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| LINTA > SEC Filings for LINTA > Form 10-K on 28-Feb-2013 | All Recent SEC Filings |
28-Feb-2013
Annual Report
On September 23, 2011, Liberty completed the split-off of a wholly owned
subsidiary, Liberty Media Corporation ("LMC") (formerly known as Liberty
CapStarz, Inc. and prior thereto Liberty Splitco, Inc.) (the "LMC Split-Off").
At the time of the LMC Split-Off, LMC owned all the assets, businesses and
liabilities previously attributed to the Capital and Starz tracking stock
groups. The LMC Split-Off was effected by means of a redemption of all of the
Liberty Capital common stock and Liberty Starz common stock of Liberty for all
of the common stock of LMC. This transaction has been accounted for at
historical cost due to the pro rata nature of the distribution.
Following the LMC Split-Off, Liberty and LMC operate as separate, publicly
traded companies and neither has any stock ownership, beneficial or otherwise,
in the other. In connection with the LMC Split-Off, Liberty and LMC entered into
certain agreements in order to govern certain of the ongoing relationships
between the two companies after the LMC Split-Off and to provide for an orderly
transition.
The consolidated financial statements of Liberty have been prepared to reflect
LMC as discontinued operations. Accordingly, the assets and liabilities,
revenue, costs and expenses, and cash flows of LMC, for periods prior to the
respective split-offs, have been excluded from the respective captions in the
accompanying consolidated balance sheets, statements of operations,
comprehensive earnings and cash flows in such consolidated financial statements.
Strategies and Challenges
QVC. QVC's goal is to become the preeminent global multimedia shopping community
for people who love to shop, and to offer a shopping experience that is as much
about entertainment and enrichment as it is about buying. QVC's objective is to
provide an integrated shopping experience that utilizes all forms of media
including television, the internet and mobile devices. In 2013, QVC intends to
employ several strategies to achieve these goals and objectives. Among these
strategies are to (i) extend the breadth, relevance and exposure of the QVC
brand; (ii) source products that represent unique quality and value;
(iii) create engaging presentation content both in televised programming, mobile
and online; (iv) leverage customer loyalty and continue multi?platform expansion
and (v) create a compelling and differentiated customer experience. In addition,
QVC expects to expand globally by leveraging its existing systems,
infrastructure and skills in other countries around the world.
QVC's televised shopping program is already received by substantially all the
multichannel television households in the U.S., Germany and the U.K. QVC's
future net revenue growth will primarily depend on international expansion,
sales growth from e-commerce and mobile platforms, additions of new customers
from households already receiving QVC's television programming and growth in
sales to existing customers and new customers as a result of expansion of the
programming reach of QVC-Japan and QVC-Italy. QVC's future net revenue may also
be affected by (i) the willingness of multichannel television distributors to
continue carrying QVC's programming service; (ii) QVC's ability to maintain
favorable channel positioning, which may become more difficult as distributors
convert 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.
The current economic downturn in the U.S. and in other regions of the world in
which QVC's subsidiaries and affiliates operate could adversely affect demand
for products and services since a substantial portion of QVC's revenue is
derived from discretionary spending by individuals, which typically falls during
times of economic instability. Global financial markets continue to experience
disruptions, including increased volatility and diminished liquidity and credit
availability. In particular, the current European debt crisis, particularly most
recently in Greece, Italy, Ireland, Portugal and Spain, and related European
financial restricting efforts may cause volatility in the European currencies
and reduce the purchasing power of European customers. In the event that one or
more countries were to replace the Euro with their legacy currency, then QVC's
revenue and operating results in such countries, or Europe generally, would
likely be adversely affected until stable exchange rates were established and
economic confidence restored. In addition, the European crisis is contributing
to instability in global credit markets. The world has recently experienced a
global macroeconomic downturn, and if economic and financial market conditions
in the United States or other key markets, including Europe, remain uncertain,
persist, or deteriorate further, our customers may respond by suspending,
delaying, or reducing their discretionary spending. A suspension, delay or
reduction in discretionary spending could adversely affect revenue. Accordingly,
QVC's ability to increase or maintain revenue and earnings could be adversely
affected to the extent that relevant economic environments remain weak or
decline further. Such weak economic conditions may also inhibit QVC's expansion
into new European markets. We currently are unable to predict the extent of any
of these potential adverse effects.
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 reportable segment and our
E-commerce businesses. The "corporate and other" category consists of those
assets or businesses which we do not disclose separately. For a more detailed
discussion and analysis of the financial results of the principal reporting
segment, see "Results of Operations - Businesses" below.
Operating Results
Years ended December 31,
2012 2011 2010
amounts in millions
Revenue
Interactive Group
QVC $ 8,516 8,268 7,807
E-commerce 1,502 1,348 1,125
Corporate and other - - -
Total Interactive Group 10,018 9,616 8,932
Ventures Group
TripAdvisor 36 - -
Corporate and other - - -
Total Ventures Group 36 - -
Consolidated Liberty $ 10,054 9,616 8,932
Adjusted OIBDA
Interactive Group
QVC $ 1,828 1,733 1,671
E-commerce 96 123 103
Corporate and other (27 ) (29 ) (25 )
Total Interactive Group 1,897 1,827 1,749
Ventures Group
TripAdvisor 8 - -
Corporate and other (5 ) (4 ) (3 )
Total Ventures Group 3 (4 ) (3 )
Consolidated Liberty $ 1,900 1,823 1,746
Operating Income (Loss)
Interactive Group
QVC $ 1,268 1,137 1,130
E-commerce (81 ) 55 40
Corporate and other (63 ) (55 ) (59 )
Total Interactive Group 1,124 1,137 1,111
Ventures Group
TripAdvisor (5 ) - -
Corporate and other (11 ) (4 ) (3 )
Total Ventures Group (16 ) (4 ) (3 )
Consolidated Liberty $ 1,108 1,133 1,108
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Revenue. Our consolidated revenue increased 4.6% and 7.7% for the years ended December 31, 2012 and 2011, respectively, as compared to the corresponding prior year periods. The current year and prior year increases were the result of increased revenue at QVC ($248 million and $461 million, respectively) and the E-commerce companies ($154 million and $223 million, respectively). See "Results of Operations - Businesses" below for a more complete discussion of the results of operations of certain of our subsidiaries.
Adjusted OIBDA. We define Adjusted OIBDA as revenue less cost of sales,
operating expenses and selling, general and administrative ("SG&A") expenses
(excluding stock compensation). Our chief operating decision maker and
management team use this measure of performance in conjunction with other
measures to evaluate our businesses and make decisions about allocating
resources among our businesses. We believe this is an important indicator of the
operational strength and performance of our businesses, including each
business's ability to service debt and fund capital expenditures. In addition,
this measure allows us to view operating results, perform analytical comparisons
and benchmarking between businesses and identify strategies to improve
performance. This measure of performance excludes such costs as depreciation and
amortization, stock-based compensation 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 18 to the accompanying consolidated financial statements for
a reconciliation of Adjusted OIBDA to earnings (loss) from continuing operations
before income taxes.
Consolidated Adjusted OIBDA increased $77 million and $77 million for the years
ended December 31, 2012 and 2011, respectively, as compared to the corresponding
prior year periods. See "Results of Operations - Businesses" below for a more
complete discussion of the results of operations of certain of our subsidiaries.
Stock-based compensation. Stock-based compensation includes compensation
related to (1) options and stock appreciation rights ("SARs") for shares of our
common stock that are granted to certain of our officers and employees,
(2) phantom stock appreciation rights ("PSARs") granted to officers and
employees of certain of our subsidiaries pursuant to private equity plans and
(3) amortization of restricted stock grants.
We recorded $91 million, $49 million and $67 million of stock compensation
expense for the years ended December 31, 2012, 2011 and 2010, respectively. The
increase in stock compensation during 2012 was largely the result of a one-time
exchange offer for certain officers of Liberty and its subsidiaries. As
described more fully in note 14, in the accompanying consolidated financial
statements, the exchange offer, in the fourth quarter of 2012, resulted in
approximately $21 million of incremental share based compensation. Additionally,
our E-commerce companies recorded an increase in stock-based compensation for
the year ended December 31, 2012. The decrease in stock compensation expense in
2011 relates primarily to our liability classified awards due to a less
significant increase in our stock prices during that period as compared to the
previous period and downward valuation revisions by our E-commerce companies
which was offset slightly by additional grants of options which slightly
increased amortization of stock compensation for the year ended December 31,
2011. As of December 31, 2012, the total unrecognized compensation cost related
to unvested Liberty equity awards was approximately $170 million. Such amount
will be recognized in our consolidated statements of operations over a weighted
average period of approximately 1.7 years.
Operating income. Our consolidated operating income decreased $25 million and
increased $25 million for the years ended December 31, 2012 and 2011,
respectively, as compared to the corresponding prior year periods. The change in
operating income from 2011 to 2012 was due to the increase in stock compensation
and the impairment of goodwill at certain E-commerce subsidiaries. See "Results
of Operations - Businesses" below for a more complete discussion of the results
of operations of certain of our subsidiaries.
Other Income and Expense
Components of Other Income (Expense) are presented in the table below.
Years ended December 31,
2012 2011 2010
amounts in millions
Interest expense
Interactive Group $ (322 ) (317 ) (515 )
Ventures Group (110 ) (110 ) (111 )
Consolidated Liberty $ (432 ) (427 ) (626 )
Share of earnings (losses) of affiliates
Interactive Group $ 28 23 8
Ventures Group 57 117 104
Consolidated Liberty $ 85 140 112
Realized and unrealized gains (losses) on
financial instruments, net
Interactive Group $ 51 75 117
Ventures Group (402 ) 9 (55 )
Consolidated Liberty $ (351 ) 84 62
Gains (losses) on transactions, net
Interactive Group $ - - 355
Ventures Group 1,531 - -
Consolidated Liberty $ 1,531 - 355
Other, net
Interactive Group $ - 15 (44 )
Ventures Group 44 (6 ) (3 )
Consolidated Liberty $ 44 9 (47 )
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Interest expense. Interest expense increased $5 million and decreased
$199 million for the years ended December 31, 2012 and 2011, respectively, as
compared to the corresponding prior year periods. The slight increase in
interest expense for the year ended December 31, 2012 was primarily the result
of a slight increase in the average debt balance outstanding during the period.
The overall decrease in interest expense for the year ended December 31, 2011
related to a lower average debt balance throughout the prior year, as compared
to the corresponding prior year period.
Share of earnings (losses) of affiliates. The following table presents our
share of earnings (losses) of affiliates:
Years ended December 31,
2012 2011 2010
amounts in millions
Interactive Group
HSN, Inc. $ 40 38 31
Other (12 ) (15 ) (23 )
Total Interactive Group 28 23 8
Ventures Group
Expedia, Inc. 67 119 103
TripAdvisor 38 - -
Other (48 ) (2 ) 1
Total Ventures Group 57 117 104
Consolidated Liberty $ 85 140 112
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During the fourth quarter of 2011, Expedia, Inc. completed the pro-rata
split-off of TripAdvisor, a wholly owned subsidiary. In the fourth quarter of
2012 we settled a forward sale of 12 million shares of Expedia, Inc. common
stock. Therefore, we have a 17% ownership interest in Expedia, Inc. as of
December 31, 2012. During the second quarter of 2012 we disposed of
approximately 8.5 million shares of TripAdvisor and then subsequently in the
fourth quarter of 2012 we acquired approximately 5 million shares along with the
right to control the vote of the shares of TripAdvisor's class A and B common
stock. Following the transaction we own approximately 22% of the equity and 57%
of the total votes of all classes of TripAdvisor common stock. As we now control
TripAdvisor we ceased accounting for our investment using the equity method of
accounting and consolidated TripAdvisor for the last 20 days of 2012. Share of
earnings for TripAdvisor for December 31, 2012 only include our share of
earnings in TripAdvisor through December 10, 2012.
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:
Years ended December 31,
2012 2011 2010
amounts in millions
Non-strategic Securities $ 470 55 202
Exchangeable senior debentures (602 ) (46 ) (257 )
Other derivatives (219 ) 75 117
$ (351 ) 84 62
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The changes in these accounts are due entirely to market factors and changes in
the fair value of the underlying stocks or financial instruments to which these
relate. The significant change in other derivatives is the forward contract
entered into on 12 million Expedia, Inc. common shares.
Gains (losses) on transactions, net. The year ended December 31, 2012 gains on
transactions relate to our acquisition of a controlling interest in TripAdvisor,
a gain on the sale of Expedia, Inc. shares ($443 million) and a gain on the sale
of TripAdvisor shares ($288 million) during the year. In December 2012, as
discussed above, we acquired an additional ownership interest in TripAdvisor and
the right to vote our shares of their class B common stock. The application of
business combination accounting, as a result of the acquisition, for TripAdvisor
required the recognition of an $800 million gain which was the difference
between the fair value of our previously held interest in TripAdvisor and the
carrying value of the same ownership interest. Gains in 2010 include a gain
related to the sale of our GSI Commerce, Inc. shares of $105 million and a gain
of $218 million related to the disposition of all of our IAC/InteractiveCorp
shares.
Income taxes. Our effective tax rate for the years ended December, 2012, 2011
and 2010 was 20%, 37% and 13%, respectively. The 2012 effective tax rate is less
than the U.S. federal income tax rate of 35% due primarily to the consolidation
of a previously held equity method affiliate in the current period that
triggered a gain for accounting purposes but not for tax purposes. The 2011
effective tax rate is greater than the U.S. federal income tax rate of 35%
primarily due to the impact of state taxes. For the year ended December 31, 2010
the effective tax rate was less than the U.S. federal income tax rate of 35% due
primarily to a nontaxable exchange of investments for a subsidiary that resulted
in a deferred tax benefit of $112 million.
Net earnings. We had net earnings of $1,591 million, $965 million and $1,937
million for the years ended December 31, 2012, 2011 and 2010, respectively. The
change in net earnings was the result of the above-described fluctuations in our
revenue, expenses and other gains and losses.
Liquidity and Capital Resources
As of December 31, 2012 substantially all of our cash and cash equivalents are
invested in U.S. Treasury securities, other government securities or government
guaranteed funds, AAA rated money market funds and other highly rated financial
and corporate debt instruments.
The following are potential sources of liquidity: available cash balances, cash
generated by the operating activities of our privately-owned subsidiaries (to
the extent such cash exceeds the working capital needs of the subsidiaries and
is not otherwise restricted), proceeds from asset sales, monetization of our
public investment portfolio, outstanding debt facilities, debt and equity
issuances, and dividend and interest receipts.
During the year, there were no changes to our or our consolidated subsidiaries
debt credit ratings.
As of December 31, 2012 Liberty had a cash balance of $2,660 million with
approximately $296 million held by foreign subsidiaries. Cash in foreign
subsidiaries is generally accessible but certain tax consequences may reduce the
net amount of cash we are able to utilize for domestic purposes. We note that
QVC-Japan's cash, which is approximately half of the foreign cash balance, is
further encumbered by a minority interest agreement. We believe that we
currently have appropriate legal structures in place to repatriate foreign cash
as tax efficiently as possible and meet the business needs of the company.
Additionally, $368 million of the cash balance is from TripAdvisor which we are
not be able to access as readily as other consolidated subsidiaries due to the
significant minority interest in TripAdvisor. Another significant source of
liquidity is our borrowing capacity under the QVC Bank Credit Facilities under
which we have approximately $1 billion of available credit at December 31, 2012.
Additionally, our operating businesses have provided, on average, more than $1
billion in annual operating cash flow over the prior three years. We do not
anticipate any significant reductions in the $1 billion of average annual
operating cash flows in future periods.
Years ended December 31,
2012 2011 2010
Cash Flow Information amounts in millions
Net cash provided (used) by operating activities $ 1,432 900 1,203
Net cash provided (used) by investing activities $ 153 (437 ) 344
Net cash provided (used) by financing activities $ 248 (916 ) (1,814 )
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During the year ended December 31, 2012, Liberty's primary uses of cash were . . .
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