10-Q 1 iaci-2012930x10q.htm 10-Q IACI-2012.9.30-10Q
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As filed with the Securities and Exchange Commission on November 8, 2012


 
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 September 30, 2012
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. (Check one):
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 October 19, 2012, the following shares of the registrant's common stock were outstanding:
Common Stock
82,665,959

Class B Common Stock
5,789,499

Total outstanding Common Stock
88,455,458

The aggregate market value of the voting common stock held by non-affiliates of the registrant as of October 19, 2012 was $4,319,523,212. For the purpose of the foregoing calculation only, all directors and executive officers of the registrant are assumed to be affiliates of the registrant.



PART I
FINANCIAL INFORMATION
Item 1.    Consolidated Financial Statements
IAC/INTERACTIVECORP
CONSOLIDATED BALANCE SHEET
(Unaudited)
 
September 30, 2012
 
December 31, 2011
 
(In thousands, except share data)
ASSETS
 
 
 
Cash and cash equivalents
$
501,779

 
$
704,153

Marketable securities
138,926

 
165,695

Accounts receivable, net of allowance of $8,071 and $7,309, respectively
220,735

 
177,030

Other current assets
126,787

 
112,255

Total current assets
988,227

 
1,159,133

Property and equipment, net
272,317

 
259,588

Goodwill
1,556,833

 
1,358,524

Intangible assets, net
491,485

 
378,107

Long-term investments
169,728

 
173,752

Other non-current assets
103,985

 
80,761

TOTAL ASSETS
$
3,582,575

 
$
3,409,865

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
LIABILITIES:
 
 
 
Current maturities of long-term debt
$
15,844

 
$
—

Accounts payable, trade
86,810

 
64,398

Deferred revenue
159,498

 
126,297

Accrued expenses and other current liabilities
362,917

 
343,490

Total current liabilities
625,069

 
534,185

Long-term debt, net of current maturities
80,000

 
95,844

Income taxes payable
479,693

 
450,533

Deferred income taxes
304,889

 
302,213

Other long-term liabilities
33,332

 
16,601

 
 
 
 
Redeemable noncontrolling interests
58,956

 
50,349

 
 
 
 
Commitments and contingencies

 

 
 
 
 
SHAREHOLDERS' EQUITY:
 
 
 
Common stock $.001 par value; authorized 1,600,000,000 shares; issued 248,747,173 and 234,100,950 shares, respectively, and outstanding 82,646,948 and 77,126,881 shares, respectively
249

 
234

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
11,627,593

 
11,280,173

Accumulated deficit
(359,258
)
 
(477,785
)
Accumulated other comprehensive loss
(11,891
)
 
(12,443
)
Treasury stock 176,468,225 and 167,342,069 shares, respectively
(9,308,315
)
 
(8,885,146
)
Total IAC shareholders' equity
1,948,394

 
1,905,049

Noncontrolling interests
52,242

 
55,091

Total shareholders' equity
2,000,636

 
1,960,140

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
3,582,575

 
$
3,409,865


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

2


IAC/INTERACTIVECORP
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands, except per share data)
Revenue
$
714,470

 
$
516,884

 
$
2,035,682

 
$
1,462,501

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue (exclusive of depreciation shown separately below)
261,932

 
188,642

 
722,193

 
542,832

Selling and marketing expense
236,763

 
153,296

 
669,671

 
426,764

General and administrative expense
94,876

 
84,628

 
278,895

 
241,472

Product development expense
24,504

 
21,556

 
71,101

 
56,558

Depreciation
13,150

 
17,484

 
37,490

 
43,373

Amortization of intangibles
5,212

 
4,538

 
18,058

 
9,195

Total costs and expenses
636,437

 
470,144

 
1,797,408

 
1,320,194

Operating income
78,033

 
46,740

 
238,274

 
142,307

Equity in losses of unconsolidated affiliates
(3,298
)
 
(15,078
)
 
(28,208
)
 
(25,677
)
Other (expense) income, net
(944
)
 
4,308

 
(1,267
)
 
10,697

Earnings from continuing operations before income taxes
73,791

 
35,970

 
208,799

 
127,327

Income tax (provision) benefit
(27,606
)
 
32,003

 
(83,360
)
 
6,444

Earnings from continuing operations
46,185

 
67,973

 
125,439

 
133,771

Loss from discontinued operations, net of tax
(5,624
)
 
(3,922
)
 
(6,581
)
 
(8,358
)
Net earnings
40,561

 
64,051

 
118,858

 
125,413

Net loss (earnings) attributable to noncontrolling interests
156

 
922

 
(331
)
 
54

Net earnings attributable to IAC shareholders
$
40,717

 
$
64,973

 
$
118,527

 
$
125,467

 
 
 
 
 
 
 
 
Per share information attributable to IAC shareholders:
 
 
 
 
 
 
Basic earnings per share from continuing operations
$
0.52

 
$
0.81

 
$
1.46

 
$
1.52

Diluted earnings per share from continuing operations
$
0.49

 
$
0.73

 
$
1.35

 
$
1.41

Basic earnings per share
$
0.46

 
$
0.77

 
$
1.38

 
$
1.43

Diluted earnings per share
$
0.43

 
$
0.69

 
$
1.28

 
$
1.32

 
 
 
 
 
 
 
 
Dividends declared per share
$
0.24

 
$
—

 
$
0.48

 
$
—

 
 
 
 
 
 
 
 
Non-cash compensation expense by function:
 
 
 
 
 
 
 
Cost of revenue
$
1,550

 
$
1,449

 
$
4,775

 
$
3,682

Selling and marketing expense
1,386

 
1,241

 
3,512

 
3,476

General and administrative expense
18,850

 
18,118

 
52,378

 
53,444

Product development expense
1,565

 
2,077

 
4,593

 
5,451

Total non-cash compensation expense
$
23,351

 
$
22,885

 
$
65,258

 
$
66,053

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

3


IAC/INTERACTIVECORP
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Net earnings
$
40,561

 
$
64,051

 
$
118,858

 
$
125,413

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Change in foreign currency translation adjustment
14,609

 
(39,619
)
 
(4,940
)
 
(29,631
)
Change in net unrealized (losses) gains on available-for-sale securities
(8,758
)
 
(16,624
)
 
4,685

 
18,192

Total other comprehensive income (loss)
5,851

 
(56,243
)
 
(255
)
 
(11,439
)
Comprehensive income
46,412

 
7,808

 
118,603

 
113,974

Comprehensive (income) loss attributable to noncontrolling interests
(2,026
)
 
7,078

 
476

 
6,084

Comprehensive income attributable to IAC shareholders
$
44,386

 
$
14,886

 
$
119,079

 
$
120,058

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

4


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, 2011
$
50,349

 
 
$
234

 
234,101

 
$
16

 
16,157

 
$
11,280,173

 
$
(477,785
)
 
$
(12,443
)
 
$
(8,885,146
)
 
$
1,905,049

 
$
55,091

 
$
1,960,140

Net (loss) earnings for the nine months ended September 30, 2012
(1,311
)
 
 
—

 
—

 
—

 
—

 
—

 
118,527

 
—

 
—

 
118,527

 
1,642

 
120,169

Other comprehensive (loss) income, net of tax
(485
)
 
 
—

 
—

 
—

 
—

 
—

 
—

 
552

 
—

 
552

 
(322
)
 
230

Non-cash compensation expense
—

 
 
—

 
—

 
—

 
—

 
63,235

 
—

 
—

 
—

 
63,235

 
2,023

 
65,258

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

 
 
3

 
2,918

 
—

 
—

 
35,958

 
—

 
—

 
—

 
35,961

 
—

 
35,961

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

 
 
—

 
—

 
—

 
—

 
18,865

 
—

 
—

 
—

 
18,865

 
—

 
18,865

Issuance of common stock upon the exercise of warrants
—

 
 
12

 
11,728

 
—

 
—

 
284,099

 
—

 
—

 
—

 
284,111

 
—

 
284,111

Dividends
—

 
 
—

 
—

 
—

 
—

 
(45,841
)
 
—

 
—

 
—

 
(45,841
)
 
—

 
(45,841
)
Purchase of treasury stock
—

 
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(423,169
)
 
(423,169
)
 
—

 
(423,169
)
Purchase of redeemable noncontrolling interests
(2,955
)
 
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Fair value of redeemable noncontrolling interests adjustment
8,896

 
 
—

 
—

 
—

 
—

 
(8,896
)
 
—

 
—

 
—

 
(8,896
)
 
—

 
(8,896
)
Transfer from noncontrolling interests to redeemable noncontrolling interests
7,192

 
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(7,192
)
 
(7,192
)
Other
(2,730
)
 
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1,000

 
1,000

Balance as of September 30, 2012
$
58,956

 
 
$
249

 
248,747

 
$
16

 
16,157

 
$
11,627,593

 
$
(359,258
)
 
$
(11,891
)
 
$
(9,308,315
)
 
$
1,948,394

 
$
52,242

 
$
2,000,636

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

5


IAC/INTERACTIVECORP
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
 
Nine Months Ended
 
September 30,
 
2012
 
2011
 
(In thousands)
Cash flows from operating activities attributable to continuing operations:
 
 
 
Net earnings
$
118,858

 
$
125,413

Less: Discontinued operations, net of tax
(6,581
)
 
(8,358
)
Earnings from continuing operations
125,439

 
133,771

Adjustments to reconcile earnings from continuing operations to net cash provided by operating activities attributable to continuing operations:
 
 
 
Non-cash compensation expense
65,258

 
66,053

Depreciation
37,490

 
43,373

Amortization of intangibles
18,058

 
9,195

Deferred income taxes
5,410

 
(44,548
)
Equity in losses of unconsolidated affiliates
28,208

 
25,677

Gain on sales of investments
(1,876
)
 
(1,861
)
Changes in assets and liabilities, net of effects of acquisitions:
 
 
 
Accounts receivable
(16,443
)
 
(27,494
)
Other current assets
(9,749
)
 
9,005

Accounts payable and other current liabilities
18,700

 
15,512

Income taxes payable
29,479

 
6,173

Deferred revenue
10,575

 
26,668

Other, net
13,058

 
8,042

Net cash provided by operating activities attributable to continuing operations
323,607

 
269,566

Cash flows from investing activities attributable to continuing operations:
 
 
 
Acquisitions, net of cash acquired
(377,123
)
 
(278,469
)
Capital expenditures
(32,363
)
 
(27,346
)
Proceeds from maturities and sales of marketable debt securities
79,353

 
528,170

Purchases of marketable debt securities
(47,902
)
 
(154,718
)
Proceeds from sales of long-term investments
12,744

 
14,021

Purchases of long-term investments
(10,031
)
 
(84,441
)
Other, net
(12,264
)
 
(11,436
)
Net cash used in investing activities attributable to continuing operations
(387,586
)
 
(14,219
)
Cash flows from financing activities attributable to continuing operations:
 
 
 
Purchase of treasury stock
(434,041
)
 
(389,566
)
Issuance of common stock, net of withholding taxes
320,070

 
62,045

Dividends
(43,695
)
 
—

Excess tax benefits from stock-based awards
23,486

 
22,878

Other, net
(4,696
)
 
(3,699
)
Net cash used in financing activities attributable to continuing operations
(138,876
)
 
(308,342
)
Total cash used in continuing operations
(202,855
)
 
(52,995
)
Total cash used in discontinued operations
(1,866
)
 
(7,379
)
Effect of exchange rate changes on cash and cash equivalents
2,347

 
(2,414
)
Net decrease in cash and cash equivalents
(202,374
)
 
(62,788
)
Cash and cash equivalents at beginning of period
704,153

 
742,099

Cash and cash equivalents at end of period
$
501,779

 
$
679,311

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

6
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 Match.com, Ask.com, CollegeHumor.com, and CityGrid Media. Focused in the areas of search, personals, local and media, IAC's family of websites is one of largest in the world, with 1.2 billion monthly visits across more than 30 countries.
All references to "IAC," the "Company," "we," "our" or "us" in this report are to IAC/InterActiveCorp.
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 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 included in the Company's annual report on Form 10-K for the year ended December 31, 2011.
During the first and second quarters of 2012, the Company renamed and realigned its reportable segments. Search was renamed "Search & Applications". The Media & Other segment was separated into a "Media" segment and an "Other" segment. The Company created a new segment called "Local" that includes HomeAdvisor (formerly ServiceMagic), which was previously reported as its own separate segment, and CityGrid Media, which was previously included in the Search & Applications segment. In addition, DailyBurn was moved from the Search & Applications segment to the Media segment and Pronto was moved from the Media & Other segment to the Search & Applications segment. Certain prior year amounts have been reclassified to conform to the current year presentation.
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 those 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 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 paid listing supply agreement with Google Inc. ("Google"), which expires on March 31, 2016. For the three and nine months ended September 30, 2012, revenue earned from Google was $357.2 million and $1.0 billion, respectively. For the three and nine months ended September 30, 2011, revenue earned from Google was $242.9 million and $679.1 million,

7


respectively. This revenue was earned by the businesses comprising the Search & Applications segment. Accounts receivable related to revenue earned from Google totaled $125.3 million at September 30, 2012 and $105.7 million at December 31, 2011.
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 those items 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 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 nine months ended September 30, 2012, the Company recorded an income tax provision for continuing operations of $27.6 million and $83.4 million, respectively, which represents effective income tax rates of 37% and 40%, respectively. The effective rate for the three months ended September 30, 2012 is higher than the statutory rate of 35% due primarily to state taxes and interest on reserves for tax contingencies, partially offset by foreign income taxed at lower rates. The effective rate for the nine months ended September 30, 2012 is higher than the statutory rate of 35% due primarily to an increase in reserves for and interest on reserves for tax contingencies, a valuation allowance on the deferred tax asset created by The Newsweek/Daily Beast Company ("Newsweek Daily Beast") non-cash re-measurement charge related to our acquisition of a controlling interest, and state taxes, partially offset by foreign income taxed at lower rates and a net decrease in the valuation allowance on the beginning of the year deferred tax assets related to investments in unconsolidated affiliates.
For the three and nine months ended September 30, 2011, the Company recorded an income tax benefit for continuing operations of $32.0 million and $6.4 million, respectively, despite pre-tax income of $36.0 million and $127.3 million , respectively. The income tax benefit for the three months ended September 30, 2011 is due principally to the reversal of a previously established deferred tax liability of $43.6 million associated with the 2009 gain that was recognized upon the exchange of Match Europe for a 27% interest in Meetic S.A. ("Meetic"). In connection with the acquisition of a controlling interest in Meetic in 2011, the Company concluded that it intends to indefinitely reinvest the earnings of Match's international operations related to Meetic, including the 2009 gain on the sale of Match Europe outside of the United States. This income tax benefit was partially offset by the non-deductible nature of the non-cash re-measurement charge related to Match's 27% equity method investment in Meetic that was recorded upon our acquisition of a controlling interest. The income tax benefit for the nine months ended September 30, 2011 is due principally to the release of a previously established deferred tax liability as described above in the three month discussion, foreign income taxed at lower rates, and the reduction in state tax accruals resulting from income tax provision to tax return reconciliations and expirations of statutes of limitations, partially offset by interest on reserves for tax contingencies, states taxes, and the non-deductible nature of the non-cash re-measurement charge as described above in the three month discussion.
At September 30, 2012 and December 31, 2011, unrecognized tax benefits, including interest, were $485.8 million and $462.8 million, respectively. Unrecognized tax benefits, including interest, at September 30, 2012 increased $23.0 million from December 31, 2011 due principally to a net increase in deductible timing differences and additions for tax positions related to prior years. Of the total unrecognized tax benefits at September 30, 2012, $468.5 million is included in "Income taxes payable," $12.1 million relates to deferred tax assets included in "Deferred income taxes" and $5.2 million is included in "Accrued expenses and other current liabilities" in the accompanying consolidated balance sheet. Included in unrecognized tax benefits at September 30, 2012 is $79.8 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. If unrecognized tax benefits at September 30, 2012 are subsequently recognized, $94.7 million and $226.4 million, net of related deferred tax assets and interest, would reduce income tax expense for continuing operations and discontinued operations, respectively.
The Company recognizes interest and, if applicable, penalties related to unrecognized tax benefits in income tax provision. Included in income tax provision for continuing operations and discontinued operations for the three months ended September 30, 2012 is a $1.6 million expense and a $0.4 million benefit, respectively, net of related deferred taxes, for interest

8

on unrecognized tax benefits. Included in income tax provision for continuing operations and discontinued operations for the nine months ended September 30, 2012 is a $3.3 million expense and a $3.8 million benefit, respectively, net of related deferred taxes, for interest on unrecognized tax benefits. At September 30, 2012 and December 31, 2011, the Company has accrued $112.2 million and $111.2 million, respectively, for the payment of interest. At September 30, 2012 and December 31, 2011, the Company has accrued $2.8 million and $2.5 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. The Internal Revenue Service ("IRS") has substantially completed its audit of the Company's tax returns for the years ended December 31, 2001 through 2006. The settlement of these tax years has not yet been submitted to the Joint Committee of Taxation for approval. The IRS began its audit of the Company's tax returns for the years ended December 31, 2007 through 2009 in July 2011. The statute of limitations for the years 2001 through 2009 has been extended to December 31, 2013. Various state and local jurisdictions are currently under examination, the most significant of which are California, New York and New York City for various tax years beginning with 2005. 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 issues raised in 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. The Company believes that it is reasonably possible that its unrecognized tax benefits could decrease by $68.9 million within twelve months of the current reporting date, of which approximately $13.3 million could decrease income tax provision, primarily due to settlements, expirations of statutes of limitations, and the reversal of deductible temporary differences that will primarily result in a corresponding decrease in net deferred tax assets. An estimate of other changes in unrecognized tax benefits, while potentially significant, cannot be made.
NOTE 3—BUSINESS COMBINATIONS
Acquisition of About, Inc.
On September 24, 2012, IAC completed its purchase of all the outstanding shares of About, Inc. (“The About Group”), an online content and reference library offering expert, quality content across 90,000 topics. The preliminary purchase price was $300 million, which was paid in cash, plus an amount equal to the estimated net working capital at closing.
The financial results of The About Group will be included in IAC's consolidated financial statements, within the Search & Applications segment, beginning October 1, 2012. The estimated fair values of the assets acquired and liabilities assumed of The About Group reflected in the accompanying consolidated balance sheet at September 30, 2012 are preliminary.
The table below summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
 
 
 
(In thousands)
Cash and cash equivalents
 
 
$
998

Other current assets
 
 
23,316

Property and equipment
 
 
14,681

Goodwill
 
 
176,127

Intangible assets
 
 
110,400

Other assets
 
 
1,613

Total assets
 
 
327,135

Current liabilities
 
 
(7,543
)
Other liabilities
 
 
(3,336
)
Net assets
 
 
$
316,256

The purchase price was based on the expected financial performance of The About Group, not on the value of the net identifiable assets at the time of acquisition, which resulted in a significant portion of the purchase price being attributed to goodwill. The expected financial performance of The About Group reflects that it is complementary and synergistic to the existing businesses of the Company's Search & Applications segment, particularly Ask.com.

9

Intangible assets are as follows:
 
(In thousands)
 
Weighted-average
Amortization Life
(Years)
Indefinite-lived trade names
$
37,000

 
Indefinite
Content
48,400

 
4.0
Technology
16,100

 
3.0
Advertiser relationships
7,400

 
2.0
Customer lists
1,500

 
3.0
   Total
$
110,400

 
3.6
The About Group's other current assets, property and equipment, other assets, current liabilities and other liabilities were reviewed and adjusted to their fair values at the date of acquisition, as necessary. The fair value of trade names was determined using a relief from royalty method. The fair value of content was determined using an excess earnings method. The fair value of developed technology was determined using replacement cost. The fair value of advertiser relationships was determined using a "with or without" method, which determines the present value of profits that would be lost without the relationships. The fair value of customer lists was determined using an excess earnings method.The valuations of the intangible assets incorporate significant unobservable inputs and require significant judgment and estimates, including the amount and timing of future cash flows and the determination of royalty and discount rates. Substantially all of the amount attributed to goodwill is tax deductible.
The Company is in the process of completing its determination of the fair values of the assets acquired and liabilities assumed and the preliminary fair values are subject to revision. These fair values are expected to be finalized in the fourth quarter of 2012.
Acquisition of Meetic
In 2009, Match acquired a 27% ownership interest in Meetic. Match accounted for this interest under the equity method of accounting through August 31, 2011. During the third quarter of 2011, Match acquired an additional 12.5 million shares of Meetic for $272.0 million in cash pursuant to a tender offer. These additional shares increased Match's voting interest and ownership interest in Meetic to 79% and 81%, respectively, resulting in Match obtaining a controlling financial interest in Meetic. Accordingly, this purchase was accounted for under the acquisition method of accounting and the financial results of Meetic are included within IAC's consolidated financial statements and the Match operating segment beginning September 1, 2011.
Pro forma financial information
The unaudited pro forma financial information in the table below summarizes the combined results of IAC, Meetic and The About Group as if the acquisition of The About Group had occurred on January 1, 2011 and the acquisition of Meetic had occurred on January 1, 2010. The pro forma financial information includes adjustments required under the acquisition method of accounting and is presented for informational purposes only and is not necessarily indicative of what the results would have been had the acquisitions occurred on the dates stated above. For the three and nine months ended September 30, 2012, pro forma adjustments reflected below include an increase of $0.6 million and a decrease of $1.9 million in amortization of intangible assets, respectively. For the three and nine months ended September 30, 2011, pro forma adjustments reflected below include increases of $6.2 million and $19.0 million in amortization of intangible assets, respectively.

10

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands, except per share data)
Revenue
$
740,086

 
$
593,545

 
$
2,115,866

 
$
1,727,843

Net earnings attributable to IAC shareholders
$
47,146

 
$
83,899

 
$
144,997

 
$
161,890

Basic earnings per share attributable to IAC shareholders
$
0.53

 
$
0.99

 
$
1.69

 
$
1.84

Diluted earnings per share attributable to IAC shareholders
$
0.50

 
$
0.89

 
$
1.56

 
$
1.71

NOTE 4—GOODWILL AND INTANGIBLE ASSETS
The balance of goodwill and intangible assets, net is as follows:
 
September 30,
2012
 
December 31,
2011
 
(In thousands)
Goodwill
$
1,556,833

 
$
1,358,524

Intangible assets with indefinite lives
388,031

 
351,488

Intangible assets with definite lives, net
103,454

 
26,619

   Total goodwill and intangible assets, net
$
2,048,318

 
$
1,736,631

The following table presents the balance of goodwill by reporting unit, including the changes in the carrying value of goodwill, for the nine months ended September 30, 2012:
 
Balance as of
December 31,
 2011
 
Additions
 
(Deductions)
 
Foreign
 Exchange
Translation
 
Balance as of
September 30,
2012
 
(In thousands)
   IAC Search & Media
$
526,444

 
$
182,969

 
$
(218
)
 
$
—

 
$
709,195

Search & Applications
526,444

 
182,969

 
(218
)
 
—

 
709,195

Match
667,073

 
13,347

 
(3,163
)
 
(10,216
)
 
667,041

   HomeAdvisor
109,947

 
1,880

 
—

 
(383
)
 
111,444

   CityGrid Media
17,751

 
14,093

 
—

 
—

 
31,844

Local
127,698

 
15,973

 
—

 
(383
)
 
143,288

   Connected Ventures
8,267

 
—

 
—

 
—

 
8,267

   DailyBurn
7,323

 
—

 
—

 
—

 
7,323

Media
15,590

 
—

 
—

 
—

 
15,590

   Shoebuy
21,719

 
—

 
—

 
—

 
21,719

Other
21,719

 
—

 
—

 
—

 
21,719

   Total
$
1,358,524

 
$
212,289

 
$
(3,381
)
 
$
(10,599
)
 
$
1,556,833

Additions primarily relate to the acquisition of The About Group. Both the December 31, 2011 and September 30, 2012 goodwill balances include accumulated impairment losses of $916.9 million, $28.0 million and $11.6 million at IAC Search & Media, Shoebuy and Connected Ventures, respectively.
Intangible assets with indefinite lives are trade names and trademarks acquired in various acquisitions. At September 30, 2012, intangible assets with definite lives are as follows:

11

 
Cost
 
Accumulated
Amortization
 
Net
 
Weighted-Average
Amortization Life
(Years)
 
(In thousands)
Content
$
48,400

 
$
—

 
$
48,400

 
4.0
Technology
38,895

 
(8,146
)
 
30,749

 
3.0
Customer lists
22,767

 
(17,363
)
 
5,404

 
1.2
Advertiser and supplier relationships
17,046

 
(6,469
)
 
10,577

 
4.3
Other
13,662

 
(5,338
)
 
8,324

 
8.3
   Total
$
140,770

 
$
(37,316
)
 
$
103,454

 
3.7
At December 31, 2011, intangible assets with definite lives are as follows:
 
Cost
 
Accumulated
Amortization
 
Net
 
Weighted-Average
Amortization Life
(Years)
 
(In thousands)
Customer lists
$
18,050

 
$
(8,837
)
 
$
9,213

 
1.0
Technology
16,145

 
(3,858
)
 
12,287

 
2.2
Supplier relationships
8,946

 
(5,298
)
 
3,648

 
6.4
Other
6,063

 
(4,592
)
 
1,471

 
3.4
   Total
$
49,204

 
$
(22,585
)
 
$
26,619

 
2.6
Amortization of intangible assets with definite lives is computed either on a straight-line basis or based on the period in which the economic benefits of the asset will be realized. At September 30, 2012, amortization of intangible assets with definite lives for each of the next five years and thereafter is estimated to be as follows:
 
 
(In thousands)
Remainder of 2012
 
$
11,500

2013
 
38,943

2014
 
25,844

2015
 
16,551

2016
 
6,467

2017
 
1,426

Thereafter
 
2,723

   Total
 
$
103,454

NOTE 5—MARKETABLE SECURITIES
At September 30, 2012, current available-for-sale marketable securities are as follows:

12

 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In thousands)
Corporate debt securities
$
15,592

 
$
40

 
$
—

 
$
15,632

States of the U.S. and state political subdivisions
112,340

 
653

 
(2
)
 
112,991

Total debt securities
127,932

 
693

 
(2
)
 
128,623

Equity security
—

 
10,303

 
—

 
10,303

Total marketable securities
$
127,932

 
$
10,996

 
$
(2
)
 
$
138,926

At December 31, 2011, current available-for-sale marketable securities are as follows:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In thousands)
Corporate debt securities
$
48,621

 
$
99

 
$
(15
)
 
$
48,705

States of the U.S. and state political subdivisions
111,758

 
587

 
(22
)
 
112,323

Total debt securities
160,379

 
686

 
(37
)
 
161,028

Equity security
4,656

 
11

 
—

 
4,667

Total marketable securities
$
165,035

 
$
697

 
$
(37
)
 
$
165,695

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 available-for-sale at September 30, 2012 are as follows:
 
Amortized
Cost
 
Estimated
Fair Value
 
(In thousands)
Due in one year or less
$
55,986

 
$
56,163

Due after one year through five years
71,946

 
72,460

Total
$
127,932

 
$
128,623

The following table summarizes investments in marketable debt securities (3 in total at September 30, 2012) that have been in a continuous unrealized loss position for less than twelve months:
 
September 30, 2012
 
December 31, 2011
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
(In thousands)
Corporate debt securities
$
—

 
$
—

 
$
12,920

 
$
(15
)
States of the U.S. and state political subdivisions
5,895

 
(2
)
 
11,711

 
(22
)
Total
$
5,895

 
$
(2
)
 
$
24,631

 
$
(37
)
At September 30, 2012 and December 31, 2011, there are no investments in marketable securities that have been in a continuous unrealized loss position for twelve months or longer.
Substantially all of the Company's marketable debt securities are rated investment grade. The gross unrealized losses on the marketable debt securities relate to changes in interest rates. Because the Company does not intend to sell any

13

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 September 30, 2012.
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 and losses:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Proceeds from maturities and sales of available-for-sale marketable securities
$
40,570

 
$
128,287

 
$
88,347

 
$
542,191

Gross realized gains
241

 
387

 
2,039

 
2,303

Gross realized losses
—

 
—

 
—

 
(18
)
Gross realized gains and losses 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. Unrealized gains, net of tax, reclassified out of accumulated other comprehensive income (loss) into other (expense) income, net related to the maturities and sales of available-for-sale securities for the three and nine months ended September 30, 2012, were less than $0.1 million and $0.9 million, respectively. Unrealized gains, net of tax, reclassified out of accumulated other comprehensive income (loss) into other (expense) income, net related to the maturities and sales of available-for-sale securities for the three and nine months ended September 30, 2011, were $0.6 million and $2.0 million, respectively.
NOTE 6—FAIR VALUE MEASUREMENTS
The Company categorizes its assets and liabilities measured at fair value into a fair value hierarchy that prioritizes the inputs used in pricing 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 values 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 assets and liabilities that are measured at fair value on a recurring basis:

14

 
September 30, 2012
 
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
$
184,449

 
$
—

 
$
—

 
$
184,449

Commercial paper
—

 
84,443

 
—

 
84,443

Time deposits
—

 
4,400

 
—

 
4,400

Marketable securities:
 
 
 
 
 
 
 
Corporate debt securities
—

 
15,632

 
—

 
15,632

States of the U.S. and state political subdivisions
—

 
112,991

 
—

 
112,991

   Equity security
10,303

 
—

 
—

 
10,303

Long-term investments:
 
 
 
 
 
 
 
Auction rate security
—

 
—

 
7,330

 
7,330

Marketable equity securities
66,078

 
—

 
—

 
66,078

Total
$
260,830

 
$
217,466

 
$
7,330

 
$
485,626


 
December 31, 2011
 
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:
 
 
 
 
 
 
 
Treasury and government agency money market funds
$
321,314

 
$
—

 
$
—

 
$
321,314

Commercial paper
—

 
237,942

 
—

 
237,942

Time deposits
—

 
4,750

 
—

 
4,750

Marketable securities:
 
 
 
 
 
 
 
Corporate debt securities
—

 
48,705

 
—

 
48,705

States of the U.S. and state political subdivisions
—

 
112,323

 
—

 
112,323

Equity security
4,667

 
—

 
—

 
4,667

Long-term investments:
 
 
 
 
 
 
 
Auction rate security
—

 
—

 
5,870

 
5,870

Marketable equity securities
74,691

 
—

 
—

 
74,691

Total
$
400,672

 
$
403,720

 
$
5,870

 
$
810,262

Liabilities:
 
 
 
 
 
 
 
Contingent consideration arrangement
$
—

 
$
—

 
$
(10,000
)
 
$
(10,000
)
The following tables present the changes in the Company's assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

15

 
Three Months Ended September 30,
 
2012
 
2011
 
Auction Rate
Security
 
Auction Rate
Security
 
Contingent
Consideration
Arrangement
 
(In thousands)
Balance at July 1
$
6,730

 
$
8,680

 
$
(10,000
)
Total net gains (losses) (realized and unrealized):
 
 
 
 
 
Included in other comprehensive income
600

 
(2,820
)
 
—

Balance at September 30
$
7,330

 
$
5,860

 
$
(10,000
)

 
Nine Months Ended September 30,
 
2012
 
2011
 
Auction Rate
Security
 
Contingent
Consideration
Arrangement
 
Auction Rate
Securities
 
Contingent
Consideration
Arrangement
 
(In thousands)
Balance at January 1
$
5,870

 
$
(10,000
)
 
$
13,100

 
$
—

Total net gains (losses) (realized and unrealized):
 
 
 
 
 
 
 
Included in other comprehensive income
1,460

 
—

 
(2,240
)
 
—

Fair value at date of acquisition
—

 
—

 
—

 
(40,000
)
Settlements
—

 
10,000

 
(5,000
)
 
30,000

Balance at September 30
$
7,330

 
$
—

 
$
5,860

 
$
(10,000
)
There are no gains or losses included in earnings for the three and nine months ended September 30, 2012 and 2011, relating to the Company's assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs.
Auction rate security
The Company's auction rate security is valued by discounting the estimated future cash flow stream 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 $2.7 million and $4.1 million at September 30, 2012 and December 31, 2011, respectively. The unrealized losses are included in "Accumulated other comprehensive loss" in the accompanying consolidated balance sheet. At September 30, 2012, 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 September 30, 2012, 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 arrangement
The fair value of the OkCupid contingent consideration arrangement at December 31, 2011 was based upon the achievement of the performance goals which required a $10.0 million payment.
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.
NOTE 7—FINANCIAL INSTRUMENTS
The fair values of the financial instruments listed below have been determined by the Company using available market information and appropriate valuation methodologies.

16

 
September 30, 2012
 
December 31, 2011
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
501,779

 
$
501,779

 
$
704,153

 
$
704,153

Marketable securities
138,926

 
138,926

 
165,695

 
165,695

Long-term marketable equity securities
66,078

 
66,078

 
74,691

 
74,691

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Current maturities of long-term debt
(15,844
)
 
(16,055
)
 
—

 
—

Long-term debt, net of current maturities
(80,000
)
 
(81,561
)
 
(95,844
)
 
(93,339
)
The carrying value of cash equivalents approximates fair value due to their short-term maturity. The fair value of long‑term debt, including current maturities, is estimated using quoted market prices or indices for similar liabilities and taking into consideration other factors such as credit quality and maturity. See Note 6 for description of the method used to determine the fair value of marketable securities. The fair value of long-term debt, including current maturities, is determined only for disclosure purposes and is based on Level 3 inputs.
The cost basis of the Company's long-term marketable equity securities at September 30, 2012 was $50.8 million, with gross unrealized gains of $24.2 million and a gross unrealized loss of $8.9 million, included in "Accumulated other comprehensive loss" in the accompanying consolidated balance sheet. The cost basis of the Company's long-term marketable equity securities at December 31, 2011 was $53.1 million, with gross unrealized gains of $29.8 million and a gross unrealized loss of $8.2 million. The Company evaluated the near-term prospects of the issuer of the equity security with the unrealized loss in relation to the severity and duration of the unrealized loss and based on that evaluation and the Company's ability and intent to hold this investment for a reasonable period of time sufficient for an expected recovery of fair value, the Company does not consider this investment to be other-than-temporarily impaired at September 30, 2012.
At September 30, 2012 and December 31, 2011, the carrying values of the Company's investments accounted for under the cost method totaled $88.1 million and $82.3 million, respectively, and are included in "Long-term investments" in the accompanying consolidated balance sheet. The Company evaluates each cost method investment for possible impairment on a quarterly basis and determines the fair value if indicators of impairment are deemed to be present; the Company 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.
NOTE 8—EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share attributable to IAC shareholders.

17

 
Three Months Ended September 30,
 
2012
 
2011
 
Basic
 
Diluted
 
Basic
 
Diluted
 
(In thousands, except per share data)
Numerator:
 
 
 
 
 
 
 
Earnings from continuing operations
$
46,185

 
$
46,185

 
$
67,973

 
$
67,973

Net loss attributable to noncontrolling interests
156

 
156

 
922

 
922

Earnings from continuing operations attributable to IAC shareholders
46,341

 
46,341

 
68,895

 
68,895

Loss from discontinued operations attributable to IAC shareholders
(5,624
)
 
(5,624
)
 
(3,922
)
 
(3,922
)
Net earnings attributable to IAC shareholders
$
40,717

 
$
40,717

 
$
64,973

 
$
64,973

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average basic shares outstanding
88,296

 
88,296

 
84,613

 
84,613

Dilutive securities including stock options, warrants, RSUs(a)(b)
—

 
6,394

 
—

 
9,129

Denominator for earnings per share—weighted average shares(a)(b)
88,296

 
94,690

 
84,613

 
93,742

 
 
 
 
 
 
 
 
Earnings (loss) per share attributable to IAC shareholders:
 
 
 
 
 
 
 
Earnings per share from continuing operations
$
0.52

 
$
0.49

 
$
0.81

 
$
0.73

Discontinued operations
(0.06
)
 
(0.06
)
 
(0.04
)
 
(0.04
)
Earnings per share
$
0.46

 
$
0.43

 
$
0.77

 
$
0.69

 
Nine Months Ended September 30,
 
2012
 
2011
 
Basic
 
Diluted
 
Basic
 
Diluted
 
(In thousands, except per share data)
Numerator:
 
 
 
 
 
 
 
Earnings from continuing operations
$
125,439

 
$
125,439

 
$
133,771

 
$
133,771

Net (earnings) loss attributable to noncontrolling interests
(331
)
 
(331
)
 
54

 
54

Earnings from continuing operations attributable to IAC shareholders
125,108

 
125,108

 
133,825

 
133,825

Loss from discontinued operations attributable to IAC shareholders
(6,581
)
 
(6,581
)
 
(8,358
)
 
(8,358
)
Net earnings attributable to IAC shareholders
$
118,527

 
$
118,527

 
$
125,467

 
$
125,467

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average basic shares outstanding
85,766

 
85,766

 
87,898

 
87,898

Dilutive securities including stock options, warrants, RSUs(a)(b)
—

 
7,026

 
—

 
6,992

Denominator for earnings per share—weighted average shares(a)(b)
85,766

 
92,792

 
87,898

 
94,890

 
 
 
 
 
 
 
 
Earnings (loss) per share attributable to IAC shareholders:
 
 
 
 
 
 
 
Earnings per share from continuing operations
$
1.46

 
$
1.35

 
$
1.52

 
$
1.41

Discontinued operations
(0.08
)
 
(0.07
)
 
(0.09
)
 
(0.09
)
Earnings per share
$
1.38

 
$
1.28

 
$
1.43

 
$
1.32

_______________________
(a)
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 warrants and vesting of restricted stock units ("RSUs") and

18

performance-based stock units ("PSUs"). At September 30, 2012, there are no warrants outstanding. For the three and nine months ended September 30, 2012, approximately 0.3 million and 0.7 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. For the three and nine months ended September 30, 2011, approximately 0.8 million and 1.3 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.

(b)
At September 30, 2012, there were approximately 2.3 million PSUs included in the calculation of diluted earnings per share, as their performance conditions have been met. Prior to September 30, 2012, no PSUs were included in diluted earnings per share. For the three and nine months ended September 30, 2012, approximately 0.6 million PSUs are excluded from the calculation of diluted earnings per share. For the three and nine months ended September 30, 2011, approximately 3.3 million PSUs are excluded from the calculation of diluted earnings per share.
NOTE 9—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 and executive management view 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 Other, do not meet the quantitative thresholds that require separate presentation.

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Revenue:
 
 
 
 
 
 
 
Search & Applications
$
370,227

 
$
258,875

 
$
1,062,187

 
$
731,054

Match
178,190

 
132,328

 
530,883

 
360,354

Local
84,314

 
80,124

 
245,938

 
231,465

Media
52,736

 
18,692

 
107,015

 
51,811

Other
29,064

 
27,023

 
89,899

 
88,442

Inter-segment elimination
(61
)
 
(158
)
 
(240
)
 
(625
)
Total
$
714,470

 
$
516,884

 
$
2,035,682

 
$
1,462,501

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Operating Income (Loss):
 
 
 
 
 
 
 
Search & Applications
$
69,036

 
$
45,508

 
$
216,593

 
$
144,780

Match
56,078

 
36,677

 
143,083

 
101,105

Local
7,343

 
7,324

 
22,802

 
22,484

Media
(13,178
)
 
(2,837
)
 
(27,152
)
 
(10,545
)
Other
(2,685
)
 
(1,648
)
 
(6,581
)
 
(3,891
)
Corporate
(38,561
)
 
(38,284
)
 
(110,471
)
 
(111,626
)
Total
$
78,033

 
$
46,740

 
$
238,274

 
$
142,307


19

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Operating Income Before Amortization:
 
 
 
 
 
 
 
Search & Applications
$
69,192

 
$
46,280

 
$
216,771

 
$
145,742

Match
59,980

 
40,207

 
159,953

 
107,530

Local
7,817

 
7,767

 
23,599

 
23,836

Media
(12,236
)
 
(2,651
)
 
(25,426
)
 
(10,301
)
Other
(2,259
)
 
(1,339
)
 
(5,412
)
 
(2,970
)
Corporate
(15,898
)
 
(16,101
)
 
(47,895
)
 
(46,282
)
Total
$
106,596

 
$
74,163

 
$
321,590

 
$
217,555

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Depreciation:
 
 
 
 
 
 
 
Search & Applications
$
3,343

 
$
9,824

 
$
10,019

 
$
21,389

Match
4,502

 
2,481

 
11,781

 
7,059

Local
2,463

 
2,738

 
7,739

 
7,325

Media
424

 
153

 
898

 
546

Other
286

 
209

 
787

 
623

Corporate
2,132

 
2,079

 
6,266

 
6,431

Total
$
13,150

 
$
17,484

 
$
37,490

 
$
43,373

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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Revenue:
 
 
 
 
 
 
 
United States
$
499,409

 
$
393,398

 
$
1,417,622

 
$
1,150,895

All other countries
215,061

 
123,486

 
618,060

 
311,606

Total
$
714,470

 
$
516,884

 
$
2,035,682

 
$
1,462,501

 
 
September 30,
2012
 
December 31,
2011
 
(In thousands)
Long-lived assets (excluding goodwill and intangible assets):
 
 
 
United States
$
257,150

 
$
246,550

All other countries
15,167

 
13,038

Total
$
272,317

 
$
259,588


The Company's primary metric is Operating Income Before Amortization, which is defined as operating income excluding, if applicable: (1) non-cash compensation expense, (2) amortization and impairment of intangibles, (3) goodwill impairment, and (4) one-time items. The Company believes this measure is useful to investors because it represents the operating results from IAC's segments, taking into account depreciation, which it believes is an ongoing cost of doing business,

20

but excluding the effects of any other non-cash expenses. Operating Income Before Amortization has certain limitations in that it does not take into account the impact to IAC's statement of operations of certain expenses, including non-cash compensation and acquisition related accounting. IAC endeavors to compensate for the limitations of the non-U.S. 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‑U.S. GAAP measure.

The following tables reconcile Operating Income Before Amortization to operating income (loss) for the Company's reportable segments:
 
Three Months Ended September 30, 2012
 
Operating
Income Before
Amortization
 
Non-Cash
Compensation
Expense
 
Amortization
of Intangibles
 
Operating
Income
(Loss)
 
(In thousands)
Search & Applications
$
69,192

 
$
(9
)
 
$
(147
)
 
$
69,036

Match
59,980

 
(560
)
 
(3,342
)
 
56,078

Local
7,817

 
—

 
(474
)
 
7,343

Media
(12,236
)
 
(62
)
 
(880
)
 
(13,178
)
Other
(2,259
)
 
(57
)
 
(369
)
 
(2,685
)
Corporate
(15,898
)
 
(22,663
)
 
—

 
(38,561
)
Total
$
106,596

 
$
(23,351
)
 
$
(5,212
)
 
$
78,033

 
Three Months Ended September 30, 2011
 
Operating
Income Before
Amortization
 
Non-Cash
Compensation
Expense
 
Amortization
of Intangibles
 
Operating
Income
(Loss)
 
(In thousands)
Search & Applications
$
46,280

 
$
(4
)
 
$
(768
)
 
$
45,508

Match
40,207

 
(423
)
 
(3,107
)
 
36,677

Local
7,767

 
—

 
(443
)
 
7,324

Media
(2,651
)
 
(186
)
 
—

 
(2,837
)
Other
(1,339
)
 
(89
)
 
(220
)
 
(1,648
)
Corporate
(16,101
)
 
(22,183
)
 
—

 
(38,284
)
Total
$
74,163

 
$
(22,885
)
 
$
(4,538
)
 
$
46,740

 
Nine Months Ended September 30, 2012
 
Operating
Income Before
Amortization
 
Non-Cash
Compensation
Expense
 
Amortization
of Intangibles
 
Operating
Income
(Loss)
 
(In thousands)
Search & Applications
$
216,771

 
$
(26
)
 
$
(152
)
 
$
216,593

Match
159,953

 
(2,023
)
 
(14,847
)
 
143,083

Local
23,599

 
—

 
(797
)
 
22,802

Media
(25,426
)
 
(566
)
 
(1,160
)
 
(27,152
)
Other
(5,412
)
 
(67
)
 
(1,102
)
 
(6,581
)
Corporate
(47,895
)
 
(62,576
)
 
—

 
(110,471
)
Total
$
321,590

 
$
(65,258
)
 
$
(18,058
)
 
$
238,274


21

 
Nine Months Ended September 30, 2011
 
Operating
Income Before
Amortization
 
Non-Cash
Compensation
Expense
 
Amortization
of Intangibles
 
Operating
Income
(Loss)
 
(In thousands)
Search & Applications
$
145,742

 
$
210

 
$
(1,172
)
 
$
144,780

Match
107,530

 
(423
)
 
(6,002
)
 
101,105

Local
23,836

 
—

 
(1,352
)
 
22,484

Media
(10,301
)
 
(241
)
 
(3
)
 
(10,545
)
Other
(2,970
)
 
(255
)
 
(666
)
 
(3,891
)
Corporate
(46,282
)
 
(65,344
)
 
—

 
(111,626
)
Total
$
217,555

 
$
(66,053
)
 
$
(9,195
)
 
$
142,307

NOTE 10—CONSOLIDATED FINANCIAL STATEMENT DETAILS
Property and equipment, net
 
September 30,
2012
 
December 31,
2011
 
(In thousands)
Buildings and leasehold improvements
$
235,275

 
$
235,737

Computer equipment and capitalized software
206,210

 
186,016

Furniture and other equipment
43,813

 
43,156

Projects in progress
17,677

 
7,643

Land
5,117

 
5,117

 
508,092

 
477,669

Less: accumulated depreciation and amortization
(235,775
)
 
(218,081
)
Property and equipment, net
$
272,317

 
$
259,588

Accumulated other comprehensive loss
 
September 30,
2012
 
December 31,
2011
 
(In thousands)
Foreign currency translation adjustment, net of tax
$
(29,306
)
 
$
(25,174
)
Unrealized gains on available-for-sale securities, net of tax
17,415

 
12,731

Accumulated other comprehensive loss
$
(11,891
)
 
$
(12,443
)

22

Other (expense) income, net
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
Interest income
$
789

 
$
1,224

 
$
2,849

 
$
3,676

Interest expense
(1,391
)
 
(1,425
)
 
(4,102
)
 
(4,135
)
Gain on sales of investments
217

 
317

 
1,876

 
1,861

Non-income tax refunds related to Match Europe, which was sold in 2009
—

 
—

 
—

 
4,630

Foreign currency exchange (losses) gains, net
(526
)
 
3,748

 
(1,564
)
 
4,050

Other
(33
)
 
444

 
(326
)
 
615

Other (expense) income, net
$
(944
)
 
$
4,308

 
$
(1,267
)
 
$
10,697

NOTE 11—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 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.


23


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 Match.com, Ask.com, CollegeHumor.com, and CityGrid Media. Focused in the areas of search, personals, local and media, IAC's family of websites is one of largest in the world, with 1.2 billion monthly visits across more than 30 countries.

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, 2011.

Results of Operations for the three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011

Revenue
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
$ Change
 
% Change
 
2011
 
2012
 
$ Change
 
% Change
 
2011
 
(Dollars in thousands)
Search & Applications
$
370,227

 
$
111,352

 
43%
 
$
258,875

 
$
1,062,187

 
$
331,133

 
45%
 
$
731,054

Match
178,190

 
45,862

 
35%
 
132,328

 
530,883

 
170,529

 
47%
 
360,354

Local
84,314

 
4,190

 
5%
 
80,124

 
245,938

 
14,473

 
6%
 
231,465

Media
52,736

 
34,044

 
182%
 
18,692

 
107,015

 
55,204

 
107%
 
51,811

Other
29,064

 
2,041

 
8%
 
27,023

 
89,899

 
1,457

 
2%
 
88,442

Inter-segment elimination
(61
)
 
97

 
62%
 
(158
)
 
(240
)
 
385

 
62%
 
(625
)
Total
$
714,470

 
$
197,586

 
38%
 
$
516,884

 
$
2,035,682

 
$
573,181

 
39%
 
$
1,462,501


For the three months ended September 30, 2012 compared to the three months ended September 30, 2011

Revenue in 2012 increased from 2011 primarily as a result of increases of $111.4 million from Search & Applications, $45.9 million from Match and $34.0 million from Media.

Search & Applications revenue increased 43% to $370.2 million, reflecting strong growth from both Websites (which includes Ask.com, Pronto and Dictionary.com, excluding downloadable applications related to the aforementioned sites) and Applications (which includes our direct to consumer applications business (B2C) and our partnership operations (B2B), as well as downloadable applications related to Ask.com and Dictionary.com). Websites revenue grew 49% to $183.0 million, reflecting strong query gains of 52%. Applications revenue grew 38% to $187.2 million, driven by 20% query growth and year over year monetization gains driven by increased contributions from existing and new partners and products.

Match revenue increased 35% to $178.2 million benefiting from the full quarter contribution of $50.9 million from Meetic as compared to the prior year period contribution of $11.1 million, and growth within our Core operations (consisting of Match.com in the U.S., Chemistry and People Media). Meetic revenue in the prior year period (consolidated with effect from September 1, 2011) was negatively impacted by the write-off of $9.6 million of deferred revenue in connection with its acquisition. Core revenue increased 8% to $110.8 million driven by an 8% increase in subscribers.

Media revenue increased 182% to $52.7 million primarily due to the impact of The Newsweek/Daily Beast Company ("Newsweek Daily Beast"), consolidated beginning June 1, 2012 following the Company's acquisition of a controlling interest,

24


as well as strong growth from Electus and Vimeo.

A substantial portion of the Company's revenue is derived from online advertising. Most of the Company's online advertising revenue is attributable to a paid listing supply agreement with Google Inc. ("Google"), which expires on March 31, 2016. For the three months ended September 30, 2012 and 2011, revenue earned from Google was $357.2 million and $242.9 million, respectively. This revenue was earned by the businesses comprising the Search & Applications segment.

For the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011

Revenue in 2012 increased from 2011 primarily as a result of increases of $331.1 million from Search & Applications, $170.5 million from Match, $55.2 million from Media and $14.5 million from Local.

Search & Applications revenue increased 45% to $1.1 billion. Applications and Websites revenue increased 48% and 43%, respectively, to $548.8 million and $513.3 million, respectively, due primarily to the factors described above in the three month discussion. Websites revenue grew more slowly than queries due to the prior year period benefiting from $21.5 million of revenue related to our direct sponsored listings business, which was sold in 2011, and modest revenue growth at Pronto and Dictionary.com.

Match revenue increased 47% to $530.9 million benefiting from the contribution of Meetic and growth within our Core operations, partially offset by a decrease in Developing revenue. Core revenue increased 12% to $329.1 million driven by an increase in subscribers. Meetic revenue in 2012 and 2011 of $152.2 million and $11.1 million, respectively, were negatively impacted by the write-off of $5.2 million and $9.6 million, respectively, of deferred revenue in connection with its acquisition. Revenue from Developing (which includes OkCupid, DateHookup and Match's non-Meetic international operations) decreased 11% to $49.5 million, despite strong growth from OkCupid, due to lower subscription revenue from Singlesnet. Excluding the results of Meetic, revenue grew 8% to $378.7 million.

Local revenue increased 6% to $245.9 million, reflecting growth from HomeAdvisor's (formerly ServiceMagic) domestic and international operations. HomeAdvisor domestic revenue grew due to higher average lead acceptance fees. HomeAdvisor international revenue grew due to an increase in service request accepts and higher average lead acceptance fees. CityGrid Media revenue increased due to the contribution of Felix, a pay-per-call advertising service that was acquired in August 2012, and higher reseller revenue, partially offset by a decline in revenue from direct sales.

Media revenue increased 107% to $107.0 million primarily due to the factors described above in the three month discussion.

For the nine months ended September 30, 2012 and 2011, revenue earned from Google was $1.0 billion and $679.1 million, respectively.

Cost of revenue

For the three months ended September 30, 2012 compared to the three months ended September 30, 2011
 
Three Months Ended September 30,
 
2012
 
$ Change
 
% Change
 
2011
 
(Dollars in thousands)
Cost of revenue
$261,932
 
$73,290
 
39%
 
$188,642
As a percentage of revenue
37%
 
 
 
16 bp
 
36%
_____________________________
bp = basis points
Cost of revenue consists primarily of traffic acquisition costs. Traffic acquisition costs 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

25


includes Shoebuy's cost of products sold and shipping and handling costs, production costs related to digital content 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.

Cost of revenue in 2012 increased from 2011 primarily due to increases of $36.0 million from Media and $31.7 million from Search & Applications. Cost of revenue from Media increased primarily due to Newsweek Daily Beast, consolidated beginning June 1, 2012, and increased production costs at Electus related to the increase in its revenue. The increase in cost of revenue from Search & Applications was primarily due to an increase of $32.4 million in traffic acquisition costs primarily related to the increased revenue from our B2B operations. As a percentage of revenue, traffic acquisition costs at Search & Applications decreased compared to the prior year period due to an increase in the proportion of revenue from Websites that resulted from increased online marketing.

For the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011
 
Nine Months Ended September 30,
 
2012
 
$ Change
 
% Change
 
2011
 
(Dollars in thousands)
Cost of revenue
$722,193
 
$179,361
 
33%
 
$542,832
As a percentage of revenue
35%
 
 
 
(164) bp
 
37%

Cost of revenue in 2012 increased from 2011 primarily due to increases of $107.7 million from Search & Applications, $53.2 million from Media and $12.2 million from Match. The increases from Search & Applications and Media are primarily due to the factors described above in the three month discussion. The increase from Match is due to the acquisition of Meetic, which was not in the full prior year period, partially offset by a decrease in customer acquisition costs.

Selling and marketing expense

For the three months ended September 30, 2012 compared to the three months ended September 30, 2011
 
Three Months Ended September 30,
 
2012
 
$ Change
 
% Change
 
2011
 
(Dollars in thousands)
Selling and marketing expense
$236,763
 
$83,467
 
54%
 
$153,296
As a percentage of revenue
33%
 
 
 
348 bp
 
30%

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 2012 increased from 2011 primarily due to increases of $61.0 million from Search & Applications and $23.1 million from Match. The increase from Search & Applications is primarily due to an increase in online marketing related to Ask.com and from existing B2C downloadable applications. Selling and marketing expense at Match increased primarily due to the acquisition of Meetic, which was not in the full prior year period, and an increase in offline marketing spend.

For the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011

26


 
Nine Months Ended September 30,
 
2012
 
$ Change
 
% Change
 
2011
 
(Dollars in thousands)
Selling and marketing expense
$669,671
 
$242,907
 
57%
 
$426,764
As a percentage of revenue
33%
 
 
 
372 bp
 
29%

Selling and marketing expense in 2012 increased from 2011 primarily due to increases of $161.1 million from Search & Applications and $78.8 million from Match. The increases from Search & Applications and Match are primarily due to the factors described above in the three month discussion.

General and administrative expense

For the three months ended September 30, 2012 compared to the three months ended September 30, 2011
 
Three Months Ended September 30,
 
2012
 
$ Change
 
% Change
 
2011
 
(Dollars in thousands)
General and administrative expense
$94,876
 
$10,248
 
12%
 
$84,628
As a percentage of revenue
13%
 
 
 
(309) bp
 
16%

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 2012 increased from 2011 primarily due to increases of $4.1 million from Media and $3.9 million from Local, partially offset by a decrease of $2.4 million from Match. The increase from Media resulted primarily from Newsweek Daily Beast, consolidated beginning June 1, 2012, and Electus. The increase in general and administrative expense from Local is primarily due to higher compensation and employee-related expenses at HomeAdvisor as well as an increase in bad debt expense. General and Administrative expense from Match decreased primarily due to lower professional fees due, in part, to the inclusion in the prior year period of $2.5 million in transaction fees associated with the Meetic acquisition. As a percentage of revenue, general and administrative expense decreased from 2011 primarily due to operating expense leverage at Corporate and Search & Applications.

For the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011
 
Nine Months Ended September 30,
 
2012
 
$ Change
 
% Change
 
2011
 
(Dollars in thousands)
General and administrative expense
$278,895
 
$37,423
 
15%
 
$241,472
As a percentage of revenue
14%
 
 
 
(281) bp
 
17%

General and administrative expense in 2012 increased from 2011 primarily due to increases of $13.3 million from Match, $12.0 million from Media and $10.0 million from Local. The increase from Match is primarily due to the acquisition of Meetic, which was not in the full prior year period, partially offset by a decrease in professional fees due, in part, to the inclusion in the prior year period of $3.7 million in transaction fees associated with the Meetic acquisition. The increases from Media and Local are primarily due to the factors described above in the three month discussion.

Product development expense

For the three months ended September 30, 2012 compared to the three months ended September 30, 2011

27


 
Three Months Ended September 30,
 
2012
 
$ Change
 
% Change
 
2011
 
(Dollars in thousands)
Product development expense
$24,504
 
$2,948
 
14%
 
$21,556
As a percentage of revenue
3%
 
 
 
(74) bp
 
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 2012 increased from 2011 primarily due to an increase of $2.5 million from Match related to an increase in headcount and the acquisition of Meetic, which was not in the full prior year period.

For the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011
 
Nine Months Ended September 30,
 
2012
 
$ Change
 
% Change
 
2011
 
(Dollars in thousands)
Product development expense
$71,101
 
$14,543
 
26%
 
$56,558
As a percentage of revenue
3%
 
 
 
(37) bp
 
4%

Product development expense in 2012 increased from 2011 primarily due to increases of $10.7 million from Match and $2.7 million from Other. The increase from Match is primarily due to the factors described above in the three month discussion. The increase from Other is primarily due to increased investment in Hatch Labs.

Depreciation

For the three months ended September 30, 2012 compared to the three months ended September 30, 2011
 
Three Months Ended September 30,
 
2012
 
$ Change
 
% Change
 
2011
 
(Dollars in thousands)
Depreciation expense
$13,150
 
$(4,334)
 
(25)%
 
$17,484
As a percentage of revenue
2%
 
 
 
(154) bp
 
3%

Depreciation in 2012 decreased from 2011 resulting primarily from the write-off of $4.9 million in capitalized software costs associated with the exit of the Company's direct sponsored listings business in 2011, partially offset by an increase in depreciation from Match, which is primarily due to the acquisition of Meetic, which was not in the full prior year period.

For the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011
 
Nine Months Ended September 30,
 
2012
 
$ Change
 
% Change
 
2011
 
(Dollars in thousands)
Depreciation expense
$37,490
 
$(5,883)
 
(14)%
 
$43,373
As a percentage of revenue
2%
 
 
 
(112) bp
 
3%

Depreciation in 2012 decreased from 2011 resulting primarily from the factors described above in the three month discussion.


28


Operating Income Before Amortization
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
$ Change
 
% Change
 
2011
 
2012
 
$ Change
 
% Change
 
2011
 
(Dollars in thousands)
Search & Applications
$
69,192

 
$
22,912

 
50%
 
$
46,280

 
$
216,771

 
$
71,029

 
49%
 
$
145,742

Match
59,980

 
19,773

 
49%
 
40,207

 
159,953

 
52,423

 
49%
 
107,530

Local
7,817

 
50

 
1%
 
7,767

 
23,599

 
(237
)
 
(1)%
 
23,836

Media
(12,236
)
 
(9,585
)
 
(362)%
 
(2,651
)
 
(25,426
)
 
(15,125
)
 
(147)%
 
(10,301
)
Other
(2,259
)
 
(920
)
 
(69)%
 
(1,339
)
 
(5,412
)
 
(2,442
)
 
(82)%
 
(2,970
)
Corporate
(15,898
)
 
203

 
1%
 
(16,101
)
 
(47,895
)
 
(1,613
)
 
(3)%
 
(46,282
)
Total
$
106,596

 
$
32,433

 
44%
 
$
74,163

 
$
321,590

 
$
104,035

 
48%
 
$
217,555


For the three months ended September 30, 2012 compared to the three months ended September 30, 2011

Operating Income Before Amortization in 2012 increased from 2011 primarily due to increases of $22.9 million from Search & Applications and $19.8 million from Match, partially offset by increased losses of $9.6 million from Media.

Search & Applications Operating Income Before Amortization increased 50% to $69.2 million, benefiting from the higher revenue noted above and a decrease of $6.5 million in depreciation, partially offset by increases of $61.0 million in selling and marketing expense and $32.4 million in traffic acquisition costs. The decrease in depreciation is due to the write-off of $4.9 million in capitalized software costs associated with the exit of the Company's direct sponsored listings business in 2011. The increase in selling and marketing expense is primarily due to an increase in advertising and promotional expenditures, driven primarily by increased online marketing related to Ask.com and existing B2C downloadable applications. The increase in traffic acquisition costs is primarily due to increased revenue from our B2B operations.

Match Operating Income Before Amortization increased 49% to $60.0 million, primarily due to the positive contribution from Meetic in the current year period and higher Core revenue noted above. Operating Income Before Amortization in 2011 was negatively impacted by the write-off of $9.6 million of deferred revenue in connection with Meetic's acquisition. Operating Income Before Amortization, excluding Meetic, was impacted by increases in product development expense and selling and marketing expense, partially offset by a decrease in general and administrative expense. The increase in product development expense is primarily due to an increase in compensation and other employee-related costs due, in part, to an increase in headcount. Selling and marketing expense increased from 2011 primarily due to an increase in offline marketing spend. The decrease in general and administrative expense is primarily due to lower professional fees due primarily to the inclusion in the prior year period of $2.5 million in transaction fees associated with the Meetic acquisition.

Media Operating Income Before Amortization loss increased by $9.6 million to a loss of $12.2 million reflecting the consolidation of Newsweek Daily Beast beginning June 1, 2012.

For the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011

Operating Income Before Amortization in 2012 increased from 2011 primarily due to increases of $71.0 million from Search & Applications and $52.4 million from Match, partially offset by increased losses of $15.1 million from Media.

Search & Applications Operating Income Before Amortization increased 49% to $216.8 million, benefiting from the higher revenue noted above and a decrease of $11.4 million in depreciation, partially offset by increases of $161.1 million in selling and marketing expense and $109.1 million in traffic acquisition costs. The decrease in depreciation and the increases in selling and marketing expense and traffic acquisition costs are primarily due to the factors described above in the three month discussion.

Match Operating Income Before Amortization increased 49% to $160.0 million, primarily due to the acquisition of Meetic and the higher Core revenue noted above. Operating Income Before Amortization, excluding Meetic, was impacted by

29


increases in product development expense and selling and marketing expense, partially offset by decreases in cost of revenue and general and administrative expense. The increases in product development expense and selling and marketing expense and the decrease in general and administrative expense are primarily due to the factors described above in the three month discussion. The decrease in cost of revenue is primarily to lower customer acquisition costs.

Media Operating Income Before Amortization loss increased by $15.1 million to losses of $25.4 million due to the factor described above in the three month discussion.

Operating income
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
$ Change
 
% Change
 
2011
 
2012
 
$ Change
 
% Change
 
2011
 
(Dollars in thousands)
Search & Applications
$
69,036

 
$
23,528

 
52%
 
$
45,508

 
$
216,593

 
$
71,813

 
50%
 
$
144,780

Match
56,078

 
19,401

 
53%
 
36,677

 
143,083

 
41,978

 
42%
 
101,105

Local
7,343

 
19

 
—%
 
7,324

 
22,802

 
318

 
1%
 
22,484

Media
(13,178
)
 
(10,341
)
 
(365)%
 
(2,837
)
 
(27,152
)
 
(16,607
)
 
(157)%
 
(10,545
)
Other
(2,685
)
 
(1,037
)
 
(63)%
 
(1,648
)
 
(6,581
)
 
(2,690
)
 
(69)%
 
(3,891
)
Corporate
(38,561
)
 
(277
)
 
(1)%
 
(38,284
)
 
(110,471
)
 
1,155

 
1%
 
(111,626
)
Total
$
78,033

 
$
31,293

 
67%
 
$
46,740

 
$
238,274

 
$
95,967

 
67%
 
$
142,307


Refer to Note 9 to the consolidated financial statements for reconciliations of Operating Income Before Amortization to operating income (loss) by reportable segment.

For the three months ended September 30, 2012 compared to the three months ended September 30, 2011

Operating income in 2012 increased from 2011 primarily due to the increase of $32.4 million in Operating Income Before Amortization described above, partially offset by increases of $0.7 million in amortization of intangibles and $0.5 million in non-cash compensation expense.

At September 30, 2012, there was $102.8 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 2.2 years.

For the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011

Operating income in 2012 increased from 2011 primarily due to the increase of $104.0 million in Operating Income Before Amortization described above and a decrease of $0.8 million in non-cash compensation expense, partially offset by an increase of $8.9 million in amortization of intangibles. The increase in amortization of intangibles is primarily due to the acquisition of Meetic.

Equity in losses of unconsolidated affiliates

For the three months ended September 30, 2012 compared to the three months ended September 30, 2011
 
Three Months Ended September 30,
 
2012
 
$ Change
 
% Change
 
2011
 
(Dollars in thousands)
Equity in losses of unconsolidated affiliates
$(3,298)
 
$11,780
 
78%
 
$(15,078)

Equity in losses of unconsolidated affiliates in 2011 includes a pre-tax non-cash charge of $11.7 million related to the

30


re‑measurement of the carrying value of Match's 27% equity method investment in Meetic to fair value (i.e., the tender offer price of €15.00 per share) in connection with our acquisition of a controlling interest. Also contributing to the equity in losses of unconsolidated affiliates in 2011 is the losses related to the Company's investment in Newsweek Daily Beast, partially offset by earnings from our investment in Meetic through August 31, 2011.

For the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011
 
Nine Months Ended September 30,
 
2012
 
$ Change
 
% Change
 
2011
 
(Dollars in thousands)
Equity in losses of unconsolidated affiliates
$(28,208)
 
$(2,531)
 
(10)%
 
$(25,677)

Equity in losses of unconsolidated affiliates in 2012 includes a pre-tax non-cash charge of $21.6 million related to the re‑measurement of the carrying value of our investment in Newsweek Daily Beast to fair value in connection with our acquisition of a controlling interest as well as losses related to Newsweek Daily Beast through May 31, 2012. Equity in losses of unconsolidated affiliates in 2011 includes the items described above in the three month discussion.

Other (expense) income, net

For the three months ended September 30, 2012 compared to the three months ended September 30, 2011
 
Three Months Ended September 30,
 
2012
 
$ Change
 
% Change
 
2011
 
(Dollars in thousands)
Other (expense) income, net
$(944)
 
$(5,252)
 
NM
 
$4,308

Other (expense) income, net in 2012 decreased from 2011 primarily due to the inclusion of a foreign currency exchange gain of $3.3 million related to the funds that were held in escrow for the Meetic tender offer in September 2011.

For the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011
 
Nine Months Ended September 30,
 
2012
 
$ Change
 
% Change
 
2011
 
(Dollars in thousands)
Other (expense) income, net
$(1,267)
 
$(11,964)
 
NM
 
$10,697

Other (expense) income, net in 2012 decreased from 2011 primarily due to the inclusion in 2011 of $4.6 million in gains associated with certain non-income tax refunds related to Match Europe, which was sold in 2009, and the foreign currency exchange gain described above in the three month discussion.

Income tax (provision) benefit

For the three months ended September 30, 2012 compared to the three months ended September 30, 2011
 
Three Months Ended September 30,
 
2012
 
$ Change
 
% Change
 
2011
 
(Dollars in thousands)
Income tax (provision) benefit
$(27,606)
 
$(59,609)
 
NM
 
$32,003

In 2012, the Company recorded an income tax provision for continuing operations of $27.6 million, which represents an effective income tax rate of 37%. The 2012 effective rate is higher than the statutory rate of 35% due primarily to state taxes

31


and interest on reserves for tax contingencies, partially offset by foreign income taxed at lower rates. In 2011, the Company recorded an income tax benefit for continuing operations of $32.0 million despite pre-tax income of $36.0 million. The income tax benefit is due principally to the reversal of a previously established deferred tax liability of $43.6 million associated with the 2009 gain that was recognized upon the exchange of Match Europe for a 27% interest in Meetic. In connection with the acquisition of a controlling interest in Meetic in 2011, the Company concluded that it intends to indefinitely reinvest the earnings of Match's international operations related to Meetic, including the 2009 gain on the sale of Match Europe outside of the United States. This income tax benefit was partially offset by the non-deductible nature of the non-cash re-measurement charge related to Match's 27% equity method investment in Meetic that was recorded upon our acquisition of a controlling interest.

For the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011
 
Nine Months Ended September 30,
 
2012
 
$ Change
 
% Change
 
2011
 
(Dollars in thousands)
Income tax (provision) benefit
$(83,360)
 
$(89,804)
 
NM
 
$6,444

In 2012, the Company recorded an income tax provision for continuing operations of $83.4 million, which represents an effective income tax rate of 40%. The 2012 effective rate is higher than the statutory rate of 35% due primarily to an increase in reserves for and interest on reserves for tax contingencies, a valuation allowance on the deferred tax asset created by the Newsweek Daily Beast non-cash re-measurement charge related to our acquisition of a controlling interest, and state taxes, partially offset by foreign income taxed at lower rates and a net decrease in the valuation allowance on the beginning of the year deferred tax assets related to investments in unconsolidated affiliates. In 2011, the Company recorded an income tax benefit for continuing operations of $6.4 million despite pre-tax income of $127.3 million. The income tax benefit is due principally to the release of a previously established deferred tax liability as described above in the three month discussion, foreign income taxed at lower rates, and the reduction in state tax accruals resulting from income tax provision to tax return reconciliations and expirations of statutes of limitations, partially offset by interest on reserves for tax contingencies, state taxes, and the non-deductible nature of the non-cash re-measurement charge as described above in the three month discussion.

At September 30, 2012 and December 31, 2011, the Company has unrecognized tax benefits of $373.5 million and $351.6 million, respectively. Unrecognized tax benefits at September 30, 2012 increased $22.0 million from December 31, 2011 due principally to a net increase in deductible timing differences and additions for tax positions related to prior years. The Company recognizes interest and, if applicable, penalties related to unrecognized tax benefits in income tax provision. Included in income tax provision for continuing operations and discontinued operations for the three months ended September 30, 2012 is a $1.6 million expense and a $0.4 million benefit, respectively, net of related deferred taxes, for interest on unrecognized tax benefits. Included in income tax provision for continuing operations and discontinued operations for the nine months ended September 30, 2012 is a $3.3 million expense and a $3.8 million benefit, respectively, net of related deferred taxes, for interest on unrecognized tax benefits. At September 30, 2012 and December 31, 2011, the Company has accrued $112.2 million and $111.2 million, respectively, for the payment of interest. At September 30, 2012 and December 31, 2011, the Company has accrued $2.8 million and $2.5 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. The Internal Revenue Service ("IRS") has substantially completed its audit of the Company's tax returns for the years ended December 31, 2001 through 2006. The settlement of these tax years has not yet been submitted to the Joint Committee of Taxation for approval. The IRS began its audit of the Company's tax returns for the years ended December 31, 2007 through 2009 in July 2011. The statute of limitations for the years 2001 through 2009 has been extended to December 31, 2013. Various state and local jurisdictions are currently under examination, the most significant of which are California, New York and New York City for various tax years beginning with 2005. 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 issues raised in 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. The Company believes that it is reasonably possible that its unrecognized tax benefits could decrease by $68.9 million within twelve months of the current reporting date, of which approximately $13.3 million could decrease income tax provision, primarily due to settlements, expirations of statutes of limitations, and the reversal of deductible temporary differences that will primarily result in a corresponding decrease in net deferred tax assets. An estimate of other changes in unrecognized tax benefits, while potentially significant, cannot be made.

32



FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2012, the Company had $501.8 million of cash and cash equivalents, $138.9 million of marketable securities, and $95.8 million of long-term debt, including current maturities of $15.8 million. 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 money market funds and time deposits. Marketable securities primarily consist of short-to-intermediate-term debt securities issued by states of the U.S. and subdivisions thereof and investment grade corporate issuers. The Company only invests in marketable securities with active secondary or resale markets to ensure portfolio liquidity and the ability to readily convert investments into cash to fund current operations or satisfy other cash requirements as needed. From time to time, the Company may invest in marketable equity securities as part of its investment strategy. Long-term debt, including current maturities, is comprised of $15.8 million in Senior Notes due January 15, 2013 and $80.0 million in Liberty Bonds due September 1, 2035.

At September 30, 2012, $230.1 million of the $501.8 million of cash and cash equivalents and none of the $138.9 million of marketable securities were held by the Company's foreign subsidiaries. No U.S. federal or state income taxes have been provided on the indefinitely reinvested earnings of any of the Company's foreign subsidiaries that hold this cash and cash equivalents. 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. However, the Company's intent is to indefinitely reinvest these funds outside of the U.S. and, currently, the Company does not anticipate a need to repatriate them to fund our U.S. operations.

In summary, the Company's cash flows attributable to continuing operations are as follows:
 
 
Nine Months Ended
September 30,
 
 
2012
 
2011
 
 
(In thousands)
Net cash provided by operating activities
 
$323,607
 
$269,566
Net cash used in investing activities
 
(387,586)
 
(14,219)
Net cash used in financing activities
 
(138,876)
 
(308,342)

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, deferred income taxes, asset impairment charges, equity in income or losses of unconsolidated affiliates and gains or losses on the sales of investments, and the effect of changes in working capital activities. Net cash provided by operating activities attributable to continuing operations in 2012 was $323.6 million and consists of earnings from continuing operations of $125.4 million, adjustments for non-cash items of $165.6 million and cash provided by working capital activities of $32.6 million. Adjustments for non-cash items primarily consists of $65.3 million of non-cash compensation expense, $37.5 million of depreciation, $28.2 million of equity in losses of unconsolidated affiliates, which includes a non-cash charge of $21.6 million to re-measure the carrying value of our investment in Newsweek Daily Beast to fair value and $18.1 million of amortization of intangibles. The increase in cash from changes in working capital activities primarily consists of an increase in income taxes payable of $29.5 million, an increase in accounts payable and other current liabilities of $18.7 million and an increase in deferred revenue of $10.6 million, partially offset by an increase of $16.4 million in accounts receivable and an increase of $9.7 million in other current assets. 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 primarily due to an increase in accrued advertising expense and an increase in accrued revenue share expense, partially offset by a decrease in accrued employee compensation and benefits and a decrease in amounts payable to suppliers at our Shoebuy business. The increase in accrued advertising expense is primarily due to an increase in advertising and promotional expenditures at Search & Applications. The increase in accrued revenue share expense is primarily due to an increase in traffic acquisition costs at Search & Applications. The decrease in accrued employee compensation and benefits is due to the payment of the 2011 discretionary cash bonus in 2012. The increase in deferred revenue is primarily due to the growth in subscription revenue at Match, which includes an increase of $6.7 million in deferred revenue at Meetic, as well as growth at Vimeo. The increase in

33


accounts receivable is primarily due to the growth in revenue at Search & Applications earned from our paid listing supply agreement with Google; the related receivable from Google was $125.3 million and $105.7 million at September 30, 2012 and December 31, 2011, respectively. While our Match and HomeAdvisor businesses experienced growth, the accounts receivable at these businesses are principally credit card receivables and, accordingly, are not significant in relation to the revenue of these businesses. The increase in other current assets is primarily related to the increase in short-term production costs at certain of our Media businesses that are capitalized as the television program, video or film is being produced.

Net cash used in investing activities attributable to continuing operations in 2012 of $387.6 million includes cash consideration used in acquisitions and investments of $387.2 million primarily related to the acquisition of The About Group, and capital expenditures of $32.4 million primarily related to the internal development of software to support our products and services, partially offset by net maturities and sales of marketable debt securities and sales of long-term investments of $44.2 million.
    
Net cash used in financing activities attributable to continuing operations in 2012 of $138.9 million includes $434.0 million for the repurchase of 9.1 million shares of common stock at an average price of $46.37 per share and $43.7 million related to the payment of cash dividends to IAC shareholders, partially offset by proceeds related to the issuance of common stock, net of withholding taxes of $320.1 million and excess tax benefits from stock-based awards of $23.5 million. Included in the proceeds related to the issuance of common stock are proceeds of $284.1 million from the exercise of warrants to acquire 11.7 million shares of IAC common stock, some of which were exercised on a cashless or net basis. The weighted average strike price of the warrants was $28.40 per share.

Net cash provided by operating activities attributable to continuing operations in 2011 was $269.6 million and consists of earnings from continuing operations of $133.8 million, adjustments for non-cash items of $105.9 million and cash provided by working capital activities of $29.9 million. Adjustments for non-cash items primarily consists of $66.1 million of non-cash compensation expense, $43.4 million of depreciation, $25.7 million of equity in losses of unconsolidated affiliates, which includes a non-cash charge of $11.7 million to re-measure the carrying value of our investment in Meetic to fair value, partially offset by $44.5 million of deferred income taxes. The deferred income tax benefit primarily relates to the reversal of a previously established deferred tax liability in connection with the acquisition of a controlling interest in Meetic. The increase in cash from changes in working capital activities primarily consists of an increase of $26.7 million in deferred revenue, an increase of $15.5 million in accounts payable and other current liabilities and a decrease of $9.0 million in other current assets, partially offset by an increase in accounts receivable of $27.5 million. The increase in deferred revenue is primarily due to the growth in subscription revenue at Match, which includes an increase of $9.2 million in deferred revenue at Meetic, as well as growth at Electus and Vimeo. The increase in accounts payable and other current liabilities is primarily due to an increase in accrued revenue share expense and an increase in accrued advertising expense. The increase in accrued revenue share expense is primarily due to an increase in traffic acquisition costs at Search & Applications. The increase in accrued advertising expense is primarily due to an increase in advertising and promotional expenditures at Search & Applications. The decrease in other current assets is primarily due to receipt of non-income tax refunds related to Match Europe, which were recorded as a receivable within other assets. The increase in accounts receivable is primarily due to the growth in revenue at Search & Applications earned from our paid listing supply agreement with Google; the related receivable from Google was $85.7 million at September 30, 2011 and $70.5 million at December 31, 2010.

Net cash used in investing activities attributable to continuing operations in 2011 of $14.2 million includes cash consideration used in acquisitions and investments of $362.9 million primarily related to the acquisitions of Meetic and OkCupid and capital expenditures of $27.3 million primarily related to the internal development of software to support our products and services, partially offset by net maturities and sales of marketable debt securities and sales of long-term investments of $387.5 million.

Net cash used in financing activities attributable to continuing operations in 2011 of $308.3 million includes $389.6 million for the repurchase of 10.8 million shares of common stock at an average price of $37.32 per share, partially offset by proceeds related to the issuance of common stock, net of withholding taxes, of $62.0 million and excess tax benefits from stock-based awards of $22.9 million.

The Company's principal sources of liquidity are its cash and cash equivalents and marketable securities as well as its cash

34


flows generated from operations. The Company currently does not have in place any formal arrangements that would provide it with external sources of financing such as a revolving credit or other similar 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 2012 capital expenditures will be higher than 2011. At September 30, 2012, IAC had 9.5 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 October 23, 2012, IAC declared a quarterly cash dividend to $0.24 per share of common and Class B common stock outstanding; the dividend is payable on December 1, 2012 to stockholders of record on November 15, 2012. 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 in 2012 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.


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CONTRACTUAL OBLIGATIONS
 
Payments Due by Period
Contractual Obligations(a)
Total
 
Less Than
1 Year
 
1-3 Years
 
3-5 Years
 
More Than
5 Years
 
(In thousands)
Long-term debt, including current maturities(b)
$
188,399

 
$
20,399

 
$
8,000

 
$
8,000

 
$
152,000

Purchase obligations(c)
43,479

 
13,395

 
29,948

 
136

 
—

Operating leases
305,151

 
21,599

 
41,416

 
34,746

 
207,390

Total contractual cash obligations
$
537,029

 
$
55,393

 
$
79,364

 
$
42,882

 
$
359,390

_______________________________________________________________________________
(a)
The Company has excluded $328.9 million in unrecognized tax benefits and related interest from the table above as we are unable to make a reasonably reliable estimate of the period in which these liabilities might be paid. For additional information on income taxes, see Note 2 to the consolidated financial statements.

(b)
Represents contractual amounts due, including interest.

(c)
The purchase obligations primarily include advertising commitments, which commitments are reducible or terminable such that these commitments can never exceed associated revenue by a meaningful amount. Purchase obligations also include minimum payments due under telecommunication contracts related to data transmission lines.


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IAC'S PRINCIPLES OF FINANCIAL REPORTING

IAC reports Operating Income Before Amortization as a supplemental measure to 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 GAAP, but should not be considered a substitute for or superior to GAAP results. IAC endeavors to compensate for the limitations of the non-GAAP measure presented by providing the comparable GAAP measure with equal or greater prominence, financial statements prepared in accordance with GAAP, 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 GAAP and non-GAAP measure, which we discuss below.

Definition of IAC's Non-GAAP Measure
        Operating Income Before Amortization is defined as operating income excluding, if applicable: (1) non-cash compensation expense, (2) amortization and impairment of intangibles, (3) goodwill impairment, and (4) one-time items. We believe this measure is useful to investors because it represents the consolidated operating results from IAC's segments, taking into account depreciation, which we believe is an ongoing cost of doing business, but excluding the effects of any other non-cash expenses. Operating Income Before Amortization has certain limitations in that it does not take into account the impact to IAC's statement of operations of certain expenses, including non-cash compensation and acquisition-related accounting.

One-Time Items
Operating Income Before Amortization is presented before one-time items, if applicable. These items are truly one-time in nature and non-recurring, infrequent or unusual, and have not occurred in the past two years or are not expected to recur in the next two years, in accordance with the Securities and Exchange Commission rules. GAAP results include one-time items. For the periods presented in this report, there are no one-time items.

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 intangibles (including impairment of intangibles, if applicable) and goodwill impairment (if applicable) 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 and 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.

RECONCILIATION OF OPERATING INCOME BEFORE AMORTIZATION

For a reconciliation of Operating Income Before Amortization to operating income (loss) by reportable segment for the three and nine months ended September 30, 2012 and 2011, see Note 9 to the consolidated financial statements.

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Item 3.    Quantitative and Qualitative Disclosures about Market Risk

At September 30, 2012, 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, 2011.

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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, the Chief Executive Officer 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, the Chief Executive Officer 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, the Chief Executive Officer 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 1.    Legal Proceedings

Litigation Arising Out of the Company's Sale of PRC, LLC
    
In 2006, the Company sold its call-center business, PRC, after conducting an auction process managed by an investment bank. In August 2008, various affiliates of the private-equity firm that won the auction and bought PRC (collectively, "Diamond Castle") sued the Company for breach of contract in New York state court. See Diamond Castle Partners IV PRC, L.P. et al. v. IAC/InterActiveCorp, No. 602427/08 (Supreme Court, New York County). The complaint alleges that the Company breached certain representations, warranties, and covenants in the purchase agreement through materially false, misleading, and incomplete statements to Diamond Castle concerning a PRC services contract that allegedly became unprofitable and later caused PRC to declare bankruptcy. The complaint (as amended in June 2010) seeks damages of up to $138.5 million, Diamond Castle's total investment in PRC. Discovery commenced in 2010.
    
In January 2011, the Company, alleging that during the auction process Diamond Castle had secretly obtained extensive confidential information from PRC's then-CEO, filed counterclaims and third-party claims against Diamond Castle and several of its principals for fraud, aiding and abetting breach of fiduciary duty, and breach of the non-disclosure agreement governing the auction. In January 2012, IAC amended its pleading to add claims for fraud and breach of fiduciary duty against PRC's former CEO.
    
On September 18, 2012, the Company, Diamond Castle and PRC’s former CEO entered into a settlement agreement pursuant to which they released all claims against each other without the exchange of any money or other form of compensation. On September 19, 2012, in accordance with the settlement, the parties filed a stipulation dismissing the action with prejudice.

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, 2011. Other unknown or unpredictable factors that could also

40


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 report. IAC does not undertake to update these forward-looking statements.

Risk Factors

In addition to the other information set forth in this 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, 2011, 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 following table sets forth purchases by the Company of its common stock during the quarter ended September 30, 2012:
Period
(a)
Total
Number of Shares
Purchased
 
(b)
Average
Price Paid
Per Share(1)
 
(c)
Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs(2)
 
(d)
Maximum
Number of
Shares that
May Yet Be
Purchased
Under Publicly
Announced
Plans or
Programs(3)
July 2012
1,295,000

 
$
47.12

 
1,295,000

 
9,497,676

August 2012
—

 
$
—

 
—

 
9,497,676

September 2012
—

 
$
—

 
—

 
9,497,676

Total
1,295,000

 
$
47.12

 
1,295,000

 
9,497,676

_______________________________________________________________________________
(1)
Reflects the average price paid per share of IAC common stock.
(2)
Reflects repurchases made pursuant to repurchase authorizations previously announced in July 2011 and May 2012.
(3)
Represents the total number of shares of common stock that remained available for repurchase as of September 30, 2012 pursuant to the May 2012 repurchase authorization. IAC may purchase shares pursuant to the May 2012 repurchase authorization 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.
Item 6.    Exhibits

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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.
31.1

Certification of the Chief Executive 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)
 
31.2

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)
 
31.3

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 Chief Executive Officer 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 Chairman and Senior Executive pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act.(2)
 
32.3

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.
(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:
November 8, 2012
 
 
 
 
 
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
 
November 8, 2012
Jeffrey W. Kip
 
 
 

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