Match Group, Inc. - FORM 10-Q - July 31, 2014

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As filed with the Securities and Exchange Commission on July 31, 2014


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2014
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 No. 0-20570
 
IAC/INTERACTIVECORP
(Exact name of registrant as specified in its charter)
Delaware
 (State or other jurisdiction of
incorporation or organization)
 
59-2712887
(I.R.S. Employer
Identification No.)
 555 West 18th Street, New York, New York 10011
 (Address of registrant's principal executive offices)
 (212) 314-7300
(Registrant's telephone number, including area code)
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 ý    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
Accelerated filer o
Non-accelerated filer o
 (Do not check if a smaller
reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý
As of July 25, 2014, the following shares of the registrant's common stock were outstanding:
Common Stock
77,597,075

Class B Common Stock
5,789,499

Total outstanding Common Stock
83,386,574

The aggregate market value of the voting common stock held by non-affiliates of the registrant as of July 25, 2014 was $5,121,561,426. For the purpose of the foregoing calculation only, all directors and executive officers of the registrant are assumed to be affiliates of the registrant.


TABLE OF CONTENTS






PART I
FINANCIAL INFORMATION
Item 1.    Consolidated Financial Statements
IAC/INTERACTIVECORP
CONSOLIDATED BALANCE SHEET
(Unaudited)
 
June 30, 2014
 
December 31, 2013
 
(In thousands, except share data)
ASSETS
 
 
 
Cash and cash equivalents
$
987,326

 
$
1,100,444

Marketable securities
81,611

 
6,004

Accounts receivable, net of allowance of $11,443 and $8,540 respectively
223,436

 
207,408

Other current assets
185,059

 
161,530

Total current assets
1,477,432

 
1,475,386

Property and equipment, net of accumulated depreciation and amortization of $277,966 and $265,298, respectively
291,289

 
293,964

Goodwill
1,720,650

 
1,675,323

Intangible assets, net of accumulated amortization of $85,407 and $83,310, respectively
470,361

 
445,336

Long-term investments
119,487

 
179,990

Other non-current assets
88,259

 
164,685

TOTAL ASSETS
$
4,167,478

 
$
4,234,684

 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
LIABILITIES:
 
 
 
Accounts payable, trade
$
58,569

 
$
77,653

Deferred revenue
184,423

 
158,206

Accrued expenses and other current liabilities
344,738

 
351,038

Total current liabilities
587,730

 
586,897

Long-term debt
1,080,000

 
1,080,000

Income taxes payable
420,408

 
416,384

Deferred income taxes
327,957

 
320,748

Other long-term liabilities
52,419

 
58,393

 
 
 
 
Redeemable noncontrolling interests
24,137

 
42,861

 
 
 
 
Commitments and contingencies

 

 
 
 
 
SHAREHOLDERS' EQUITY:
 
 
 
Common stock $.001 par value; authorized 1,600,000,000 shares; issued 251,393,985 and 250,982,079 shares, respectively and outstanding 77,579,984 and 76,404,552 shares, respectively
251

 
251

Class B convertible common stock $.001 par value; authorized 400,000,000 shares; issued 16,157,499 shares and outstanding 5,789,499 shares
16

 
16

Additional paid-in capital
11,358,763

 
11,562,567

Accumulated deficit
(14,846
)
 
(32,735
)
Accumulated other comprehensive loss
(9,906
)
 
(13,046
)
Treasury stock 184,182,001 and 184,945,527 shares, respectively
(9,661,350
)
 
(9,830,317
)
Total IAC shareholders' equity
1,672,928

 
1,686,736

Noncontrolling interests
1,899

 
42,665

Total shareholders' equity
1,674,827

 
1,729,401

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
4,167,478

 
$
4,234,684


The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

3


IAC/INTERACTIVECORP
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands, except per share data)
Revenue
$
756,315

 
$
799,411

 
$
1,496,562

 
$
1,541,660

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of revenue (exclusive of depreciation shown separately below)
211,100

 
272,822

 
420,294

 
528,671

Selling and marketing expense
272,786

 
247,153

 
571,498

 
490,067

General and administrative expense
109,719

 
103,515

 
204,535

 
199,239

Product development expense
38,357

 
34,052

 
77,373

 
69,169

Depreciation
15,257

 
17,036

 
30,075

 
31,052

Amortization of intangibles
13,406

 
18,137

 
25,385

 
32,215

Total operating costs and expenses
660,625

 
692,715

 
1,329,160

 
1,350,413

Operating income
95,690

 
106,696

 
167,402

 
191,247

Equity in losses of unconsolidated affiliates
(6,850
)
 
(1,078
)
 
(8,785
)
 
(1,169
)
Interest expense
(14,046
)
 
(7,658
)
 
(28,110
)
 
(15,321
)
Other (expense) income, net
(62,900
)
 
(4
)
 
(62,923
)
 
1,654

Earnings from continuing operations before income taxes
11,894

 
97,956

 
67,584

 
176,411

Income tax provision
(29,889
)
 
(39,416
)
 
(51,274
)
 
(65,162
)
(Loss) earnings from continuing operations
(17,995
)
 
58,540

 
16,310

 
111,249

Loss from discontinued operations, net of tax
(868
)
 
(1,068
)
 
(1,682
)
 
(2,012
)
Net (loss) earnings
(18,863
)
 
57,472

 
14,628

 
109,237

Net loss attributable to noncontrolling interests
867

 
818

 
3,261

 
2,690

Net (loss) earnings attributable to IAC shareholders
$
(17,996
)
 
$
58,290

 
$
17,889

 
$
111,927

 
 
 
 
 
 
 
 
Per share information attributable to IAC shareholders:
 
 
 
 
 
 
Basic (loss) earnings per share from continuing operations
$
(0.21
)
 
$
0.71

 
$
0.24

 
$
1.36

Diluted (loss) earnings per share from continuing operations
$
(0.21
)
 
$
0.69

 
$
0.22

 
$
1.31

Basic (loss) earnings per share
$
(0.22
)
 
$
0.70

 
$
0.22

 
$
1.33

Diluted (loss) earnings per share
$
(0.22
)
 
$
0.67

 
$
0.20

 
$
1.29

 
 
 
 
 
 
 
 
Dividends declared per share
$
0.24

 
$
0.24

 
$
0.48

 
$
0.48

 
 
 
 
 
 
 
 
Non-cash compensation expense by function:
 
 
 
 
 
 
 
Cost of revenue
$
459

 
$
681

 
$
451

 
$
1,301

Selling and marketing expense
657

 
794

 
853

 
1,180

General and administrative expense
13,707

 
9,427

 
21,659

 
20,207

Product development expense
1,729

 
918

 
3,202

 
1,795

Total non-cash compensation expense
$
16,552

 
$
11,820

 
$
26,165

 
$
24,483

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

4


IAC/INTERACTIVECORP
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Net (loss) earnings
$
(18,863
)
 
$
57,472

 
$
14,628

 
$
109,237

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Change in foreign currency translation adjustment
(187
)
 
(4,598
)
 
5,190

 
(13,021
)
Change in net unrealized (losses) gains on available-for-sale securities (net of tax benefits of $865 and $1,438 for the three and six months ended June 30, 2014, respectively, and tax provision of $740 and tax benefit of $84 for the three and six months ended June 30, 2013, respectively)
(2,139
)
 
17,187

 
(2,250
)
 
12,211

Total other comprehensive (loss) income, net of tax
(2,326
)
 
12,589

 
2,940

 
(810
)
Comprehensive (loss) income
(21,189
)
 
70,061

 
17,568

 
108,427

Comprehensive loss attributable to noncontrolling interests
984

 
138

 
3,461

 
3,482

Comprehensive (loss) income attributable to IAC shareholders
$
(20,205
)
 
$
70,199

 
$
21,029

 
$
111,909

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

5


IAC/INTERACTIVECORP
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
 
 
 
 
IAC Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
Class B
Convertible
Common
Stock $.001
Par Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common
Stock $.001
Par Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
Other
Comprehensive
Loss
 
 
 
Total IAC
Shareholders'
Equity
 
 
 
 
 
Redeemable
Noncontrolling
Interests
 
 
Additional
Paid-in
Capital
 
 Accumulated
Deficit
 
 
Treasury
Stock
 
 
Noncontrolling
Interests
 
Total
Shareholders'
Equity
 
$
 
Shares
 
$
 
Shares
 
 
 
 
 
 
(In thousands)
 
 
Balance as of December 31, 2013
$
42,861

 
 
$
251

 
250,982

 
$
16

 
16,157

 
$
11,562,567

 
$
(32,735
)
 
$
(13,046
)
 
$
(9,830,317
)
 
$
1,686,736

 
$
42,665

 
$
1,729,401

Net (loss) earnings for the six months ended June 30, 2014
(3,261
)
 
 
—

 
—

 
—

 
—

 
—

 
17,889

 
—

 
—

 
17,889

 
—

 
17,889

Other comprehensive (loss) income, net of tax
(299
)
 
 
—

 
—

 
—

 
—

 
—

 
—

 
3,140

 
—

 
3,140

 
99

 
3,239

Non-cash compensation expense
—

 
 
—

 
—

 
—

 
—

 
25,979

 
—

 
—

 
—

 
25,979

 
186

 
26,165

Issuance of common stock upon exercise of stock options, vesting of restricted stock units and other, net of withholding taxes
—

 
 
—

 
412

 
—

 
—

 
(182,702
)
 
—

 
—

 
168,967

 
(13,735
)
 
—

 
(13,735
)
Income tax benefit related to the exercise of stock options, vesting of restricted stock units and other
—

 
 
—

 
—

 
—

 
—

 
25,487

 
—

 
—

 
—

 
25,487

 
—

 
25,487

Dividends
—

 
 
—

 
—

 
—

 
—

 
(39,556
)
 
—

 
—

 
—

 
(39,556
)
 
—

 
(39,556
)
Purchase of redeemable noncontrolling interests
(38,893
)
 
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Purchase of noncontrolling interests
—

 
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(50,347
)
 
(50,347
)
Adjustment of redeemable noncontrolling interests and noncontrolling interests to fair value
23,716

 
 
—

 
—

 
—

 
—

 
(33,012
)
 
—

 
—

 
—

 
(33,012
)
 
9,296

 
(23,716
)
Other
13

 
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Balance as of June 30, 2014
$
24,137

 
 
$
251

 
251,394

 
$
16

 
16,157

 
$
11,358,763

 
$
(14,846
)
 
$
(9,906
)
 
$
(9,661,350
)
 
$
1,672,928

 
$
1,899

 
$
1,674,827

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

6


IAC/INTERACTIVECORP
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
 
Six Months Ended June 30,
 
2014
 
2013
 
(In thousands)
Cash flows from operating activities attributable to continuing operations:
 
 
 
Net earnings
$
14,628

 
$
109,237

Less: loss from discontinued operations, net of tax
(1,682
)
 
(2,012
)
Earnings from continuing operations
16,310

 
111,249

Adjustments to reconcile earnings from continuing operations to net cash provided by operating activities attributable to continuing operations:
 
 
 
Non-cash compensation expense
26,165

 
24,483

Depreciation
30,075

 
31,052

Amortization of intangibles
25,385

 
32,215

Impairment of long-term investments
64,281

 
—

Excess tax benefits from stock-based awards
(32,889
)
 
(23,547
)
Deferred income taxes
5,849

 
(6,737
)
Equity in losses of unconsolidated affiliates
8,785

 
1,169

 Acquisition-related contingent consideration fair value adjustments
500

 
5,707

Changes in assets and liabilities, net of effects of acquisitions:
 
 
 
Accounts receivable
(5,718
)
 
(9,754
)
Other assets
(19,238
)
 
(14,789
)
Accounts payable and other current liabilities
(31,242
)
 
23,438

Income taxes payable
29,299

 
45,529

Deferred revenue
25,851

 
(203
)
Other, net
5,358

 
8,451

Net cash provided by operating activities attributable to continuing operations
148,771

 
228,263

Cash flows from investing activities attributable to continuing operations:
 
 
 
Acquisitions, net of cash acquired
(103,637
)
 
(36,913
)
Capital expenditures
(26,557
)
 
(47,819
)
Proceeds from maturities and sales of marketable debt securities
998

 
12,502

Purchases of marketable debt securities
(78,380
)
 
—

Proceeds from sales of long-term investments
2,803

 
310

Purchases of long-term investments
(14,701
)
 
(25,259
)
Other, net
(616
)
 
(1,443
)
Net cash used in investing activities attributable to continuing operations
(220,090
)
 
(98,622
)
Cash flows from financing activities attributable to continuing operations:
 
 
 
Principal payments on long-term debt
—

 
(15,844
)
Purchase of treasury stock
—

 
(162,660
)
Dividends
(40,086
)
 
(38,880
)
Issuance of common stock, net of withholding taxes
(13,823
)
 
(868
)
Excess tax benefits from stock-based awards
32,889

 
23,547

Purchase of noncontrolling interest
(30,000
)
 
—

Funds returned from escrow for Meetic tender offer
12,354

 
—

Acquisition-related contingent consideration payment
(7,373
)
 
—

Other, net
(141
)
 
(3,634
)
Net cash used in financing activities attributable to continuing operations
(46,180
)
 
(198,339
)
Total cash used in continuing operations
(117,499
)
 
(68,698
)
Total cash (used in) provided by discontinued operations
(157
)
 
2,335

Effect of exchange rate changes on cash and cash equivalents
4,538

 
(4,889
)
Net decrease in cash and cash equivalents
(113,118
)
 
(71,252
)
Cash and cash equivalents at beginning of period
1,100,444

 
749,977

Cash and cash equivalents at end of period
$
987,326

 
$
678,725

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements

7

IAC/INTERACTIVECORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



NOTE 1—THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
IAC is a leading media and Internet company comprised of more than 150 brands and products, including Ask.com, About.com, Match.com, HomeAdvisor and Vimeo. Focused on the areas of search, applications, online dating, media and eCommerce, IAC's family of websites is one of the largest in the world, with over a billion monthly visits across more than 100 countries. IAC includes its Search & Applications, The Match Group, Media and eCommerce reportable segments, as well as investments in unconsolidated affiliates.
All references to "IAC," the "Company," "we," "our" or "us" in this report are to IAC/InterActiveCorp.
Reportable Segments
During the first quarter of 2014, IAC realigned its reportable segments as follows:
•
The Company created a new segment called The Match Group that includes Match, which was previously reported as its own separate segment, and DailyBurn and Tutor, which were previously in the Media and Other segments, respectively.
•
The businesses within the Local segment (HomeAdvisor, Felix and, for periods prior to July 1, 2013, CityGrid Media) were moved to the eCommerce segment, formerly called the Other segment.
•
There were no changes to the Search & Applications segment.
Non-GAAP Measure
In addition, the Company introduced Adjusted EBITDA, a new non-GAAP financial measure, beginning with the first quarter of 2014. We believe Adjusted EBITDA is a useful measure for analysts and investors as this measure allows a more meaningful comparison between our performance and that of our competitors. Moreover, our management uses this measure internally to evaluate the performance of our business as a whole and our individual business segments.
Refer to Note 8 to the consolidated financial statements for the reconciliation of Adjusted EBITDA to operating income (loss) by reportable segment.
Basis of Presentation
The consolidated financial statements include the accounts of the Company, all entities that are wholly-owned by the Company and all entities in which the Company has a controlling financial interest. Intercompany transactions and accounts have been eliminated. Investments in the common stock or in-substance common stock of entities in which the Company has the ability to exercise significant influence over the operating and financial matters of the investee, but does not have a controlling financial interest, are accounted for using the equity method and are included in "Long-term investments" in the accompanying consolidated balance sheet.
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation. Interim results are not necessarily indicative of the results that may be expected for a full year. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2013 included in our Current Report on Form 8-K dated July 2, 2014.

8

IAC/INTERACTIVECORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Accounting Estimates
The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make certain estimates, judgments and assumptions that impact the reported amounts of assets, liabilities, revenue and expenses and the related disclosure of contingent assets and liabilities. Actual results could differ from these estimates. On an ongoing basis, the Company evaluates its estimates and judgments including those related to: the fair values of marketable securities and other investments; the recoverability of goodwill and indefinite-lived intangible assets; the useful lives and recovery of definite-lived intangible assets and property and equipment; the carrying value of accounts receivable, including the determination of the allowance for doubtful accounts and revenue reserves; the fair value of acquisition-related contingent consideration; the reserves for income tax contingencies; the valuation allowance for deferred income tax assets; and the fair value of and forfeiture rates for stock-based awards, among others. The Company bases its estimates and judgments on historical experience, its forecasts and budgets and other factors that the Company considers relevant.
Certain Risks and Concentrations
A substantial portion of the Company's revenue is derived from online advertising, the market for which is highly competitive and rapidly changing. Significant changes in this industry or changes in advertising spending behavior or in customer buying behavior could adversely affect our operating results. Most of the Company's online advertising revenue is attributable to a services agreement with Google Inc. ("Google"), which expires on March 31, 2016. Our services agreement requires that we comply with certain guidelines promulgated by Google. Subject to certain limitations, Google may unilaterally update its policies and guidelines, which could require modifications to, or prohibit and/or render obsolete certain of our products, services and/or business practices, which could be costly to address or otherwise have an adverse effect on our business, financial condition and results of operations. For the three and six months ended June 30, 2014, revenue earned from Google is $349.5 million and $704.6 million, respectively. For the three and six months ended June 30, 2013, revenue earned from Google is $405.8 million and $781.9 million, respectively. This revenue is earned by the businesses comprising the Search & Applications segment. Accounts receivable related to revenue earned from Google totaled $114.5 million and $112.3 million at June 30, 2014 and December 31, 2013, respectively.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, which clarifies the principles for recognizing revenue and develops a common standard for all industries. The new guidance is effective for reporting periods beginning after December 15, 2016. Entities have the option of using either a full retrospective or cumulative effect approach to adopt ASU No. 2014-09. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on its consolidated financial statements or the method of adoption.
In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies the related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that represents a strategic shift that has, or will have, a major effect on an entity's operations and financial results. The Company will adopt the new guidance effective January 1, 2015. The adoption of ASU No. 2014-08 will not have a material effect on the Company’s consolidated financial statements.
NOTE 2—INCOME TAXES
At the end of each interim period, the Company makes its best estimate of the annual expected effective income tax rate and applies that rate to its ordinary year-to-date earnings or loss. The income tax provision or benefit related to significant, unusual, or extraordinary items, if applicable, that will be separately reported or reported net of their related tax effects are individually computed and recognized in the interim period in which they occur. In addition, the effect of changes in enacted tax laws or rates, tax status, judgment on the realizability of a beginning-of-the-year deferred tax asset in future years or income tax contingencies is recognized in the interim period in which the change occurs.
The computation of the annual expected effective income tax rate at each interim period requires certain estimates and assumptions including, but not limited to, the expected pre-tax income (or loss) for the year, projections of the proportion of income (and/or loss) earned and taxed in foreign jurisdictions, permanent and temporary differences, and the likelihood of the

9

IAC/INTERACTIVECORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

realizability of deferred tax assets generated in the current year. The accounting estimates used to compute the provision or benefit for income taxes may change as new events occur, more experience is acquired, additional information is obtained or our tax environment changes. To the extent that the expected annual effective income tax rate changes during a quarter, the effect of the change on prior quarters is included in income tax provision in the quarter in which the change occurs.
For the three and six months ended June 30, 2014, the Company recorded an income tax provision for continuing operations of $29.9 million and $51.3 million, respectively, which represents effective income tax rates of 251% and 76%, respectively. The effective rates for the three and six months ended June 30, 2014 are higher than the statutory rate of 35% due primarily to the largely unbenefited loss associated with the write-downs of certain of the Company's investments, interest on reserves for income tax contingencies, and state taxes, partially offset by foreign income taxed at lower rates. For the three and six months ended June 30, 2013, the Company recorded an income tax provision for continuing operations of $39.4 million and $65.2 million, respectively, which represents effective income tax rates of 40% and 37%, respectively. The effective rates for the three and six months ended June 30, 2013 are higher than the statutory rate of 35% due primarily to state taxes and interest on reserves for income tax contingencies, partially offset by foreign income taxed at lower rates.
The Company recognizes interest and, if applicable, penalties related to unrecognized tax benefits in the income tax provision. Included in the income tax provision for continuing operations and discontinued operations for the three months ended June 30, 2014 is a $1.5 million and a $0.8 million expense, respectively, net of related deferred taxes, for interest on unrecognized tax benefits. Included in the income tax provision for continuing operations and discontinued operations for the six months ended June 30, 2014 is a $3.1 million and a $1.6 million expense, respectively, net of related deferred taxes, for interest on unrecognized tax benefits. At June 30, 2014 and December 31, 2013, the Company has accrued $140.7 million and $133.0 million, respectively, for the payment of interest. At June 30, 2014 and December 31, 2013, the Company has accrued $5.3 million and $5.1 million, respectively, for penalties.
The Company is routinely under audit by federal, state, local and foreign authorities in the area of income tax. These audits include questioning the timing and the amount of income and deductions and the allocation of income and deductions among various tax jurisdictions. In June 2014, the Internal Revenue Service notified the Company that it will audit the Company’s tax returns for the years ended December 31, 2010 through 2012. Various other jurisdictions are currently under examination, the most significant of which are France, California, New York and New York City for various tax years beginning with 2006. Income taxes payable include reserves considered sufficient to pay assessments that may result from examination of prior year tax returns. Changes to reserves from period to period and differences between amounts paid, if any, upon resolution of audits and amounts previously provided may be material. Differences between the reserves for income tax contingencies and the amounts owed by the Company are recorded in the period they become known.
At June 30, 2014 and December 31, 2013, unrecognized tax benefits, including interest, are $412.0 million and $408.8 million, respectively. Of the total unrecognized tax benefits at June 30, 2014, $409.5 million is included in "Income taxes payable," $2.1 million relates to deferred tax assets included in "Deferred income taxes" and $0.3 million is included in "Accrued expenses and other current liabilities" in the accompanying consolidated balance sheet. Included in unrecognized tax benefits at June 30, 2014 is $39.9 million relating to tax positions for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility.
The statute of limitations for federal income taxes for the years 2001 through 2009 expired on July 1, 2014. As a result, previously unrecognized tax benefits, including interest, totaling $374.8 million will be recognized in the third quarter of 2014. The income tax benefit to continuing operations and discontinued operations will be $88.3 million and $175.7 million, respectively. The remaining amount of $110.8 million will affect various balance sheet accounts, primarily non-current deferred tax assets, which will be reduced by $100.0 million. If the remaining balance of unrecognized tax benefits at June 30, 2014 is subsequently recognized, $32.5 million, net of related deferred tax assets and interest, would reduce income tax provision for continuing operations. Excluding the amounts related to the 2001-2009 period described above, the Company believes that it is reasonably possible that its unrecognized tax benefits could decrease by an additional $11.6 million within twelve months of the current reporting date, of which approximately $8.3 million would decrease income tax provision for continuing operations, primarily due to expirations of statutes of limitations.

NOTE 3—MARKETABLE SECURITIES
At June 30, 2014, current available-for-sale marketable securities are as follows:

10

IAC/INTERACTIVECORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Corporate debt securities
$
78,599

 
$
41

 
$
(59
)
 
$
78,581

Total debt securities
78,599

 
41

 
(59
)
 
78,581

Equity security
149

 
2,881

 
—

 
3,030

Total marketable securities
$
78,748

 
$
2,922

 
$
(59
)
 
$
81,611

At December 31, 2013, current available-for-sale marketable securities are as follows:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Corporate debt security
$
1,004

 
$
4

 
$
—

 
$
1,008

Total debt security
1,004

 
4

 
—

 
1,008

Equity securities
216

 
4,780

 
—

 
4,996

Total marketable securities
$
1,220

 
$
4,784

 
$
—

 
$
6,004

The net unrealized gains in the tables above are included in "Accumulated other comprehensive loss" in the accompanying consolidated balance sheet.
The contractual maturities of debt securities classified as current available-for-sale at June 30, 2014 are as follows:
 
Amortized
Cost
 
Fair
Value
 
(In thousands)
Due in one year or less
$
10,632

 
$
10,642

Due after one year through five years
67,967

 
67,939

Total
$
78,599

 
$
78,581

The following table summarizes investments in current available-for-sale marketable debt securities (22 in total at June 30, 2014) that have been in a continuous unrealized loss position for less than twelve months:
 
June 30, 2014
 
December 31, 2013
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
(In thousands)
Corporate debt securities
$
51,621

 
$
(59
)
 
$
—

 
$
—

Total
$
51,621

 
$
(59
)
 
$
—

 
$
—

At June 30, 2014 and December 31, 2013, there are no investments in current available-for-sale marketable securities that have been in a continuous unrealized loss position for twelve months or longer.

11

IAC/INTERACTIVECORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

All of the Company’s marketable debt securities are rated investment grade. The gross unrealized losses on the marketable debt securities relate principally to changes in interest rates. Because the Company does not intend to sell any marketable debt securities and it is not more likely than not that the Company will be required to sell any marketable debt securities before recovery of their amortized cost bases, which may be maturity, the Company does not consider any of its marketable debt securities to be other-than-temporarily impaired at June 30, 2014.
The following table presents the proceeds from maturities and sales of current and non-current available-for-sale marketable securities and the related gross realized gains:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Proceeds from maturities and sales of available-for-sale marketable securities
$
3,462

 
$
2

 
$
3,462

 
$
12,502

Gross realized gains
2,299

 
—

 
2,299

 
—

There were no realized losses from the maturities and sales of available-for-sale marketable securities for the three and six months ended June 30, 2014 and 2013. Gross realized gains from the maturities and sales of available-for-sale marketable securities are included in "Other (expense) income, net" in the accompanying consolidated statement of operations.
The specific-identification method is used to determine the cost of securities sold and the amount of unrealized gains and losses reclassified out of accumulated other comprehensive income into earnings.
NOTE 4—FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS
The Company categorizes its financial instruments measured at fair value into a fair value hierarchy that prioritizes the inputs used in determining the fair value of the asset or liability. The three levels of the fair value hierarchy are:
•
Level 1: Observable inputs obtained from independent sources, such as quoted prices for identical assets and liabilities in active markets.
•
Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs that are derived principally from or corroborated by observable market data. The fair value of the Company's Level 2 financial assets are primarily obtained from observable market prices for identical underlying securities that may not be actively traded. Certain of these securities may have different market prices from multiple market data sources, in which case an average market price is used.
•
Level 3: Unobservable inputs for which there is little or no market data and require the Company to develop its own assumptions, based on the best information available in the circumstances, about the assumptions market participants would use in pricing the assets or liabilities. See below for a discussion of fair value measurements made using Level 3 inputs.
The following tables present the Company's financial instruments that are measured at fair value on a recurring basis:

12

IAC/INTERACTIVECORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

 
June 30, 2014
 
Quoted Market
Prices in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Fair Value
Measurements
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
350,637

 
$
—

 
$
—

 
$
350,637

Commercial paper
—

 
246,620

 
—

 
246,620

Time deposits
—

 
59,006

 
—

 
59,006

Marketable securities:
 
 
 
 
 
 
 
Corporate debt securities
—

 
78,581

 
—

 
78,581

   Equity security
3,030

 
—

 
—

 
3,030

Long-term investments:
 
 
 
 
 
 
 
Auction rate security
—

 
—

 
9,250

 
9,250

Marketable equity security
9,516

 
—

 
—

 
9,516

Total
$
363,183

 
$
384,207

 
$
9,250

 
$
756,640

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Contingent consideration arrangements
$
—

 
$
—

 
$
(41,397
)
 
$
(41,397
)

 
December 31, 2013
 
Quoted Market
Prices in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Fair Value
Measurements
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
698,307

 
$
—

 
$
—

 
$
698,307

Commercial paper
—

 
12,000

 
—

 
12,000

Time deposits
—

 
32,325

 
—

 
32,325

Marketable securities:
 
 
 
 
 
 
 
Corporate debt security
—

 
1,008

 
—

 
1,008

Equity securities
4,996

 
—

 
—

 
4,996

Long-term investments:
 
 
 
 
 
 
 
Auction rate security
—

 
—

 
8,920

 
8,920

Marketable equity securities
11,711

 
—

 
—

 
11,711

Total
$
715,014

 
$
45,333

 
$
8,920

 
$
769,267

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Contingent consideration arrangements
$
—

 
$
—

 
$
(45,828
)
 
$
(45,828
)

13

IAC/INTERACTIVECORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

The following tables present the changes in the Company's financial instruments that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
 
Three Months Ended June 30,
 
2014
 
2013
 
Auction Rate
Security
 
Contingent
Consideration
Arrangements
 
Auction Rate
Security
 
Contingent
Consideration
Arrangements
 
(In thousands)
Balance at April 1
$
9,150

 
$
(48,758
)
 
$
8,580

 
$
(44,577
)
Total net gains (losses):
 
 


 
 
 
 
Included in earnings (unrealized)
—

 
(527
)
 
—

 
(4,249
)
Included in other comprehensive income (loss)
100

 
499

 
180

 
(368
)
Settlements
—

 
7,389

 
—

 
12

Balance at June 30
$
9,250

 
$
(41,397
)
 
$
8,760

 
$
(49,182
)
 
Six Months Ended June 30,
 
2014
 
2013
 
Auction Rate
Security
 
Contingent
Consideration
Arrangements
 
Auction Rate
Security
 
Contingent
Consideration
Arrangements
 
(In thousands)
Balance at January 1
$
8,920

 
$
(45,828
)
 
$
8,100

 
$
(1,909
)
Total net gains (losses):
 
 
 
 
 
 
 
Included in earnings (unrealized)
—

 
(500
)
 
—

 
(5,707
)
Included in other comprehensive income (loss)
330

 
136

 
660

 
(368
)
Fair value at date of acquisition
—

 
(2,835
)
 
—

 
(41,387
)
Settlements
—

 
7,630

 
—

 
189

Balance at June 30
$
9,250

 
$
(41,397
)
 
$
8,760

 
$
(49,182
)
Auction rate security
The Company's auction rate security is valued by discounting the estimated future cash flow streams of the security over the life of the security. Credit spreads and other risk factors are also considered in establishing fair value. The cost basis of the auction rate security is $10.0 million, with gross unrealized losses of $0.8 million and $1.1 million at June 30, 2014 and December 31, 2013, respectively. The unrealized losses are included in "Accumulated other comprehensive loss" in the accompanying consolidated balance sheet. At June 30, 2014, the auction rate security is rated A-/WR and matures in 2035. The Company does not consider the auction rate security to be other-than-temporarily impaired at June 30, 2014, due to its high credit rating and because the Company does not intend to sell this security, and it is not more likely than not that the Company will be required to sell this security, before the recovery of its amortized cost basis, which may be maturity.
Contingent Consideration Arrangements
As of June 30, 2014, there are six contingent consideration arrangements related to recent business acquisitions. Five of the contingent consideration arrangements have limits as to the maximum amount that can be paid; the maximum contingent payments related to these arrangements is $158.9 million and the fair value of these five arrangements at June 30, 2014 is $40.0 million. The fair value of the one contingent consideration arrangement without a limit on the maximum amount is $1.4 million at June 30, 2014. The contingent consideration arrangements are generally based upon earnings performance and/or operating metrics. The Company primarily uses probability-weighted analyses to determine the amount of the gross liability, and, to the extent the arrangement is long-term in nature, applies a discount rate, which captures the risks associated with the

14

IAC/INTERACTIVECORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

obligation. The amount of scenarios in the probability-weighted analyses can vary; generally, more scenarios are prepared for longer duration and more complex arrangements.
The most significant contingent consideration arrangement relates to the January 2013 acquisition of Massive Media, NV, which operates Twoo.com. The Twoo.com contingent consideration arrangement is payable in three annual installments beginning in 2014. The 2014, 2015 and 2016 payments are based upon 2013 EBITDA, 2014 EBITDA and monthly active users of Twoo.com at December 31, 2014 and 2015 EBITDA and monthly active users of Twoo.com at December 31, 2015, respectively. The 2014 installment in the amount of $7.4 million was paid in the second quarter of 2014. The remaining aggregate amount of the 2015 and 2016 installment payments cannot exceed €77.9 million ($105.9 million at June 30, 2014). The estimate of the fair value for the Twoo.com 2015 and 2016 installment payments is based upon the Company's multi-scenario forecasts of Twoo.com's EBITDA for 2014 and 2015 and the number of users at December 31, 2014 and December 31, 2015, and the Company's estimate of the probability of each scenario occurring. These multi-scenario forecasts and related probability assessments were based primarily on management's internal projections and strategic plans. The fair value of this arrangement is determined using a discount rate of 15%.
The fair value of the contingent consideration arrangements is sensitive to changes in the forecasts of earnings and/or the relevant operating metrics and changes in discount rates. The Company remeasures the fair value of the contingent consideration arrangements each reporting period, and changes are recognized in “General and administrative expense” in the accompanying consolidated statement of operations. The contingent consideration arrangement liability at June 30, 2014 includes a current portion of $10.4 million and non-current portion of $31.0 million, which are included in “Accrued expenses and other current liabilities” and “Other long-term liabilities,” respectively, in the accompanying consolidated balance sheet.
Assets measured at fair value on a nonrecurring basis
The Company's non-financial assets, such as goodwill, intangible assets and property and equipment, as well as equity and cost method investments, are adjusted to fair value only when an impairment charge is recognized. Such fair value measurements are based predominantly on Level 3 inputs.
Cost method investments
At June 30, 2014 and December 31, 2013, the carrying values of the Company's investments accounted for under the cost method totaled $85.7 million and $137.3 million, respectively, and are included in "Long-term investments" in the accompanying consolidated balance sheet. The Company evaluates each cost method investment for impairment on a quarterly basis and recognizes an impairment loss if a decline in value is determined to be other-than-temporary. If the Company has not identified events or changes in circumstances that may have a significant adverse effect on the fair value of a cost method investment, then the fair value of such cost method investment is not estimated, as it is impracticable to do so.
In the second quarter of 2014, the Company recorded $64.2 million of other-than-temporary impairment charges for certain cost method investments as a result of our assessment of the near-term prospects and financial condition of the investees. This charge is included in "Other (expense) income, net" in the accompanying consolidated statement of operations.
Equity method investments
In the second quarter of 2014, the Company recorded a $4.2 million other-than-temporary impairment charge on an equity method investment following the sale of a majority of the investee's assets. This charge is included in "Equity in losses of unconsolidated affiliates" in the accompanying consolidated statement of operations.


15

IAC/INTERACTIVECORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Financial instruments measured at fair value only for disclosure purposes
The following table presents the carrying value and the fair value of financial instruments measured at fair value only for disclosure purposes:
 
June 30, 2014
 
December 31, 2013
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
(In thousands)
Liabilities:
 
 
 
 
 
 
 
Long-term debt
$
(1,080,000
)
 
$
(1,109,517
)
 
$
(1,080,000
)
 
$
(1,058,396
)
The fair value of long-term debt is estimated using market prices or indices for similar liabilities and taking into consideration other factors such as credit quality and maturity, which are Level 3 inputs.
NOTE 5—LONG-TERM DEBT
The balance of long-term debt is comprised of:
 
June 30,
2014
 
December 31, 2013
 
(In thousands)
4.875% Senior Notes due November 30, 2018 (the "2013 Senior Notes"); interest payable each May 30 and November 30, which commenced May 30, 2014
$
500,000

 
$
500,000

4.75% Senior Notes due December 15, 2022 (the "2012 Senior Notes"); interest payable each June 15 and December 15, which commenced June 15, 2013
500,000

 
500,000

5% New York City Industrial Development Agency Liberty Bonds due September 1, 2035; interest payable each March 1 and September 1, which commenced March 1, 2006
80,000

 
80,000

Total long-term debt
$
1,080,000

 
$
1,080,000

The 2013 and 2012 Senior Notes were issued on November 15, 2013 and December 21, 2012, respectively. On December 21, 2012, the Company entered into a $300 million revolving credit facility, which expires on December 21, 2017. The annual fee to maintain the revolving credit facility is 25 basis points. At June 30, 2014 and December 31, 2013, there are no outstanding borrowings under the revolving credit facility.
The 2013 and 2012 Senior Notes are unconditionally guaranteed by certain domestic subsidiaries, which are designated as guarantor subsidiaries. The guarantor subsidiaries are the same for the 2013 and 2012 Senior Notes and IAC's obligation under the revolving credit; IAC's obligation under the revolving credit is also secured by the stock of certain of our domestic and foreign subsidiaries. See Note 10 for guarantor and non-guarantor financial information.
The indentures governing the 2013 and 2012 Senior Notes restrict our ability to incur additional indebtedness in the event we are not in compliance with the maximum leverage ratio of 3.0 to 1.0. In addition, the terms of the revolving credit facility require that we maintain a leverage ratio of not more than 3.0 to 1.0 and restrict our ability to incur additional indebtedness. As of June 30, 2014, the Company was in compliance with all of these covenants.

16

IAC/INTERACTIVECORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

NOTE 6—ACCUMULATED OTHER COMPREHENSIVE LOSS
The following tables present the components of accumulated other comprehensive (loss) income and items reclassified out of accumulated other comprehensive (loss) income into earnings:
 
Three Months Ended June 30, 2014
 
Foreign Currency Translation Adjustment
 
Unrealized Gains (Losses)On Available-For-Sale Securities
 
Accumulated Other Comprehensive Loss
 
(In thousands)
Balance as of April 1
$
(15,132
)
 
$
7,435

 
$
(7,697
)
Other comprehensive loss before reclassifications, net of tax benefit of $0.1 million related to unrealized losses on available-for-sale securities
(150
)
 
(799
)
 
(949
)
Amounts reclassified from accumulated other comprehensive loss, net of tax benefit of $0.8 million related to unrealized losses on available-for-sale securities
—

 
(1,260
)
 
(1,260
)
Net current period other comprehensive loss
(150
)
 
(2,059
)
 
(2,209
)
Balance as of June 30
$
(15,282
)
 
$
5,376

 
$
(9,906
)
 
Three Months Ended June 30, 2013
 
Foreign Currency Translation Adjustment
 
Unrealized (Losses) Gains On Available-For-Sale Securities
 
Accumulated Other Comprehensive (Loss) Income
 
(In thousands)
Balance as of April 1
$
(32,024
)
 
$
(12,072
)
 
$
(44,096
)
Other comprehensive (loss) income before reclassifications, net of tax benefit of $0.7 million related to unrealized gains on available-for-sale securities
(5,278
)
 
17,187

 
11,909

Amounts reclassified from accumulated other comprehensive loss
—

 
—

 
—

Net current period other comprehensive (loss) income
(5,278
)
 
17,187

 
11,909

Balance as of June 30
$
(37,302
)
 
$
5,115

 
$
(32,187
)
 
Six Months Ended June 30, 2014
 
Foreign Currency Translation Adjustment
 
Unrealized Gains (Losses)On Available-For-Sale Securities
 
Accumulated Other Comprehensive Loss
 
(In thousands)
Balance as of January 1
$
(20,352
)
 
$
7,306

 
$
(13,046
)
Other comprehensive income (loss) before reclassifications, net of tax benefit of $0.7 million related to unrealized losses on available-for-sale securities
5,070

 
(670
)
 
4,400

Amounts reclassified from accumulated other comprehensive loss, net of tax benefit of $0.8 million related to unrealized losses on available-for-sale securities
—

 
(1,260
)
 
(1,260
)
Net current period other comprehensive income (loss)
5,070

 
(1,930
)
 
3,140

Balance as of June 30
$
(15,282
)
 
$
5,376

 
$
(9,906
)

17

IAC/INTERACTIVECORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

 
Six Months Ended June 30, 2013
 
Foreign Currency Translation Adjustment
 
Unrealized (Losses) Gains On Available-For-Sale Securities
 
Accumulated Other Comprehensive Loss
 
(In thousands)
Balance as of January 1
$
(25,073
)
 
$
(7,096
)
 
$
(32,169
)
Other comprehensive (loss) income before reclassifications, net of tax provision of $0.1 million related to unrealized losses on available-for-sale securities
(12,229
)
 
12,212

 
(17
)
Amounts reclassified from accumulated other comprehensive loss
—

 
(1
)
 
(1
)
Net current period other comprehensive (loss) income
(12,229
)
 
12,211

 
(18
)
Balance as of June 30
$
(37,302
)
 
$
5,115

 
$
(32,187
)
Unrealized gains and losses, net of tax, reclassified out of accumulated other comprehensive loss related to the maturities and sales of available-for-sale securities are included in "Other (expense) income, net" in the accompanying consolidated statement of operations.

NOTE 7—(LOSS) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted (loss) earnings per share attributable to IAC shareholders.
 
Three Months Ended June 30,
 
2014
 
2013
 
Basic
 
Diluted
 
Basic
 
Diluted
 
(In thousands, except per share data)
Numerator:
 
 
 
 
 
 
 
(Loss) earnings from continuing operations
$
(17,995
)
 
$
(17,995
)
 
$
58,540

 
$
58,540

Net loss attributable to noncontrolling interests
867

 
867

 
818

 
818

(Loss) earnings from continuing operations attributable to IAC shareholders
(17,128
)
 
(17,128
)
 
59,358

 
59,358

Loss from discontinued operations attributable to IAC shareholders
(868
)
 
(868
)
 
(1,068
)
 
(1,068
)
Net (loss) earnings attributable to IAC shareholders
$
(17,996
)
 
$
(17,996
)
 
$
58,290

 
$
58,290

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average basic shares outstanding
83,178

 
83,178

 
83,609

 
83,609

Dilutive securities including stock options and RSUs(a)
—

 
—

 
—

 
2,954

Denominator for earnings per share—weighted average shares(a)
83,178

 
83,178

 
83,609

 
86,563

 
 
 
 
 
 
 
 
(Loss) earnings per share attributable to IAC shareholders:
 
 
 
 
 
 
 
(Loss) earnings per share from continuing operations
$
(0.21
)
 
$
(0.21
)
 
$
0.71

 
$
0.69

Discontinued operations
(0.01
)
 
(0.01
)
 
(0.01
)
 
(0.02
)
(Loss) earnings per share
$
(0.22
)
 
$
(0.22
)
 
$
0.70

 
$
0.67


18

IAC/INTERACTIVECORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

 
Six Months Ended June 30,
 
2014
 
2013
 
Basic
 
Diluted
 
Basic
 
Diluted
 
(In thousands, except per share data)
Numerator:
 
 
 
 
 
 
 
Earnings from continuing operations
$
16,310

 
$
16,310

 
$
111,249

 
$
111,249

Net loss attributable to noncontrolling interests
3,261

 
3,261

 
2,690

 
2,690

Earnings from continuing operations attributable to IAC shareholders
19,571

 
19,571

 
113,939

 
113,939

Loss from discontinued operations attributable to IAC shareholders
(1,682
)
 
(1,682
)
 
(2,012
)
 
(2,012
)
Net earnings attributable to IAC shareholders
$
17,889

 
$
17,889

 
$
111,927

 
$
111,927

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average basic shares outstanding
82,833

 
82,833

 
83,912

 
83,912

Dilutive securities including stock options and RSUs(b)
—

 
5,150

 
—

 
3,058

Denominator for earnings per share—weighted average shares(b)
82,833

 
87,983

 
83,912

 
86,970

 
 
 
 
 
 
 
 
Earnings (loss) per share attributable to IAC shareholders:
 
 
 
 
 
 
 
Earnings per share from continuing operations
$
0.24

 
$
0.22

 
$
1.36

 
$
1.31

Discontinued operations
(0.02
)
 
(0.02
)
 
(0.03
)
 
(0.02
)
Earnings per share
$
0.22

 
$
0.20

 
$
1.33

 
$
1.29

_________________________________________
(a) 
For the three months ended June 30, 2014, the Company has a loss from continuing operations and as a result, approximately 11.5 million shares related to potentially dilutive securities were excluded for computing dilutive earnings per share because the impact would have been anti-dilutive. Accordingly, the weighted average basic shares outstanding were used to compute all earnings per share amounts.
(b) 
If the effect is dilutive, weighted average common shares outstanding include the incremental shares that would be issued upon the assumed exercise of stock options and vesting of restricted stock units ("RSUs"). For the six months ended June 30, 2014, there are no shares excluded from the calculation of diluted earnings per share. For the three and six months ended June 30, 2013, approximately 0.7 million and 3.8 million shares, respectively, related to potentially dilutive securities are excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.

NOTE 8—SEGMENT INFORMATION
The overall concept that IAC employs in determining its operating segments is to present the financial information in a manner consistent with how the chief operating decision maker views the businesses, how the businesses are organized as to segment management, and the focus of the businesses with regards to the types of services or products offered or the target market. Operating segments are combined for reporting purposes if they meet certain aggregation criteria, which principally relate to the similarity of their economic characteristics or, in the case of the eCommerce reportable segment, do not meet the quantitative thresholds that require presentation as separate operating segments.

19

IAC/INTERACTIVECORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Revenue:
 
 
 
 
 
 
 
Search & Applications
$
395,716

 
$
427,449

 
$
793,751

 
$
824,641

The Match Group
214,314

 
197,987

 
425,501

 
390,862

Media
36,656

 
57,495

 
73,011

 
102,490

eCommerce
109,949

 
116,591

 
204,791

 
223,888

Inter-segment elimination
(320
)
 
(111
)
 
(492
)
 
(221
)
Total
$
756,315

 
$
799,411

 
$
1,496,562

 
$
1,541,660

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Operating Income (Loss):
 
 
 
 
 
 
 
Search & Applications
$
77,771

 
$
89,346

 
$
148,108

 
$
176,329

The Match Group
61,198

 
53,129

 
101,001

 
90,488

Media
(9,794
)
 
(2,033
)
 
(18,360
)
 
(9,190
)
eCommerce
8

 
(4,603
)
 
(1,553
)
 
(9,096
)
Corporate
(33,493
)
 
(29,143
)
 
(61,794
)
 
(57,284
)
Total
$
95,690

 
$
106,696

 
$
167,402

 
$
191,247

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Adjusted EBITDA:
 
 
 
 
 
 
 
Search & Applications
$
91,258

 
$
102,420

 
$
173,329

 
$
199,934

The Match Group
69,368

 
67,685

 
116,798

 
115,591

Media
(8,911
)
 
(1,003
)
 
(16,775
)
 
(7,183
)
eCommerce
4,523

 
4,467

 
7,327

 
5,190

Corporate
(14,806
)
 
(15,631
)
 
(31,152
)
 
(28,828
)
Total
$
141,432

 
$
157,938

 
$
249,527

 
$
284,704

Revenue by geography is based on where the customer is located. Geographic information about revenue and long-lived assets is presented below:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Revenue:
 
 
 
 
 
 
 
United States
$
511,862

 
$
551,880

 
$
1,016,265

 
$
1,066,494

All other countries
244,453

 
247,531

 
480,297

 
475,166

 Total
$
756,315

 
$
799,411

 
$
1,496,562

 
$
1,541,660


20

IAC/INTERACTIVECORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

 
June 30,
2014
 
December 31,
2013
 
(In thousands)
Long-lived assets (excluding goodwill and intangible assets):
 
 
 
 United States
$
269,746

 
$
271,916

 All other countries
21,543

 
22,048

Total
$
291,289

 
$
293,964

The Company's primary financial measure is Adjusted EBITDA, which is defined as operating income excluding: (1) non-cash compensation expense; (2) depreciation; and (3) acquisition-related items consisting of (i) amortization of intangible assets and goodwill and intangible asset impairments and (ii) gains and losses recognized on changes in the fair value of contingent consideration arrangements. The Company believes this measure is useful for analysts and investors as this measure allows a more meaningful comparison between our performance and that of our competitors. Moreover, our management uses this measure internally to evaluate the performance of our business as a whole and our individual business segments. The above items are excluded from our Adjusted EBITDA measure because these items are non-cash in nature, and we believe that by excluding these items, Adjusted EBITDA corresponds more closely to the cash operating income generated from our business, from which capital investments are made and debt is serviced. Adjusted EBITDA has certain limitations in that it does not take into account the impact to IAC's statement of operations of certain expenses. IAC endeavors to compensate for the limitations of the non-GAAP measure presented by providing the comparable U.S. GAAP measure with equal or greater prominence, financial statements prepared in accordance with U.S. GAAP, and descriptions of the reconciling items, including quantifying such items, to derive the non-GAAP measure.
The following tables reconcile Adjusted EBITDA to operating income (loss) for the Company's reportable segments:
 
Three Months Ended June 30, 2014
 

Adjusted
EBITDA
 
Non-Cash
Compensation
Expense
 
Depreciation
 
Amortization
of Intangibles
 
Acquisition-related Contingent Consideration Fair Value Adjustments
 
Operating
Income
(Loss)
 
(In thousands)
Search & Applications
$
91,258

 
$
—

 
$
(5,082
)
 
$
(8,405
)
 
$
—

 
$
77,771

The Match Group
69,368

 
(170
)
 
(5,589
)
 
(1,684
)
 
(727
)
 
61,198

Media
(8,911
)
 
(161
)
 
(224
)
 
(698
)
 
200

 
(9,794
)
eCommerce
4,523

 
—

 
(1,896
)
 
(2,619
)
 
—

 
8

Corporate
(14,806
)
 
(16,221
)
 
(2,466
)
 
—

 
—

 
(33,493
)
Total
$
141,432

 
$
(16,552
)
 
$
(15,257
)
 
$
(13,406
)
 
$
(527
)
 
$
95,690


21

IAC/INTERACTIVECORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

 
Three Months Ended June 30, 2013
 

Adjusted
EBITDA
 
Non-Cash
Compensation
Expense
 
Depreciation
 
Amortization
of Intangibles
 
Acquisition-related Contingent Consideration Fair Value Adjustments
 
Operating
Income
(Loss)
 
(In thousands)
Search & Applications
$
102,420

 
$
—

 
$
(6,413
)
 
$
(6,661
)
 
$
—

 
$
89,346

The Match Group
67,685

 
(363
)
 
(4,838
)
 
(5,106
)
 
(4,249
)
 
53,129

Media
(1,003
)
 
(213
)
 
(524
)
 
(293
)
 
—

 
(2,033
)
eCommerce
4,467

 
—

 
(2,993
)
 
(6,077
)
 
—

 
(4,603
)
Corporate
(15,631
)
 
(11,244
)
 
(2,268
)
 
—

 
—

 
(29,143
)
Total
$
157,938

 
$
(11,820
)
 
$
(17,036
)
 
$
(18,137
)
 
$
(4,249
)
 
$
106,696

 
Six Months Ended June 30, 2014
 

Adjusted
EBITDA
 
Non-Cash
Compensation
Expense
 
Depreciation
 
Amortization
of Intangibles
 
Acquisition-related Contingent Consideration Fair Value Adjustments
 
Operating
Income
(Loss)
 
(In thousands)
Search & Applications
$
173,329

 
$
—

 
$
(9,547
)
 
$
(15,674
)
 
$
—

 
$
148,108

The Match Group
116,798

 
(187
)
 
(11,389
)
 
(3,521
)
 
(700
)
 
101,001

Media
(16,775
)
 
(325
)
 
(506
)
 
(954
)
 
200

 
(18,360
)
eCommerce
7,327

 
—

 
(3,644
)
 
(5,236
)
 
—

 
(1,553
)
Corporate
(31,152
)
 
(25,653
)
 
(4,989
)
 
—

 
—

 
(61,794
)
Total
$
249,527

 
$
(26,165
)
 
$
(30,075
)
 
$
(25,385
)
 
$
(500
)
 
$
167,402

 
Six Months Ended June 30, 2013
 

Adjusted
EBITDA
 
Non-Cash
Compensation
Expense
 
Depreciation
 
Amortization
of Intangibles
 
Acquisition-related Contingent Consideration Fair Value Adjustments
 
Operating
Income
(Loss)
 
(In thousands)
Search & Applications
$
199,934

 
$
(3
)
 
$
(10,278
)
 
$
(13,324
)
 
$
—

 
$
176,329

The Match Group
115,591

 
(206
)
 
(9,544
)
 
(9,646
)
 
(5,707
)
 
90,488

Media
(7,183
)
 
(418
)
 
(1,047
)
 
(542
)
 
—

 
(9,190
)
eCommerce
5,190

 
29

 
(5,612
)
 
(8,703
)
 
—

 
(9,096
)
Corporate
(28,828
)
 
(23,885
)
 
(4,571
)
 
—

 
—

 
(57,284
)
Total
$
284,704

 
$
(24,483
)
 
$
(31,052
)
 
$
(32,215
)
 
$
(5,707
)
 
$
191,247

NOTE 9—CONTINGENCIES
In the ordinary course of business, the Company is a party to various lawsuits. The Company establishes reserves for specific legal matters when it determines that the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable. Management has also identified certain other legal matters where we believe an unfavorable outcome is not probable and, therefore, no reserve is established. Although management currently believes that resolving claims against us, including claims where an unfavorable outcome is reasonably possible, will not have a material impact on the liquidity, results

22

IAC/INTERACTIVECORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

of operations, or financial condition of the Company, these matters are subject to inherent uncertainties and management's view of these matters may change in the future. The Company also evaluates other contingent matters, including income and non-income tax contingencies, to assess the likelihood of an unfavorable outcome and estimated extent of potential loss. It is possible that an unfavorable outcome of one or more of these lawsuits or other contingencies could have a material impact on the liquidity, results of operations, or financial condition of the Company. See Note 2 for additional information related to income tax contingencies.
NOTE 10—GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION
The 2013 and 2012 Senior Notes are unconditionally guaranteed, jointly and severally, by certain domestic subsidiaries which are 100% owned by the Company. The following tables present condensed consolidating financial information at June 30, 2014 and December 31, 2013 and for the three and six months ended June 30, 2014 and 2013 for: IAC, on a stand-alone basis; the combined guarantor subsidiaries of IAC; the combined non-guarantor subsidiaries of IAC; and IAC on a consolidated basis.

Balance sheet at June 30, 2014:
 
IAC
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Total Eliminations
 
IAC Consolidated
 
(In thousands)
Cash and cash equivalents
$
732,792

 
$
—

 
$
254,534

 
$
—

 
$
987,326

Marketable securities
78,581

 
—

 
3,030

 
—

 
81,611

Accounts receivable, net
10

 
142,486

 
80,940

 
—

 
223,436

Other current assets
40,425

 
88,193

 
60,904

 
(4,463
)
 
185,059

Intercompany receivables
—

 
620,647

 
888,364

 
(1,509,011
)
 
—

Property and equipment, net
6,229

 
219,466

 
65,594

 
—

 
291,289

Goodwill
—

 
1,212,699

 
507,951

 
—

 
1,720,650

Intangible assets, net
—

 
308,170

 
162,191

 
—

 
470,361

Investment in subsidiaries
3,904,440

 
822,242

 
—

 
(4,726,682
)
 
—

Other non-current assets
70,343

 
26,184

 
119,709

 
(8,490
)
 
207,746

Total assets
$
4,832,820

 
$
3,440,087

 
$
2,143,217

 
$
(6,248,646
)
 
$
4,167,478

 
 
 
 
 
 
 
 
 
 
Accounts payable, trade
$
3,712

 
$
23,852

 
$
31,005

 
$
—

 
$
58,569

Other current liabilities
32,195

 
292,415

 
204,551

 
—

 
529,161

Long-term debt
1,000,000

 
80,000

 
—

 
—

 
1,080,000

Income taxes payable
386,753

 
7,785

 
25,870

 
—

 
420,408

Intercompany liabilities
1,509,011

 
—

 
—

 
(1,509,011
)
 
—

Other long-term liabilities
228,221

 
98,506

 
66,602

 
(12,953
)
 
380,376

Redeemable noncontrolling interests
—

 
—

 
24,137

 
—

 
24,137

IAC shareholders' equity
1,672,928

 
2,937,529

 
1,789,153

 
(4,726,682
)
 
1,672,928

Noncontrolling interests
—

 
—

 
1,899

 
—

 
1,899

Total liabilities and shareholders' equity
$
4,832,820

 
$
3,440,087

 
$
2,143,217

 
$
(6,248,646
)
 
$
4,167,478


23

IAC/INTERACTIVECORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Balance sheet at December 31, 2013:
 
IAC
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Total Eliminations
 
IAC Consolidated
 
(In thousands)
Cash and cash equivalents
$
782,022

 
$
—

 
$
318,422

 
$
—

 
$
1,100,444

Marketable securities
1,007

 
—

 
4,997

 
—

 
6,004

Accounts receivable, net
38

 
135,651

 
71,719

 
—

 
207,408

Other current assets
45,111

 
76,572

 
40,661

 
(814
)
 
161,530

Intercompany receivables
—

 
569,030

 
847,423

 
(1,416,453
)
 
—

Property and equipment, net
5,316

 
221,386

 
67,262

 
—

 
293,964

Goodwill
—

 
1,180,159

 
495,164

 
—

 
1,675,323

Intangible assets, net
—

 
302,082

 
143,254

 
—

 
445,336

Investment in subsidiaries
3,833,751

 
782,840

 
—

 
(4,616,591
)
 
—

Other non-current assets
83,207

 
15,521

 
252,576

 
(6,629
)
 
344,675

Total assets
$
4,750,452

 
$
3,283,241

 
$
2,241,478

 
$
(6,040,487
)
 
$
4,234,684

 
 
 
 
 
 
 
 
 
 
Accounts payable, trade
$
4,310

 
$
51,525

 
$
21,818

 
$
—

 
$
77,653

Other current liabilities
41,623

 
280,549

 
187,072

 
—

 
509,244

Long-term debt
1,000,000

 
80,000

 
—

 
—

 
1,080,000

Income taxes payable
383,926

 
6,768

 
25,690

 
—

 
416,384

Intercompany liabilities
1,416,453

 
—

 
—

 
(1,416,453
)
 
—

Other long-term liabilities
217,404

 
96,239

 
72,941

 
(7,443
)
 
379,141

Redeemable noncontrolling interests
—

 
—

 
42,861

 
—

 
42,861

IAC shareholders' equity
1,686,736

 
2,768,160

 
1,848,431

 
(4,616,591
)
 
1,686,736

Noncontrolling interests
—

 
—

 
42,665

 
—

 
42,665

Total liabilities and shareholders' equity
$
4,750,452

 
$
3,283,241

 
$
2,241,478

 
$
(6,040,487
)
 
$
4,234,684


24

IAC/INTERACTIVECORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Statement of operations for the three months ended June 30, 2014:
 
IAC
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Total Eliminations
 
IAC Consolidated
 
(In thousands)
Revenue
$
—

 
$
556,162

 
$
203,497

 
$
(3,344
)
 
$
756,315

Operating costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of revenue (exclusive of depreciation shown separately below)
383

 
124,935

 
86,469

 
(687
)
 
211,100

Selling and marketing expense
619

 
219,959

 
54,647

 
(2,439
)
 
272,786

General and administrative expense
26,609

 
49,415

 
33,682

 
13

 
109,719

Product development expense
1,705

 
26,769

 
10,114

 
(231
)
 
38,357

Depreciation
312

 
9,224

 
5,721

 
—

 
15,257

Amortization of intangibles
—

 
9,659

 
3,747

 
—

 
13,406

Total operating costs and expenses
29,628

 
439,961

 
194,380

 
(3,344
)
 
660,625

Operating (loss) income
(29,628
)
 
116,201

 
9,117

 
—

 
95,690

Equity in earnings (losses) of unconsolidated affiliates
5,112

 
1,535

 
64

 
(13,561
)
 
(6,850
)
Interest expense
(12,985
)
 
(1,052
)
 
(9
)
 
—

 
(14,046
)
Other income (expense), net
9,689

 
(10,072
)
 
(62,517
)
 
—

 
(62,900
)
(Loss) earnings from continuing operations before income taxes
(27,812
)
 
106,612

 
(53,345
)
 
(13,561
)
 
11,894

Income tax benefit (provision)
10,684

 
(39,785
)
 
(788
)
 
—

 
(29,889
)
(Loss) earnings from continuing operations
(17,128
)
 
66,827

 
(54,133
)
 
(13,561
)
 
(17,995
)
Loss from discontinued operations, net of tax
(868
)
 
—

 
(27
)
 
27

 
(868
)
Net (loss) earnings
(17,996
)
 
66,827

 
(54,160
)
 
(13,534
)
 
(18,863
)
Net (earnings) loss attributable to noncontrolling interests
—

 
(9
)
 
876

 
—

 
867

Net (loss) earnings attributable to IAC shareholders
$
(17,996
)
 
$
66,818

 
$
(53,284
)
 
$
(13,534
)
 
$
(17,996
)
Comprehensive (loss) income attributable to IAC shareholders
$
(20,205
)
 
$
66,154

 
$
(55,870
)
 
$
(10,284
)
 
$
(20,205
)


25

IAC/INTERACTIVECORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Statement of operations for the three months ended June 30, 2013:
 
IAC
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Total Eliminations
 
IAC Consolidated
 
(In thousands)
Revenue
$
—

 
$
576,605

 
$
223,965

 
$
(1,159
)
 
$
799,411

Operating costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of revenue (exclusive of depreciation shown separately below)
549

 
161,166

 
112,107

 
(1,000
)
 
272,822

Selling and marketing expense
710

 
201,025

 
45,570

 
(152
)
 
247,153

General and administrative expense
23,582

 
46,993

 
32,947

 
(7
)
 
103,515

Product development expense
867

 
24,779

 
8,406

 
—

 
34,052

Depreciation
344

 
12,142

 
4,550

 
—

 
17,036

Amortization of intangibles
—

 
12,399

 
5,738

 
—

 
18,137

Total operating costs and expenses
26,052

 
458,504

 
209,318

 
(1,159
)
 
692,715

Operating (loss) income
(26,052
)
 
118,101

 
14,647

 
—

 
106,696

Equity in earnings (losses) of unconsolidated affiliates
75,927

 
7,728

 
(131
)
 
(84,602
)
 
(1,078
)
Interest expense
(6,515
)
 
(1,078
)
 
(65
)
 
—

 
(7,658
)
Other income (expense), net
3,109

 
(9,331
)
 
6,218

 
—

 
(4
)
Earnings from continuing operations before income taxes
46,469

 
115,420

 
20,669

 
(84,602
)
 
97,956

Income tax benefit (provision)
12,889

 
(41,863
)
 
(10,442
)
 
—

 
(39,416
)
Earnings from continuing operations
59,358

 
73,557

 
10,227

 
(84,602
)
 
58,540

(Loss) earnings from discontinued operations, net of tax
(1,068
)
 
—

 
4

 
(4
)
 
(1,068
)
Net earnings
58,290

 
73,557

 
10,231

 
(84,606
)
 
57,472

Net loss attributable to noncontrolling interests
—

 
404

 
414

 
—

 
818

Net earnings attributable to IAC shareholders
$
58,290

 
$
73,961

 
$
10,645

 
$
(84,606
)
 
$
58,290

Comprehensive income attributable to IAC shareholders
$
70,199

 
$
73,897

 
$
5,147

 
$
(79,044
)
 
$
70,199



26

IAC/INTERACTIVECORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Statement of operations for the six months ended June 30, 2014:
 
IAC
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Total Eliminations
 
IAC Consolidated
 
(In thousands)
Revenue
$
—

 
$
1,102,488

 
$
400,404

 
$
(6,330
)
 
$
1,496,562

Operating costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of revenue (exclusive of depreciation shown separately below)
355

 
253,096

 
168,490

 
(1,647
)
 
420,294

Selling and marketing expense
811

 
456,049

 
118,775

 
(4,137
)
 
571,498

General and administrative expense
49,055

 
96,131

 
59,323

 
26

 
204,535

Product development expense
3,176

 
54,215

 
20,554

 
(572
)
 
77,373

Depreciation
641

 
18,784

 
10,650

 
—

 
30,075

Amortization of intangibles
—

 
18,660

 
6,725

 
—

 
25,385

Total operating costs and expenses
54,038

 
896,935

 
384,517

 
(6,330
)
 
1,329,160

Operating (loss) income
(54,038
)
 
205,553

 
15,887

 
—

 
167,402

Equity in earnings (losses) of unconsolidated affiliates
59,394

 
(114
)
 
37

 
(68,102
)
 
(8,785
)
Interest expense
(25,970
)
 
(2,094
)
 
(46
)
 
—

 
(28,110
)
Other income (expense), net
19,388

 
(18,706
)
 
(63,605
)
 
—

 
(62,923
)
(Loss) earnings from continuing operations before income taxes
(1,226
)
 
184,639

 
(47,727
)
 
(68,102
)
 
67,584

Income tax benefit (provision)
20,797

 
(69,730
)
 
(2,341
)
 
—

 
(51,274
)
Earnings (loss) from continuing operations
19,571

 
114,909

 
(50,068
)
 
(68,102
)
 
16,310

Loss from discontinued operations, net of tax
(1,682
)
 
—

 
(40
)
 
40

 
(1,682
)
Net earnings (loss)
17,889

 
114,909

 
(50,108
)
 
(68,062
)
 
14,628

Net loss attributable to noncontrolling interests
—

 
—

 
3,261

 
—

 
3,261

Net earnings (loss) attributable to IAC shareholders
$
17,889

 
$
114,909

 
$
(46,847
)
 
$
(68,062
)
 
$
17,889

Comprehensive income (loss) attributable to IAC shareholders
$
21,029

 
$
114,629

 
$
(45,764
)
 
$
(68,865
)
 
$
21,029



27

IAC/INTERACTIVECORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Statement of operations for the six months ended June 30, 2013:
 
IAC
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Total Eliminations
 
IAC Consolidated
 
(In thousands)
Revenue
$
—

 
$
1,113,443

 
$
430,413

 
$
(2,196
)
 
$
1,541,660

Operating costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of revenue (exclusive of depreciation shown separately below)
1,226

 
319,041

 
210,183

 
(1,779
)
 
528,671

Selling and marketing expense
1,141

 
386,941

 
102,394

 
(409
)
 
490,067

General and administrative expense
45,827

 
89,849

 
63,571

 
(8
)
 
199,239

Product development expense
1,766

 
48,787

 
18,616

 
—

 
69,169

Depreciation
711

 
21,535

 
8,806

 
—

 
31,052

Amortization of intangibles
—

 
21,449

 
10,766

 
—

 
32,215

Total operating costs and expenses
50,671

 
887,602

 
414,336

 
(2,196
)
 
1,350,413

Operating (loss) income
(50,671
)
 
225,841

 
16,077

 
—

 
191,247

Equity in earnings (losses) of unconsolidated affiliates
190,477

 
10,123

 
(223
)
 
(201,546
)
 
(1,169
)
Interest expense
(13,072
)
 
(2,143
)
 
(106
)
 
—

 
(15,321
)
Other (expense) income, net
(52,339
)
 
(27,518
)
 
81,511

 
—

 
1,654

Earnings from continuing operations before income taxes
74,395

 
206,303

 
97,259

 
(201,546
)
 
176,411

Income tax benefit (provision)
39,544

 
(74,511
)
 
(30,195
)
 
—

 
(65,162
)
Earnings from continuing operations
113,939

 
131,792

 
67,064

 
(201,546
)
 
111,249

(Loss) earnings from discontinued operations, net of tax
(2,012
)
 
—

 
11

 
(11
)
 
(2,012
)
Net earnings
111,927

 
131,792

 
67,075

 
(201,557
)
 
109,237

Net loss attributable to noncontrolling interests
—

 
412

 
2,278

 
—

 
2,690

Net earnings attributable to IAC shareholders
$
111,927

 
$
132,204

 
$
69,353

 
$
(201,557
)
 
$
111,927

Comprehensive income attributable to IAC shareholders
$
111,909

 
$
132,066

 
$
47,763

 
$
(179,829
)
 
$
111,909



28

IAC/INTERACTIVECORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Statement of cash flows for the six months ended June 30, 2014:
 
IAC
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Total Eliminations
 
IAC Consolidated
 
(In thousands)
Net cash (used in) provided by operating activities attributable to continuing operations
$
(38,576
)
 
$
193,388

 
$
(6,041
)
 
$
—

 
$
148,771

Cash flows from investing activities attributable to continuing operations:
 
 
 
 
 
 
 
 
 
Acquisitions, net of cash acquired
—

 
(88,462
)
 
(15,175
)
 
—

 
(103,637
)
Capital expenditures
(2,390
)
 
(16,477
)
 
(7,690
)
 
—

 
(26,557
)
Proceeds from maturities and sales of marketable debt securities
998

 
—

 
—

 
—

 
998

Purchases of marketable debt securities
(78,380
)
 
—

 
—

 
—

 
(78,380
)
Proceeds from sales of long-term investments
—

 
—

 
2,803

 
—

 
2,803

Purchases of long-term investments
(3,000
)
 
(6,761
)
 
(4,940
)
 
—

 
(14,701
)
Other, net
—

 
11

 
(627
)
 
—

 
(616
)
Net cash used in investing activities attributable to continuing operations
(82,772
)
 
(111,689
)
 
(25,629
)
 
—

 
(220,090
)
Cash flows from financing activities attributable to continuing operations:
 
 
 
 
 
 
 
 
 
Dividends
(40,086
)
 
—

 
—

 
—

 
(40,086
)
Issuance of common stock, net of withholding taxes
(13,823
)
 
—

 
—

 
—

 
(13,823
)
Excess tax benefits from stock-based awards
22,116

 
—

 
10,773

 
—

 
32,889

Purchase of noncontrolling interest
—

 
(30,000
)
 
—

 
—

 
(30,000
)
Funds returned from escrow for Meetic tender offer
—

 
—

 
12,354

 
—

 
12,354

Acquisition-related contingent consideration payment
—

 
—

 
(7,373
)
 
—

 
(7,373
)
Intercompany
104,410

 
(51,723
)
 
(52,687
)
 
—

 
—

Other, net
(383
)
 
—

 
242

 
—

 
(141
)
Net cash provided by (used in) financing activities attributable to continuing operations
72,234

 
(81,723
)
 
(36,691
)
 
—

 
(46,180
)
Total cash used in continuing operations
(49,114
)
 
(24
)
 
(68,361
)
 
—

 
(117,499
)
Total cash used in discontinued operations
(116
)
 
—

 
(41
)
 
—

 
(157
)
Effect of exchange rate changes on cash and cash equivalents
—

 
24

 
4,514

 
—

 
4,538

Net decrease in cash and cash equivalents
(49,230
)
 
—

 
(63,888
)
 
—

 
(113,118
)
Cash and cash equivalents at beginning of period
782,022

 
—

 
318,422

 
—

 
1,100,444

Cash and cash equivalents at end of period
$
732,792

 
$
—

 
$
254,534

 
$
—

 
$
987,326



29

IAC/INTERACTIVECORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Statement of cash flows for the six months ended June 30, 2013:
 
IAC
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Total Eliminations
 
IAC Consolidated
 
(In thousands)
Net cash (used in) provided by operating activities attributable to continuing operations
$
(32,997
)
 
$
260,013

 
$
1,247

 
$
—

 
$
228,263

Cash flows from investing activities attributable to continuing operations:
 
 
 
 
 
 
 
 
 
Acquisitions, net of cash acquired
—

 
(6,572
)
 
(30,341
)
 
—

 
(36,913
)
Capital expenditures
(719
)
 
(39,071
)
 
(8,029
)
 
—

 
(47,819
)
Proceeds from maturities and sales of marketable debt securities
12,502

 
—

 
—

 
—

 
12,502

Proceeds from sales of long-term investments
—

 
—

 
310

 
—

 
310

Purchases of long-term investments
(17,362
)
 
—

 
(7,897
)
 
—

 
(25,259
)
Other, net
(55
)
 
38

 
(1,426
)
 
—

 
(1,443
)
Net cash used in investing activities attributable to continuing operations
(5,634
)
 
(45,605
)
 
(47,383
)
 
—

 
(98,622
)
Cash flows from financing activities attributable to continuing operations:
 
 
 
 
 
 
 
 
 
Principal payments on long-term debt
(15,844
)
 
—

 
—

 
—

 
(15,844
)
Purchase of treasury stock
(162,660
)
 
—

 
—

 
—

 
(162,660
)
Dividends
(38,880
)
 
—

 
—

 
—

 
(38,880
)
Issuance of common stock, net of withholding taxes
(868
)
 
—

 
—

 
—

 
(868
)
Excess tax benefits from stock-based awards
23,547

 
—

 
—

 
—

 
23,547

Intercompany
144,320

 
(213,207
)
 
68,887

 
—

 
—

Other, net
(927
)
 
(1,224
)
 
(1,483
)
 
—

 
(3,634
)
Net cash (used in) provided by financing activities attributable to continuing operations
(51,312
)
 
(214,431
)
 
67,404

 
—

 
(198,339
)
Total cash (used in) provided by continuing operations
(89,943
)
 
(23
)
 
21,268

 
—

 
(68,698
)
Total cash provided by discontinued operations
2,335

 
—

 
—

 
—

 
2,335

Effect of exchange rate changes on cash and cash equivalents
—

 
23

 
(4,912
)
 
—

 
(4,889
)
Net (decrease) increase in cash and cash equivalents
(87,608
)
 
—

 
16,356

 
—

 
(71,252
)
Cash and cash equivalents at beginning of period
501,075

 
—

 
248,902

 
—

 
749,977

Cash and cash equivalents at end of period
$
413,467

 
$
—

 
$
265,258

 
$
—

 
$
678,725



30


Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

GENERAL
Management Overview

IAC is a leading media and Internet company comprised of more than 150 brands and products, including Ask.com, About.com, Match.com, HomeAdvisor and Vimeo. Focused on the areas of search, applications, online dating, media and eCommerce, IAC's family of websites is one of the largest in the world, with over a billion monthly visits across more than 100 countries.

During the first quarter of 2014, IAC realigned its reportable segments as follows:
•
The Company created a new segment called The Match Group that includes Match, which was previously reported as its own separate segment, and DailyBurn and Tutor, which were previously in the Media and Other segments, respectively.
•
The businesses within the Local segment (HomeAdvisor, Felix and, for periods prior to July 1, 2013, CityGrid Media) were moved to the eCommerce segment, formerly called the Other segment.
•
There were no changes to the Search & Applications segment.
In addition, the Company introduced Adjusted EBITDA, a new non-GAAP financial measure, beginning with the first quarter of 2014. We believe Adjusted EBITDA is a useful measure for analysts and investors as this measure allows a more meaningful comparison between our performance and that of our competitors. Moreover, our management uses this measure internally to evaluate the performance of our business as a whole and our individual business segments.
For a more detailed description of the Company's operating businesses, see the Company's annual report on Form 10-K for the year ended December 31, 2013.

A substantial portion of the Company's revenue is derived from online advertising. Most of the Company's online advertising revenue is attributable to our services agreement with Google Inc. ("Google"), which expires on March 31, 2016. Our services agreement requires that we comply with certain guidelines promulgated by Google. Subject to certain limitations, Google may unilaterally update its policies and guidelines, which could require modifications to, or prohibit and/or render obsolete certain of our products, services and/or business practices, which could be costly to address or otherwise have an adverse effect on our business, financial condition and results of operations. For the three months ended June 30, 2014 and 2013, revenue earned from Google is $349.5 million and $405.8 million, respectively. For the six months ended June 30, 2014 and 2013, revenue earned from Google is $704.6 million and $781.9 million, respectively. This revenue is earned by the businesses comprising the Search & Applications segment.

Results of Operations for the three and six months ended June 30, 2014 compared to the three and six months ended June 30, 2013

Revenue
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
$ Change
 
% Change
 
2013
 
2014
 
$ Change
 
% Change
 
2013
 
(Dollars in thousands)
Search & Applications
$
395,716

 
$
(31,733
)
 
(7)%
 
$
427,449

 
$
793,751

 
$
(30,890
)
 
(4)%
 
$
824,641

The Match Group
214,314

 
16,327

 
8%
 
197,987

 
425,501

 
34,639

 
9%
 
390,862

Media
36,656

 
(20,839
)
 
(36)%
 
57,495

 
73,011

 
(29,479
)
 
(29)%
 
102,490

eCommerce
109,949

 
(6,642
)
 
(6)%
 
116,591

 
204,791

 
(19,097
)
 
(9)%
 
223,888

Inter-segment elimination
(320
)
 
(209
)
 
(187)%
 
(111
)
 
(492
)
 
(271
)
 
(123)%
 
(221
)
Total
$
756,315

 
$
(43,096
)
 
(5)%
 
$
799,411

 
$
1,496,562

 
$
(45,098
)
 
(3)%
 
$
1,541,660



31


For the three months ended June 30, 2014 compared to the three months ended June 30, 2013
Search & Applications revenue decreased 7% to $395.7 million reflecting a decline from Applications (which includes our direct to consumer downloadable applications operations (B2C), our partnership operations (B2B) and SlimWare), partially offset by a slight increase from Websites (which principally includes Ask.com, About.com, CityGrid Media, Dictionary.com, Investopedia.com and PriceRunner.com). Applications revenue decreased 15% to $190.5 million, despite query growth from our B2C operations, primarily due to lower queries from our B2B operations. Websites revenue grew 1% to $205.2 million due to the acquisition of the ValueClick "Owned & Operated" ("O&O") website businesses on January 10, 2014, the contribution of CityGrid Media, which had been moved from the eCommerce segment to the Search & Applications segment, effective July 1, 2013, and growth from About.com, partially offset by a decline in revenue at Ask.com.

The Match Group revenue increased 8% to $214.3 million driven by a 7% increase in Dating revenue. Dating North America revenue (which includes Match.com, Chemistry, People Media, OkCupid and other dating businesses operating within the United States and Canada and is referred to as "North America") and Dating International revenue (which includes all dating businesses operating outside of the United States and Canada and is referred to as "International") increased 6% to $138.1 million and 8% to $69.5 million, respectively. These businesses are collectively referred to as "Dating". Non-dating revenue (consisting of DailyBurn and Tutor) increased 84%. The growth in revenue was driven by increased subscribers across the segment. North America and International paid subscribers increased 11% and 6%, respectively.

Media revenue decreased 36% to $36.7 million primarily due to the impact of the closure of the Newsweek print business and the sale of the Newsweek digital business in August 2013 as well as the timing of Electus projects, partially offset by continued strong growth at Vimeo.

eCommerce revenue decreased 6% to $109.9 million primarily due to the move of CityGrid Media from the eCommerce segment to the Search & Applications segment, partially offset by increases from HomeAdvisor and Shoebuy.
For the six months ended June 30, 2014 compared to the six months ended June 30, 2013
Search & Applications revenue decreased 4% to $793.8 million reflecting a decline from Applications, partially offset by an increase from Websites. Applications revenue decreased 11% to $384.8 million, while Websites revenue grew 4% to $408.9 million. The decrease in Applications revenue and the increase in Websites revenue are primarily due to the factors described above in the three month discussion.

The Match Group revenue increased 9% to $425.5 million driven by an 8% increase in Dating revenue and a 68% increase in non-dating revenue. North America revenue and International revenue increased 7% to $272.6 million and 10% to $140.0 million, respectively, driven by the factors described above in the three month discussion.

Media and eCommerce revenue decreased 29% to $73.0 million and 9% to $204.8 million, respectively, primarily due to the factors described above in the three month discussion.

Cost of revenue
For the three months ended June 30, 2014 compared to the three months ended June 30, 2013
 
Three Months Ended June 30,
 
2014
 
$ Change
 
% Change
 
2013
 
(Dollars in thousands)
Cost of revenue (exclusive of depreciation shown separately below)
$211,100
 
$(61,722)
 
(23)%
 
$272,822
As a percentage of revenue
28%
 
 
 
 
 
34%
Cost of revenue consists primarily of traffic acquisition costs, which consist of payments made to partners who distribute our B2B customized browser-based applications, integrate our paid listings into their websites or direct traffic to our websites. These payments include amounts based on revenue share and other arrangements. Cost of revenue also includes Shoebuy's cost of products sold and shipping and handling costs, production costs related to media produced by Electus and other businesses within our Media segment, content acquisition costs, expenses associated with the operation of the Company's data centers, including compensation and other employee-related costs (including stock-based compensation) for personnel engaged in data center functions, rent, energy and bandwidth costs.

32



Cost of revenue in 2014 decreased from 2013 primarily due to decreases of $45.9 million from Search & Applications and $13.4 million from Media. Cost of revenue from Search & Applications decreased primarily due to a decrease of $50.4 million in traffic acquisition costs driven primarily by lower revenue from our B2B operations and Ask.com, partially offset by the acquisition of the ValueClick O&O website businesses and the move of CityGrid Media to the Search & Applications segment. The decrease in cost of revenue from Media was primarily due to lower production costs at Electus resulting from the timing of projects.

For the six months ended June 30, 2014 compared to the six months ended June 30, 2013
 
Six Months Ended June 30,
 
2014
 
$ Change
 
% Change
 
2013
 
(Dollars in thousands)
Cost of revenue
$420,294
 
$(108,377)
 
(20)%
 
$528,671
As a percentage of revenue
28%
 
 
 
 
 
34%
Cost of revenue in 2014 decreased from 2013 primarily due to decreases of $83.1 million from Search & Applications, $18.9 million from Media and $13.0 million from eCommerce, partially offset by an increase of $7.7 million from The Match Group. The decreases in cost of revenue from Search & Applications and Media are primarily due to the factors described above in the three month discussion. Cost of revenue from eCommerce decreased primarily due to the move of CityGrid Media to the Search & Applications segment, partially offset by an increase in traffic acquisition costs
from Felix and an increase in the cost of products sold at Shoebuy resulting from increased sales. The increase in cost of revenue from The Match Group is primarily due to increases in hosting fees and customer acquisition costs.

Selling and marketing expense
For the three months ended June 30, 2014 compared to the three months ended June 30, 2013
 
Three Months Ended June 30,
 
2014
 
$ Change
 
% Change
 
2013
 
(Dollars in thousands)
Selling and marketing expense
$272,786
 
$25,633
 
10%
 
$247,153
As a percentage of revenue
36%
 
 
 
 
 
31%
Selling and marketing expense consists primarily of advertising and promotional expenditures and compensation and other employee-related costs (including stock-based compensation) for personnel engaged in sales, sales support and customer service functions. Advertising and promotional expenditures include online marketing, including fees paid to search engines and third parties that distribute our B2C downloadable applications, and offline marketing, which is primarily television advertising.
Selling and marketing expense in 2014 increased from 2013 primarily due to increases of $14.8 million from Search & Applications and $8.9 million from The Match Group. Selling and marketing expense from Search & Applications increased primarily due to a $16.1 million increase in online marketing spend, which was primarily related to our B2C downloadable applications, the acquisition of the ValueClick O&O website businesses and an increase in compensation and other employee-related costs, partially offset by a decrease in television advertising at Ask.com. The increase in selling and marketing expense from The Match Group was primarily due to an increase of $8.7 million in both offline and online marketing spend at Dating and DailyBurn.
For the six months ended June 30, 2014 compared to the six months ended June 30, 2013
 
Six Months Ended June 30,
 
2014
 
$ Change
 
% Change
 
2013
 
(Dollars in thousands)
Selling and marketing expense
$571,498
 
$81,431
 
17%
 
$490,067
As a percentage of revenue
38%
 
 
 
 
 
32%

33


Selling and marketing expense in 2014 increased from 2013 primarily due to increases of $61.8 million from Search & Applications and $22.5 million from The Match Group, partially offset by a decrease of $4.1 million from eCommerce. The increases in selling and marketing expense from Search & Applications and The Match Group are primarily due to the factors described above in the three month discussion. Search & Applications was further impacted by the move of CityGrid Media to the Search & Applications segment. Selling and marketing expense from eCommerce decreased primarily due to the move of CityGrid Media to the Search & Applications segment, partially offset by increases in offline marketing spend and compensation and other employee-related costs at HomeAdvisor.

General and administrative expense
For the three months ended June 30, 2014 compared to the three months ended June 30, 2013
 
Three Months Ended June 30,
 
2014
 
$ Change
 
% Change
 
2013
 
(Dollars in thousands)
General and administrative expense
$109,719
 
$6,204
 
6%
 
$103,515
As a percentage of revenue
15%
 
 
 
 
 
13%
General and administrative expense consists primarily of compensation and other employee-related costs (including stock-based compensation) for personnel engaged in executive management, finance, legal, tax and human resources, facilities costs and fees for professional services.
General and administrative expense in 2014 increased from 2013 primarily due to increases of $7.1 million from Search & Applications and $3.6 million from Corporate, partially offset by decreases of $2.1 million from eCommerce and $1.4 million from The Match Group. The increase in general and administrative expense from Search & Applications is primarily due to the move of CityGrid Media from the eCommerce segment and the acquisition of the ValueClick O&O website businesses. General and administrative expense from Corporate increased primarily due to an increase of $5.0 million in non-cash compensation expense, partially offset by lower salary expense and professional fees. The increase in non-cash compensation expense is primarily due to higher forfeitures in the prior year and the issuance of equity awards since the second quarter of 2013. The decrease in general and administrative expense from eCommerce is primarily due to the inclusion in the prior year of $4.2 million in employee termination costs associated with the CityGrid Media restructuring and the move of CityGrid Media to the Search & Applications segment, partially offset by an increase in compensation and other employee-related costs at HomeAdvisor and Shoebuy due, in part, to increases in headcount. General and administrative expense from The Match Group decreased primarily due to a decrease of $3.5 million in acquisition-related contingent consideration fair value adjustments, partially offset by higher professional fees.
For the six months ended June 30, 2014 compared to the six months ended June 30, 2013
 
Six Months Ended June 30,
 
2014
 
$ Change
 
% Change
 
2013
 
(Dollars in thousands)
General and administrative expense
$204,535
 
$5,296
 
3%
 
$199,239
As a percentage of revenue
14%
 
 
 
 
 
13%
General and administrative expense in 2014 increased from 2013 primarily due to increases of $11.1 million from Search & Applications and $3.9 million from Corporate, partially offset by decreases of $4.6 million from eCommerce, $3.0 million from The Match Group and $2.2 million from Media. The increase from Search & Applications and the decreases from eCommerce and The Match Group are primarily due to the factors described above in the three month discussion. General and administrative expense from Corporate increased primarily due to increases in professional fees and compensation and other employee-related costs. The decrease in general and administrative expense from The Match Group was further impacted by a $3.9 million benefit recorded in the first quarter of 2014 related to the expiration of the statute of limitations for a non-income tax matter, partially offset by an increase in compensation and other employee-related costs at our Dating businesses due, in part, to an increase in headcount. General and administrative expense from Media decreased primarily due to the closure of the Newsweek print business and the sale of the Newsweek digital business in August 2013, partially offset by an increase in compensation and other employee-related costs due to increased headcount at Vimeo.


34


Product development expense
For the three months ended June 30, 2014 compared to the three months ended June 30, 2013
 
Three Months Ended June 30,
 
2014
 
$ Change
 
% Change
 
2013
 
(Dollars in thousands)
Product development expense
$38,357
 
$4,305
 
13%
 
$34,052
As a percentage of revenue
5%
 
 
 
 
 
4%
Product development expense consists primarily of compensation and other employee-related costs (including stock-based compensation) that are not capitalized for personnel engaged in the design, development, testing and enhancement of product offerings and related technology.
Product development expense in 2014 increased from 2013 primarily due to an increase of $3.4 million from Search & Applications. The increase in product development expense from Search & Applications is primarily related to an increase in compensation and other employee-related costs due, in part, to the acquisition of the ValueClick O&O website businesses.
For the six months ended June 30, 2014 compared to the six months ended June 30, 2013
 
Six Months Ended June 30,
 
2014
 
$ Change
 
% Change
 
2013
 
(Dollars in thousands)
Product development expense
$77,373
 
$8,204
 
12%
 
$69,169
As a percentage of revenue
5%
 
 
 
 
 
4%
Product development expense in 2014 increased from 2013 primarily due to increases of $5.9 million from Search & Applications and $1.2 million from The Match Group. The increase in product development expense from Search & Applications is primarily due to the factors described above in the three month discussion. The increase from The Match Group is primarily due to an increase in compensation and other employee-related costs.

Depreciation
For the three months ended June 30, 2014 compared to the three months ended June 30, 2013
 
Three Months Ended June 30,
 
2014
 
$ Change
 
% Change
 
2013
 
(Dollars in thousands)
Depreciation
$15,257
 
$(1,779)
 
(10)%
 
$17,036
As a percentage of revenue
2%
 
 
 
 
 
2%
Depreciation in 2014 decreased from 2013 resulting from the inclusion in the prior year of the write-off of $2.7 million in capitalized software costs at The About Group primarily related to projects which commenced prior to its acquisition and from certain fixed assets becoming fully depreciated, partially offset by incremental depreciation associated with capital expenditures made throughout 2013 and various acquisitions.
For the six months ended June 30, 2014 compared to the six months ended June 30, 2013
 
Six Months Ended June 30,
 
2014
 
$ Change
 
% Change
 
2013
 
(Dollars in thousands)
Depreciation
$30,075
 
$(977)
 
(3)%
 
$31,052
As a percentage of revenue
2%
 
 
 
 
 
2%

35


Depreciation in 2014 decreased from 2013 primarily due to the factors described above in the three month discussion.

Adjusted EBITDA
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
$ Change
 
% Change
 
2013
 
2014
 
$ Change
 
% Change
 
2013
 
(Dollars in thousands)
Search & Applications
$
91,258

 
$
(11,162
)
 
(11)%
 
$
102,420

 
$
173,329

 
$
(26,605
)
 
(13)%
 
$
199,934

The Match Group
69,368

 
1,683

 
2%
 
67,685

 
116,798

 
1,207

 
1%
 
115,591

Media
(8,911
)
 
(7,908
)
 
(789)%
 
(1,003
)
 
(16,775
)
 
(9,592
)
 
(134)%
 
(7,183
)
eCommerce
4,523

 
56

 
1%
 
4,467

 
7,327

 
2,137

 
41%
 
5,190

Corporate
(14,806
)
 
825

 
5%
 
(15,631
)
 
(31,152
)
 
(2,324
)
 
(8)%
 
(28,828
)
Total
$
141,432

 
$
(16,506
)
 
(10)%
 
$
157,938

 
$
249,527

 
$
(35,177
)
 
(12)%
 
$
284,704

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As a percentage of revenue
19%
 
 
 
 
 
20%
 
17%
 
 
 
 
 
18%
For the three months ended June 30, 2014 compared to the three months ended June 30, 2013
Search & Applications Adjusted EBITDA decreased 11% to $91.3 million, primarily due to the lower revenue noted above and an increase in selling and marketing expense, partially offset by the contribution from the acquisition of the ValueClick O&O website businesses and the move of CityGrid Media to the Search & Applications segment. The increase in selling and marketing expense is primarily due to an increase in online marketing spend, which was primarily related to our B2C downloadable applications, partially offset by a decrease in television advertising of Ask.com. Partially offsetting the increase in selling and marketing expense is a decrease in cost of revenue, primarily due to a decrease in traffic acquisition costs driven primarily by lower revenue from our B2B operations and Ask.com.
The Match Group Adjusted EBITDA increased 2% to $69.4 million, primarily due to the higher revenue noted above, partially offset by higher selling and marketing expense. The increase in selling and marketing expense is primarily due to an increase in both offline and online marketing spend at Dating and DailyBurn.
Media Adjusted EBITDA loss increased $7.9 million to a loss of $8.9 million primarily due to the favorable effect in the prior year of certain items related to the Newsweek print closure in the second quarter of 2013, and increased investment in Vimeo in the current year.
eCommerce Adjusted EBITDA increased 1% to $4.5 million primarily due to the inclusion in the prior year of $4.2 million in employee termination costs associated with the CityGrid Media restructuring and the move of CityGrid Media to the Search & Applications segment, partially offset by increased investment in the current year at both HomeAdvisor and Shoebuy.
Corporate Adjusted EBITDA loss decreased 5% to a loss of $14.8 million primarily due to lower salary expense and professional fees.
For the six months ended June 30, 2014 compared to the six months ended June 30, 2013
Search & Applications Adjusted EBITDA decreased 13% to $173.3 million, primarily due to the factors described above in the three month discussion.
The Match Group Adjusted EBITDA increased 1% to $116.8 million, primarily due to the higher revenue noted above, partially offset by higher selling and marketing expense, cost of revenue and product development expense. The increase in selling and marketing expense is primarily due to the factors described above in the three month discussion. The increase in cost of revenue is primarily due to increases in hosting fees and customer acquisition costs. The increase in product development expense is primarily due to an increase in compensation and other employee-related costs. Partially offsetting these increases in expense is a $3.9 million benefit recorded in general and administrative expense in the first quarter of 2014 related to the expiration of the statute of limitations for a non-income tax matter.
Media Adjusted EBITDA loss increased $9.6 million to a loss of $16.8 million primarily due to the factors described above in the three month discussion, partially offset by a decrease in cost of revenue driven by lower production costs at Electus resulting from the timing of projects.

36


eCommerce Adjusted EBITDA increased 41% to $7.3 million primarily due to the factors described above in the three month discussion.
Corporate Adjusted EBITDA loss increased 8% to a loss of $31.2 million primarily due to higher professional fees and an increase in compensation and other employee-related costs.

Operating income (loss)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
$ Change
 
% Change
 
2013
 
2014
 
$ Change
 
% Change
 
2013
 
(Dollars in thousands)
Search & Applications
$
77,771

 
$
(11,575
)
 
(13)%
 
$
89,346

 
$
148,108

 
$
(28,221
)
 
(16)%
 
$
176,329

The Match Group
61,198

 
8,069

 
15%
 
53,129

 
101,001

 
10,513

 
12%
 
90,488

Media
(9,794
)
 
(7,761
)
 
(382)%
 
(2,033
)
 
(18,360
)
 
(9,170
)
 
(100)%
 
(9,190
)
eCommerce
8

 
4,611

 
NM
 
(4,603
)
 
(1,553
)
 
7,543

 
83%
 
(9,096
)
Corporate
(33,493
)
 
(4,350
)
 
(15)%
 
(29,143
)
 
(61,794
)
 
(4,510
)
 
(8)%
 
(57,284
)
Total
$
95,690

 
$
(11,006
)
 
(10)%
 
$
106,696

 
$
167,402

 
$
(23,845
)
 
(12)%
 
$
191,247

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As a percentage of revenue
13%
 
 
 
 
 
13%
 
11%
 
 
 
 
 
12%
________________________
NM = not meaningful
Refer to Note 8 to the consolidated financial statements for reconciliations of Adjusted EBITDA to operating income (loss) by reportable segment.
For the three months ended June 30, 2014 compared to the three months ended June 30, 2013
Operating income in 2014 decreased from 2013 primarily due to the decrease of $16.5 million in Adjusted EBITDA described above and an increase of $4.7 million in non-cash compensation expense, partially offset by decreases of $4.7 million in amortization of intangibles, $3.7 million in acquisition-related contingent consideration fair value adjustments and $1.8 million in depreciation. The increase in non-cash compensation expense is primarily due to higher forfeitures in the prior year and the issuance of equity awards since the second quarter of 2013. The decrease in amortization of intangibles is primarily related to lower amortization expense at The Match Group due to certain intangible assets becoming fully amortized, and the inclusion in the prior year of a $3.4 million impairment charge associated with an indefinite-lived intangible asset related to the CityGrid restructuring. The decrease in acquisition-related contingent consideration fair value adjustments is principally related to the acquisition of Twoo.
At June 30, 2014, there was $109.8 million of unrecognized compensation cost, net of estimated forfeitures, related to all equity-based awards, which is expected to be recognized over a weighted average period of approximately 2.1 years.
For the six months ended June 30, 2014 compared to the six months ended June 30, 2013
Operating income in 2014 decreased from 2013 primarily due to the decrease of $35.2 million in Adjusted EBITDA described above and an increase of $1.7 million in non-cash compensation expense, partially offset by decreases of $6.8 million in amortization of intangibles, $5.2 million in acquisition-related contingent consideration fair value adjustments and $1.0 million in depreciation. The increase in non-cash compensation expense and the decreases in amortization of intangibles and acquisition-related contingent consideration fair value adjustments are due to the factors described above in the three month discussion.

Equity in losses of unconsolidated affiliates
For the three months ended June 30, 2014 compared to the three months ended June 30, 2013

37


 
Three Months Ended June 30,
 
2014
 
$ Change
 
% Change
 
2013
 
(Dollars in thousands)
Equity in losses of unconsolidated affiliates
$(6,850)
 
$(5,772)
 
(535)%
 
$(1,078)
Equity in losses of unconsolidated affiliates in 2014 increased from 2013 principally due to a $4.2 million other-than-temporary impairment charge on one of our investments following the sale of a majority of the investee's assets.
For the six months ended June 30, 2014 compared to the six months ended June 30, 2013
 
Six Months Ended June 30,
 
2014
 
$ Change
 
% Change
 
2013
 
(Dollars in thousands)
Equity in losses of unconsolidated affiliates
$(8,785)
 
$(7,616)
 
(651)%
 
$(1,169)
Equity in losses of unconsolidated affiliates in 2014 increased from 2013 primarily due to the factor described above in the three month discussion.

Interest expense
For the three months ended June 30, 2014 compared to the three months ended June 30, 2013
 
Three Months Ended June 30,
 
2014
 
$ Change
 
% Change
 
2013
 
(Dollars in thousands)
Interest expense
$(14,046)
 
$(6,388)
 
(83)%
 
$(7,658)
Interest expense in 2014 increased from 2013 principally due to the 4.875% Senior Notes due November 30, 2018, which were issued on November 15, 2013.
For the six months ended June 30, 2014 compared to the six months ended June 30, 2013
 
Six Months Ended June 30,
 
2014
 
$ Change
 
% Change
 
2013
 
(Dollars in thousands)
Interest expense
$(28,110)
 
$(12,789)
 
(83)%
 
$(15,321)
Interest expense in 2014 increased from 2013 principally due to the factor described above in the three month discussion.

Other (expense) income, net
For the three months ended June 30, 2014 compared to the three months ended June 30, 2013
 
Three Months Ended June 30,
 
2014
 
$ Change
 
% Change
 
2013
 
(Dollars in thousands)
Other expense, net
$(62,900)
 
$(62,896)
 
NM
 
$(4)

Other expense, net in 2014 increased from 2013 principally due to $64.2 million in other-than-temporary impairment charges for certain cost method investments as a result of our assessment of the near-term prospects and financial condition of the investees.

38


For the six months ended June 30, 2014 compared to the six months ended June 30, 2013
 
Six Months Ended June 30,
 
2014
 
$ Change
 
% Change
 
2013
 
(Dollars in thousands)
Other (expense) income, net
$(62,923)
 
$(64,577)
 
NM
 
$1,654

Other (expense) income, net in 2014 consists primarily of the impairment charges described above in the three month discussion.
Income tax provision
For the three months ended June 30, 2014 compared to the three months ended June 30, 2013
 
Three Months Ended June 30,
 
2014
 
$ Change
 
% Change
 
2013
 
(Dollars in thousands)
Income tax provision
$(29,889)
 
NM
 
NM
 
$(39,416)

In 2014, the Company recorded an income tax provision for continuing operations of $29.9 million, which represents an effective income tax rate of 251%. The 2014 effective rate is higher than the statutory rate of 35% due primarily to the largely unbenefited loss associated with the write-downs of certain of the Company's investments, interest on reserves for income tax contingencies, and state taxes, partially offset by foreign income taxed at lower rates. In 2013, the Company recorded an income tax provision for continuing operations of $39.4 million, which represents an effective income tax rate of 40%. The 2013 effective rate is higher than the statutory rate of 35% due primarily to state taxes and interest on reserves for income tax contingencies, partially offset by foreign income taxed at lower rates.
For the six months ended June 30, 2014 compared to the six months ended June 30, 2013
 
Six Months Ended June 30,
 
2014
 
$ Change
 
% Change
 
2013
 
(Dollars in thousands)
Income tax provision
$(51,274)
 
NM
 
NM
 
$(65,162)

In 2014, the Company recorded an income tax provision for continuing operations of $51.3 million, which represents an effective income tax rate of 76%. The 2014 effective rate is higher than the statutory rate of 35% due primarily to the factors described above in the three month discussion. In 2013, the Company recorded an income tax provision for continuing operations of $65.2 million, which represents an effective income tax rate of 37%. The 2013 effective rate is higher than the statutory rate of 35% due primarily to the factors described above in the three month discussion.
The Company recognizes interest and, if applicable, penalties related to unrecognized tax benefits in income tax provision. Included in the income tax provision for continuing operations and discontinued operations for the three months ended June 30, 2014 is a $1.5 million and a $0.8 million expense, respectively, net of related deferred taxes, for interest on unrecognized tax benefits. Included in the income tax provision for continuing operations and discontinued operations for the six months ended June 30, 2014 is a $3.1 million and a $1.6 million expense, respectively, net of related deferred taxes, for interest on unrecognized tax benefits. At June 30, 2014 and December 31, 2013, the Company has accrued $140.7 million and $133.0 million, respectively, for the payment of interest. At June 30, 2014 and December 31, 2013, the Company has accrued $5.3 million and $5.1 million, respectively, for penalties.

The Company is routinely under audit by federal, state, local and foreign authorities in the area of income tax. These audits include questioning the timing and the amount of income and deductions and the allocation of income and deductions among various tax jurisdictions. In June 2014, the Internal Revenue Service notified the Company that it will audit the Company’s tax returns for the years ended December 31, 2010 through 2012. Various other jurisdictions are currently under examination, the most significant of which are France, California, New York and New York City for various tax years

39


beginning with 2006. Income taxes payable include reserves considered sufficient to pay assessments that may result from examination of prior year tax returns. Changes to reserves from period to period and differences between amounts paid, if any, upon the resolution of audits and amounts previously provided may be material. Differences between the reserves for income tax contingencies and the amounts owed by the Company are recorded in the period they become known.

At June 30, 2014 and December 31, 2013, unrecognized tax benefits, including interest, are $412.0 million and $408.8 million, respectively. The statute of limitations for federal income taxes for the years 2001 through 2009 expired on July 1, 2014. As a result, previously unrecognized tax benefits, including interest, totaling $374.8 million will be recognized in the third quarter of 2014. The income tax benefit to continuing operations and discontinued operations will be $88.3 million and $175.7 million, respectively. The remaining amount of $110.8 million will affect various balance sheet accounts, primarily non-current deferred tax assets, which will be reduced by $100.0 million. If the remaining balance of unrecognized tax benefits at June 30, 2014 is subsequently recognized, $32.5 million, net of related deferred tax assets and interest, would reduce income tax provision for continuing operations. Excluding the amounts related to the 2001-2009 period described above, the Company believes that it is reasonably possible that its unrecognized tax benefits could decrease by an additional $11.6 million within twelve months of the current reporting date, of which approximately $8.3 million would decrease income tax provision for continuing operations, primarily due to expirations of statutes of limitations.


40


FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2014, the Company had $987.3 million of cash and cash equivalents, $81.6 million of marketable securities, and $1.1 billion of long-term debt. Domestically, cash equivalents primarily consist of AAA rated money market funds and commercial paper rated A2/P2 or better. Internationally, cash equivalents primarily consist of AAA rated money market funds and time deposits. Marketable securities consist of short-to-medium-term debt securities issued by investment grade corporate issuers and an equity security. The Company invests in marketable debt securities with active secondary or resale markets to ensure portfolio liquidity to fund current operations or satisfy other cash requirements as needed. The Company also invests in equity securities as part of its investment strategy. Long-term debt is comprised of $500 million in 2013 Senior Notes due November 30, 2018, $500 million in 2012 Senior Notes due December 15, 2022 and $80 million in Liberty Bonds due September 1, 2035.

At June 30, 2014, $251.5 million of the $987.3 million of cash and cash equivalents was held by the Company's foreign subsidiaries. If needed for our operations in the U.S., most of the cash and cash equivalents held by the Company's foreign subsidiaries could be repatriated to the U.S. but, under current law, would be subject to U.S. federal and state income taxes. We have not provided for any such tax because the Company currently does not anticipate a need to repatriate these funds to finance our U.S. operations and it is the Company's intent to indefinitely reinvest these funds outside of the U.S.

In summary, the Company's cash flows attributable to continuing operations are as follows:
 
 
Six Months Ended June 30,
 
 
2014
 
2013
 
 
(In thousands)
Net cash provided by operating activities
 
$148,771
 
$228,263
Net cash used in investing activities
 
(220,090)
 
(98,622)
Net cash used in financing activities
 
(46,180)
 
(198,339)
Net cash provided by operating activities attributable to continuing operations consists of earnings or loss from continuing operations adjusted for non-cash items, including non-cash compensation expense, depreciation, amortization of intangibles, asset impairment charges, excess tax benefits from stock-based awards, deferred income taxes, equity in earnings or losses of unconsolidated affiliates, acquisition-related contingent consideration fair value adjustments, and the effect of changes in working capital activities. Net cash provided by operating activities attributable to continuing operations in 2014 consists of earnings from continuing operations of $16.3 million, adjustments for non-cash items of $133.5 million, and cash used in working capital activities of $1.0 million. Adjustments for non-cash items primarily consist of $64.3 million in impairments related to long-term investments, $30.1 million of depreciation, $26.2 million of non-cash compensation expense and $25.4 million of amortization of intangibles, partially offset by $32.9 million of excess tax benefits from stock-based awards. The decrease in cash from changes in working capital activities primarily consists of a decrease of $31.2 million in accounts payable and other current liabilities and an increase in other assets of $19.2 million, partially offset by an increase in income taxes payable of $29.3 million and an increase in deferred revenue of $25.9 million. The decrease in accounts payable and other current liabilities is due to a decrease in accrued revenue share, accrued employee compensation and benefits, and a seasonal decrease in payables to suppliers at Shoebuy, partially offset by an increase in accrued advertising expense at The Match Group. The decrease in accrued revenue share is primarily due to lower B2B revenue in the Search & Applications segment. The decrease in accrued employee compensation and benefits is due to the payment of 2013 cash bonuses in 2014. The increase in other assets is primarily due to a receivable related to amounts collected on our behalf by a third-party and an increase in short-term and long-term production costs at certain of our media businesses that are capitalized as the television program, video or film is being produced. The increase in income taxes payable is due to current year income tax accruals in excess of current year income tax payments. The increase in deferred revenue is primarily due to growth in subscription revenue at The Match Group and Vimeo as well as an increase at Electus due to the timing of cash received related to various production deals.
Net cash used in investing activities attributable to continuing operations in 2014 includes cash consideration used in acquisitions and investments of $118.3 million, which includes the acquisition of the ValueClick O&O website businesses and SlimWare, the purchase of marketable debt securities of $78.4 million and capital expenditures of $26.6 million, primarily related to the internal development of software to support our products and services.
Net cash used in financing activities attributable to continuing operations in 2014 includes $40.1 million related to the payment of cash dividends to IAC shareholders, $30.0 million for the purchase of noncontrolling interests, $13.8 million in

41


proceeds related to the issuance of common stock, net of withholding taxes and $7.4 million in contingent consideration payments related to the 2013 Twoo acquisition, partially offset by excess tax benefits from stock-based awards of $32.9 million and the return of $12.4 million of funds held in escrow related to the Meetic tender offer.
Net cash provided by operating activities attributable to continuing operations in 2013 consists of earnings from continuing operations of $111.2 million, adjustments for non-cash items of $72.8 million and cash provided by working capital activities of $44.2 million. Adjustments for non-cash items primarily consists of $32.2 million of amortization of intangibles, $31.1 million of depreciation, $24.5 million of non-cash compensation expense, partially offset by $23.5 million of excess tax benefits from stock-based awards. The increase in cash from changes in working capital activities primarily consists of an increase in income taxes payable of $45.5 million and an increase in accounts payable and other current liabilities of $23.4 million, partially offset by an increase of $14.8 million in other current assets and an increase of $9.8 million in accounts receivable. The increase in income taxes payable is due to current year income tax accruals in excess of current year income tax payments. The increase in accounts payable and other current liabilities is due to an increase in accrued employee compensation and benefits due to the timing of bonus payments and an increase in accrued revenue share expense primarily at Search & Applications, partially offset by a decrease in accruals due to Newsweek's transition to a digital only publication in 2013 and a seasonal decrease in payables to suppliers at Shoebuy. The increase in other current assets is primarily due to an increase in short-term and long-term production costs at certain of our media businesses that are capitalized as the television program, video or film is being produced. The increase in accounts receivable is primarily due to the growth in revenue at Search & Applications earned from our services agreement with Google; the related receivable from Google was $140.2 million and $125.3 million at June 30, 2013 and December 31, 2012, respectively. While Match experienced growth, its accounts receivable is principally credit card receivables and, is not significant in relation to its revenue. Electus' accounts receivable increased due to higher revenue. These increases were partially offset by a $15.8 million decrease in accounts receivable at Newsweek due to its transition to a digital only publication.

Net cash used in investing activities attributable to continuing operations in 2013 includes cash consideration used in acquisitions and investments of $62.2 million, which includes the acquisition of Twoo, and capital expenditures of $47.8 million, which includes $23.6 million related to the purchase of a 50% ownership interest in an aircraft, partially offset by net maturities and sales of marketable debt securities and sales of long-term investments of $12.8 million.
    
Net cash used in financing activities attributable to continuing operations in 2013 includes $162.7 million for the repurchase of 2.9 million shares of common stock at an average price of $46.27 per share, $38.9 million related to the payment of cash dividends to IAC shareholders and $15.8 million for the payment of our 2002 Senior Notes, which were due January 15, 2013, partially offset by excess tax benefits from stock-based awards of $23.5 million.

The Company's principal sources of liquidity are its cash and cash equivalents and marketable securities and cash flows from operations. The Company has a $300.0 million revolving credit facility, which expires on December 21, 2017, and is available as an additional source of financing. At June 30, 2014, there were no outstanding borrowings under the revolving credit facility.

The Company anticipates that it will need to make capital and other expenditures in connection with the development and expansion of its operations. The Company expects that 2014 capital expenditures will be lower than 2013. At June 30, 2014, IAC had 8.6 million shares remaining in its share repurchase authorization. IAC may purchase shares over an indefinite period of time on the open market and in privately negotiated transactions, depending on those factors IAC management deems relevant at any particular time, including, without limitation, market conditions, share price and future outlook. On July 29, 2014, IAC declared a quarterly cash dividend of $0.34 per share of common and Class B common stock outstanding payable on September 1, 2014 to stockholders of record on August 15, 2014. Future declarations of dividends are subject to the determination of IAC's Board of Directors.

The Company believes its existing cash, cash equivalents and marketable securities, together with its expected positive cash flows generated from operations and available borrowing capacity under its $300 million revolving credit facility, will be sufficient to fund its normal operating requirements, including capital expenditures, share repurchases, quarterly cash dividends, and investing and other commitments for the foreseeable future. Our liquidity could be negatively affected by a decrease in demand for our products and services. The Company may make acquisitions and investments that could reduce its cash, cash equivalents and marketable securities balances and as a result, the Company may need to raise additional capital through future debt or equity financing to provide for greater financial flexibility. Additional financing may not be available at all or on terms favorable to us. The indentures governing the 2013 and 2012 Senior Notes restrict our ability to incur additional indebtedness in the event we are not in compliance with the maximum leverage ratio of 3.0 to 1.0. In addition, the terms of the revolving

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credit facility require that we maintain a leverage ratio of not more than 3.0 to 1.0 and restrict our ability to incur additional indebtedness. As of June 30, 2014, the Company was in compliance with all of these covenants.

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CONTRACTUAL OBLIGATIONS AND COMMERICAL COMMITMENTS

At June 30, 2014, there have been no material changes to the Company's contractual obligations, commercial commitments and off-balance sheet arrangements since the disclosure in our Annual Report on Form 10-K for the year ended December 31, 2013.


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IAC'S PRINCIPLES OF FINANCIAL REPORTING

IAC reports Adjusted EBITDA as a supplemental measure to U.S. generally accepted accounting principles ("GAAP"). This measure is one of the primary metrics by which we evaluate the performance of our businesses, on which our internal budgets are based and by which management is compensated. We believe that investors should have access to, and we are obligated to provide, the same set of tools that we use in analyzing our results. This non-GAAP measure should be considered in addition to results prepared in accordance with U.S. GAAP, but should not be considered a substitute for or superior to U.S. GAAP results. IAC endeavors to compensate for the limitations of the non-GAAP measure presented by providing the comparable U.S. GAAP measure with equal or greater prominence and descriptions of the reconciling items, including quantifying such items, to derive the non-GAAP measure. We encourage investors to examine the reconciling adjustments between the U.S. GAAP and non-GAAP measure, which we discuss below.

Definition of IAC's Non-GAAP Measure
        Adjusted EBITDA is defined as operating income excluding: (1) non-cash compensation expense; (2) depreciation; and (3) acquisition-related items consisting of (i) amortization of intangible assets and goodwill and intangible asset impairments and (ii) gains and losses recognized on changes in the fair value of contingent consideration arrangements. We believe this measure is useful for analysts and investors as this measure allows a more meaningful comparison between our performance and that of our competitors. Moreover, our management uses this measure internally to evaluate the performance of our business as a whole and our individual business segments. The above items are excluded from our Adjusted EBITDA measure because these items are non-cash in nature, and we believe that by excluding these items, Adjusted EBITDA corresponds more closely to the cash operating income generated from our business, from which capital investments are made and debt is serviced. Adjusted EBITDA has certain limitations in that it does not take into account the impact to IAC's statement of operations of certain expenses.

Non-Cash Expenses That Are Excluded From IAC's Non-GAAP Measure
        Non-cash compensation expense consists principally of expense associated with the grants, including unvested grants assumed in acquisitions, of stock options, restricted stock units ("RSUs") and performance-based RSUs. These expenses are not paid in cash, and we include the related shares in our fully diluted shares outstanding which, for stock options and RSUs are included on a treasury method basis, and for performance-based RSUs are included on a treasury method basis once the performance conditions are met. Upon the exercise of certain stock options and vesting of RSUs and performance-based RSUs, the awards are settled, at the Company's discretion, on a net basis, with the Company remitting the required tax-withholding amount from its current funds.
Amortization of intangible assets and goodwill and intangible asset impairments are non-cash expenses relating primarily to acquisitions. At the time of an acquisition, the identifiable definite-lived intangible assets of the acquired company, such as content, technology, customer lists, advertiser and supplier relationships, are valued and amortized over their estimated lives. Value is also assigned to acquired indefinite-lived intangible assets, which comprise trade names and trademarks, and goodwill that are not subject to amortization. An impairment is recorded when the carrying value of an intangible asset or goodwill exceeds its fair value. While it is likely that we will have significant intangible amortization expense as we continue to acquire companies, we believe that intangible assets represent costs incurred by the acquired company to build value prior to acquisition and the related amortization and impairment charges of intangible assets or goodwill, if applicable, are not ongoing costs of doing business.
Gains and losses recognized on changes in the fair value of contingent consideration arrangements are accounting adjustments to report contingent consideration liabilities at fair value. These adjustments can be highly variable and are excluded from our assessment of performance because they are considered non-operational in nature and, therefore, are not indicative of current or future performance or ongoing costs of doing business.

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RECONCILIATION OF ADJUSTED EBITDA

For a reconciliation of Adjusted EBITDA to operating income (loss) by reportable segment for the three and six months ended June 30, 2014 and 2013, see Note 8 to the consolidated financial statements.


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Item 3.    Quantitative and Qualitative Disclosures about Market Risk

At June 30, 2014, there have been no material changes to the Company's instruments or positions that are sensitive to market risk since the disclosure in our Annual Report on Form 10-K for the year ended December 31, 2013.

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Item 4.    Controls and Procedures

The Company monitors and evaluates on an ongoing basis its disclosure controls and internal control over financial reporting in order to improve its overall effectiveness. In the course of these evaluations, the Company modifies and refines its internal processes as conditions warrant.

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), IAC management, including the Chairman and Senior Executive and the Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures as defined by Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, the Chairman and Senior Executive and the Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report in providing reasonable assurance that information we are required to disclose in our filings with the Securities and Exchange Commission under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and Forms, and include controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

As required by Rule 13a-15(d) of the Exchange Act, the Company, under the supervision and with the participation of IAC management, including the Chairman and Senior Executive and the Chief Financial Officer, also evaluated whether any changes occurred to the Company's internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, such control. Based on that evaluation, the Company concluded that there has been no such change during the period covered by this report.

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PART II
OTHER INFORMATION
Item 1A.    Risk Factors

Cautionary Statement Regarding Forward-Looking Information

This quarterly report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The use of words such as "anticipates," "estimates," "expects," "intends," "plans" and "believes," among others, generally identify forward-looking statements. These forward-looking statements include, among others, statements relating to: IAC's future financial performance, IAC's business prospects and strategy, anticipated trends and prospects in the industries in which IAC's businesses operate and other similar matters. These forward-looking statements are based on IAC management's current expectations and assumptions about future events, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict.

Actual results could differ materially from those contained in these forward-looking statements for a variety of reasons, including, among others: changes in senior management at IAC and/or its businesses, changes in our relationship with, or policies implemented by, Google, adverse changes in economic conditions, either generally or in any of the markets or industries in which IAC's businesses operate, adverse trends in the online advertising industry or the advertising industry generally, our ability to convert visitors to our various websites into users and customers, our ability to offer new or alternative products and services in a cost-effective manner and consumer acceptance of these products and services, changes in industry standards and technology, actual tax liabilities that differ materially from our estimates, operational and financial risks relating to acquisitions, our ability to expand successfully into international markets and regulatory changes. Certain of these and other risks and uncertainties are discussed in IAC's filings with the SEC, including in Part I "Item 1A. Risk Factors" of our annual report on Form 10-K for the fiscal year ended December 31, 2013. Other unknown or unpredictable factors that could also adversely affect IAC's business, financial condition and operating results may arise from time to time. In light of these risks and uncertainties, the forward-looking statements discussed in this report may not prove to be accurate. Accordingly, you should not place undue reliance on these forward-looking statements, which only reflect the views of IAC management as of the date of this quarterly report. IAC does not undertake to update these forward-looking statements.

Risk Factors

In addition to the other information set forth in this quarterly report, you should carefully consider the risk factors discussed in Part I "Item 1A. Risk Factors" of our annual report on Form 10-K for the fiscal year ended December 31, 2013, which could materially affect our business, financial condition or future operating results. The risks described in this report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or future operating results.
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

The Company did not purchase any shares of its common stock during the quarter ended June 30, 2014. As of that date, 8,562,170 shares of common stock remained available for repurchase under the Company's previously announced April 2013 repurchase authorization. IAC may purchase shares pursuant to this repurchase authorization over an indefinite period of time in the open market and/or privately negotiated transactions, depending on those factors IAC management deems relevant at any particular time, including, without limitation, market conditions, share price and future outlook.





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Item 6.    Exhibits
The documents set forth below, numbered in accordance with Item 601 of Regulation S-K, are filed herewith, incorporated by reference to the location indicated or furnished herewith.

Exhibit
Number
Description
Location
3.1

Restated Certificate of Incorporation of IAC/InterActiveCorp.
Exhibit 3.1 to the Registrant's Registration Statement on Form 8-A/A, filed on August 12, 2005.
3.2

Certificate of Amendment of the Restated Certificate of Incorporation of IAC/InterActiveCorp.
Exhibit 3.1 to the Registrant's Current Report on Form 8-K, filed on August 22, 2008.
3.3

Amended and Restated By-Laws of IAC/InterActiveCorp.
Exhibit 3.1 to the Registrant's Current Report on Form 8-K, filed on December 6, 2010.
4.1

Supplemental Indenture for 4.75% Senior Notes due 2022, dated as of May 1, 2014, among IAC/InterActiveCorp, Match Group, LLC as Guarantor and Computershare Trust Company, N.A., as Trustee.(1)
 
4.2

Supplemental Indenture for 4.875% Senior Notes due 2018, dated as of May 1, 2014, among IAC/InterActiveCorp, Match Group, LLC as Guarantor and Computershare Trust Company, N.A., as Trustee.(1)
 
4.3

Supplemental Indenture for 4.75% Senior Notes due 2022, dated as of May 15, 2014, among IAC/InterActiveCorp, the Guarantors named therein and Computershare Trust Company, N.A., as Trustee.(1)
 
4.4

Supplemental Indenture for 4.875% Senior Notes due 2018, dated as of May 15, 2014, among IAC/InterActiveCorp, the Guarantors named therein and Computershare Trust Company, N.A., as Trustee.(1)
 
31.1

Certification of the Chairman and Senior Executive pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act.(1)
 
31.2

Certification of the Executive Vice President and Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act.(1)
 
32.1

Certification of the Chairman and Senior Executive pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act.(2)
 
32.2

Certification of the Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act.(2)
 
101.INS

XBRL Instance
 
101.SCH

XBRL Taxonomy Extension Schema
 
101.CAL

XBRL Taxonomy Extension Calculation
 
101.DEF

XBRL Taxonomy Extension Definition
 
101.LAB

XBRL Taxonomy Extension Labels
 
101.PRE

XBRL Taxonomy Extension Presentation
 
_______________________________________________________________________________
(1) 
Filed herewith.

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(2) 
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.

Dated:
July 31, 2014
 
 
 
 
 
IAC/INTERACTIVECORP
 
 
 
 
 
 
 
By:
 
/s/ JEFFREY W. KIP
 
 
 
 
Jeffrey W. Kip
 
 
 
 
Executive Vice President and
Chief Financial Officer




 
 
 
 
Signature
Title
 
Date
 
 
 
 
/s/ JEFFREY W. KIP
Executive Vice President and
Chief Financial Officer
 
July 31, 2014
Jeffrey W. Kip
 
 
 

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