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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015 

OR

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                             to                             

Commission File Number 001-33982

LIBERTY INTERACTIVE CORPORATION

(Exact name of Registrant as specified in its charter)

 


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, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

(do not check if
smaller reporting company)

Smaller reporting company 

 

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

The number of outstanding shares of Liberty Interactive Corporation's common stock as of April 30, 2015 was:

 

 

 

 

 

 

 

 

 

Series A

 

Series B

 

 

 

 

 

 

 

Liberty Interactive

 

443,321,805 

 

29,263,775 

 

Liberty Ventures

 

134,623,906 

 

7,092,111 

 

 

 

 

 

 

 

 

 

 


 

Table of Contents

 

 

 

 

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-25

Item 3. Quantitative and Qualitative Disclosures about Market Risk. 

 

I-37

Item 4. Controls and Procedures. 

 

I-38

 

 

 

PART II—OTHER INFORMATION 

 

II-1

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

 

II-1

Item 6. Exhibits 

 

II-2

 

 

 

SIGNATURES 

 

II-3

EXHIBIT INDEX 

 

II-4

 

 

 

I-2


 

 

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(unaudited)

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

 

2015

 

2014

 

 

 

amounts in millions

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,350 

 

2,306 

 

Trade and other receivables, net of allowance for doubtful accounts of $90 million and $92 million, respectively

 

 

867 

 

1,232 

 

Inventory, net

 

 

1,119 

 

1,049 

 

Short term marketable securities (note 6)

 

 

860 

 

889 

 

Other current assets

 

 

75 

 

72 

 

Total current assets

 

 

5,271 

 

5,548 

 

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

 

 

1,236 

 

1,224 

 

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

 

 

1,419 

 

1,633 

 

Property and equipment, at cost

 

 

1,966 

 

2,030 

 

Accumulated depreciation

 

 

(928)

 

(937)

 

 

 

 

1,038 

 

1,093 

 

Intangible assets not subject to amortization (note 9):

 

 

 

 

 

 

Goodwill

 

 

5,355 

 

5,404 

 

Trademarks

 

 

2,489 

 

2,489 

 

 

 

 

7,844 

 

7,893 

 

Intangible assets subject to amortization, net (note 9)

 

 

1,122 

 

1,185 

 

Other assets, at cost, net of accumulated amortization

 

 

72 

 

65 

 

Total assets

 

$

18,002 

 

18,641 

 

 

(continued)

 

See accompanying notes to condensed consolidated financial statements.

I-3


 

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Continued)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

 

2015

 

2014

 

 

 

amounts in millions,

 

 

 

except share amounts

 

Liabilities and Equity

    

 

    

    

    

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

639 

 

735 

 

Accrued liabilities

 

 

591 

 

743 

 

Current portion of debt (note 10)

 

 

939 

 

946 

 

Deferred income tax liabilities

 

 

991 

 

972 

 

Other current liabilities

 

 

236 

 

343 

 

Total current liabilities

 

 

3,396 

 

3,739 

 

Long-term debt, including $2,502 million and $2,574 million measured at fair value (note 10)

 

 

6,981 

 

7,105 

 

Deferred income tax liabilities

 

 

1,739 

 

1,849 

 

Other liabilities

 

 

181 

 

168 

 

Total liabilities

 

 

12,297 

 

12,861 

 

Equity

 

 

 

 

 

 

Stockholders' equity (note 11):

 

 

 

 

 

 

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

 

 

 —

 

 —

 

Series A Liberty Interactive common stock, $.01 par value. Authorized 4,000,000,000 shares; issued and outstanding 444,595,005 shares at March 31, 2015 and 447,451,702 shares at December 31, 2014

 

 

 

 

Series B Liberty Interactive common stock, $.01 par value. Authorized 150,000,000 shares; issued and outstanding 29,275,775 shares at March 31, 2015 and 28,877,554 shares at December 31, 2014

 

 

 —

 

 —

 

Series A Liberty Ventures common stock, $.01 par value. Authorized 200,000,000 shares; issued and outstanding 134,566,440 shares at March 31, 2015 and 134,525,874 shares at December 31, 2014

 

 

 

 

Series B Liberty Ventures common stock, $.01 par value. Authorized 7,500,000 shares; issued and outstanding 7,092,111 shares at March 31, 2015 and 6,991,127 shares at December 31, 2014

 

 

 —

 

 —

 

Additional paid-in capital

 

 

 —

 

 

Accumulated other comprehensive earnings (loss), net of taxes

 

 

(210)

 

(94)

 

Retained earnings

 

 

5,813 

 

5,757 

 

Total stockholders' equity

 

 

5,609 

 

5,673 

 

Noncontrolling interests in equity of subsidiaries

 

 

96 

 

107 

 

Total equity

 

 

5,705 

 

5,780 

 

Commitments and contingencies (note 12)

 

 

 

 

 

 

Total liabilities and equity

 

$

18,002 

 

18,641 

 

 

See accompanying notes to condensed consolidated financial statements.

I-4


 

 

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements Of Operations

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

March 31,

 

 

    

2015

    

2014

 

 

 

amounts in millions

 

Net retail sales

 

$

2,214 

 

2,434 

 

Operating costs and expenses:

 

 

 

 

 

 

Cost of sales (exclusive of depreciation shown separately below)

 

 

1,415 

 

1,556 

 

Operating

 

 

191 

 

213 

 

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

 

 

204 

 

256 

 

Depreciation and amortization

 

 

168 

 

163 

 

 

 

 

1,978 

 

2,188 

 

Operating income

 

 

236 

 

246 

 

Other income (expense):

 

 

 

 

 

 

Interest expense

 

 

(95)

 

(95)

 

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

 

 

 

(2)

 

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

 

 

(4)

 

(25)

 

Other, net

 

 

15 

 

 

 

 

 

(81)

 

(115)

 

Earnings (loss) from continuing operations before income taxes

 

 

155 

 

131 

 

Income tax (expense) benefit

 

 

(3)

 

(40)

 

Net earnings (loss) from continuing operations

 

 

152 

 

91 

 

Earnings (loss) from discontinued operations, net of taxes

 

 

 —

 

19 

 

Net earnings (loss)

 

 

152 

 

110 

 

Less net earnings (loss) attributable to the noncontrolling interests

 

 

 

28 

 

Net earnings (loss) attributable to Liberty Interactive Corporation shareholders

 

$

143 

 

82 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Liberty Interactive common stock

 

$

151 

 

110 

 

Liberty Ventures common stock

 

 

(8)

 

(28)

 

 

 

$

143 

 

82 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

I-5


 

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements Of Operations (Continued)

(unaudited)

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

March 31,

 

 

 

2015

    

2014

 

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

 

 

 

 

 

 

Series A and Series B Liberty Interactive common stock

 

$

0.32 

 

0.23 

 

Series A and Series B Liberty Ventures common stock

 

$

(0.06)

 

(0.45)

 

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

 

 

 

 

 

 

Series A and Series B Liberty Interactive common stock

 

$

0.31 

 

0.23 

 

Series A and Series B Liberty Ventures common stock

 

$

(0.06)

 

(0.45)

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Series A and Series B Liberty Interactive common stock

 

$

0.32 

 

0.22 

 

Series A and Series B Liberty Ventures common stock

 

$

(0.06)

 

(0.38)

 

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

 

 

 

 

 

 

Series A and Series B Liberty Interactive common stock

 

$

0.31 

 

0.22 

 

Series A and Series B Liberty Ventures common stock

 

$

(0.06)

 

(0.38)

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

I-6


 

 

 

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements Of Comprehensive Earnings (Loss)

(unaudited)

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

March 31,

 

 

    

2015

    

2014

 

 

 

amounts in millions

 

Net earnings (loss)

 

$

152 

 

110 

 

Other comprehensive earnings (loss), net of taxes:

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(102)

 

17 

 

Share of other comprehensive earnings (losses) of equity affiliates

 

 

(14)

 

 —

 

Share of other comprehensive earnings (losses) of discontinued operations

 

 

 —

 

 

Other comprehensive earnings (loss)

 

 

(116)

 

25 

 

Comprehensive earnings (loss)

 

 

36 

 

135 

 

Less comprehensive earnings (loss) attributable to the noncontrolling interests

 

 

 

40 

 

Comprehensive earnings (loss) attributable to Liberty Interactive Corporation shareholders

 

$

27 

 

95 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Liberty Interactive common stock

 

$

35 

 

123 

 

Liberty Ventures common stock

 

 

(8)

 

(28)

 

 

 

$

27 

 

95 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

I-7


 

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements Of Cash Flows

(unaudited)

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

March 31,

 

 

    

2015

    

2014

 

 

 

amounts in millions

 

Cash flows from operating activities:

 

 

 

 

 

 

Net earnings (loss)

 

$

152 

 

110 

 

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

 

 

 

 

 

 

(Earnings) loss from discontinued operations

 

 

 —

 

(19)

 

Depreciation and amortization

 

 

168 

 

163 

 

Stock-based compensation

 

 

15 

 

25 

 

Cash payments for stock-based compensation

 

 

(2)

 

(4)

 

Excess tax benefit from stock-based compensation

 

 

(13)

 

(8)

 

Share of (earnings) losses of affiliates, net

 

 

(3)

 

 

Cash receipts from returns on equity investments

 

 

13 

 

10 

 

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

 

 

 

25 

 

Deferred income tax expense (benefit)

 

 

(54)

 

(32)

 

Other, net

 

 

(8)

 

 —

 

Changes in operating assets and liabilities

 

 

 

 

 

 

Current and other assets

 

 

258 

 

176 

 

Payables and other liabilities

 

 

(310)

 

(51)

 

Net cash provided (used) by operating activities

 

 

220 

 

397 

 

Cash flows from investing activities:

 

 

 

 

 

 

Cash paid for acquisitions, net of cash acquired

 

 

(20)

 

 —

 

Cash proceeds from dispositions of investments

 

 

 —

 

25 

 

Investments in and loans to cost and equity investees

 

 

(45)

 

(18)

 

Cash receipts from returns of equity investments

 

 

200 

 

 —

 

Capital expended for property and equipment

 

 

(44)

 

(41)

 

Purchases of short term and other marketable securities

 

 

(287)

 

(106)

 

Sales of short term and other marketable securities

 

 

313 

 

68 

 

Other investing activities, net

 

 

(44)

 

(8)

 

Net cash provided (used) by investing activities

 

 

73 

 

(80)

 

Cash flows from financing activities:

 

 

 

 

 

 

Borrowings of debt

 

 

531 

 

1,551 

 

Repayments of debt

 

 

(642)

 

(1,352)

 

Repurchases of Liberty Interactive common stock

 

 

(123)

 

(213)

 

Minimum withholding taxes on net settlements of stock-based compensation

 

 

(11)

 

(8)

 

Excess tax benefit from stock-based compensation

 

 

13 

 

 

Other financing activities, net

 

 

(7)

 

(37)

 

Net cash provided (used) by financing activities

 

 

(239)

 

(51)

 

Net cash provided (used) by discontinued operations:

 

 

 

 

 

 

Operating

 

 

 —

 

129 

 

Investing

 

 

 —

 

(154)

 

Financing

 

 

 —

 

(13)

 

Change in available cash held by discontinued operations

 

 

 —

 

32 

 

Net cash provided (used) by discontinued operations

 

 

 —

 

(6)

 

Effect of foreign currency exchange rates on cash

 

 

(10)

 

 —

 

Net increase (decrease) in cash and cash equivalents

 

 

44 

 

260 

 

Cash and cash equivalents at beginning of period

 

 

2,306 

 

902 

 

Cash and cash equivalents at end of period

 

$

2,350 

 

1,162 

 

 

See accompanying notes to condensed consolidated financial statements.

 

I-8


 

 

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statement Of Equity

(unaudited)

Three months ended March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

Liberty

 

Liberty

 

Additional

 

other

 

 

 

Noncontrolling

 

 

 

 

 

Preferred

 

Interactive

 

Ventures

 

paid-in

 

comprehensive

 

Retained

 

interest in equity

 

Total

 

 

  

stock

  

Series A

  

Series B

  

Series A

  

Series B

  

capital

  

earnings

  

earnings

  

of subsidiaries

  

equity

 

 

 

amounts in millions

 

Balance at January 1, 2015

 

$

 —

 

 

 —

 

 

 —

 

 

(94)

 

5,757 

 

107 

 

5,780 

 

Net earnings (loss)

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

143 

 

 

152 

 

Other comprehensive earnings (loss)

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

(116)

 

 —

 

 —

 

(116)

 

Stock-based compensation

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

14 

 

 —

 

 —

 

 —

 

14 

 

Series A Liberty Interactive common stock repurchases

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

(123)

 

 —

 

 —

 

 —

 

(123)

 

Stock issued upon exercise of stock options

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

16 

 

 —

 

 —

 

 —

 

16 

 

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

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

(11)

 

 —

 

 —

 

 —

 

(11)

 

Excess tax benefit from stock-based compensation

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

13 

 

 —

 

 —

 

 —

 

13 

 

Distribution to noncontrolling interest

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

(20)

 

(20)

 

Other (note 1)

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

87 

 

 —

 

(87)

 

 —

 

 —

 

Balance at March 31, 2015

 

$

 —

 

 

 —

 

 

 —

 

 —

 

(210)

 

5,813 

 

96 

 

5,705 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

I-9


 

Table of Contents

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

(1)   Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of Liberty Interactive Corporation and its controlled subsidiaries (collectively, "Liberty" or the "Company" unless the context otherwise requires). All significant intercompany accounts and transactions have been eliminated in consolidation.

Liberty, through its ownership of interests in subsidiaries and other companies, is primarily engaged in the video and on-line commerce industries in North America, Europe and Asia.

The accompanying (a) condensed consolidated balance sheet as of December 31, 2014, 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, 2014.

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.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance on revenue from contracts with customers.  The new guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated guidance will replace most existing revenue recognition guidance in GAAP when it becomes effective and permits the use of either a retrospective or cumulative effect transition method. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 but a proposal has been issued to extend the effective date to those fiscal years beginning after December 31, 2017.  The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on its revenue recognition but does not believe that the standard will significantly impact its financial statements and related disclosures.

In April 2015, the FASB issued new accounting guidance on the presentation of debt issuance costs,  which requires debt issuance costs related to a recognized debt liability to be presented on the balance sheet as a direct deduction from the debt liability. The new guidance intends to simplify the presentation of debt issuance costs. This standard will more closely align the presentation of debt issuance costs under GAAP with the presentation under comparable International Financial Reporting Standards. The new standard is effective for the Company on January 1, 2016. Early application is permitted. The standard requires the use of the retrospective transition method. The Company is evaluating the effect that the new guidance will have on its consolidated financial statements and related disclosures. The Company has not yet determined the effect of the standard on its ongoing financial reporting.

As a result of the TripAdvisor Holdings Spin-Off (defined in note 3) and repurchases of Series A Liberty Interactive common stock, the Company’s additional paid-in capital balance was in a deficit position as of March 31, 2015. In order to maintain a zero balance in the additional paid-in capital account, we reclassified the amount of the deficit ($87 million) to retained earnings as of March 31, 2015.

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

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LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

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"), 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 was reimbursable to LMC for each of the three months ended March 31, 2015 and 2014.  Additionally, the Tax Sharing Agreement provides for the allocation and indemnification of tax liabilities and benefits between Liberty and LMC and other agreements related to tax matters.

 

(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—Liberty Interactive common stock and Liberty Ventures common stock, which are intended to track and reflect the economic performance of the QVC Group and the Ventures Group, respectively.

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.

On October 3, 2014, Liberty announced that its board of directors approved the change in attribution from the QVC Group (referred to as the “Interactive Group” prior to the reattribution) to the Ventures Group of certain of its Digital Commerce companies (defined below) and cash, which was provided by QVC, Inc. (“QVC”) as a result of a draw-down of QVC’s credit facility. In return, holders of Liberty Interactive common stock received a dividend of approximately 67.7 million shares of Liberty Ventures common stock, or 0.14217 of a Liberty Ventures share for each share of Liberty Interactive common stock outstanding on October 13, 2014, the record date of the dividend. The distribution date for the dividend was October 20, 2014, and the Liberty Interactive common stock began trading ex-dividend on October 15, 2014. The reattributed Digital Commerce companies were comprised of Liberty’s consolidated subsidiaries Backcountry.com, Bodybuilding.com, LLC, Provide Commerce, Inc. (“Provide”), CommerceHub, Evite, Inc. and LMC Right Start, Inc. (collectively, the “Digital Commerce” companies). The reattribution of the Digital Commerce companies is presented on a prospective basis from the date of the reattribution in Liberty’s condensed consolidated financial statements and attributed financial information, with October 1, 2014 used as a proxy for the date of the reattribution. In connection with the reattribution, the Liberty Interactive tracking stock trading symbol “LINTA” was changed to "QVCA" and the "LINTB" trading symbol was changed to "QVCB," effective October 7, 2014. Other than the issuance of Liberty Ventures shares in the fourth quarter of 2014, the reattribution of tracking stock groups had no consolidated impact on Liberty.

Provide was included in the Digital Commerce companies prior to the sale of Provide to FTD Companies, Inc. (“FTD”) on December 31, 2014 in exchange for cash and shares of FTD common stock representing approximately 35% of the combined company (see note 8 for additional information related to this transaction). Subsequent to this transaction,

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LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

the Company’s interest in FTD, accounted for under the equity method, is included in the Digital Commerce companies. Given Liberty’s significant continuing involvement with FTD, Provide is not presented as a discontinued operation in the Company’s condensed consolidated financial statements.

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. Following the reattribution, 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 subsidiary QVC and our approximate 38% interest in HSN, Inc., along with cash and certain liabilities that reside with QVC as well as certain liabilities related to our corporate indebtedness (see note 10) and certain deferred tax liabilities. As of March 31, 2015, the QVC Group has cash and cash equivalents of approximately $530 million, which includes subsidiary cash.  

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. Following the reattribution, the Ventures Group is primarily comprised of our Digital Commerce businesses and interests in Expedia, Inc., Interval Leisure Group, Inc. and LendingTree, Inc., available-for-sale securities in Time Warner Inc. and Time Warner Cable Inc., as well as cash and cash equivalents of approximately $1,820 million at March 31, 2015. 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. 

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

(3) Discontinued Operations

On August 27, 2014, Liberty completed the spin-off to holders of its Liberty Ventures common stock shares of its former wholly-owned subsidiary, Liberty TripAdvisor Holdings, Inc. (“TripAdvisor Holdings”) (the “TripAdvisor Holdings Spin-Off”). TripAdvisor Holdings is comprised of Liberty’s former 22% economic and 57% voting interest in TripAdvisor, Inc. as well as BuySeasons, Inc.,  Liberty’s former wholly-owned subsidiary, and a corporate level net debt balance of $350 million. In connection with the TripAdvisor Holdings Spin-Off during August 2014, TripAdvisor Holdings drew down $400 million in margin loans and distributed approximately $350 million to Liberty. This transaction has been recorded at historical cost due to the pro rata nature of the distribution. Following the completion of the TripAdvisor Holdings Spin-Off, Liberty and TripAdvisor Holdings operate as separate, publicly traded companies, and neither has any stock ownership, beneficial or otherwise, in the other. The condensed consolidated financial statements of Liberty have been prepared to reflect TripAdvisor Holdings as discontinued operations. Accordingly, the revenue, costs and expenses, and cash flows of the businesses, assets and liabilities owned by TripAdvisor Holdings at the time of the TripAdvisor Holdings Spin-Off have been excluded from the respective captions in the accompanying condensed consolidated statements of operations, comprehensive earnings and cash flows in such condensed consolidated financial statements. Additionally, TripAdvisor, Inc. and BuySeasons, Inc. are no longer reflected in the segment financial information for all periods presented.

 

In connection with the TripAdvisor Holdings Spin-off, Liberty and TripAdvisor Holdings entered into a tax sharing agreement (the “Tax Sharing Agreement”).  The Tax Sharing Agreement provides for the allocation and indemnification of tax liabilities and benefits between Liberty and TripAdvisor Holdings and other agreements related to tax matters.  Among other things, pursuant to the Tax Sharing Agreement, TripAdvisor Holdings has agreed to indemnify Liberty, subject to certain limited exceptions, for losses and taxes resulting from the TripAdvisor Holdings Spin-Off to the extent such losses or taxes result primarily from, individually or in the aggregate, the breach of certain restrictive covenants made by TripAdvisor Holdings (applicable to actions or failures to act by TripAdvisor Holdings and its subsidiaries following the completion of the TripAdvisor Holdings Spin-Off).

 

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LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

In October 2014, the IRS completed its examination of the TripAdvisor Holdings Spin-Off and notified Liberty that it agreed with the nontaxable characterization of the transaction.  Liberty expects to execute a closing agreement with the IRS documenting this conclusion during 2015.

 

Certain combined financial information for TripAdvisor Holdings, which is included in earnings (loss) from discontinued operations, is as follows (amounts in millions, except per share amounts):

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

March 31, 2014

 

Revenue

 

$

294 

 

Earnings (loss) before income taxes

 

$

27 

 

Earnings (loss) attributable to Liberty Interactive Corporation shareholders

 

$

 

 

Earnings per share of discontinued operations

 

The combined impact from discontinued operations, discussed above, is as follows:

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

March 31, 2014

 

Basic earnings (loss) from discontinued operations attributable to Liberty shareholders per common share (note 5):

 

 

 

 

Series A and Series B Liberty Interactive common stock

 

$

(0.01)

 

Series A and Series B Liberty Ventures common stock

 

$

0.07 

 

Diluted earnings (loss) from discontinued operations attributable to Liberty shareholders per common share (note 5):

 

 

 

 

Series A and Series B Liberty Interactive common stock

 

$

(0.01)

 

Series A and Series B Liberty Ventures common stock

 

$

0.07 

 

 

The assets and liabilities included in the TripAdvisor Holdings Spin-Off, and their resulting impacts on the attributed statements of operations, were included in discontinued operations based on which group owned the assets at the time of the TripAdvisor Holdings Spin-Off.

 

(4)   Stock-Based Compensation

The Company has granted to certain of its directors, employees and employees of its subsidiaries, stock appreciation rights ("SARs"), restricted stock, performance-based restricted stock units 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 of the Award, and recognizes that cost over the period during which the employee is required to provide service (usually the vesting period of the Award). The Company measures the cost of employee services received in exchange for a liability classified Award (such as SARs that will be settled in cash) based on the current fair value of the Award, and remeasures the fair value of the Award at each reporting date.

Included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations are $15 million and $25 million of stock-based compensation during the three months ended March 31, 2015 and 2014, respectively.

 

During the three months ended March 31, 2015, Liberty granted 1.9 million options to QVC employees to purchase shares of Series A Liberty Interactive common stock.  Such options had a weighted average grant-date fair value of $11.92 per share and vest semi-annually over 4 years.

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LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

Also during the three months ended March 31, 2015, Liberty granted to Liberty employees 1.1 million and 308 thousand options to purchase shares of Series A Liberty Interactive common stock and Series A Liberty Ventures common stock, respectively.  Such options had a weighted average grant-date fair value of $12.20 and $17.65 per share, respectively, and each grant contains options that vest over two different periods, annually over three years and 50% on each of December 31, 2019 and 2020.

In connection with our CEO’s employment agreement, Liberty also granted 132 thousand and 135 thousand performance-based options of Series B Liberty Interactive common stock and Series B Liberty Ventures common stock, respectively, and 182 thousand and 13 thousand performance-based restricted stock units of Series B Liberty Interactive common stock and Series B Liberty Ventures common stock, respectively.  Such options had a weighted average grant-date fair value of $10.10 per share and $17.16 per share, respectively. The restricted stock units had a weighted average grant-date fair value of $29.41 per share and $42.33 per share, respectively. The options and restricted stock units cliff vest in one year, subject to satisfaction of certain performance objectives.

The Company has calculated the grant-date fair value for all of its equity classified Awards and any subsequent remeasurement of its liability classified Awards using the Black-Scholes Model. The Company estimates the expected term of the Awards based on historical exercise and forfeiture data. The volatility used in the calculation for Awards is based on the historical volatility of Liberty's stock and the implied volatility of publicly traded Liberty options. The Company uses a zero dividend rate and the risk-free rate for Treasury Bonds with a term similar to that of the subject options.

Liberty—Outstanding Awards

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liberty Interactive

 

 

    

 

    

 

 

    

Weighted

    

Aggregate

 

 

 

 

 

 

 

 

average

 

intrinsic

 

 

 

Series A

 

 

 

 

remaining

 

value

 

 

 

(000's)

 

WAEP

 

life

 

(millions)

 

Outstanding at January 1, 2015

 

24,900 

 

$

17.49 

 

 

 

 

 

 

 

Granted

 

2,963 

 

$

29.59 

 

 

 

 

 

 

 

Exercised

 

(1,928)

 

$

15.77 

 

 

 

 

 

 

 

Forfeited/Cancelled

 

(338)

 

$

22.49 

 

 

 

 

 

 

 

Outstanding at March 31, 2015

 

25,597 

 

$

18.95 

 

4.5 

years

 

$

263 

 

Exercisable at March 31, 2015

 

16,175 

 

$

16.64 

 

3.9 

years

 

$

203 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liberty Interactive

 

 

    

 

    

 

 

    

Weighted

    

Aggregate

 

 

 

 

 

 

 

 

average

 

intrinsic

 

 

 

Series B

 

 

 

 

remaining

 

value

 

 

 

(000's)

 

WAEP

 

life

 

(millions)

 

Outstanding at January 1, 2015

 

1,044 

 

$

24.78 

 

 

 

 

 

 

 

Granted

 

132 

 

$

29.41 

 

 

 

 

 

 

 

Exercised

 

(398)

 

$

16.51 

 

 

 

 

 

 

 

Outstanding at March 31, 2015

 

778 

 

$

29.79 

 

6.8 

years

 

$

 —

 

Exercisable at March 31, 2015

 

 —

 

$

 —

 

 —

years

 

$

 —

 

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LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liberty Ventures

 

 

    

 

    

 

 

    

Weighted

    

Aggregate

 

 

 

 

 

 

 

 

average

 

intrinsic

 

 

 

Series A

 

 

 

 

remaining

 

value

 

 

 

(000's)

 

WAEP

 

life

 

(millions)

 

Outstanding at January 1, 2015

 

3,997 

 

$

19.10 

 

 

 

 

 

 

 

Granted

 

308 

 

$

40.07 

 

 

 

 

 

 

 

Exercised

 

(195)

 

$

19.56 

 

 

 

 

 

 

 

Forfeited/Cancelled

 

(2)

 

$

25.03 

 

 

 

 

 

 

 

Outstanding at March 31, 2015

 

4,108 

 

$

20.65 

 

4.2 

years

 

$

88 

 

Exercisable at March 31, 2015

 

2,951 

 

$

18.84 

 

3.9 

years

 

$

68 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liberty Ventures

 

 

    

 

    

 

 

    

Weighted

    

Aggregate

 

 

 

 

 

 

 

 

average

 

intrinsic

 

 

 

Series B

 

 

 

 

remaining

 

value

 

 

 

(000's)

 

WAEP

 

life

 

(millions)

 

Outstanding at January 1, 2015

 

1,507 

 

$

36.24 

 

 

 

 

 

 

 

Granted

 

135 

 

$

42.33 

 

 

 

 

 

 

 

Exercised

 

(101)

 

$

16.82 

 

 

 

 

 

 

 

Outstanding at March 31, 2015

 

1,541 

 

$

38.04 

 

6.8 

years

 

$

 

Exercisable at March 31, 2015

 

 —

 

$

 —

 

 —

years

 

$

 —

 

 

As of March 31, 2015, the total unrecognized compensation cost related to unvested Awards was approximately $107 million, including compensation associated with the option exchange that occurred in December 2012. Such amount will be recognized in the Company's consolidated statements of operations over a weighted average period of approximately 2.4 years.

Other

Certain of the Company's other subsidiaries have stock based compensation plans under which employees and non-employees are granted options or similar stock based awards. Awards made under these plans vest and become exercisable over various terms. The awards and compensation recorded, if any, under these plans is not significant to Liberty.

 

 

(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 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.

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LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

Series A and Series B Liberty Interactive Common Stock

Excluded from diluted EPS, for the three months ended March 31, 2015 and 2014, are 4 million and 2 million potential common shares, respectively, because their inclusion would be antidilutive.

 

 

 

 

 

 

 

 

 

 

Liberty Interactive Common Stock

 

 

    

Three months ended 

 

 

 

March 31, 2015

 

March 31, 2014

 

 

 

number of shares in millions

 

Basic EPS

 

473 

 

494 

 

Potentially dilutive shares

 

 

10 

 

Diluted EPS

 

480 

 

504 

 

 

 

Series A and Series B Liberty Ventures Common Stock

 

As discussed in note 11, Liberty completed a two for one stock split on April 11, 2014 on its Series A and Series B Liberty Ventures common stock. Therefore, all prior period outstanding share amounts have been retroactively adjusted for comparability.  Excluded from diluted EPS, for all periods presented, are less than a million potential common shares because their inclusion would be antidilutive.

 

 

 

 

 

 

 

 

 

 

Liberty Ventures Common Stock

 

 

    

Three months ended 

 

 

 

March 31, 2015

 

March 31, 2014

 

 

 

number of shares in millions

 

Basic EPS

 

141 

 

73 

 

Potentially dilutive shares

 

 

 

Diluted EPS

 

143 

 

74 

 

 

 

 

 

 

 

 

(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.

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LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

The Company's assets and liabilities measured at fair value are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at

 

Fair Value Measurements at

 

 

 

March 31, 2015

 

December 31, 2014

 

 

    

 

 

    

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

 

$

2,230 

 

2,230 

 

 —

 

2,147 

 

2,147 

 

 —

 

Short term marketable securities

 

$

860 

 

254 

 

606 

 

889 

 

277 

 

612 

 

Available-for-sale securities

 

$

1,207 

 

1,186 

 

21 

 

1,220 

 

1,203 

 

17 

 

Debt

 

$

2,502 

 

 —

 

2,502 

 

2,574 

 

 —

 

2,574 

 

 

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

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 

 

 

 

March 31,

 

 

    

2015

    

2014

 

 

 

amounts in millions

 

Fair Value Option Securities

 

$

(17)

 

(10)

 

Exchangeable senior debentures

 

 

13 

 

(15)

 

 

 

$

(4)

 

(25)

 

 

 

 

 

(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"). In prior years, Liberty has historically entered into economic hedges for certain of its non-strategic AFS securities (although such instruments were not accounted for as fair value hedges by the Company). Changes in the fair value of these economic hedges were reflected in Liberty's 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 elected the fair value option for those of its AFS securities which it considered to be non-strategic ("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 in the accompanying condensed consolidated statements of operations.

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LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

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

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

 

2015

 

2014

 

 

 

amounts in millions

 

QVC Group

 

 

 

 

 

 

Other cost investments

 

$

 

 

Total attributed QVC Group

 

 

 

 

Ventures Group

 

 

 

 

 

 

Time Warner Inc.

 

 

371 

 

375 

 

Time Warner Cable Inc.

 

 

803 

 

815 

 

Other AFS investments

 

 

58 

 

30 

 

Total attributed Ventures Group

 

 

1,232 

 

1,220 

 

Consolidated Liberty

 

$

1,236 

 

1,224 

 

 

 

 

 

 

(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 March 31, 2015 and the carrying amount at December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

March 31, 2015

 

2014

 

 

    

Percentage

    

Fair value

    

Carrying

    

Carrying

 

 

 

ownership

 

(Level 1)

 

amount

 

amount

 

 

 

 

 

dollar amounts in millions

 

QVC Group

 

 

 

 

 

 

 

 

 

 

 

HSN, Inc. (1)

 

38 

%  

$

1,366 

 

$

146 

 

328 

 

Other