Liberty completed the CommerceHub Spin-Off. CommerceHub is included in the Corporate and other segment through July 22, 2016 and is not presented as a discontinued operation as the CommerceHub Spin-Off did not represent a strategic shift that had a major effect on Liberty’s operations and financial results. Included in revenue in the accompanying condensed consolidated statements of operations is $7 million for the three months ended September 30, 2016, and $51 million for the nine months ended September 30, 2016 related to CommerceHub.  Included in net earnings (loss) in the accompanying condensed consolidated statements of operations is income of $4 million for the three months ended September 30, 2016, and $4 million for the nine months ended September 30, 2016 related to CommerceHub. 

On November 4, 2016, Liberty completed the Expedia Holdings Split-Off. At the time of the Expedia Holdings Split-Off, Expedia Holdings was comprised of, among other things, Liberty’s former interest in Expedia and Liberty’s former wholly-owned subsidiary Bodybuilding. Liberty views Expedia and Bodybuilding as separate components and evaluated them separately for discontinued operations presentation. Based on a quantitative analysis, the Expedia Holdings Split-Off represents a strategic shift that has a major effect on Liberty’s operations, primarily due to prior year one-time gains on transactions recognized by Expedia.  Accordingly, the accompanying condensed consolidated financial statements of Liberty have been prepared to reflect Liberty’s interest in Expedia as a discontinued operation. The disposition of Bodybuilding as part of the Expedia Holdings Split-Off does not have a major effect on Liberty’s historical results nor is it expected to have a major effect on Liberty’s future operations. The disposition of Bodybuilding does not represent a strategic shift in Liberty’s operations. Accordingly, Bodybuilding is not presented as a discontinued operation in the accompanying condensed consolidated financial statements of Liberty. Bodybuilding is included in the Corporate and other segment through November 4, 2016. Included in revenue in the accompanying condensed consolidated statements of operations is $97 million for the three months ended September 30, 2016, and $325 million for the nine months ended September 30, 2016 related to Bodybuilding. Included in net earnings (loss) in the accompanying condensed consolidated statements of operations are earnings of $2  million for the three months ended September 30, 2016, and $6 million for the nine months ended September 30, 2016 related to Bodybuilding.

Certain financial information for Liberty’s investment in Expedia, which is included in earnings (loss) from discontinued operations is as follows:

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Nine months ended

 

 

 

 

September 30,

 

September 30,

 

 

 

 

2016

 

2016

 

 

 

 

amounts in millions

 

Earnings (loss) before income taxes

 

 

40

 

15

 

Income tax (expense) benefit

 

 

(13)

 

(1)

 

 

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LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

The impact from discontinued operations on basic and diluted earnings (loss) per share is as follows:

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Nine months ended

 

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

2016

 

2016

 

 

Basic earnings (loss) from discontinued operations attributable to Liberty shareholders per common share (note 3):

 

 

 

 

 

 

 

Series A and Series B QVC Group common stock

 

 

NA

 

NA

 

 

Series A and Series B Liberty Ventures common stock

 

 

0.19

 

0.10

 

 

Diluted earnings (loss) from discontinued operations attributable to Liberty shareholders per common share (note 3):

 

 

 

 

 

 

 

Series A and Series B QVC Group common stock

 

 

NA

 

NA

 

 

Series A and Series B Liberty Ventures common stock

 

 

0.19

 

0.10

 

 

 

 

(4)   Stock-Based Compensation

The Company has granted to certain of its directors, employees and employees of its subsidiaries, restricted stock, restricted stock units (“RSUs”) 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) based on the grant-date fair value (“GDFV”) of the Award, and recognizes that cost over the period during which the employee is required to provide service (usually the vesting period of the Award). The Company measures the cost of employee services received in exchange for a liability classified Award 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 $22 million and $20 million of stock-based compensation during the three months ended September 30, 2017 and 2016, respectively, and $59 million and $75 million during the nine months ended September 30, 2017 and 2016, respectively.  

During the nine months ended September 30, 2017, Liberty granted 3.1 million options and 483 thousand options to QVC and zulily employees, respectively, to purchase shares of Series A QVC Group common stock.  Such options had a weighted average GDFV of $7.86 per share and vest semi-annually over four years.

Also during the nine months ended September 30, 2017, Liberty granted to Liberty employees and directors  165 thousand and 34 thousand options to purchase shares of Series A QVC Group common stock and Series A Liberty Ventures common stock, respectively.  Such options had a weighted average GDFV of $7.73 and $15.48 per share, respectively, and vest between one and five years.

In connection with our CEO’s employment agreement, during the nine months ended September 30, 2017, Liberty also granted 154 thousand and 269 thousand options to purchase shares of Series B QVC Group common stock and Series B Liberty Ventures common stock, respectively, and 115 thousand performance-based RSUs of Series B QVC Group common stock. Such options had a GDFV of $7.92 per share and $15.41 per share, respectively.  The RSUs had a GDFV of $19.90 per share at the time they were granted. The options vest on December 31, 2017, and the RSUs cliff vest in one year, subject to satisfaction of certain performance objectives. Performance objectives, which are subjective, are considered in determining the timing and amount of the compensation expense recognized. When the satisfaction of the performance objectives becomes probable, the Company records compensation expense. The value of the grant is remeasured at each reporting period.

The Company has calculated the GDFV for all of its equity classified Awards and any subsequent remeasurement of its liability classified Awards and certain performance-based Awards using the Black-Scholes-Merton Model. The Company estimates the expected term of the Awards based on historical exercise and forfeiture data. The volatility used in

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Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

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 tables present the number and weighted average exercise price ("WAEP") of the Awards to purchase QVC Group and Liberty Ventures common stock granted to certain officers, employees and directors of the Company.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

QVC Group

 

 

    

 

    

 

 

    

Weighted

    

Aggregate

 

 

 

 

 

 

 

 

average

 

intrinsic

 

 

 

Series A

 

 

 

 

remaining

 

value

 

 

 

(000's)

 

WAEP

 

life

 

(millions)

 

Outstanding at January 1, 2017

 

29,585

 

$

20.80

 

 

 

 

 

 

 

Granted

 

3,763

 

$

23.69

 

 

 

 

 

 

 

Exercised

 

(1,333)

 

$

14.11

 

 

 

 

 

 

 

Forfeited/Cancelled

 

(1,083)

 

$

27.31

 

 

 

 

 

 

 

Outstanding at September 30, 2017

 

30,932

 

$

21.21

 

4.0

years

 

$

118

 

Exercisable at September 30, 2017

 

19,432

 

$

19.15

 

3.1

years

 

$

106

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

QVC Group

 

 

    

 

    

 

 

    

Weighted

    

Aggregate

 

 

 

 

 

 

 

 

average

 

intrinsic

 

 

 

Series B

 

 

 

 

remaining

 

value

 

 

 

(000's)

 

WAEP

 

life

 

(millions)

 

Outstanding at January 1, 2017

 

1,489

 

$

27.50

 

 

 

 

 

 

 

Granted

 

154

 

$

23.87

 

 

 

 

 

 

 

Exercised

 

 —

 

$

 —

 

 

 

 

 

 

 

Forfeited/Cancelled

 

 —

 

$

 —

 

 

 

 

 

 

 

Outstanding at September 30, 2017

 

1,643

 

$

27.16

 

5.0

years

 

$

 —

 

Exercisable at September 30, 2017

 

843

 

$

25.68

 

5.4

years

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liberty Ventures

 

 

    

 

    

 

 

    

Weighted

    

Aggregate

 

 

 

 

 

 

 

 

average

 

intrinsic

 

 

 

Series A

 

 

 

 

remaining

 

value

 

 

 

(000's)

 

WAEP

 

life

 

(millions)

 

Outstanding at January 1, 2017

 

1,974

 

$

22.18

 

 

 

 

 

 

 

Granted

 

34

 

$

52.00

 

 

 

 

 

 

 

Exercised

 

(428)

 

$

16.48

 

 

 

 

 

 

 

Forfeited/Cancelled

 

(12)

 

$

38.21

 

 

 

 

 

 

 

Outstanding at September 30, 2017

 

1,568

 

$

24.27

 

2.9

years

 

$

52

 

Exercisable at September 30, 2017

 

1,161

 

$

19.30

 

2.0

years

 

$

44

 

 

 

I-17


 

Table of Contents

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liberty Ventures

 

 

    

 

    

 

 

    

Weighted

    

Aggregate

 

 

 

 

 

 

 

 

average

 

intrinsic

 

 

 

Series B

 

 

 

 

remaining

 

value

 

 

 

(000's)

 

WAEP

 

life

 

(millions)

 

Outstanding at January 1, 2017

 

987

 

$

35.02

 

 

 

 

 

 

 

Granted

 

269

 

$

52.39

 

 

 

 

 

 

 

Exercised

 

 —

 

$

 —

 

 

 

 

 

 

 

Forfeited/Cancelled

 

 —

 

$

 —

 

 

 

 

 

 

 

Outstanding at September 30, 2017

 

1,256

 

$

38.74

 

4.9

years

 

$

27

 

Exercisable at September 30, 2017

 

184

 

$

36.82

 

5.2

years

 

$

 4

 

 

As of September 30, 2017, the total unrecognized compensation cost related to unvested Awards was approximately $111 million. Such amount will be recognized in the Company's consolidated statements of operations over a weighted average period of approximately 2.6 years.

As of September 30, 2017, Liberty reserved for issuance upon exercise of outstanding stock options approximately 30.9 million shares of Series A QVC Group common stock, 1.6 million shares of Series B QVC Group common stock, 1.6 million shares of Series A Liberty Ventures common stock and 1.3 million shares of Series B Liberty Ventures common stock.

 

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

Series A and Series B QVC Group Common Stock

Excluded from diluted EPS, for the three months ended September 30, 2017 and 2016,  are 16 million and 13 million potential common shares, respectively, because their inclusion would be antidilutive. Excluded from diluted EPS, for the nine months ended September 30, 2017 and 2016, are 16 million and 13 million potential common shares, respectively, because their inclusion would be antidilutive.

 

 

 

 

 

 

 

 

 

 

 

 

QVC Group Common Stock

 

 

    

Three months ended 

    

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

number of shares in millions

 

Basic WASO

 

448

 

473

 

451

 

479

 

Potentially dilutive shares

 

 4

 

 5

 

 3

 

 6

 

Diluted WASO

 

452

 

478

 

454

 

485

 

 

I-18


 

Table of Contents

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

Series A and Series B Liberty Ventures Common Stock

 

No potential common shares were excluded from diluted EPS for the three and nine months ended September 30, 2017.  Excluded from diluted EPS for the three and nine months ended September 30, 2016 were less than a million potential common shares in both periods, because their inclusion would be antidilutive.

 

 

 

 

 

 

 

 

 

 

 

 

 

Liberty Ventures Common Stock

 

 

    

Three months ended 

    

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

number of shares in millions

 

Basic WASO

 

86

 

142

 

85

 

142

 

Potentially dilutive shares

 

 1

 

2  

 

 1

 

2  

 

Diluted WASO

 

87

 

144

 

86

 

144

 

 

 

 

(6)   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

 

Fair Value Measurements at

 

 

 

September 30, 2017

 

December 31, 2016

 

 

    

 

 

    

Quoted

    

 

    

 

    

Quoted

    

 

 

 

 

 

 

 

prices

 

 

 

 

 

prices

 

 

 

 

 

 

 

 

in active

 

Significant

 

 

 

in active

 

Significant

 

 

 

 

 

 

markets for

 

other

 

 

 

markets for

 

other

 

 

 

 

 

 

identical

 

observable

 

 

 

identical

 

observable

 

 

 

 

 

 

assets

 

inputs

 

 

 

assets

 

inputs

 

Description

 

Total

 

(Level 1)

 

(Level 2)

 

Total

 

(Level 1)

 

(Level 2)

 

 

 

amounts in millions

 

Cash equivalents

 

$

623

 

623

 

 —

 

625

 

625

 

 —

 

Available-for-sale securities

 

$

2,393

 

2,393

 

 —

 

1,846

 

1,846

 

 —

 

Investment in Liberty Broadband

 

$

4,068

 

4,068

 

 —

 

3,161

 

3,161

 

 —

 

Debt

 

$

1,886

 

 —

 

1,886

 

1,667

 

 —

 

1,667

 

 

The majority of the Company's Level 2 financial assets and liabilities are primarily debt instruments with quoted market prices that are not considered to be traded on "active markets," as defined in GAAP. The fair values for such instruments are derived from a typical model using observable market data as the significant inputs. 

I-19


 

Table of Contents

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

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 

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

 

 

amounts in millions

 

Fair Value Option Securities - Available-for-sale securities

 

$

130

 

260

 

552

 

608

 

Fair Value Option Securities - Liberty Broadband

 

 

365

 

490

 

906

 

651

 

Exchangeable senior debentures

 

 

(91)

 

(138)

 

(230)

 

(313)

 

Other financial instruments

 

 

(35)

 

(6)

 

(42)

 

(4)

 

 

 

$

369

 

606

 

1,186

 

942

 

 

(7)   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"). Liberty has historically entered into economic hedges for certain of its 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 statements 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 has elected the Fair Value Option for certain of its AFS securities ("Fair Value Option Securities"). Accordingly, changes in the fair value of Fair Value Option Securities, as determined by quoted market prices, are reported in realized and unrealized gains (losses) on financial instruments, net in the accompanying condensed consolidated statements of operations.

 

Investments in AFS securities, the majority of which are considered Fair Value Option Securities, and other cost investments are summarized as follows:

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

 

2017

 

2016

 

 

 

amounts in millions

 

QVC Group

 

 

 

 

 

 

Other investments

 

$

 4

 

 4

 

Total attributed QVC Group

 

 

 4

 

 4

 

Ventures Group

 

 

 

 

 

 

Charter

 

 

1,947

 

1,543

 

ILG

 

 

445

 

302

 

Other investments

 

 

85

 

73

 

Total attributed Ventures Group

 

 

2,477

 

1,918

 

Consolidated Liberty

 

$

2,481

 

1,922

 

 

 

 

I-20


 

Table of Contents

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

(8)   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, fair value, and percentage ownership of the more significant investments in affiliates at September 30, 2017 and the carrying amount at December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

September 30, 2017

 

2016

 

 

    

Percentage

    

Fair value

    

Carrying

    

Carrying

 

 

 

ownership

 

(Level 1)

 

amount

 

amount

 

 

 

 

 

dollar amounts in millions

 

QVC Group

 

 

 

 

 

 

 

 

 

 

 

HSN

 

38

%  

$

782

 

$

198

 

184

 

Other

 

various

 

 

NA

 

 

38

 

40

 

Total QVC Group

 

 

 

 

 

 

 

236

 

224

 

Ventures Group

 

 

 

 

 

 

 

 

 

 

 

FTD (1)

 

37

%  

 

133

 

 

133

 

216

 

LendingTree (2)

 

27

%  

 

788

 

 

113

 

31

 

Other

 

various

 

 

NA

 

 

91

 

110

 

Total Ventures Group

 

 

 

 

 

 

 

337

 

357

 

Consolidated Liberty

 

 

 

 

 

 

$

573

 

581

 

 

(1)

The Company recorded an impairment on its investment in FTD during the third quarter of 2017 in the amount of $50 million. 

(2)

During the nine months ended September 30, 2017, the Company purchased an additional 450 thousand shares of LendingTree.

 

The following table presents Liberty's share of earnings (losses) of affiliates:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  September 30,

 

Nine months ended September 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

 

 

amounts in millions

 

QVC Group

 

 

 

 

 

 

 

 

 

 

HSN

 

$

12

 

 9

 

35

 

41

 

Other

 

 

(1)

 

(1)

 

(4)

 

(3)

 

Total QVC Group

 

 

11

 

 8

 

31

 

38

 

Ventures Group

 

 

 

 

 

 

 

 

 

 

FTD (1)

 

 

(81)

 

(7)

 

(86)

 

(8)

 

LendingTree

 

 

 2

 

 2

 

 5

 

10

 

Other

 

 

(18)

 

(25)

 

(72)

 

(61)

 

Total Ventures Group

 

 

(97)

 

(30)

 

(153)

 

(59)

 

Consolidated Liberty

 

$

(86)

 

(22)

 

(122)

 

(21)

 

 

(1)

As discussed above, the Company recorded an impairment of $50 million on its investment in FTD during the third quarter of 2017 which is reflected in the share of earnings (losses) of affiliates line item in the condensed consolidated statement of operations for the three and nine months ended September 30, 2017.

 

Investment in Liberty Broadband

 

As discussed in note 1, in connection with the merger of Charter and TWC, on May 18, 2016, Liberty invested $2.4 billion in Liberty Broadband Series C nonvoting shares. As of September 30, 2017, Liberty has a 23% economic ownership interest in Liberty Broadband. Due to overlapping boards of directors and management, Liberty has been deemed to have significant influence over Liberty Broadband for accounting purposes even though Liberty does not have any voting rights.

I-21


 

Table of Contents

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

Liberty has elected to apply the fair value option for its investment in Liberty Broadband (Level 1) as it believes that the Company’s investors value this investment based on the trading price of Liberty Broadband. Liberty recognizes changes in the fair value of its investment in Liberty Broadband in realized and unrealized gains (losses) on financial instruments, net in the condensed consolidated statements of operations. Summarized financial information for Liberty Broadband is as follows:

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

December 31, 2016

 

 

 

amounts in millions

 

Current assets

 

$

142

 

258

 

Investment in Charter, accounted for using the equity method

 

 

9,327

 

9,315

 

Other assets

 

 

13

 

18

 

Total assets

 

 

9,482

 

9,591

 

Long-term debt, including current portion

 

 

497

 

599

 

Deferred income taxes

 

 

498

 

505

 

Other liabilities

 

 

17

 

14

 

Equity

 

 

8,470

 

8,473

 

Total liabilities and shareholders’ equity

 

$

9,482

 

9,591

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Nine months ended

 

September 30,

 

September 30,

 

2017

 

2016

 

2017

 

2016

 

 

amounts in millions

 

amounts in millions

Revenue

$

 3

 

21

 

10

 

27

 

Operating expenses, net

 

 9

 

14

 

29

 

41

 

Operating income (loss)

 

(6)

 

 7

 

(19)

 

(14)

 

Share of earnings (losses) of affiliates

 

(5)

 

19

 

25

 

570

 

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

 

 3

 

 —

 

 5

 

93

 

Gain (loss) on dilution of investment in affiliate

 

(4)

 

(16)

 

(42)

 

760

 

Other income (expense), net

 

(5)

 

(4)

 

(14)

 

(5)

 

Income tax benefit (expense)

 

 7

 

(2)

 

18

 

(532)

 

Net earnings (loss)

$

(10)

 

 4

 

(27)

 

872

 

 

 

 

(9)   Intangible Assets

Goodwill

Changes in the carrying amount of goodwill are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate and

 

 

 

 

    

QVC

 

zulily

    

Other

    

Total

 

 

 

amounts in millions

 

Balance at January 1, 2017

 

$

5,110

 

917

 

25

 

6,052

 

Foreign currency translation adjustments

 

 

71

 

 —

 

 —

 

71

 

Balance at September 30, 2017

 

$

5,181

 

917

 

25

 

6,123

 

 

I-22


 

Table of Contents

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

Intangible Assets Subject to Amortization

Amortization expense for intangible assets with finite useful lives was $137 million and $181 million for the three months ended September 30, 2017 and 2016, respectively, and $462 million and $538 million for the nine months ended September 30, 2017 and 2016, respectively. Based on its amortizable intangible assets as of September 30, 2017, Liberty expects that amortization expense will be as follows for the next five years (amounts in millions):

 

 

 

 

 

 

Remainder of 2017

    

$

80

 

2018

 

$

283

 

2019

 

$

142

 

2020

 

$

74

 

2021

 

$

54

 

 

 

 

 

 

 

 

 

(10)   Long-Term Debt

Debt is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding

 

 

 

 

 

 

 

 

principal at

 

Carrying value

 

 

    

September 30, 2017

    

September 30, 2017

    

December 31, 2016

 

 

 

amounts in millions

 

QVC Group

 

 

 

 

 

 

 

 

 

Corporate level debentures

 

 

 

 

 

 

 

 

 

8.5% Senior Debentures due 2029

 

$

287

 

 

285

 

285

 

8.25% Senior Debentures due 2030

 

 

504

 

 

502

 

501

 

Subsidiary level notes and facilities

 

 

 

 

 

 

 

 

 

QVC 3.125% Senior Secured Notes due 2019

 

 

400

 

 

399

 

399

 

QVC 5.125% Senior Secured Notes due 2022

 

 

500

 

 

500

 

500

 

QVC 4.375% Senior Secured Notes due 2023

 

 

750

 

 

750

 

750

 

QVC 4.85% Senior Secured Notes due 2024

 

 

600

 

 

600

 

600

 

QVC 4.45% Senior Secured Notes due 2025

 

 

600

 

 

599

 

599

 

QVC 5.45% Senior Secured Notes due 2034

 

 

400

 

 

399

 

399

 

QVC 5.95% Senior Secured Notes due 2043

 

 

300

 

 

300

 

300

 

QVC Bank Credit Facilities

 

 

1,690

 

 

1,690

 

1,896

 

Other subsidiary debt

 

 

177

 

 

177

 

174

 

Deferred loan costs

 

 

 

 

 

(26)

 

(28)

 

Total QVC Group debt

 

$

6,208

 

 

6,175

 

6,375

 

Ventures Group

 

 

 

 

 

 

 

 

 

Corporate level debentures

 

 

 

 

 

 

 

 

 

4% Exchangeable Senior Debentures due 2029

 

$

435

 

 

334

 

276

 

3.75% Exchangeable Senior Debentures due 2030

 

 

435

 

 

326

 

267

 

3.5% Exchangeable Senior Debentures due 2031

 

 

328

 

 

331

 

316

 

0.75% Exchangeable Senior Debentures due 2043

 

 

 1

 

 

 3

 

 3

 

1.75% Exchangeable Senior Debentures due 2046

 

 

750

 

 

892

 

805

 

Total Ventures Group debt

 

$

1,949

 

 

1,886

 

1,667

 

Total consolidated Liberty debt

 

$

8,157

 

 

8,061

 

8,042

 

Less current classification

 

 

 

 

 

(1,011)

 

(876)

 

Total long-term debt

 

 

 

 

$

7,050

 

7,166

 

 

I-23


 

Table of Contents

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

QVC Bank Credit Facilities

 

On June 23, 2016, QVC amended and restated its senior secured credit facility (the “Third Amended and Restated Credit Agreement”) with zulily as co-borrower. The Third Amended and Restated Credit Agreement is a multi-currency facility that provides for a $2.65 billion revolving credit facility, with a $300 million total sub-limit for standby letters of credit and $1.5 billion of uncommitted incremental revolving loan commitments or incremental term loans. The Third Amended and Restated Credit Agreement includes a $400 million tranche that may be borrowed by QVC and zulily, as co-borrowers with an additional $50 million sub-limit for standby letters of credit.  The remaining $2.25 billion and any incremental loans may be borrowed only by QVC. The borrowers may elect that the loans extended under the Third Amended and Restated Credit Agreement bear interest at a rate per annum equal to the annual base rate or LIBOR, as each is defined in the Third Amended and Restated Credit Agreement.  Borrowings that are alternate base rate loans will bear interest at a per annum rate equal to the base rate plus a margin that varies between 0.25% to 0.75% depending on QVC and zulily’s combined ratio of Consolidated Total Debt to Consolidated EBITDA for the most recent four fiscal quarter period (the “Combined Consolidated Leverage Ratio”). Borrowings that are LIBOR loans will bear interest at a per annum rate equal to the applicable LIBOR rate plus a margin that varies between 1.25% and 1.75% depending on QVC and zulily’s Combined Consolidated Leverage Ratio.  Because the calculation of the Combined Consolidated Leverage Ratio was revised to include zulily, the effective interest rate margins, on the date that the Third Amended and Restated Credit Agreement was entered into, decreased from the interest rate margins under the previous bank credit facility. Each loan may be prepaid at any time and from time to time without penalty other than customary breakage costs. No mandatory prepayments are required other than when borrowings and letter of credit usage exceed availability; provided that, if zulily ceases to be controlled by Liberty, all of its loans must be repaid and its letters of credit cash collateralized. Any amounts prepaid on the revolving facility may be reborrowed. The facility matures on June 23, 2021, except that $140 million of the $2.25 billion commitment available to QVC matures on March 9, 2020. Payment of loans may be accelerated following certain customary events of default.

 

The purpose of the amendment was to, among other things, extend the maturity of QVC's senior secured credit facility, provide zulily the opportunity to borrow on the senior secured credit facility, and lower the interest rate on borrowings. The payment and performance of the borrowers’ obligations (including zulily’s obligations) under the Third Amended and Restated Credit Agreement are guaranteed by each of QVC’s Material Domestic Subsidiaries (as defined in the Third Amended and Restated Credit Agreement). Further, the borrowings under the Third Amended and Restated Credit Agreement are secured, pari passu with QVC’s existing notes, by a pledge of all of the capital stock of QVC.  The payment and performance of the borrowers’ obligations with respect to the $400 million tranche available to both QVC and zulily are also guaranteed by each of zulily’s Material Domestic Subsidiaries (as defined in the Third Amended and Restated Credit Agreement), if any, and are secured by a pledge of all of zulily’s equity interests.

 

The Third Amended and Restated Credit Agreement contains certain affirmative and negative covenants, including certain restrictions on QVC and zulily and each of their restricted subsidiaries (subject to certain exceptions) with respect to, among other things: incurring additional indebtedness; creating liens on property or assets; making certain loans or investments; selling or disposing of assets; paying certain dividends and other restricted payments; dissolving, consolidating or merging; entering into certain transactions with affiliates; entering into sale or leaseback transactions; restricting subsidiary distributions; limiting QVC’s consolidated leverage ratio, which is defined in the Third Amended Restated Credit Agreement as QVC’s consolidated total debt to Adjusted OIBDA ratio for the most recent four fiscal quarter period; and limiting the Combined Consolidated Leverage Ratio.

 

The interest rate on borrowings outstanding under the Third Amended and Restated Credit Agreement was 2.7% at September 30, 2017. Availability under the Third Amended and Restated Credit Agreement at September 30, 2017 was $950  million, including the remaining portion of the $400 million tranche that zulily may also borrow on. 

 

Exchangeable Senior Debentures

 

Liberty has elected to account for its exchangeable senior debentures using the fair value option. Accordingly, changes in the fair value of these instruments are recognized as unrealized gains (losses) in the statements of operations.  As of September 30, 2017 the balance of the 4% Exchangeable Senior Debentures due 2029, the 3.75% Exchangeable Senior

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LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

Debentures due 2030 and the 3.5% Exchangeable Senior Debentures due 2031 have been classified as current because Liberty does not own shares to redeem the debentures.  For the remaining exchangeables, Liberty reviews the terms of the debentures on a quarterly basis to determine whether a triggering event has occurred to require current classification of the exchangeables upon a call event. The 0.75% Exchangeable Senior Debentures due 2043 are classified as current as of September 30, 2017.

 

During the year ended December 31, 2016, holders exchanged, under the terms of the debentures, approximately $523 million principal of Liberty’s 0.75% Exchangeable Senior Debentures due 2043 and Liberty made cash payments of approximately $1,181 million to settle the obligations. In addition, in conjunction with the investment in Liberty Broadband (see note 1), an extraordinary distribution of approximately $325 million was paid to holders of the 0.75% Exchangeable Senior Debentures due 2043.  

 

In August 2016, Liberty issued $750 million principal amount of new 1.75% Exchangeable Senior Debentures due 2046. The 1.75% Exchangeable Senior Debentures are senior exchangeable debentures due September 2046, which bear interest at an annual rate of 1.75%.  Each $1,000 debenture is exchangeable at the holder’s option for the value of 2.9317 shares of Charter Class A common stock. Liberty may, at its election, pay the exchange value in cash, Charter Class A common stock or a combination thereof. The number of shares of Charter Class A common stock attributable to a debenture represents an initial exchange price of approximately $341.10 per share. Liberty, at its option, may redeem the debentures, in whole or in part, for cash generally equal to the face amount of the debentures plus accrued interest.

 

Debt Covenants

Liberty, QVC and zulily are in compliance with all debt covenants at September 30, 2017.

Other Subsidiary Debt

Other subsidiary debt at September 30, 2017 is comprised primarily of capitalized satellite transponder lease obligations.

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 September 30, 2017 are as follows (amounts in millions):

 

 

 

 

 

Senior debentures

 

$

885

 

QVC senior secured notes

    

$

3,654

 

 

Due to the variable rate nature, Liberty believes that the carrying amount of its other debt, not discussed above, approximated fair value at September 30, 2017.

 

(11)   Stockholders' Equity

In addition to the Series A and Series B QVC Group and Liberty Ventures common stock, there are 4 billion shares of Series C QVC Group and 400 million shares of Series C Liberty Ventures common stock authorized for issuance. As of September 30, 2017,  no shares of any Series C QVC Group or Liberty Ventures common stock were issued or outstanding.  

 

(12)   Commitments and Contingencies

Distribution Center Lease

 

On July 2, 2015, QVC entered into a lease (the “Lease”) for a west coast distribution center. Pursuant to the Lease, the landlord built an approximately one million square foot rental building in Ontario, California (the “Premises”), and

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LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

thereafter leased the Premises to QVC as its new west coast distribution center for an initial term of 15 years. Under the Lease, QVC is required to pay an initial base rent of approximately $6 million per year, increasing to approximately $8 million per year by the final year of the initial term, as well as all real estate taxes and other building operating costs. QVC also has an option to extend the term of the Lease for up to two consecutive terms of 10 years each.

 

QVC has the right to purchase the Premises and related land from the landlord by entering into an amended and restated agreement at any time during the twenty-fifth or twenty-sixth months of the Lease's initial term, which will occur in June and July of 2018, with a $10 million initial payment and annual payments of $12 million over a term of 13 years.

 

QVC concluded that it was the deemed owner (for accounting purposes only) of the Premises during the construction period under build to suit lease accounting. Building construction began in July of 2015. During the construction period, QVC recorded estimated project construction costs incurred by the landlord as a projects in progress asset and a corresponding long-term liability in "Property and equipment, net" and "Other long-term liabilities," respectively, on its consolidated balance sheet. In addition, QVC paid for normal tenant improvements and certain structural improvements and recorded these amounts as part of the projects in progress asset. Upon completion of construction, the long-term liability was reclassified to debt.

 

On August 29, 2016, QVC’s west coast distribution center officially opened. QVC concluded that the Lease does not meet the criteria for “sale-leaseback” treatment under GAAP. Therefore, QVC is treating the Lease as a financing obligation and lease payments are being attributed to: (1) a reduction of the principal financing obligation; (2) imputed interest expense; and (3) land lease expense representing an imputed cost to lease the underlying land of the Premises. In addition, the building asset is being depreciated over its estimated useful life of 20 years. Although QVC did not begin making monthly lease payments pursuant to the Lease until February 2017, the portion of the lease obligations allocated to the land is being treated for accounting purposes as an operating lease that commenced in 2015. If QVC does not exercise its right to purchase the Premises and related land, QVC will derecognize both the net book values of the asset and the financing obligation at the conclusion of the lease term.

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.

 

 

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LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

(13)   Information About Liberty's Operating Segments

Liberty, through its ownership interests in subsidiaries and other companies, is primarily engaged in the video, online commerce and cable industries. Liberty identifies its reportable segments as (A) those consolidated subsidiaries that represent 10% or more of its consolidated annual revenue, annual Adjusted OIBDA or total assets and (B) those equity method affiliates whose share of earnings represent 10% or more of Liberty's annual pre-tax earnings.

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 and revenue or sales per customer equivalent. In addition, Liberty reviews nonfinancial measures such as unique website visitors, number of units shipped, 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 all 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, certain purchase accounting adjustments, 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 nine months ended September 30, 2017, Liberty has identified the following consolidated subsidiaries as its reportable segments:

·

QVC – a 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.

·

zulily – a consolidated subsidiary that markets and sells unique products in the United States and several foreign countries through flash sales events, primarily through its desktop and mobile websites and mobile applications.

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 are the same as those described in the Company's Summary of Significant Accounting Policies in the Annual Report on Form 10-K for the year ended December 31, 2016.

Performance Measures

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  September 30,

 

 

 

2017

 

2016

 

 

    

 

 

    

Adjusted

    

 

    

Adjusted

 

 

 

Revenue

 

OIBDA

 

Revenue

 

OIBDA

 

 

 

amounts in millions

 

QVC Group

 

 

 

 

 

 

 

 

 

 

QVC

 

$

2,010

 

412

 

1,948

 

393

 

zulily

 

 

367

 

12

 

359

 

18

 

Corporate and other

 

 

 —

 

(8)

 

 —

 

(5)

 

Inter-segment eliminations

 

 

(2)

 

 —

 

(4)

 

 —

 

Total QVC Group

 

 

2,375

 

416

 

2,303

 

406

 

Ventures Group

 

 

 

 

 

 

 

 

 

 

Corporate and other

 

 

 6

 

(6)

 

109

 

(4)

 

Total Ventures Group

 

 

 6

 

(6)

 

109

 

(4)

 

Consolidated Liberty

 

$

2,381

 

410

 

2,412

 

402

 

 

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LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30,

 

 

 

2017

 

2016

 

 

    

 

 

    

Adjusted

    

 

    

Adjusted

 

 

 

Revenue

 

OIBDA

 

Revenue

 

OIBDA

 

 

 

amounts in millions

 

QVC Group

 

 

 

 

 

 

 

 

 

 

QVC

 

$

5,954

 

1,314

 

6,024

 

1,271

 

zulily

 

 

1,093

 

53

 

1,080

 

72

 

Corporate and other

 

 

 —

 

(18)

 

 —

 

(17)

 

Inter-segment eliminations

 

 

(3)

 

 —

 

(10)

 

 —

 

Total QVC Group

 

 

7,044

 

1,349

 

7,094

 

1,326

 

Ventures Group

 

 

 

 

 

 

 

 

 

 

Corporate and other

 

 

16

 

(21)

 

391

 

 8

 

Total Ventures Group

 

 

16

 

(21)

 

391

 

 8

 

Consolidated Liberty

 

$

7,060

 

1,328

 

7,485

 

1,334

 

 

Other Information

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

 

Total assets

 

Investments in affiliates

 

Investment in Liberty Broadband

 

Capital expenditures

 

 

 

amounts in millions

 

QVC Group

 

 

 

 

 

 

 

 

 

 

QVC

 

$

11,263

 

38

 

 —

 

83

 

zulily

 

 

2,374

 

 —

 

 —

 

41

 

Corporate and other

 

 

343

 

198

 

 —

 

 —

 

Total QVC Group

 

 

13,980

 

236

 

 —

 

124

 

Ventures Group

 

 

 

 

 

 

 

 

 

 

Corporate and other

 

 

7,467

 

337

 

4,068

 

 2

 

Total Ventures Group

 

 

7,467

 

337

 

4,068

 

 2

 

Consolidated Liberty

 

$

21,447

 

573

 

4,068

 

126

 

 

 

The following table provides a reconciliation of Consolidated segment Adjusted OIBDA to  Operating income (loss) and  Earnings (loss) from continuing operations before income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

 

 

amounts in millions

 

Consolidated segment Adjusted OIBDA

 

$

410

 

402

 

1,328

 

1,334

 

Stock-based compensation

 

 

(22)

 

(20)

 

(59)

 

(75)

 

Depreciation and amortization

 

 

(180)

 

(225)

 

(594)

 

(663)

 

Operating income (loss)

 

 

208

 

157

 

675

 

596

 

Interest expense

 

 

(88)

 

(92)

 

(267)

 

(277)

 

Share of earnings (loss) of affiliates, net

 

 

(86)

 

(22)

 

(122)

 

(21)

 

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

 

 

369

 

606

 

1,186

 

942

 

Other, net

 

 

 7

 

(8)

 

 1

 

130

 

Earnings (loss) before income taxes from continuing operations

 

$

410

 

641

 

1,473

 

1,370

 

 

 

 

 

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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; international expansion; new service offerings; our proposed transactions involving General Communication, Inc. (“GCI”) and HSN, Inc. (“HSN”); revenue growth at QVC, Inc. ("QVC"); the recoverability of our goodwill and other long-lived assets; our projected sources and uses of cash; and the anticipated impact of certain contingent liabilities related to legal and tax proceedings and other matters arising in the ordinary course of business. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. The following include some but not all of the factors 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;

·

increased digital TV penetration and the impact on channel positioning of our programs;

·

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

·

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

·

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

·

our proposed transactions involving GCI and HSN and the satisfaction of conditions thereto;

·

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

·

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

·

the outcome of any pending or threatened litigation;

·

availability of qualified personnel;

·

changes in, 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, distributors, suppliers and vendors;

·

domestic and international economic and business conditions and industry trends, including the impact of Brexit (as defined below);

·

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 Internet protocol television and their impact on home shopping programming;

·

rapid technological changes;

·

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

·

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

·

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

·

fluctuations in foreign currency exchange rates.

For additional risk factors, please see Part I, Item 1A of the Annual Report on Form 10-K for the year ended December 31, 2016, as well as Part II, Item 1A of the Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 and Part II, Item 1A of the Quarterly Report on Form 10-Q for the quarter ended June 30, 2017. These forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Quarterly Report on

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Form 10-Q, 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, 2016.

See note 1 of the accompanying condensed consolidated financial statements for an overview of new accounting standards that we have adopted or that we plan to adopt that have had or may have an impact on our financial statements.

The information herein relates to Liberty Interactive Corporation and its controlled subsidiaries (collectively “Liberty,” the “Company,” “Consolidated Liberty,” “us,” “we” or “our” unless the context otherwise requires).

Overview

 

We own controlling and non-controlling interests in a broad range of video, online commerce and cable companies. Our largest business and reportable segment is QVC. 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 the Internet through its domestic and international websites and mobile applications. On October 1, 2015 we acquired zulily, inc. (“zulily”) (now known as zulily, llc), an online retailer offering customers a fun and entertaining shopping experience with a fresh selection of new product styles launched every day.

 

Our “Corporate and other” category includes entire or majority interests in consolidated subsidiaries, which operate online commerce businesses in a broad range of retail categories, ownership interests in unconsolidated businesses and corporate expenses.  These consolidated subsidiaries include Evite, Inc. (“Evite”), CommerceHub, Inc. (“CommerceHub”) (through July 22, 2016) (see note 3 of the accompanying condensed consolidated financial statements) and Bodybuilding.com, LLC ("Bodybuilding") (through November 4, 2016) (see note 3 of the accompanying condensed consolidated financial statements) (collectively, the “Digital Commerce businesses”). Evite is an online invitation and social event planning service on the web. CommerceHub provides a cloud-based platform for online retailers and their suppliers (manufacturers and distributors) to sell products to consumers without physically owning inventory, or managing the fulfillment of those products. Bodybuilding manages websites related to sports nutrition, bodybuilding and fitness. We also hold ownership interests in FTD Companies, Inc. (“FTD”), HSN and LendingTree, Inc. (“LendingTree”), which we account for as equity method investments; an interest in Liberty Broadband Corporation (“Liberty Broadband”), which we account for at fair value; and investments and related financial instruments in public companies such as Charter Communications, Inc. (“Charter”), ILG, Inc. (“ILG”) and Time Warner Inc. (“Time Warner”), which are accounted for at their respective fair market values.

 

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 has two tracking stocks—QVC Group common stock and Liberty Ventures common stock, which are intended to track and reflect the economic performance of the Liberty QVC Group and the Ventures Group, respectively (as defined below).

 

The term “Ventures Group” does not represent a separate legal entity, rather it represents those businesses, assets and liabilities that have been attributed to that group. As of September 30, 2017, the Ventures Group has attributed to it our interests in Evite, FTD, LendingTree, and Liberty Broadband, investments in Charter, ILG, and Time Warner, and cash and cash equivalents in the amount of approximately $512 million. The Ventures Group also has attributed to it certain liabilities related to our corporate level indebtedness (see note 10 in the accompanying condensed consolidated financial statements) and certain deferred tax liabilities. The Ventures Group is primarily focused on the maximization of the value of these investments and investing in new business opportunities. 

On April 4, 2017, Liberty entered into an Agreement and Plan of Reorganization (the “GCI Reorganization Agreement” and the transactions contemplated thereby, the “Transactions”) with General Communication, Inc. (“GCI”), an Alaska corporation, and Liberty Interactive LLC, a Delaware limited liability company and a direct wholly-owned subsidiary of Liberty (“LI LLC”), whereby Liberty will acquire GCI through a reorganization in which certain Ventures Group assets and liabilities will be contributed to GCI in exchange for a controlling interest in GCI.  Liberty and LI LLC will contribute to GCI Liberty (as defined below) its entire equity interest in Liberty Broadband and Charter, along with,

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subject to certain exceptions, Liberty’s entire equity interests in FTD and LendingTree, together with the Evite operating business and certain other assets and liabilities, in exchange for (a) the issuance to LI LLC of (i) a number of shares of reclassified GCI Class A Common Stock and a number of shares of reclassified GCI Class B Common Stock equal to the number of outstanding shares of Series A Liberty Ventures common stock and Series B Liberty Ventures common stock outstanding on the closing date of the Contribution, respectively, and (ii) cash and (b) the assumption of certain liabilities by GCI Liberty (the “Contribution”).

Liberty will then effect a tax-free separation of its controlling interest in the combined company (to be named GCI Liberty, Inc. (“GCI Liberty”)) to the holders of Liberty Ventures common stock in full redemption of all outstanding shares of such stock, leaving QVC Group common stock as the only outstanding common stock of Liberty.  Holders of GCI Class A Common Stock and GCI Class B Common Stock each will receive (i) 0.63 of a share of reclassified GCI Class A Common Stock and (ii) 0.20 of a share of new GCI Series A preferred stock in exchange for each share of their existing GCI stock.  The exchange ratios were determined based on total consideration of $32.50 per share for existing GCI common stock, comprised of $27.50 per share in reclassified GCI Class A Common Stock and $5.00 per share in newly issued GCI Preferred Stock, and a Liberty Ventures reference price of $43.65 (with no additional premium paid for shares of GCI Class B Common Stock). The Series A preferred shares will accrue dividends at an initial rate of 5% per annum (which would increase to 7% in connection with a future reincorporation of GCI Liberty in Delaware) and will be redeemable upon the 21st anniversary of the closing.

At the closing of the Transactions, Liberty will reattribute certain assets and liabilities from the Ventures Group to the QVC Group (the “Reattribution”).  The reattributed assets and liabilities, if effected as of the date hereof, would include cash, Liberty’s interest in ILG, certain green energy investments, LI LLC’s exchangeable debentures, and certain tax benefits.  Pursuant to a recent amendment to the reorganization agreement, LI LLC’s 1.75% Exchangeable Debentures due 2046 (the “1.75% Exchangeable Debentures”) will not be subject to a pre-closing exchange offer and will instead be reattributed to the QVC Group, along with (i) an amount of cash equal to the net present value of the adjusted principal amount of such 1.75% Exchangeable Debentures (determined as if paid on October 5, 2023) and stated interest payments on the 1.75% Exchangeable Debentures to October 5, 2023 and (ii) an indemnity obligation from GCI Liberty with respect to any payments made by LI LLC in excess of stated principal and interest to any holder that exercises its exchange right under the terms of the debentures through October 5, 2023. The cash reattributed to the QVC Group will be funded by available cash attributed to Liberty’s Ventures Group and the proceeds of a margin loan facility in an initial principal amount of up to $1 billion.  Within six months of the closing, Liberty, LI LLC and GCI Liberty will cooperate with, and reasonably assist each other with respect to, the commencement and consummation of a purchase offer (the “Purchase Offer”) whereby LI LLC will offer to purchase, either pursuant to privately negotiated transactions or a tender offer, the 1.75% Exchangeable Debentures on terms and conditions (including maximum offer price) reasonably acceptable to GCI Liberty. GCI Liberty will indemnify LI LLC for each 1.75% Exchangeable Debenture repurchased by LI LLC in the Purchase Offer in an amount equal to the difference between (x) the purchase price paid by LI LLC to acquire such 1.75% Exchangeable Debenture in the Purchase Offer and (y) the sum of the amount of cash reattributed with respect to such purchased 1.75% Exchangeable Debenture in the reattribution plus the amount of certain tax benefits attributable to such 1.75% Exchangeable Debenture so purchased. GCI Liberty’s indemnity obligation with respect to payments made upon a holder’s exercise of its exchange right will be eliminated as to any 1.75% Exchangeable Debentures purchased in the Purchase Offer.

Liberty will complete the Reattribution using similar valuation methodologies to those used in connection with its previous reattributions, including taking into account the advice of its financial advisor. The Transactions are expected to be consummated during the first quarter of 2018, subject to the satisfaction of customary closing conditions and the requisite stockholder approvals.

On July 22, 2016, Liberty completed its previously announced spin-off (the “CommerceHub Spin-Off”) of its former wholly-owned subsidiary CommerceHub.  The CommerceHub Spin-Off was accomplished by the distribution by Liberty of a dividend of (i) 0.1 of a share of CommerceHub’s Series A common stock for each outstanding share of Liberty’s Series A Liberty Ventures common stock as of 5:00 p.m., New York City time, on July 8, 2016 (such date and time, the “Record Date”), (ii) 0.1 of a share of CommerceHub’s Series B common stock for each outstanding share of Liberty’s Series B Liberty Ventures common stock as of the Record Date and (iii) 0.2 of a share of CommerceHub’s Series C common stock for each outstanding share of Series A and Series B Liberty Ventures common stock as of the Record Date, in each case, with cash paid in lieu of fractional shares. This transaction has been recorded at historical cost due to the pro rata nature of the distribution. In September 2016, the Internal Revenue Service (“IRS”) completed its review of the CommerceHub

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Spin-Off and notified Liberty that it agreed with the nontaxable characterization of the CommerceHub Spin-Off. Liberty received an Issue Resolution Agreement from the IRS documenting this conclusion.

 

On November 4, 2016, Liberty completed its previously announced split-off (the “Expedia Holdings Split-Off”) of its former wholly-owned subsidiary Liberty Expedia Holdings, Inc. (“Expedia Holdings”). At the time of the Expedia Holdings Split-Off, Expedia Holdings was comprised of, among other things, Liberty’s former interest in Expedia, Inc. and Liberty’s former wholly-owned subsidiary Bodybuilding. On November 2, 2016, Expedia Holdings borrowed $350 million under a new margin loan and distributed $299 million, net of certain debt related costs, to Liberty on November 4, 2016. The Expedia Holdings Split-Off was accomplished by the redemption of (i) 0.4 of each outstanding share of Liberty’s Series A Liberty Ventures common stock for 0.4 of a share of Expedia Holdings Series A common stock at 5:00 p.m., New York City time, on November 4, 2016 (such date and time, the “Redemption Date”) and (ii) 0.4 of each outstanding share of Liberty’s Series B Liberty Ventures common stock for 0.4 of a share of Expedia Holdings Series B common stock on the Redemption Date, in each case, with cash paid in lieu of any fractional shares of Liberty Ventures common stock or Expedia Holdings common stock (after taking into account all of the shares owned of record by each holder thereof, as applicable). In February 2017, the IRS completed its review of the Expedia Holdings Split-Off and informed Liberty that it agreed with the nontaxable characterization of the transaction. Liberty received an Issue Resolution Agreement from the IRS documenting this conclusion.

 

The term “QVC Group” does not represent a separate legal entity, rather it represents those businesses, assets and liabilities that have been attributed to that group.  As of September 30, 2017, the QVC Group is primarily comprised of our merchandise-focused televised-shopping programs, Internet and mobile application businesses, and has attributed to it our wholly-owned subsidiaries QVC and zulily, as well as our approximate 38% interest in HSN and cash and cash equivalents of approximately $383 million, including subsidiary cash. The QVC Group also has attributed to it liabilities that reside with QVC and zulily, certain liabilities related to our corporate level indebtedness (see note 10 of the accompanying condensed consolidated financial statements) and certain deferred tax liabilities.

On July 6, 2017, Liberty announced that it had entered into an Agreement and Plan of Merger, dated as of July 5, 2017 (the “HSN Merger Agreement”), by and among Liberty, Liberty Horizon, Inc., a Delaware corporation and a direct, wholly-owned subsidiary of Liberty (“Merger Sub”), and HSN. Pursuant to the terms of the HSN Merger Agreement, Merger Sub will merge with and into HSN, with HSN surviving as a wholly-owned subsidiary of Liberty (the “HSN Merger”). As a result of the HSN Merger, Liberty will acquire the approximately 62% of HSN it does not already own in an all-stock transaction,  making HSN a wholly-owned subsidiary, attributed to the QVC Group tracking stock group. Liberty currently owns approximately 38% of HSN. HSN shareholders (other than Liberty) will receive fixed consideration of 1.65 shares of Series A QVC Group common stock for each share of HSN common stock. Based on the Series A QVC Group common stock’s closing price as of July 5, 2017 and the number of HSN undiluted shares outstanding as of May 1, 2017, this equates to a total enterprise value for HSN of $2.6 billion, an equity value of $2.1 billion, and consideration of $40.36 per HSN share, representing a premium of approximately 29% to HSN shareholders, based on HSN’s closing price on July 5, 2017. Liberty intends to issue 53.4 million shares of Series A QVC Group common stock to HSN shareholders.

The HSN Merger is expected to be completed by the fourth quarter of 2017.  The completion of the acquisition is subject to certain customary conditions, including approval by a majority of the outstanding voting power of HSN shareholders. A voting agreement has been obtained from Liberty to vote its HSN shares in-favor of the transaction.  Approval of the Liberty stockholders is not required, and is not being sought, for the HSN Merger.  Upon closing, Liberty’s board of directors will be expanded by one to include a director from HSN’s board of directors; this director will be selected by Liberty.

As discussed above, the Transactions are expected to close in the first quarter of 2018.  Simultaneous with that closing, QVC Group, including wholly-owned subsidiaries QVC, Inc., zulily and HSN (or, if the HSN acquisition has not yet closed, following such closing), will become an asset-backed stock and Liberty will be renamed QVC Group, Inc.  Neither the Transactions nor the HSN Merger is conditioned on the completion of the other, and no assurance can be given as to which of these transactions will be completed first.

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 principal reporting segments. The "Corporate and other" category consists of those assets or businesses which we do not disclose separately,

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including our Digital Commerce businesses. For a more detailed discussion and analysis of the financial results of the principal reporting segments, see "Results of Operations—Businesses" below.

Operating Results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

 

 

amounts in millions

 

Revenue

 

 

 

 

 

 

 

 

 

 

QVC Group

 

 

 

 

 

 

 

 

 

 

QVC

 

$

2,010

 

1,948

 

5,954

 

6,024

 

zulily

 

 

367

 

359

 

1,093

 

1,080

 

Inter-segment eliminations

 

 

(2)

 

(4)

 

(3)

 

(10)

 

Total QVC Group

 

 

2,375

 

2,303

 

7,044

 

7,094

 

Ventures Group

 

 

 

 

 

 

 

 

 

 

Corporate and other

 

 

 6

 

109

 

16

 

391

 

Total Ventures Group

 

 

 6

 

109

 

16

 

391

 

Consolidated Liberty

 

$

2,381

 

2,412

 

7,060

 

7,485

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income (Loss)

 

 

 

 

 

 

 

 

 

 

QVC Group

 

 

 

 

 

 

 

 

 

 

QVC

 

$

274

 

231

 

851

 

799

 

zulily

 

 

(44)

 

(52)

 

(112)

 

(138)

 

Corporate and other

 

 

(12)

 

(12)

 

(30)

 

(34)

 

Total QVC Group

 

 

218

 

167

 

709

 

627

 

Ventures Group

 

 

 

 

 

 

 

 

 

 

Corporate and other

 

 

(10)

 

(10)

 

(34)

 

(31)

 

Total Ventures Group

 

 

(10)

 

(10)

 

(34)

 

(31)

 

Consolidated Liberty

 

$

208

 

157

 

675

 

596

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted OIBDA

 

 

 

 

 

 

 

 

 

 

QVC Group

 

 

 

 

 

 

 

 

 

 

QVC

 

$

412

 

393

 

1,314

 

1,271

 

zulily

 

 

12

 

18

 

53

 

72

 

Corporate and other

 

 

(8)

 

(5)

 

(18)

 

(17)

 

Total QVC Group

 

 

416

 

406

 

1,349

 

1,326

 

Ventures Group

 

 

 

 

 

 

 

 

 

 

Corporate and other

 

 

(6)

 

(4)

 

(21)

 

 8

 

Total Ventures Group

 

 

(6)

 

(4)

 

(21)

 

 8

 

Consolidated Liberty

 

$

410

 

402

 

1,328

 

1,334

 

 

Revenue.    Our consolidated revenue decreased 1.3% or $31 million and 5.7% or $425 million for the three and nine months ended September 30, 2017, respectively, as compared to the corresponding periods in the prior year. The decreases were due to the disposition of Bodybuilding (which contributed $97 million and $325 million for the three and nine month periods ended September 30, 2016, respectively), decreased revenue at QVC of $70 million for the nine month period ended September 30, 2017, and the CommerceHub Spin-Off (which contributed $7 million and $51 million for the three and nine month periods ended September 30, 2016, respectively). The decrease in the three month period ended September 30, 2017 was partially offset by an increase in revenue at QVC of $62 million. See "Results of Operations—Businesses" below for a more complete discussion of the results of operations of QVC and zulily.

Stock-based compensation.    Stock-based compensation includes compensation related to (1) options, restricted stock awards and restricted stock units for shares of our common stock that are granted to certain of our officers and employees and (2) phantom stock appreciation rights granted to officers and employees of certain of our subsidiaries pursuant to private equity plans. 

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We recorded $22 million and $20 million of stock-based compensation for the three months ended September 30, 2017 and 2016, respectively. We recorded $59 million and $75 million of stock-based compensation for the nine months ended September 30, 2017 and 2016, respectively. The increase of $2 million for the three months ended September 30, 2017 was primarily due to an increase at the corporate level. The decrease of $16 million for the nine months ended September 30, 2017 was primarily due to the CommerceHub Spin-Off and declines at QVC U.S., zulily, and at the corporate level. As of September 30, 2017, the total unrecognized compensation cost related to unvested Liberty equity awards was approximately $111 million. Such amount will be recognized in our condensed consolidated statements of operations over a weighted average period of approximately 2.6 years. 

Operating income.    Our consolidated operating income increased 32.5% or $51 million and 13.3% or $79 million for the three and nine months ended September 30, 2017, respectively, as compared to the corresponding periods in the prior year. The increase in operating income for the three months ended September 30, 2017 was primarily due to an increase in operating income at QVC of $43 million and a decrease in operating losses at zulily of $8 million. The increase in operating income for the nine months ended September 30, 2017 was primarily due to an increase in operating income at QVC of $52 million, a decrease in operating losses at zulily of $26 million, a decrease in corporate spending at the QVC Group of $4 million, partially offset by an increase in corporate spending at the Ventures Group of $3  million. See "Results of Operations—Businesses" below for a more complete discussion of the results of operations of QVC and zulily.

Adjusted OIBDA.    We define Adjusted OIBDA as revenue less cost of sales, operating expenses and selling, general and administrative ("SG&A") expenses excluding all stock-based 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 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 13 to the accompanying condensed consolidated financial statements for a reconciliation of Adjusted OIBDA to Operating income and Earnings (loss) from continuing operations before income taxes.

Consolidated Adjusted OIBDA increased 2.0% or $8 million and decreased  0.4% or $6 million for the three and nine months ended September 30, 2017, respectively, as compared to the corresponding periods in the prior year.  The increase in Adjusted OIBDA for the three months ended September 30, 2017 was primarily due to an increase at QVC of $19 million,  partially offset by a decrease at zulily of $6 million, a decrease in corporate and other Adjusted OIBDA at QVC Group of $3 million, and a decrease in corporate and other Adjusted OIBDA at Ventures Group of $2 million (of which $1 million related to the CommerceHub Spin-Off and $7 million related to the disposition of Bodybuilding). The decrease in Adjusted OIBDA for the nine months ended September 30, 2017 was primarily due to a decrease in corporate and other Adjusted OIBDA at Ventures Group of $29 million (of which $16 million related to the CommerceHub Spin-Off and $22 million related to the disposition of Bodybuilding) and a decrease at zulily of $19 million,  partially offset by an increase at QVC of $43 million.  See "Results of Operations—Businesses" below for a more complete discussion of the results of operations of QVC and zulily.

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Other Income and Expense

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

 

 

amounts in millions

 

Interest expense

 

 

 

 

 

 

 

 

 

 

QVC Group

 

$

(73)

 

(73)

 

(222)

 

(220)

 

Ventures Group

 

 

(15)

 

(19)

 

(45)

 

(57)

 

Consolidated Liberty

 

$

(88)

 

(92)

 

(267)

 

(277)

 

 

 

 

 

 

 

 

 

 

 

 

Share of earnings (losses) of affiliates

 

 

 

 

 

 

 

 

 

 

QVC Group

 

$

11

 

 8

 

31

 

38

 

Ventures Group

 

 

(97)

 

(30)

 

(153)

 

(59)

 

Consolidated Liberty

 

$

(86)

 

(22)

 

(122)

 

(21)

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

QVC Group

 

$

 1

 

(6)

 

 —

 

(2)

 

Ventures Group

 

 

368

 

612

 

1,186

 

944

 

Consolidated Liberty

 

$

369

 

606

 

1,186

 

942

 

 

 

 

 

 

 

 

 

 

 

 

Other, net

 

 

 

 

 

 

 

 

 

 

QVC Group

 

$

 5

 

 6

 

(5)

 

31

 

Ventures Group

 

 

 2

 

(14)

 

 6

 

99

 

Consolidated Liberty

 

$

 7

 

(8)

 

 1

 

130

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Liberty other income (expense)

 

$

202

 

484

 

798

 

774

 

 

Interest expense.    Interest expense remained relatively flat for the three and nine months ended September 30, 2017, as compared to the corresponding periods in the prior year.

 

Share of earnings (losses) of affiliates.    The following table presents our share of earnings (losses) of affiliates:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

 

 

amounts in millions

 

QVC Group

 

 

 

 

 

 

 

 

 

 

HSN

 

$

12

 

 9

 

35

 

41

 

Other

 

 

(1)

 

(1)

 

(4)

 

(3)

 

Total QVC Group

 

 

11

 

 8

 

31

 

38

 

Ventures Group

 

 

 

 

 

 

 

 

 

 

FTD (1)

 

 

(81)

 

(7)

 

(86)

 

(8)

 

LendingTree

 

 

 2

 

 2

 

 5

 

10

 

Other

 

 

(18)

 

(25)

 

(72)

 

(61)

 

Total Ventures Group

 

 

(97)

 

(30)

 

(153)

 

(59)

 

Consolidated Liberty

 

$

(86)

 

(22)

 

(122)

 

(21)

 

 

(1)

The Company recorded an impairment of $50 million on its investment in FTD during the third quarter of 2017 which is reflected in the share of earnings (losses) of affiliates line item in the condensed consolidated statement of operations for the three and nine months ended September 30, 2017.

 

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The share of losses in the “Other” category of the Ventures Group, in all periods, is primarily related to our investments in alternative energy solution entities. These entities typically operate at a loss and 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, net.    Realized and unrealized gains (losses) on financial instruments, net are comprised of changes in the fair value of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

 

 

amounts in millions

 

Fair Value Option Securities - Available-for-sale securities

 

$

130

 

260

 

552

 

608

 

Fair Value Option Securities - Liberty Broadband

 

 

365

 

490

 

906

 

651

 

Exchangeable senior debentures

 

 

(91)

 

(138)

 

(230)

 

(313)

 

Other financial instruments

 

 

(35)

 

(6)

 

(42)

 

(4)

 

 

 

$

369

 

606

 

1,186

 

942

 

 

The changes in realized and unrealized gains (losses) on financial instruments, net are due to market activity in the period on the various financial instruments that are marked to market on a periodic basis. The decrease for the three months ended September 30, 2017, compared to the corresponding period in the prior year, was primarily driven by the investments in Liberty Broadband and Charter experiencing higher gains during the third quarter of 2016 compared to the third quarter of 2017. The increase for the nine months ended September 30, 2017, compared to the same period in the prior year, was primarily driven by the investment in Liberty Broadband and the investment in Charter, as well as the exchange of a majority of the 0.75% Exchangeable Senior Debentures during the nine months ended September 30, 2016.

 

Other, net. Other, net includes the impact of foreign currency at QVC. Certain loans between QVC and its subsidiaries are deemed to be short-term in nature, and accordingly, the translation of these loans is recorded in the accompanying condensed consolidated statements of operations. The change in foreign currency gain (loss) was also due to variances in interest and operating payables balances between QVC and its international subsidiaries denominated in the currency of the subsidiary and the effects of currency exchange rate changes on those balances. Other, net increased $15 million and decreased $129 million for the three and nine months ended September 30, 2017, respectively, compared to the corresponding periods in the prior year. The increase for the three months ended September 30, 2017, compared to the same period in the prior year was the result of a loss on extinguishment of debt of $18 million during the three months ended September 30, 2016, and no similar loss in the three months ended September 30, 2017.  The decrease for the nine months ended September 30, 2017, compared to the same period in the prior year was primarily as a result of a change in gain (loss) on dilution of investments of $80 million and a change in foreign exchange gains (losses) of  $33 million in the nine months ended September 30, 2016.

 

Income taxes. We had income tax expense of $102 million and $190 million for the three months ended September 30, 2017 and 2016, respectively, and income tax expense of $462 million and $440 million for the nine months ended September 30, 2017 and 2016, respectively. Income tax expense was lower than the U.S. statutory tax rate of 35% during the three and nine months ended September 30, 2017 due to a federal benefit from tax credits and incentives generated by our alternative energy investments and permanent tax benefits related to foreign currency losses realized for tax purposes partially offset by state taxes, net of federal benefit. Income tax expense was lower than the U.S. statutory tax rate of 35% during the three and nine months ended September 30, 2016, due to a federal benefit from tax credits and incentives generated by our alternative energy investments partially offset by state taxes, net of federal benefit.

 

Net earnings. We had net earnings of $308 million and $478 million for the three months ended September 30, 2017 and 2016, respectively, and net earnings of $1,011 million and $944 million for the nine months ended September 30, 2017 and 2016, respectively. The 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

While the QVC Group and the Ventures Group are not separate legal entities and the assets and liabilities attributed to each group remain assets and liabilities of our consolidated company, we manage the liquidity and financial resources of each group separately. Keeping in mind that assets of one group may be used to satisfy liabilities of the other group, the

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following discussion assumes, consistent with management expectations, that future liquidity needs of each group will be funded by the financial resources attributed to each respective group.

As of September 30, 2017, substantially all of our cash and cash equivalents are invested in U.S. Treasury securities, other government agencies, AAA rated money market funds and other highly rated financial and corporate debt instruments.

The following are potential sources of liquidity: available cash balances, equity issuances, dividend and interest receipts, proceeds from asset sales, monetization of our public investment portfolio, debt (including availability under QVC’s Senior Secured Credit Facility, (the “Third Amended and Restated Credit Facility”)) and cash generated by the operating activities of our wholly-owned subsidiaries.  Cash generated by the operating activities of our subsidiaries is only a source of liquidity to the extent such cash exceeds the working capital needs of the subsidiaries and is not otherwise restricted such that, in the case of QVC, a leverage ratio (defined in the amendment and restatement, dated June 23, 2016, of the Third Amended and Restated Credit Facility as the ratio of QVC’s consolidated total debt to Adjusted OIBDA for the most recent four fiscal quarter period and the ratio of QVC and zulily’s combined debt to Adjusted OIBDA ratio for the most recent four fiscal quarter period) of less than 3.5 to 1.0 must be maintained.

During the quarter there have been no changes to our corporate or subsidiary debt credit ratings.

As of September 30, 2017, Liberty's liquidity position consisted of the following:

 

 

 

 

 

 

 

 

 

    

 

 

    

Available-for-Sale

 

 

 

Cash and cash

 

Securities and Other

 

 

 

equivalents

 

Cost Investments

 

 

 

amounts in millions

 

QVC

 

$

343

 

 —

 

zulily

 

 

15

 

 —

 

Corporate and other

 

 

25

 

 4

 

Total QVC Group

 

 

383

 

 4

 

Corporate and other

 

 

512

 

2,477

 

Total Ventures Group

 

 

512

 

2,477

 

Total Liberty

 

$

895

 

2,481

 

 

To the extent that the Company recognizes any taxable gains from the sale of assets we may incur tax expense and be required to make tax payments, thereby reducing any cash proceeds.  Additionally, we have borrowing capacity of approximately $950  million under the Third Amended and Restated Credit Facility at September 30, 2017, including the remaining portion of the $400 million tranche that zulily may utilize. As of September 30, 2017, QVC had approximately $263 million of cash and cash equivalents held in foreign subsidiaries that is available for domestic purposes with no significant tax consequences upon repatriation to the U.S.

 

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Additionally, our operating businesses have generated, on average, more than $1 billion in annual cash provided by operating activities over the prior three years and we do not anticipate any significant reductions in that amount in future periods.

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

September 30,

 

 

    

2017

    

2016

 

 

 

amounts in millions

 

Cash Flow Information

 

 

 

 

 

 

QVC Group net cash provided (used) by operating activities

 

$

901

 

893

 

Ventures Group net cash provided (used) by operating activities

 

 

178

 

127

 

Net cash provided (used) by operating activities

 

$

1,079

 

1,020

 

QVC Group net cash provided (used) by investing activities

 

 

(159)

 

(157)

 

Ventures Group net cash provided (used) by investing activities

 

 

(143)

 

(1,241)

 

Net cash provided (used) by investing activities

 

$

(302)

 

(1,398)

 

QVC Group net cash provided (used) by financing activities

 

 

(710)

 

(821)

 

Ventures Group net cash provided (used) by financing activities

 

 

(10)

 

(767)

 

Net cash provided (used) by financing activities

 

$

(720)

 

(1,588)

 

 

QVC Group

 

During the nine months ended September 30, 2017, the QVC Group uses of cash were primarily the net repayment of certain debt obligations of approximately $217 million and the repurchase of Series A QVC Group common stock of $452 million. Additionally, the QVC Group had approximately $124 million of capital expenditures during the nine months ended September 30, 2017.  These uses of cash were funded by cash provided by operating activities. 

 

The projected uses of QVC Group cash for the remainder of 2017 are the cost to service outstanding debt, approximately $30 million in interest payments on QVC and corporate level debt, anticipated capital improvement spending of approximately $70 million and the continued buyback of QVC Group common stock under the approved share buyback program.

 

Ventures Group

 

During the nine months ended September 30, 2017, the Ventures Group uses of cash were primarily investments in and loans to cost and equity investments of $140 million and $11 million of repayments on outstanding debt. These uses of cash for the Ventures Group were funded by cash on hand.

 

The projected uses of Ventures Group cash for the remainder of 2017 are approximately $10 million in interest payments to service outstanding debt and further investments in existing or new businesses through continued investment activity. 

 

Consolidated

 

During the nine months ended September 30, 2017, Liberty's primary uses of cash were investments in and loans to cost and equity investments of $140 million, the net repayment of certain debt obligations of approximately $228 million and the repurchase of Series A QVC Group common stock of $452 million. These activities were funded primarily by cash provided by operating activities.

 

The projected uses of Liberty cash for the remainder of 2017 are the continued capital improvement spending of approximately $70 million, payment of expenses to be incurred with respect to the Transactions and the HSN Merger, the repayment of certain debt obligations, approximately $40 million for interest payments on outstanding debt, the potential buyback of common stock under the approved share buyback program 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. We expect that cash on hand and cash provided by operating activities and borrowing capacity in future periods will be sufficient to fund projected uses of cash.

 

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Results of Operations—Businesses

 

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 ("U.S."), QVC’s televised shopping programs, including live and recorded content, are broadcast across multiple channels nationally on a full-time basis, including QVC, QVC 2 (f/k/a QVC Plus) and their recently launched Beauty iQ. QVC-U.S. programming is also available on QVC.com, QVC’s U.S. website; mobile applications via streaming video; over-the-air broadcasters; and over-the-top content platforms (Roku, Apple TV, etc.).  

 

QVC believes that its digital platforms complement its televised shopping programs by allowing consumers to purchase a wide assortment of goods offered on its televised programs, as well as other products that are available only on its digital platforms. QVC views e-commerce as a natural extension of its business, allowing QVC to stream live video and offer on-demand video segments of items recently presented live on its televised programs. QVC’s digital platforms allow shoppers to browse, research, compare and perform targeted searches for products, control the order-entry process and conveniently access their QVC account.

 

QVC’s international televised shopping programs, including live and recorded content, are distributed to households outside of the U.S., primarily in Germany, Austria, Japan, the United Kingdom ("U.K."), the Republic of Ireland, Italy and France. In some of the countries where QVC operates, its televised shopping programs are broadcast across multiple QVC channels: QVC Beauty & Style and QVC Plus in Germany and QVC Beauty, QVC Extra, QVC Style and QVC +1 in the U.K. The programming created for most of these markets is also available via streaming video on QVC’s digital platforms. QVC’s international business employs product sourcing teams who select products tailored to the interests of each local market.

 

QVC's Japanese operations (“QVC-Japan”) are conducted through a joint venture with Mitsui & Co., LTD ("Mitsui") for a television and multimedia retailing service in Japan. QVC-Japan is owned 60% by QVC and 40% by Mitsui. QVC and Mitsui share in all profits and losses based on their respective ownership interests. During the nine months ended September 30, 2017 and 2016, QVC-Japan paid dividends to Mitsui of $22 million and $21 million, respectively.

 

Additionally, QVC also has a joint venture with CNR Media Group, formerly known as China Broadcasting Corporation, a limited liability company owned by China National Radio (''CNR'').  QVC owns a 49% interest in a CNR subsidiary, CNR Home Shopping Co., Ltd. (''CNRS''). CNRS operates a retail business in China through a shopping television channel with an associated website. This joint venture is accounted for as an equity method investment recorded in share of earnings (losses) of affiliates, net in QVC’s condensed consolidated statements of operations.

 

QVC's operating results were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

 

 

amounts in millions

 

Net revenue

 

$

2,010

 

1,948

 

5,954

 

6,024

 

Cost of sales

 

 

1,282

 

1,251

 

3,755

 

3,816

 

Gross profit

 

 

728

 

697

 

2,199

 

2,208

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

Operating

 

 

145

 

140

 

419

 

428

 

SG&A expenses (excluding stock-based compensation)

 

 

171

 

164

 

466

 

509

 

Adjusted OIBDA

 

 

412

 

393

 

1,314

 

1,271

 

Stock-based compensation

 

 

 9

 

 8

 

23

 

24

 

Depreciation

 

 

38

 

38

 

116

 

103

 

Amortization

 

 

91

 

116

 

324

 

345

 

Operating income

 

$

274

 

231

 

851

 

799

 

 

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Net revenue was generated in the following geographical areas:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

 

 

amounts in millions

 

QVC-U.S.

 

$

1,374

 

 

1,338

 

 

4,111

 

 

4,173

 

QVC-International

 

 

636

 

 

610

 

 

1,843

 

 

1,851

 

Consolidated QVC

 

$

2,010

 

 

1,948

 

 

5,954

 

 

6,024

 

 

QVC's consolidated net revenue increased 3.2% and  decreased 1.2% for the three and nine months ended September 30, 2017, respectively, as compared to the corresponding periods in the prior year. The increase in net revenue of $62 million for the three month period was primarily comprised of an increase of $199 million due to a 9.2% increase in units sold, offset by a decrease of $92 million due to a 3.9% decrease in average selling price per unit ("ASP"),  an increase in estimated product returns of $26 million, $8 million due to a decrease in shipping and handling revenue, $7 million due to unfavorable foreign currency rates, and a $4 million decrease in miscellaneous income. The decrease in net revenue of $70 million for the nine month period was primarily comprised of $206 million due to a 2.9% decrease in ASP, $65 million due to unfavorable foreign currency rates, a decrease in shipping and handling revenue of $20 million, and a $12 million decrease in miscellaneous income. The decrease was offset by a $212 million increase in units sold and  a $21 million decrease in estimated product returns.

 

During the three and nine months ended September 30, 2017 and 2016, the changes in revenue and expenses were affected 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 affected. As QVC’s product margins could continue to be under pressure due to the devaluation of the U.K. Pound Sterling, QVC will attempt to reduce its exposure through pricing and vendor negotiations as Brexit negotiations progress.

 

In describing QVC’s operating results, the term currency exchange rates refers to the currency exchange rates QVC uses to convert the operating results for all countries where the functional currency is not the U.S. Dollar. QVC calculates the effect of changes in currency exchange rates as the difference between current period activity translated using the prior period's currency exchange rates. QVC refers to the results of this calculation as the impact of currency exchange rate fluctuations. Constant currency operating results refers to operating results without the impact of the currency exchange rate fluctuations. The disclosure of constant currency amounts or results permits investors to better understand QVC’s underlying performance without the effects of currency exchange rate fluctuations.

 

The percentage increase (decrease) in net revenue for each of QVC's geographic areas in U.S. Dollars and in constant currency was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Nine months ended

 

 

 

September 30, 2017

 

September 30, 2017

 

 

    

U.S. Dollars

 

Foreign Currency Exchange Impact

 

Constant Currency

 

U.S. Dollars

 

Foreign Currency Exchange Impact

 

Constant currency

 

QVC-U.S.

 

2.7

%  

 

 —

%  

 

2.7

%  

 

(1.5)

%  

 

 —

%  

 

(1.5)

%  

 

QVC-International

 

4.3

%  

 

(1.0)

%  

 

5.3

%  

 

(0.4)

%  

 

(3.4)

%  

 

3.0

%  

 

 

QVC-U.S. net revenue increase for the three months ended September 30, 2017 was primarily due to an 8.7%  increase in units shipped. The increase was offset by a decrease of 3.5%  in ASP, a $19 million increase in estimated product returns, an $11 million decrease in shipping and handling revenue, and a $5 million decrease in miscellaneous income. QVC-U.S. experienced a system outage during the second quarter of 2017 which resulted in an estimated 1% shift in net revenue to the third quarter. The increase in returns is driven by an increase in sales during the third quarter. Additionally, the Company experienced a decrease in shipping and handling revenue per unit due to promotional offers.  For the three months ended September 30, 2017, QVC-U.S. experienced shipped sales increases in apparel, electronics, beauty, and accessories, offset by decreases in jewelry and home. For the nine months ended September 30, 2017, the QVC-U.S. net revenue decline was due to a decrease of 3.2% in ASP, a $24 million decrease in shipping and handling revenue, and an $11 million decrease in miscellaneous income. The decrease was offset by a 2.1% increase in units shipped, and a $30

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million decrease in estimated product returns. The decrease in net shipping and handling revenue was a result of a decrease in shipping and handling revenue per unit from promotional offers. The decrease in estimated product returns was primarily due to an overall lower return rate and reduced sales. For the nine months ended September 30, 2017, QVC-U.S. experienced shipped sales increases in apparel, beauty and electronics, offset by decreases in jewelry, home and accessories.  

 

QVC-International net revenue growth in constant currency for the three months ended September 30, 2017 was primarily due to a 9.9% increase in units shipped, driven by increases in Japan, Germany, the U.K., and France, offset by a decrease in Italy. There was a $3 million increase in shipping and handling revenue, primarily driven by Japan and Germany. This was offset by a 4.5% decrease in ASP, primarily driven by Japan and Germany, and a $7 million increase in estimated product returns driven by all markets except for Japan. For the three months ended September 30, 2017, QVC-International experienced shipped sales growth in constant currency in apparel, accessories, home and beauty with declines in electronics and jewelry. Net revenue growth in constant currency for the nine months ended September 30, 2017 was primarily due to a 4.9% increase in units shipped, driven by increases in Japan, Germany, and France, offset by decreases in units shipped in the U.K. and Italy. There was a $4 million increase in shipping and handling revenue, primarily driven by Japan. This was offset by a 2% decrease in ASP, primarily driven in Japan and Germany offset by increases in the U.K., Italy and France, and a $9 million increase in estimated product returns, driven by all markets except for Japan. For the nine months ended September 30, 2017, QVC-International experienced shipped sales growth in constant currency in apparel,  beauty and accessories with declines in electronics, jewelry and home.

 

QVC's future net revenue growth will primarily depend on sales growth from e-commerce and mobile platforms, additions of new customers from households already receiving QVC's television programming and increased spending from existing customers. QVC's future net revenue may also be affected by (i) the willingness of cable television and direct-to-home satellite system operators to continue carrying QVC's programming service; (ii) QVC's ability to maintain favorable channel positioning, which may become more difficult due to governmental action or from distributors converting analog customers to digital; (iii) changes in television viewing habits because of personal video recorders, video-on-demand and Internet video services; and (iv) general economic conditions.

 

On June 23, 2016, the U.K. held a referendum in which British citizens approved an exit from the European Union (the “E.U.”), commonly referred to as “Brexit.” As a result of the referendum, the global markets and currencies have been adversely impacted, including a sharp decline in the value of the U.K. Pound Sterling as compared to the U.S. Dollar. Volatility in exchange rates is expected to continue in the short term as the U.K. negotiates its exit from the E.U.  In the longer term, any impact from Brexit on us will also depend, in part, on the outcome of tariff, trade, regulatory and other negotiations. Although it is unknown what the result of those negotiations will be, it is possible that new terms may adversely affect QVC’s operations and financial results. On March 29, 2017, the U.K. invoked Article 50 of the Treaty of Lisbon, which is the first step of the U.K.’s formal exit from the E.U. This started the two-year window in which the U.K. and the European Commission can negotiate future terms for imports, exports, taxes, employment, immigration and other areas, ending in the exit of the U.K. from the E.U.

QVC's gross profit percentage was 36.2% and 36.9% for the three and nine months ended September 30, 2017, respectively, compared to 35.8% and 36.7% for the three and nine months ended September 30, 2016, respectively. For the three months ended September 30, 2017, the gross profit percentage increased primarily due to an increase in product margins. The increase was offset by an unfavorable inventory obsolescence provision in the U.S. and increased freight costs. The increase in freight and warehouse costs was primarily due to increased units shipped in both segments. For the nine months ended September 30, 2017, the gross profit percentage increased primarily due to increased product margins.

 

QVC's operating expenses are principally comprised of commissions, order processing and customer service expenses, credit card processing fees and telecommunications expenses. Operating expenses increased $5 million or 3.6% and decreased  $9 million or 2.1% for the three and nine months ended September 30, 2017, respectively, compared to the same periods in the prior year. For the three months ended September 30, 2017, operating expenses increased primarily due to a $3 million increase in credit card processing fees and a $3 million increase in commissions offset by $1 million from favorable foreign currency exchange rates. Credit card fees and commissions increased primarily due to the increase in U.S. sales. In addition, credit card interchange processing fees have increased compared to the three months ended September 30, 2016. For the nine months ended September 30, 2017, operating expenses decreased primarily due to a $6 

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million decrease in customer service expenses related to lower call volumes in the U.S. and favorable foreign currency exchange rates, offset somewhat by higher credit card fees primarily in the U.S.  

 

QVC's SG&A expenses (excluding stock-based compensation) include personnel, information technology, provision for doubtful accounts, production costs, credit card income, marketing and advertising expenses. Such expenses increased $7 million for the three months ended September 30, 2017, and decreased $43 million for the nine months ended September 30, 2017, as compared to the same periods in the prior year, and as a percentage of net revenue, increased from 8.4% to 8.5% for the three months ended September 30, 2017, respectively, as compared to the three months ended September 30, 2016, and decreased from 8.4% to 7.8% for the nine months ended September 30, 2017, respectively, as compared to the nine months ended September 30, 2016.  For the three months ended September 30, 2017, the increase was primarily due to an increase in personnel costs of $10 million and an increase in franchise taxes of $4 million offset by a decrease in bad debt expense of $5 million and a $2 million decrease in marketing expenses. The increase in personnel costs was primarily due to an increase in bonus expense offset by decreases in severance expense and salaries and wages, mostly in the U.S. The decrease in bad debt expense was primarily related to lower default rates experienced from prior periods mostly associated with the Easy-Pay program in the U.S. The decrease in marketing expenses is primarily related to discontinuing the naming rights to the Chiba Marine Stadium in Japan.

 

For the nine months ended September 30, 2017, the decrease is primarily due to a decrease in bad debt expense of $26 million, $8 million from favorable foreign currency rates, a $7 million increase in credit card income, a $4 million decrease in marketing expenses, and a $5 million decrease in various other expenses offset by an increase in personnel cost of $7 million. The decrease in bad debt expense was primarily related to lower default rates experienced from prior periods mostly associated with the Easy-Pay program in the U.S. The increase in credit card income was due to the favorable economics of the QVC-branded credit card portfolio in the U.S. The decrease in marketing expenses is primarily related to discontinuing the naming rights to the Chiba Marine Stadium in Japan. The increase in personnel costs was primarily due to an increase in bonus expense offset by decreases in severance expenses and salaries and wages. 

Depreciation and amortization consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

 

 

amounts in millions

 

Affiliate agreements

 

$

25

 

37

 

98

 

110

 

Customer relationships

 

 

28

 

43

 

112

 

128

 

Acquisition related amortization

 

 

53

 

80

 

210

 

238

 

Property and equipment

 

 

38

 

38

 

116

 

103

 

Software amortization

 

 

24

 

26

 

70

 

73

 

Channel placement amortization and related expenses

 

 

14

 

10

 

44

 

34

 

Total depreciation and amortization

 

$

129

 

154

 

440

 

448

 

 

For the three and nine months ended September 30, 2017, acquisition related amortization expense decreased primarily due to the end of the useful lives of certain affiliate agreements and customer relationships established at the time of the Company’s acquisition of QVC in 2003. This was offset by an increase in channel placement amortization related to the addition of Beauty iQ in the U.S. For the nine months ended September 30, 2017, the amortization decrease mentioned above was offset by an increase in depreciation related to the addition of the California distribution center in the third quarter of 2016.

 

zulily. Liberty acquired zulily on October 1, 2015.  zulily is an online retailer offering customers a fun and entertaining shopping experience with a fresh selection of new product styles launched each day. The zulily website was launched in January 2010 with the goal of revolutionizing the way moms shop. Through its desktop and mobile websites and mobile applications, zulily helps its customers discover new and unique products at great values that they would likely not find elsewhere. zulily’s merchandise includes women’s, children’s and men’s apparel and other products such as home, beauty and personalized products. zulily sources its merchandise from thousands of vendors, including emerging brands and smaller boutique vendors, as well as larger national brands. By bringing together millions of customers and a daily

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selection of products chosen from its vendor base, zulily has built a large scale and uniquely curated marketplace. zulily's stand-alone operating results for the three and nine months ended September 30, 2017 and 2016 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

 

 

amounts in millions

 

Net revenue

 

$

367

 

359

 

1,093

 

1,080

 

Costs of sales

 

 

272

 

257

 

800

 

768

 

Gross profit

 

 

95

 

102

 

293

 

312

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

Operating

 

 

11

 

12

 

33

 

34

 

SG&A expenses (excluding stock-based compensation)

 

 

72

 

72

 

207

 

206

 

Adjusted OIBDA

 

 

12

 

18

 

53

 

72

 

Stock-based compensation

 

 

 5

 

 5

 

13

 

16

 

Depreciation

 

 

 5

 

 5

 

16

 

16

 

Amortization of intangible assets

 

 

46

 

60

 

136

 

178

 

Operating income (loss)

 

$

(44)

 

(52)

 

(112)

 

(138)

 

 

zulily's consolidated net revenue increased 2.2% and 1.2% for the three and nine months ended September 30, 2017, respectively, as compared to the corresponding periods in the prior year. The increase in net revenue for the three and nine months ended September 30, 2017 was primarily attributed to a 5.7% and 2.4% increase in orders placed, respectively, driven by a 5.8% increase in active customers year over year, offset by increased backlog due to timing of orders within the period. Along with the increase in orders placed, units per order also increased but was offset with lower average sales price per unit. An active customer is defined as an individual who had purchased from zulily at least once in the last twelve months, measured from the last date of a period.

 

zulily's gross profit percentage was 25.9% and 28.4% for the three months ended September 30, 2017 and 2016, respectively. zulily’s gross profit percentage was 26.8% and 28.9% for the nine months ended September 30, 2017 and 2016, respectively.  For the three months ended September 30, 2017, the decrease was primarily due to increased promotional offers, as well as higher supply chain expenses resulting from an increase in international shipping, and ramping up of zulily’s Pennsylvania fulfillment center, a shift in product mix, and higher unit volume at a lower average sales price per unit. For the nine months ended September 30, 2017, the decrease was primarily due to higher free shipping and promotional offers, as well as higher supply chain expenses resulting from an increase in international shipping, a  shift in product mix, and growth of our third-party fulfillment services and higher unit volume at a lower average sales price per unit.

 

zulily’s operating expenses are principally comprised of credit card processing fees and customer service expenses.  For the three and nine month periods ended September 30, 2017, operating expenses decreased as compared to the corresponding periods in the prior year as a result of a reduction in customer service labor expenses.

 

zulily’s SG&A expenses (excluding stock-based compensation) include personnel related costs for general corporate functions, marketing and advertising expenses, information technology, and the costs associated with the use by these functions of facilities and equipment, including rent. For the three months ended September 30, 2017, these expenses remained flat, and as a percentage of net revenue, decreased from 20.1% to 19.6%, as compared to the corresponding period in the prior year.  For the nine months ended September 30, 2017, these expenses increased $1 million, and as a percentage of net revenue decreased from 19.1% to 18.9%, as compared to the corresponding period in the prior year. The decrease as a percentage of net revenue for the nine months ended September 30, 2017 was primarily due to a shift in marketing and advertising spend to promotional offers.  

 

zulily’s total depreciation and amortization of intangible assets expense decreased $14 million and $42 million for the three and nine months ended September 30, 2017, respectively, as compared to the corresponding periods in the prior year. The decrease is attributed to the decelerating amortization of intangible assets recognized in acquisition accounting. 

 

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Item 3.   Quantitative and Qualitative Disclosures about Market Risk.

 

We are exposed to market risk in the normal course of business due to our ongoing investing and financial activities and the conduct of operations by our subsidiaries in different foreign countries. Market risk refers to the risk of loss arising from adverse changes in stock prices, interest rates and foreign currency exchange rates. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings. We have established policies, procedures and internal processes governing our management of market risks and the use of financial instruments to manage our exposure to such risks.

 

We are exposed to changes in interest rates primarily as a result of our borrowing and investment activities, which include investments in fixed and floating rate debt instruments and borrowings used to maintain liquidity and to fund business operations. The nature and amount of our long-term and short-term debt are expected to vary as a result of future requirements, market conditions and other factors. We manage our exposure to interest rates by maintaining what we believe is an appropriate mix of fixed and variable rate debt. We believe this best protects us from interest rate risk. We have achieved this mix by (i) issuing fixed rate debt that we believe has a low stated interest rate and significant term to maturity, (ii) issuing variable rate debt with appropriate maturities and interest rates and (iii) entering into interest rate swap arrangements when we deem appropriate. As of September 30, 2017, our debt is comprised of the following amounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable rate debt

 

Fixed rate debt

 

 

    

 

 

    

Weighted

    

 

 

    

Weighted

 

 

 

Principal

 

average

 

Principal

 

average

 

 

 

amount

 

interest rate

 

amount

 

interest rate

 

 

 

dollar amounts in millions

 

QVC Group

 

 

 

 

 

 

 

 

 

 

 

QVC

 

$

1,390

 

2.7

%  

$

3,727

 

4.6

%  

zulily

 

$

300

 

2.7

%  

$

 —

 

 —

%  

Corporate and other

 

$

 —

 

 —

%  

$

791

 

8.3

%  

Ventures Group

 

 

 

 

 

 

 

 

 

 

 

Corporate and other

 

$

 —

 

 —

%  

$

1,949

 

3.0

%  

 

We are exposed to changes in stock prices primarily as a result of our significant holdings in publicly traded securities. We continually monitor changes in stock markets, in general, and changes in the stock prices of our holdings, specifically. We believe that changes in stock prices can be expected to vary as a result of general market conditions, technological changes, specific industry changes and other factors. We periodically use equity collars and other financial instruments to manage market risk associated with certain investment positions. These instruments are recorded at fair value based on option pricing models.

 

At September 30, 2017, the fair value of our available-for-sale securities was $2,393 million. Had the market price of such securities been 10% lower at September 30, 2017, the aggregate value of such securities would have been $239 million lower.  Our investments in HSN and FTD are publicly traded securities and are accounted for as equity method affiliates, which are not reflected at fair value in our balance sheet.  The aggregate fair value of such securities was $915 million at September 30, 2017 and had the market price of such securities been 10% lower at September 30, 2017, the aggregate value of such securities would have been $92 million lower. Such changes in value are not directly reflected in our statement of operations.  At September 30, 2017, the fair value of our investment in Liberty Broadband was $4,068 million. Had the market price of such security been 10% lower at September 30, 2017, the fair value of such security would have been $407 million lower. Additionally, our exchangeable senior debentures are also subject to market risk. Because we mark these instruments to fair value each reporting date, increases in the stock price of the respective underlying security and decreases in interest rates generally result in higher liabilities and unrealized losses in our statement of operations.

 

Liberty is exposed to foreign exchange rate fluctuations related primarily to the monetary assets and liabilities and the financial results of QVC's foreign subsidiaries. Assets and liabilities of foreign subsidiaries for which the functional currency is the local currency are translated into U.S. Dollars at period-end exchange rates, and the statements of operations are generally translated at the average exchange rate for the period. Exchange rate fluctuations on translating foreign currency financial statements into U.S. Dollars that result in unrealized gains or losses are referred to as translation adjustments. Cumulative translation adjustments are recorded in accumulated other comprehensive earnings (loss) as a

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separate component of stockholders' equity. Transactions denominated in currencies other than the functional currency are recorded based on exchange rates at the time such transactions arise. Subsequent changes in exchange rates result in transaction gains and losses, which are reflected in income as unrealized (based on period-end translations) or realized upon settlement of the transactions. Cash flows from our operations in foreign countries are translated at the average rate for the period. Accordingly, Liberty may experience economic loss and a negative impact on earnings and equity with respect to our holdings solely as a result of foreign currency exchange rate fluctuations. QVC's reported Adjusted OIBDA for the three and nine months ended September 30, 2017 would have been impacted by approximately $1 million and $3 million, respectively, for every 1% change in foreign currency exchange rates relative to the U.S. Dollar.

 

We periodically assess the effectiveness of our derivative financial instruments. With regard to interest rate swaps, we monitor the fair value of interest rate swaps as well as the effective interest rate the interest rate swap yields, in comparison to historical interest rate trends. We believe that any losses incurred with regard to interest rate swaps would be largely offset by the effects of interest rate movements on the underlying debt facilities. These measures allow our management to evaluate the success of our use of derivative instruments and to determine when to enter into or exit from derivative instruments.

 

Item 4.   Controls and Procedures.

 

Disclosure Controls and Procedures

In accordance with Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company carried out an evaluation, under the supervision and with the participation of management, including its chief executive officer and its principal accounting and financial officer (the "Executives"), of the effectiveness of its disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Executives concluded that the Company's disclosure controls and procedures were effective as of September 30, 2017 to provide reasonable assurance that information required to be disclosed in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.

 

Changes in Internal Control Over Financial Reporting

There has been no change in the Company's internal control over financial reporting that occurred during the three and nine months ended September 30, 2017 that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

 

 

 

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PART II—OTHER INFORMATION

Item 1.   Legal Proceedings

 

On September 28, 2017, a putative class action complaint was filed by a purported HSN stockholder in the United States District Court for the Middle District of Florida: Palkon v. HSN, Inc., et al., Case No. 8:17-cv-2271. The complaint names as defendants HSN, members of the HSN board, Liberty and Merger Sub. The complaint asserts claims under Sections 14(a) and 20(a) of the Exchange Act and rules and regulations promulgated thereunder, and alleges that HSN and the members of the HSN board caused a registration statement that omitted material information to be filed in connection with the HSN Merger, which allegedly rendered the registration statement false and misleading.

 

The complaint further alleges that the members of the HSN board, Liberty and Merger Sub acted as controlling persons of HSN, were involved in the making and composition of the registration statement, and had knowledge of the allegedly false statements contained in the registration statement. The complaint seeks, among other relief, an injunction to prevent the HSN Merger from proceeding, rescission of the HSN Merger, an order directing HSN to disseminate a registration statement that does not contain any untrue statements of material fact, a judgment declaring a violation of Sections 14(a) and/or 20(a) of the Exchange Act, as well as Rule 14a-9 promulgated thereunder, unspecified damages, and unspecified costs, expenses, and attorneys’ fees. Defendants believe the claims are without merit and intend to defend vigorously against all claims asserted.

 

 

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

 

Share Repurchase Programs

 

On several occasions our board of directors has authorized a share repurchase program for our Series A and Series B QVC Group common stock. On each of May 5, 2006, November 3, 2006 and October 30, 2007 our board authorized the repurchase of $1 billion of Series A and Series B Liberty Interactive common stock for a total of $3 billion. These previous authorizations remained effective following the split-off of Liberty Media Corporation from the Company in September 2011 (the “LMC Split-Off”), notwithstanding the fact that the Liberty Interactive common stock ceased to be a tracking stock during the period following the LMC Split-Off and prior to the creation of our Liberty Ventures common stock in August 2012.  On February 22, 2012 the board authorized the repurchase of an additional $700 million of Series A and Series B Liberty Interactive common stock.  Additionally, on each of October 30, 2012 and February 27, 2014, the board authorized the repurchase of an additional $1 billion of Series A and Series B Liberty Interactive common stock. In connection with the spin-off of the Company’s former wholly-owned subsidiary, Liberty TripAdvisor Holdings, Inc., during August 2014, the board authorized $350 million for the repurchase of either the QVC Group or Liberty Ventures tracking stocks. In October 2014, the board authorized the repurchase of an additional $650 million of Series A and Series B Liberty Ventures common stock.   In August 2015, the board authorized the repurchase of an additional $1 billion of Series A or Series B QVC Group common stock. On October 26, 2016, the board authorized the repurchase of an additional $300 million of either the QVC Group common stock or Liberty Ventures common stock. On September 19, 2017, the board authorized the repurchase of an additional $1 billion of Series A QVC Group common stock.

 

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A summary of the repurchase activity for the three months ended September 30, 2017 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A QVC Group Common Stock

 

 

    

 

    

 

 

    

(c) Total Number

    

(d) Maximum Number

 

 

 

 

 

 

 

 

of Shares

 

(or Approximate Dollar

 

 

 

 

 

 

 

 

Purchased as

 

Value) of Shares that

 

 

 

(a) Total Number

 

(b) Average

 

Part of Publicly

 

May Yet Be Purchased

 

 

 

of Shares

 

Price Paid per

 

Announced Plans or

 

Under the Plans or

 

Period

 

Purchased

 

Share

 

Programs

 

Programs

 

July 1 - 31, 2017

 

 —

 

$

 —

 

 —

 

 

$
298

million

August 1 - 31, 2017

 

5,492,034

 

$

21.80

 

5,492,034

 

 

$
178

million

September 1 - 30, 2017

 

7,778,532

 

$

22.97

 

7,778,532

 

 

$
1,000

million

Total

 

13,270,566

 

 

 

 

13,270,566

 

 

 

 

 

No shares of Series A QVC Group common stock and Series A Liberty Ventures common stock were surrendered by our officers and employees to pay withholding taxes and other deductions in connection with the vesting of their restricted stock and restricted stock units during the three months ended September 30, 2017.

 

Item 6.   Exhibits

 

(a)   Exhibits

 

Listed below are the exhibits which are filed as a part of this Quarterly Report (according to the number assigned to them in Item 601 of Regulation S-K):

 

 

 

 

2.1

 

Agreement and Plan of Merger, dated as of July 5, 2017, by and among Liberty Interactive Corporation, Liberty Horizon, Inc. and HSN, Inc. (incorporated by reference to Exhibit 2.1 to Liberty Interactive Corporation’s Current Report on Form 8-K filed on July 11, 2017 (File No. 001-33982)).

10.1

 

Form of 2017 Performance-based Restricted Stock Unit Agreement (QVCB) under the Liberty Interactive Corporation 2016 Omnibus Incentive Plan (the “2016 Incentive Plan”) for Gregory B. Maffei.*

10.2

 

Form of 2017 Term Option Agreement under the 2016 Incentive Plan for Gregory B. Maffei.*

10.3

 

Form of 2017 Performance-based Restricted Stock Unit Agreement under the 2016 Incentive Plan for certain officers other than the Chief Executive Officer and Chief Legal Officer.*

10.4

 

Form of Restricted Stock Units Agreement under the 2016 Incentive Plan for Nonemployee Directors.*

10.5

 

Form of Nonqualified Stock Option Agreement under the 2016 Incentive Plan for Nonemployee Directors.*

31.1

 

Rule 13a-14(a)/15d-14(a) Certification*

31.2

 

Rule 13a-14(a)/15d-14(a) Certification*

32

 

Section 1350 Certification**

99.1

 

Unaudited Attributed Financial Information for Tracking Stock Groups*

99.2

 

Reconciliation of Liberty Interactive Corporation Net Assets and Net Earnings to Liberty Interactive LLC Net Assets and Net Earnings**

101.INS

 

XBRL Instance Document*

101.SCH

 

XBRL Taxonomy Extension Schema Document*

101.CAL

 

XBRL Taxonomy Calculation Linkbase Document*

101.LAB

 

XBRL Taxonomy Label Linkbase Document*

101.PRE

 

XBRL Taxonomy Presentation Linkbase Document*

101.DEF

 

XBRL Taxonomy Definition Document*

 


*Filed herewith

**Furnished herewith

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

LIBERTY INTERACTIVE CORPORATION

Date: November 9, 2017

 

By:

/s/ GREGORY B. MAFFEI

 

 

 

Gregory B. Maffei

President and Chief Executive Officer

Date: November 9, 2017

 

By:

/s/ MARK D. CARLETON

 

 

 

Mark D. Carleton

Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)

 

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