Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2013

OR

 

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

For the transition period from              to             

Commission File Number: 000-51447

 

 

EXPEDIA, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   20-2705720

(State or other jurisdiction of

incorporation or organization)

  (I.R.S. Employer Identification No.)

333 108th Avenue NE

Bellevue, WA 98004

(Address of principal executive office) (Zip Code)

(425) 679-7200

(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  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   þ    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   þ    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

The number of shares outstanding of each of the registrant’s classes of common stock as of July 12, 2013 was:

 

Common stock, $0.0001 par value per share

     123,193,374 shares   

Class B common stock, $0.0001 par value per share

     12,799,999 shares   

 

 

 


Table of Contents

Expedia, Inc.

Form 10-Q

For the Quarter Ended June 30, 2013

Contents

 

Part I

   Financial Information   

Item 1

   Consolidated Financial Statements   
  

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2013 and 2012 (unaudited)

     2   
  

Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2013 and 2012 (unaudited)

     3   
  

Consolidated Balance Sheets as of June 30, 2013 (unaudited), and December 31, 2012

     4   
  

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012 (unaudited)

     5   
  

Notes to Consolidated Financial Statements (unaudited)

     6   

Item 2

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      24   

Item 3

   Quantitative and Qualitative Disclosures about Market Risk      38   

Item 4

   Controls and Procedures      39   

Part II

   Other Information   

Item 1

   Legal Proceedings      40   

Item 1A

   Risk Factors      43   

Item 2

   Unregistered Sales of Equity Securities and Use of Proceeds      44   

Item 6

   Exhibits      45   

Signature

        46   


Table of Contents

Part I. Item 1. Consolidated Financial Statements

EXPEDIA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except for per share data)

(Unaudited)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2013     2012     2013     2012  

Revenue

   $ 1,205,017      $ 1,039,980      $ 2,217,384      $ 1,856,468   

Costs and expenses:

        

Cost of revenue (1)

     262,607        229,741        513,188        429,839   

Selling and marketing (1) (2)

     590,468        444,573        1,086,623        821,645   

Technology and content (1)

     140,682        116,026        278,965        224,937   

General and administrative (1)

     91,891        83,218        184,267        161,796   

Amortization of intangible assets

     18,837        8,631        31,407        12,053   

Legal reserves, occupancy tax and other

     6,246        3,350        67,804        3,074   

Acquisition-related and other(1)

     —          —          66,472        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     94,286        154,441        (11,342     203,124   

Other income (expense):

        

Interest income

     7,278        7,072        13,195        12,815   

Interest expense

     (21,629     (21,989     (43,377     (43,381

Other, net

     7,488        (4,660     9,676        (10,867
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (6,863     (19,577     (20,506     (41,433
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     87,423        134,864        (31,848     161,691   

Provision for income taxes

     (24,408     (28,755     (12,505     (33,995
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     63,015        106,109        (44,353     127,696   

Discontinued operations, net of taxes

     —          —          —          (23,889
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     63,015        106,109        (44,353     103,807   

Net (income) loss attributable to noncontrolling interests

     8,485        (868     11,627        (1,847
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Expedia, Inc.

   $ 71,500      $ 105,241      $ (32,726   $ 101,960   
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts attributable to Expedia, Inc.:

        

Income (loss) from continuing operations

   $ 71,500      $ 105,241      $ (32,726   $ 125,849   

Discontinued operations, net of taxes

     —          —          —          (23,889
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 71,500      $ 105,241      $ (32,726   $ 101,960   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share from continuing operations attributable to Expedia, Inc. available to common stockholders:

        

Basic

   $ 0.52      $ 0.79      $ (0.24   $ 0.95   

Diluted

     0.51        0.76        (0.24     0.91   

Earnings (loss) per share attributable to Expedia, Inc. available to common stockholders:

        

Basic

   $ 0.52      $ 0.79      $ (0.24   $ 0.77   

Diluted

     0.51        0.76        (0.24     0.73   

Shares used in computing earnings per share:

        

Basic

     136,351        132,556        135,998        132,877   

Diluted

     141,112        138,192        135,998        138,747   

Dividends declared per common share

   $ 0.13      $ 0.09      $ 0.26      $ 0.18   

 

                        

(1)     Includes stock-based compensation as follows:

        

Cost of revenue

   $ 764      $ 803      $ 1,825      $ 1,722   

Selling and marketing

     3,649        3,248        7,914        7,693   

Technology and content

     4,692        3,874        10,087        8,158   

General and administrative

     6,981        8,696        14,695        15,999   

Acquisition-related and other

     —          —          56,643        —     

(2)    Includes related party amounts as follows:

   $ 54,053      $ 55,720      $ 115,124      $ 107,081   

See accompanying notes.

 

2


Table of Contents

EXPEDIA, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2013     2012     2013     2012  

Net income (loss)

   $ 63,015      $ 106,109      $ (44,353   $ 103,807   

Other comprehensive income (loss), net of tax

        

Currency translation adjustments

     4,970        (24,326     (13,031     (11,375

Unrealized gains (losses) on available for sale securities, net of taxes (1)

     (1,282     (313     (1,573     1,089   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     3,688        (24,639     (14,604     (10,286
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     66,703        81,470        (58,957     93,521   

Less: Comprehensive (income) loss attributable to noncontrolling interests

     6,965        18        9,595        (972
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Expedia, Inc.

   $ 73,668      $ 81,488      $ (49,362   $ 92,549   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Net gains (losses) recognized and reclassified during the three and six months ended June 30, 2013 and 2012 were immaterial.

See accompanying notes.

 

3


Table of Contents

EXPEDIA, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

 

     June 30,
2013
    December 31,
2012
 
     (Unaudited)        
ASSETS   

Current assets:

    

Cash and cash equivalents

   $ 1,311,817      $ 1,293,161   

Restricted cash and cash equivalents

     30,236        21,475   

Short-term investments

     958,417        644,982   

Accounts receivable, net of allowance of $12,570 and $10,771

     684,875        461,531   

Prepaid expenses and other current assets

     278,365        193,353   
  

 

 

   

 

 

 

Total current assets

     3,263,710        2,614,502   

Property and equipment, net

     440,727        409,373   

Long-term investments and other assets

     251,063        224,231   

Intangible assets, net

     1,145,400        821,419   

Goodwill

     3,643,196        3,015,670   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 8,744,096      $ 7,085,195   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY   

Current liabilities:

    

Accounts payable, merchant

   $ 1,252,362      $ 954,071   

Accounts payable, other

     414,508        283,029   

Deferred merchant bookings

     2,052,840        1,128,231   

Deferred revenue

     40,487        26,475   

Accrued expenses and other current liabilities

     450,715        590,505   
  

 

 

   

 

 

 

Total current liabilities

     4,210,912        2,982,311   

Long-term debt

     1,249,378        1,249,345   

Deferred income taxes, net

     460,853        323,766   

Other long-term liabilities

     127,025        126,912   

Commitments and contingencies

    

Redeemable noncontrolling interests

     357,715        13,473   

Stockholders’ equity:

    

Common stock $.0001 par value

     19        19   

Authorized shares: 1,600,000

    

Shares issued: 191,536 and 189,255

    

Shares outstanding: 123,137 and 122,530

    

Class B common stock $.0001 par value

     1        1   

Authorized shares: 400,000

    

Shares issued and outstanding: 12,800 and 12,800

    

Additional paid-in capital

     5,796,205        5,675,075   

Treasury stock—Common stock, at cost

     (3,077,013     (2,952,790

Shares: 68,399 and 66,725

    

Retained earnings (deficit)

     (474,794     (442,068

Accumulated other comprehensive income (loss)

     (16,614     22   
  

 

 

   

 

 

 

Total Expedia, Inc. stockholders’ equity

     2,227,804        2,280,259   

Noncontrolling interest

     110,409        109,129   
  

 

 

   

 

 

 

Total stockholders’ equity

     2,338,213        2,389,388   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 8,744,096      $ 7,085,195   
  

 

 

   

 

 

 

See accompanying notes.

 

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Table of Contents

EXPEDIA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Six months ended June 30,  
     2013     2012  

Operating activities:

    

Net income (loss)

   $ (44,353   $ 103,807   

Less: Discontinued operations, net of tax

     —          (23,889
  

 

 

   

 

 

 

Net income (loss) from continuing operations

     (44,353     127,696   

Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating activities:

    

Depreciation of property and equipment, including internal-use software and website development

     100,005        72,980   

Amortization of stock-based compensation

     91,164        33,572   

Amortization of intangible assets

     31,407        12,053   

Deferred income taxes

     25,012        8,556   

Foreign exchange (gain) loss on cash, cash equivalents and short-term investments, net

     84,299        14,522   

Realized (gain) loss on foreign currency forwards

     (24,189     (10,460

Other

     10,871        14,772   

Changes in operating assets and liabilities, net of effects from acquisitions:

    

Accounts receivable

     (207,418     (142,121

Prepaid expenses and other current assets

     (56,372     (13,494

Accounts payable, merchant

     301,568        193,080   

Accounts payable, other, accrued expenses and other current liabilities

     (75,021     123,754   

Deferred merchant bookings

     948,749        958,066   

Deferred revenue

     13,886        7,619   
  

 

 

   

 

 

 

Net cash provided by operating activities from continuing operations

     1,199,608        1,400,595   
  

 

 

   

 

 

 

Investing activities:

    

Capital expenditures, including internal-use software and website development

     (157,840     (117,217

Purchases of investments

     (1,129,789     (1,007,745

Sales and maturities of investments

     772,817        674,315   

Acquisitions, net of cash acquired

     (540,489     (199,267

Net settlement of foreign currency forwards

     24,189        10,460   

Other, net

     (43     (1,999
  

 

 

   

 

 

 

Net cash used in investing activities from continuing operations

     (1,031,155     (641,453
  

 

 

   

 

 

 

Financing activities:

    

Purchases of treasury stock

     (134,238     (297,704

Proceeds from issuance of treasury stock

     25,273        —     

Payment of dividends to stockholders

     (35,621     (24,409

Proceeds from exercise of equity awards

     34,613        224,770   

Excess tax benefit on equity awards

     28,827        16,920   

Other, net

     (8,886     (5,466
  

 

 

   

 

 

 

Net cash used in financing activities from continuing operations

     (90,032     (85,889
  

 

 

   

 

 

 

Net cash provided by continuing operations

     78,421        673,253   

Net cash used in discontinued operations

     —          (7,607

Effect of exchange rate changes on cash and cash equivalents

     (59,765     (11,434
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     18,656        654,212   

Cash and cash equivalents at beginning of period

     1,293,161        689,134   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1,311,817      $ 1,343,346   
  

 

 

   

 

 

 

Supplemental cash flow information

    

Cash paid for interest from continuing operations

   $ 41,893      $ 43,441   

Income tax payments (refunds), net from continuing operations

     41,797        (3,597

See accompanying notes.

 

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Table of Contents

Notes to Consolidated Financial Statements

June 30, 2013

(Unaudited)

Note 1 – Basis of Presentation

Description of Business

Expedia, Inc. and its subsidiaries provide travel products and services to leisure and corporate travelers in the United States and abroad as well as various media and advertising offerings to travel and non-travel advertisers. These travel products and services are offered through a diversified portfolio of brands including: Expedia.com®, Hotels.com®, Hotwire.com™, Expedia® Affiliate Network, Classic Vacations, Expedia Local Expert, Egencia™, Expedia® CruiseShipCenters®, eLong™, Inc. (“eLong”), Venere Net SpA (“Venere”) and trivago GmbH (“trivago”). In addition, many of these brands have related international points of sale. We refer to Expedia, Inc. and its subsidiaries collectively as “Expedia,” the “Company,” “us,” “we” and “our” in these consolidated financial statements.

TripAdvisor Spin-Off

On December 20, 2011, following the close of trading on the Nasdaq Stock Market, we completed the spin-off of TripAdvisor, Inc. (“TripAdvisor”), which consisted of the domestic and international operations previously associated with our TripAdvisor Media Group, to Expedia stockholders. We refer to this transaction as the “spin-off.” As a result of the spin-off, we were required to redeem the $400 million aggregate principal amount of 8.5% senior notes due 2016 (the “8.5% Notes”), which were legally extinguished in the first quarter of 2012. Accordingly, the results of operations, financial condition and cash flows of TripAdvisor as related to the 8.5% Notes extinguishment have been presented as discontinued operations for all periods presented.

Basis of Presentation

These accompanying financial statements present our results of operations, financial position and cash flows on a consolidated basis. The unaudited consolidated financial statements include Expedia, Inc., our wholly-owned subsidiaries, and entities we control, or in which we have a variable interest and are the primary beneficiary of expected cash profits or losses. We have eliminated significant intercompany transactions and accounts.

We have prepared the accompanying unaudited consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting. We have included all adjustments necessary for a fair presentation of the results of the interim period. These adjustments consist of normal recurring items. Our interim unaudited consolidated financial statements are not necessarily indicative of results that may be expected for any other interim period or for the full year. These interim unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2012, previously filed with the Securities and Exchange Commission.

Accounting Estimates

We use estimates and assumptions in the preparation of our interim unaudited consolidated financial statements in accordance with GAAP. Our estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of our interim unaudited consolidated financial statements. These estimates and assumptions also affect the reported amount of net income or loss during any period. Our actual financial results could differ significantly from these estimates. The significant estimates underlying our interim unaudited consolidated financial statements include revenue recognition; recoverability of current and long-lived assets, intangible assets and goodwill; income and transactional taxes, such as potential settlements related to occupancy and excise taxes; loss contingencies; loyalty program liabilities; stock-based compensation and accounting for derivative instruments.

 

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Table of Contents

Notes to Consolidated Financial Statements – (Continued)

 

Reclassifications

We have reclassified certain amounts related to our prior period results to conform to our current period presentation.

Seasonality

We generally experience seasonal fluctuations in the demand for our travel products and services. For example, traditional leisure travel bookings are generally the highest in the first three quarters as travelers plan and book their spring, summer and holiday travel. The number of bookings typically decreases in the fourth quarter. Because revenue in our merchant business is generally recognized when the travel takes place rather than when it is booked, revenue typically lags bookings by several weeks or longer. The seasonal revenue impact is exacerbated with respect to income by the more stable nature of our fixed costs. As a result, revenue and income are typically the lowest in the first quarter and highest in the third quarter.

Note 2 – Acquisitions and Dispositions

Business Acquisitions. On March 8, 2013, we completed the purchase of a 63% equity position (61.6% on a fully diluted basis) in trivago GmbH, a leading hotel metasearch company based in Germany. trivago was acquired due to the quality and strength of its product and brand and our belief that the company will continue to scale as it expands globally. In conjunction with the acquisition, we paid €434 million in cash, or approximately $564 million based on March 8, 2013 exchange rates, of which $554 million was paid to the shareholders of trivago and $10 million was used to settle a portion of an employee compensation plan. In addition, we agreed to issue 875,200 shares of Expedia, Inc. common stock to certain employee stockholders in five equal increments on or about each of the first through fifth anniversaries of the acquisition. The number of shares of Expedia common stock was calculated based on the aggregate value of €43 million using a thirty-day trailing average of closing trading prices and exchange rates prior to acquisition. Also in conjunction with the acquisition, we replaced certain employee stock-based awards of the acquiree, which related to pre-combination service, for an acquisition date fair value of $15 million.

As a result of the acquisition, we expensed $66 million to acquisition-related and other on the consolidated statements of operations in the first half of 2013, which included approximately $57 million in stock-based compensation related to the issuance of the 875,200 shares of common stock as the issuance was determined separate from the business combination and was not contingent upon any future service or other certain event except the passage of time as well as approximately $10 million for the amount paid to settle a portion of the employee compensation plan of trivago, which was considered separate from the business combination. Acquisition-related costs were expensed as incurred and were not significant.

The aggregate purchase price consideration was $570 million, which included the cash paid to shareholders of trivago of $554 million as well as $15 million for replaced employee stock-based awards of the acquiree. The purchase price was allocated to the fair value of assets acquired and liabilities assumed as follows, in thousands:

 

Goodwill

   $ 635,565   

Intangible assets with indefinite lives

     220,416   

Intangible assets with definite lives(1)

     136,281   

Net assets(2)

     16,935   

Deferred tax liabilities

     (111,379

Redeemable noncontrolling interest

     (343,984
  

 

 

 

Total

   $ 553,834   
  

 

 

 

 

(1) Acquired definite-lived intangible assets primarily consist of technology, partner relationship and non-compete agreement assets and have estimated useful lives of between 3 and 7 years with a weighted average life of 3.7 years.
(2) Includes cash acquired of $13 million.

 

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Table of Contents

Notes to Consolidated Financial Statements – (Continued)

 

The value of the replaced employee stock-based awards of the acquiree was included in the purchase price allocation with a corresponding offset to redeemable noncontrolling interest, because the replacement awards were issued in subsidiary stock.

The goodwill of $636 million is primarily attributed to assembled workforce, operating synergies and potential expansion into other global markets. The goodwill has been allocated to the Leisure segment and is not expected to be deductible for tax purposes.

The fair value of the 37% noncontrolling interest was estimated to be $344 million at the time of acquisition based on the fair value per share, excluding the control premium which was paid to certain shareholders in order to obtain control. In addition, the purchase agreement contains certain put/call rights whereby we may acquire and the minority shareholders of trivago may sell to us 50% and 100% of the minority shares of the company at fair value during the first quarter of 2016 and 2018, respectively. As the noncontrolling interest is redeemable at the option of the minority holders, we classified the balance as redeemable noncontrolling interest with future changes in the fair value above the initial basis recorded as charges or credits to retained earnings (or additional paid-in capital in absence of retained earnings). The put/call arrangement includes certain rollover provisions that, if triggered, would cause the minority shares to be treated as though they become mandatorily redeemable, and to be reclassified as a liability at the time such trigger becomes certain to occur. For further information on redeemable noncontrolling interest, see Note 5, Redeemable Noncontrolling Interest.

Business combination accounting is preliminary and subject to revision while we accumulate all relevant information regarding the fair values of the net assets acquired, and any change to the fair value of net assets acquired would be expected to lead to a corresponding change to the amount of goodwill recorded on a retroactive basis.

Trivago’s results of operations have been included in our consolidated results from the transaction closing date forward. Pro forma results of operations have not been presented as such pro forma financial information would not be materially different from historical results.

Discontinued Operations. On December 20, 2011, we completed the spin-off of TripAdvisor, Inc. and, as a result of the spin-off, recorded to discontinued operations a loss in the first quarter of 2012 to extinguish our 8.5% Notes. See below for a full description of the extinguishment. Financial data for the discontinued operations for the six months ended June 30, 2012 was as follows, in thousands:

 

     Six months
ended
June 30,
 
     2012  

Revenue

   $ —     

Loss before income taxes

     (37,568

Provision for income taxes

     13,679   
  

 

 

 

Net loss attributable to discontinued operations

   $ (23,889
  

 

 

 

Loss per share:

  

Basic

   $ (0.18

Diluted

     (0.17

Shares used in computing loss per share:

  

Basic

     132,877   

Diluted

     138,747   

 

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Table of Contents

Notes to Consolidated Financial Statements – (Continued)

 

The indenture governing our $400 million aggregate principal amount of 8.5% Notes contained certain covenants that could have restricted implementation of the spin-off. On December 20, 2011, prior to consummation of the spin-off, we gave “Notice of Redemption” to the bondholders, the effect of which was the bonds became due and payable on the redemption date at the redemption price. The redemption date was defined as 30 days after the Notice of Redemption was given. The 8.5% Notes were fully redeemed on January 19, 2012, the redemption date, for approximately $450 million. In connection with the redemption, we incurred a pre-tax loss from early extinguishment of debt of approximately $38 million (or $24 million net of tax), which included an early redemption premium of $33 million and the write-off of $5 million of unamortized debt issuance and discount costs. This loss was recorded within discontinued operations in the first quarter of 2012, as that was the period in which the bonds were legally extinguished.

Note 3 – Fair Value Measurements

Financial assets measured at fair value on a recurring basis as of June 30, 2013 are classified using the fair value hierarchy in the table below:

 

     Total      Level 1      Level 2  
     (In thousands)  

Assets

        

Cash equivalents:

        

Money market funds

   $ 316,623       $  316,623       $ —     

Time deposits

     153,657         —           153,657   

Restricted cash:

        

Time deposits

     10,004         —           10,004   

Derivatives:

        

Foreign currency forward contracts

     22,182         —           22,182   

Investments:

        

Time deposits

     859,035         —           859,035   

Corporate debt securities

     230,913         —           230,913   
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 1,592,414       $ 316,623       $ 1,275,791   
  

 

 

    

 

 

    

 

 

 

Financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2012 are classified using the fair value hierarchy in the table below:

 

     Total      Level 1      Level 2  
     (In thousands)  

Assets

        

Cash equivalents:

        

Money market funds

   $ 677,523       $  677,523       $ —     

Time deposits

     89,084         —           89,084   

Restricted cash:

        

Time deposits

     9,855         —           9,855   

Investments:

        

Time deposits

     525,533         —           525,533   

Corporate debt securities

     245,477         —           245,477   
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 1,547,472       $ 677,523       $ 869,949   
  

 

 

    

 

 

    

 

 

 

Liabilities

        

Derivatives:

        

Foreign currency forward contracts

   $ 3,290       $ —         $ 3,290   
  

 

 

    

 

 

    

 

 

 

We classify our cash equivalents and investments within Level 1 and Level 2 as we value our cash equivalents and investments using quoted market prices or alternative pricing sources and models utilizing market observable inputs. Valuation of the foreign currency forward contracts is based on foreign currency exchange rates in active markets, a Level 2 input.

 

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Notes to Consolidated Financial Statements – (Continued)

 

As of June 30, 2013 and December 31, 2012, our cash and cash equivalents consisted primarily of prime institutional money market funds with maturities of 90 days or less, time deposits as well as bank account balances.

We invest in investment grade corporate debt securities all of which are classified as available for sale. As of June 30, 2013, we had $99 million of short-term and $132 million of long-term available for sale investments and the amortized cost basis of the investments approximated their fair value with gross unrealized gains of $1 million and gross unrealized losses of $2 million. As of December 31, 2012, we had $119 million of short-term and $126 million of long-term available for sale investments and the amortized cost basis of these investments approximated their fair value with gross unrealized gains of $2 million and gross unrealized losses of less than $1 million.

We also hold time deposit investments with financial institutions. Time deposits with original maturities of less than 90 days are classified as cash equivalents and those with remaining maturities of less than one year are classified as short-term investments. Additionally, we have time deposits classified as restricted cash to fulfill the requirement of an aviation authority of a certain foreign country to protect against the potential non-delivery of travel services in that country. Of the total time deposit investments, $274 million as of both June 30, 2013 and December 31, 2012 related to balances held by our majority-owned subsidiaries.

Derivative instruments are carried at fair value on our consolidated balance sheets. We use foreign currency forward contracts to economically hedge certain merchant revenue exposures and in lieu of holding certain foreign currency cash for the purpose of economically hedging our foreign currency-denominated operating liabilities. Our goal in managing our foreign exchange risk is to reduce, to the extent practicable, our potential exposure to the changes that exchange rates might have on our earnings, cash flows and financial position. Our foreign currency forward contracts are typically short-term and, as they do not qualify for hedge accounting treatment, we classify the changes in their fair value in other, net. As of June 30, 2013, we were party to outstanding forward contracts hedging our liability and revenue exposures with a total net notional value of $877 million. We had a net forward asset of $22 million as of June 30, 2013 recorded in prepaid expenses and other current assets and a net forward liability of $3 million as of December 31, 2012 recorded in accrued expenses and other current liabilities. We recorded $38 million and $2 million in net gains from foreign currency forward contracts during the three months ended June 30, 2013 and 2012, and $51 million and $4 million in net gains for the six months ended June 30, 2013 and 2012.

Note 4 – Debt

The following table sets forth our outstanding debt:

 

     June 30,
2013
     December 31,
2012
 
     (In thousands)  

7.456% senior notes due 2018

   $ 500,000       $ 500,000   

5.95% senior notes due 2020, net of discount

     749,378         749,345   
  

 

 

    

 

 

 

Long-term debt

   $ 1,249,378       $ 1,249,345   
  

 

 

    

 

 

 

Long-term Debt

Our $500 million in registered senior unsecured notes outstanding at June 30, 2013 are due in August 2018 and bear interest at 7.456% (the “7.456% Notes”). Interest is payable semi-annually in February and August of each year. The 7.456% Notes were repayable in whole or in part on August 15, 2013, at the option of the holders of such 7.456% Notes, at 100% of the principal amount plus accrued interest, if such holders elected to exercise their option for repayment during a tendering period of June 1, 2013 to June 30, 2013. No investors elected to exercise their option during the required tendering period. Separately from the holder option, at any time Expedia may redeem the 7.456% Notes at a redemption price of 100% of the principal plus accrued interest, plus a “make-whole” premium, in whole or in part.

 

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Notes to Consolidated Financial Statements – (Continued)

 

Our $750 million in registered senior unsecured notes outstanding at June 30, 2013 are due in August 2020 and bear interest at 5.95% (the “5.95% Notes”). The 5.95% Notes were issued at 99.893% of par resulting in a discount, which is being amortized over their life. Interest is payable semi-annually in February and August of each year. We may redeem the 5.95% Notes at a redemption price of 100% of the principal plus accrued interest, plus a “make-whole” premium, in whole or in part.

The 7.456% and 5.95% Notes (collectively the “Notes”) are senior unsecured obligations guaranteed by certain domestic Expedia subsidiaries and rank equally in right of payment with all of our existing and future unsecured and unsubordinated obligations. For further information, see Note 12 — Guarantor and Non-Guarantor Supplemental Financial Information. In addition, the Notes include covenants that limit our ability to (i) create certain liens, (ii) enter into sale/leaseback transactions and (iii) merge or consolidate with or into another entity. Accrued interest related to the Notes was $31 million as of both June 30, 2013 and December 31, 2012.

The approximate fair value of 7.456% Notes was approximately $583 million and $598 million as of June 30, 2013 and December 31, 2012, and the approximate fair value of 5.95% Notes was $798 million and $832 million as of June 30, 2013 and December 31, 2012. These fair values were based on quoted market prices in less active markets (Level 2 inputs).

Credit Facility

Expedia, Inc. maintains a $1 billion unsecured revolving credit facility with a group of lenders, which is unconditionally guaranteed by certain domestic Expedia subsidiaries that are the same as under the Notes and expires in November 2017. As of June 30, 2013 and December 31, 2012, we had no revolving credit facility borrowings outstanding. The facility bears interest based on the Company’s credit ratings, with drawn amounts bearing interest at LIBOR plus 150 basis points and the commitment fee on undrawn amounts at 20 basis points as of June 30, 2013. The facility contains covenants including maximum leverage and minimum interest coverage ratios.

The amount of stand-by letters of credit (“LOC”) issued under the facility reduces the credit amount available. As of June 30, 2013 and December 31, 2012, there was $18 million and $25 million of outstanding stand-by LOCs issued under the facility.

Note 5 – Redeemable Noncontrolling Interests

We have noncontrolling interests in majority owned entities, which are carried at fair market value as the noncontrolling interests contain certain rights, whereby we may acquire and the minority shareholders may sell to us the additional shares of the companies. A reconciliation of redeemable noncontrolling interest for the six months ended June 30, 2013 is as follows:

 

     Six months ended
June  30,

2013
 
     (in thousands)  

Balance, beginning of the period

   $ 13,473   

Acquisition of redeemable noncontrolling interest

     343,984   

Net loss attributable to noncontrolling interests

     (7,687

Fair value adjustments

     6,923   

Currency translation adjustments and other

     1,022   
  

 

 

 

Balance, end of period

   $ 357,715   
  

 

 

 

 

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Table of Contents

Notes to Consolidated Financial Statements – (Continued)

 

Note 6 – Stockholders’ Equity

Dividends on our Common Stock

The Executive Committee, acting on behalf of the Board of Directors, declared the following dividends during the periods presented:

 

Declaration Date

   Dividend
Per Share
     Record Date      Total Amount
(in thousands)
     Payment Date  

Six months ended June 30, 2013:

           

February 5, 2013

   $ 0.13         March 11, 2013       $ 17,983         March 28, 2013   

April 24, 2013

     0.13         May 30, 2013         17,638         June 19, 2013   

Six months ended June 30, 2012:

           

February 9, 2012

   $ 0.09         March 12, 2012       $ 12,204         March 30, 2012   

April 25, 2012

     0.09         May 30, 2012         12,205         June 19, 2012   

In addition, on July 24, 2013, the Executive Committee, acting on behalf of the Board of Directors, declared a quarterly cash dividend of $0.15 per share of outstanding common stock payable on September 18, 2013 to stockholders of record as of the close of business on August 28, 2013. Future declarations of dividends are subject to final determination by our Board of Directors.

Share Repurchases

In April 2012, the Executive Committee, acting on behalf of the Board of Directors, authorized a repurchase of up to 20 million outstanding shares of our common stock. There is no fixed termination date for the repurchases. During the first half of 2013, we repurchased, through open market transactions, 2.0 million shares under this authorization for a total cost of $127 million, excluding transaction costs, representing an average repurchase price of $63.60 per share. As of June 30, 2013, 16.1 million shares remain authorized for repurchase under the 2012 authorization.

Employee Stock Purchase Plan

During the first quarter of 2013, we announced our 2013 Employee Stock Purchase Plan (“ESPP”), which allows shares of our common stock to be purchased by eligible employees at three-month intervals at 85% of the fair market value of the stock on the last day of each three-month period. The first three-month exercise period began on June 1, 2013; the corresponding purchase for this exercise period will take place on August 30, 2013. Eligible employees are allowed to contribute up to 10% of their base compensation. We have reserved 1.5 million shares of our common stock for issuance under the ESPP.

 

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Table of Contents

Notes to Consolidated Financial Statements – (Continued)

 

Note 7 – Earnings Per Share

The following table presents our basic and diluted earnings per share:

 

     Three months ended June 30,      Six months ended June 30,  
     2013      2012      2013     2012  
     (In thousands, except per share data)  

Income (loss) from continuing operations attributable to Expedia, Inc.

   $ 71,500       $ 105,241       $ (32,726   $ 125,849   

Earnings (loss) per share from continuing operations attributable to Expedia, Inc. available to common stockholders:

          

Basic

   $ 0.52       $ 0.79       $ (0.24   $ 0.95   

Diluted

     0.51         0.76         (0.24     0.91   

Weighted average number of shares outstanding:

          

Basic

     136,351         132,556         135,998        132,877   

Dilutive effect of:

          

Options to purchase common stock

     4,594         3,988         —          3,715   

Other dilutive securities

     167         1,648         —          2,155   
  

 

 

    

 

 

    

 

 

   

 

 

 

Diluted

     141,112         138,192         135,998        138,747   
  

 

 

    

 

 

    

 

 

   

 

 

 

The earnings per share amounts are the same for common stock and Class B common stock because the holders of each class are legally entitled to equal per share distributions whether through dividends or in liquidation.

Note 8 – Income Taxes

We determine our provision for income taxes for interim periods using an estimate of our annual effective rate. We record any changes to the estimated annual rate in the interim period in which the change occurs, including discrete tax items. Our effective tax rate was 27.9% and 21.3% for the three months ended June 30, 2013 and 2012, and (39.3)% and 21.0% for the six months ended June 30, 2013 and 2012. The change in the effective tax rate for the three months ended June 30, 2013 as compared to the same period in 2012 was due to the recording of a valuation allowance related to foreign deferred tax assets. For the six months ended June 30, 2013, we recorded $13 million of income tax expense on our pre-tax losses primarily as a result of non-deductible stock-based compensation recorded in relation to the trivago acquisiton and non-deductible penalties included in the Hawaii pay-to-play assessments, disclosed below in Note 9 – Commitments and Contingencies.

Uncertain Tax Positions

The Company is routinely under audit by federal, state, local and foreign income tax authorities. 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 IAC/InterActiveCorp’s (“IAC”) U.S. consolidated federal income tax returns for the years ended December 31, 2001 through 2005 when Expedia filed as part of the IAC consolidated group. The settlement of these tax years has been submitted to the Joint Committee on Taxation for approval. The statute of limitations for the years 2001 through 2005 has been extended to June 30, 2014. The IRS is currently examining Expedia’s U.S. federal income tax returns for the periods ended December 31, 2009 through December 31, 2010.

The Company believes it is reasonably possible its liabilities related to uncertain tax positions could decrease by $29.4 million within twelve months of the current reporting date due to settlements, expirations of statutes of limitations, and the reversal of deductible temporary differences.

 

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Table of Contents

Notes to Consolidated Financial Statements – (Continued)

 

Note 9 – Commitments and Contingencies

Legal Proceedings

In the ordinary course of business, we are a party to various lawsuits. Management does not expect these lawsuits to have a material impact on the liquidity, results of operations, or financial condition of Expedia. We also evaluate other potential contingent matters, including value-added tax, federal excise tax, transient occupancy or accommodation tax and similar matters. We do not believe that the aggregate amount of liability that could be reasonably possible with respect to these matters would have a material adverse effect on our financial results; however, litigation is inherently uncertain and the actual losses incurred in the event that our legal proceedings were to result in unfavorable outcomes could have a material adverse effect on our business and financial performance.

Litigation Relating to Hotel Occupancy Taxes. Eighty-four lawsuits have been filed by cities, counties and states involving hotel occupancy taxes. Thirty-eight lawsuits are currently active. These lawsuits are in various stages and we continue to defend against the claims made in them vigorously. With respect to the principal claims in these matters, we believe that the ordinances at issue do not apply to the services we provide, namely the facilitation of hotel reservations, and, therefore, that we do not owe the taxes that are claimed to be owed. We believe that the ordinances at issue generally impose occupancy and other taxes on entities that own, operate or control hotels (or similar businesses) or furnish or provide hotel rooms or similar accommodations. To date, thirty-three of these lawsuits have been dismissed. Some of these dismissals have been without prejudice and, generally, allow the governmental entity or entities to seek administrative remedies prior to pursuing further litigation. Twenty dismissals were based on a finding that we and the other defendants were not subject to the local hotel occupancy tax ordinance or that the local government lacked standing to pursue their claims. As a result of this litigation and other attempts by certain jurisdictions to levy such taxes, we have established a reserve for the potential settlement of issues related to hotel occupancy taxes, consistent with applicable accounting principles and in light of all current facts and circumstances, in the amount of $42 million as of June 30, 2013 and $35 million as of December 31, 2012. This reserve is based on our best estimate of probable losses and the ultimate resolution of these contingencies may be greater or less than the liabilities recorded. In addition, as of June 30, 2013, we had an accrual totaling $1 million related to court decisions and final settlements. An estimate for a reasonably possible loss or range of loss in excess of the amount reserved cannot be made. Changes to these settlement reserves are included within legal reserves, occupancy tax and other in the consolidated statements of operations.

In connection with various occupancy tax audits and assessments, certain jurisdictions may assert that taxpayers are required to pay any assessed taxes prior to being allowed to contest or litigate the applicability of the ordinances, which is referred to as “pay-to-play.” These jurisdictions may attempt to require that we pay any assessed taxes prior to being allowed to contest or litigate the applicability of the tax ordinance. Payment of these amounts is not an admission that we believe we are subject to such taxes and, even when such payments are made, we continue to defend our position vigorously. If we prevail in the litigation, for which a pay-to-play payment was made, the jurisdiction collecting the payment will be required to repay such amounts, plus interest.

During 2009, we expensed $48 million related to monies paid in advance of litigation in occupancy tax proceedings with the city of San Francisco. The city of San Francisco issued additional assessments of tax, penalties and interest for the time period from the fourth quarter of 2007 through the fourth quarter of 2011 against the travel companies, including $22 million against Expedia, Hotels.com and Hotwire. The additional assessments, including the prepayment of such assessments, have been contested by the online companies. The city has agreed, subject to documentation, that this assessment may be placed under a bond and not paid, and may proceed to a legal challenge. During 2010, we expensed $3 million related to monies paid in advance of litigation in occupancy tax proceedings with the city of Santa Monica; these funds were returned to us by the city in December 2011 in exchange for a letter of credit. The online travel companies subsequently prevailed in the litigation and the letter of credit in favor of the city has been voided. Hotels.com is currently under audit by the State of Texas, which imposes a pay-to-play requirement to challenge an adverse audit result in court.

 

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Notes to Consolidated Financial Statements – (Continued)

 

Litigation Relating to Other Taxes. On January 11, 2013, the Hawaii tax court ruled that certain online travel companies, including Expedia, Hotels.com and Hotwire (“the Expedia Subsidiaries”), are obligated to remit past Hawaii general excise taxes with interest, which the Hawaii Director of Taxation has claimed total $110 million for the Expedia Subsidiaries, comprised of $78 million relating to tax liability from January 2000 to December 2011 and $32 million in interest from January 2000 to December 2012. On March 15, 2013, the Hawaii tax court issued penalties against the online travel companies. Under this ruling, the state is seeking penalties and interest totaling $60 million against the Expedia Subsidiaries, representing 50% of the Expedia’s Subsidiaries’ tax liability plus interest thereon. On April 22, 2013, the Hawaii Supreme Court denied the online travel companies’ petition for mandamus requesting review of the tax court’s ruling that online travel companies must remit tax on gross bookings and therefore subject the hotel’s charge for the room to double taxation. A conference before the tax court is set for August 12, 2013 regarding the remaining issue of whether interest is due on the penalties claimed by the state. The case will then proceed on appeal. The online travel companies had previously filed an appeal, but it was dismissed as premature. We strongly believe that the court ruling regarding the general excise tax is contrary to the plain language of the ordinances at issue as well as prior Hawaiian Supreme Court decisions, previous positions taken by the Hawaii Director of Taxation, and an opinion by the Attorney General of the State of Hawaii. We intend to vigorously pursue our rights on appeal. In addition, on May 20, 2013, the state issued final assessments against the online travel companies, including the Expedia Subsidiaries, for general excise taxes that the state claims are due for the year 2012. The total of these assessments against the Expedia Subsidiaries is $20.5 million

We were required to pay an amount equal to the taxes, interest and penalties prior to appealing the Hawaii’s tax court’s ruling. Payment of these amounts is not an admission that we believe we are subject to the taxes in question. To the extent our appeal is successful in reducing or eliminating the assessed amounts, the State of Hawaii would be required to repay such amounts, plus interest. During the year ended December 31, 2012, we expensed $110 million, and during the six months ended June 30, 2013, we expensed an additional $60 million for amounts required to be paid prior to appealing the tax court’s ruling. During the three months ended June 30, 2013, we paid $153 million in advance of litigation. As of June 30, 2013, we have $17 million remaining in accrued expenses and other liabilities for interest on penalties related to this matter. It is also reasonably possible that we will incur amounts in excess of the amounts expensed, which we estimate could be up to $25 million. The ultimate resolution of these contingencies may be greater or less than the liabilities recorded and our estimates of possible additional assessments.

Matters Relating to Hotel Booking Practices. On July 31, 2012, the United Kingdom Office of Fair Trading (“OFT”) issued a Statement of Objections alleging that Expedia, Booking.com B.V. and InterContinental Hotels Group PLC (“IHG”) have infringed European Union and United Kingdom competition law in relation to the online supply of hotel room accommodations. The Statement of Objections alleges that Expedia and Booking.com entered into separate agreements with IHG that restricted each online travel company’s ability to discount the price of IHG hotel rooms. The OFT limited its investigation to a small number of companies, but has stated that the investigation is likely to have wider implications for the industry within the United Kingdom.

The Statement of Objections does not constitute a finding of infringement and all parties have the opportunity to respond. If the OFT maintains its objections after the companies’ responses, the OFT can issue a final decision. In such a case a final decision would be issued at the earliest in 2014. An appeal of an adverse OFT decision is to the English courts but may involve a reference on matters of European Union law to the European Court of Justice. We are unable at this time to predict the outcome of the OFT proceeding and any appeal. In addition, a number of competition authorities in other European countries have initiated investigations in relation to certain contractual arrangements between hotels and online travel companies, including Expedia. These investigations differ in relation to the parties involved and the precise nature of the concerns.

Since August 20, 2012, thirty-four putative class action lawsuits, which refer to the OFT’s Statement of Objections, have been initiated in the United States by consumer plaintiffs alleging claims against the online travel companies, including Expedia, and several major hotel chains for alleged resale price maintenance for online hotel room reservations, including but not limited to violation of the Sherman Act, state antitrust laws, state consumer protection statutes and common law tort claims, such as unjust enrichment. The cases have been consolidated and transferred to Judge Boyle in the United States District Court for the Northern District of Texas. On May 1, 2013, the plaintiffs filed their consolidated amended complaint. On July 1, 2013, the defendants filed motions to dismiss that complaint.

 

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Table of Contents

Notes to Consolidated Financial Statements – (Continued)

 

Note 10 – Related Party Transactions

TripAdvisor, Inc. In connection with the spin-off, we entered into various agreements with TripAdvisor, a related party due to common ownership, including, among others, a separation agreement, a tax sharing agreement, an employee matters agreement and a transition services agreement. In addition, we have continued to work with TripAdvisor pursuant to various commercial arrangements between subsidiaries of Expedia, on the one hand, and subsidiaries of TripAdvisor, on the other hand. During the three and six months ended June 30, 2013, we recognized $1 million and $3 million of revenue and expensed approximately $54 million and $115 million related to these various arrangements with TripAdvisor. During the three and six months ended June 30, 2012, we recognized approximately $2 million and $3 million of revenue and expensed approximately $56 million and $107 million related to these various arrangements with TripAdvisor. Net amounts payable to TripAdvisor were $35 million and $24 million as of June 30, 2013 and December 31, 2012 and were primarily included in accounts payable, other on the consolidated balance sheet.

Liberty Interactive Corporation. During the six months ended June 30, 2013, we issued 467,672 shares of common stock from treasury stock to Liberty Interactive Corporation (“Liberty”) at a price per share of $54.04 and an aggregate value of approximately $25 million pursuant to and in accordance with the preemptive rights as detailed by the Amended and Restated Governance Agreement with Liberty dated as of December 20, 2011.

Note 11 – Segment Information

We have two reportable segments: Leisure and Egencia. Our Leisure segment, which consists of the aggregation of operating segments, provides a full range of travel and advertising services to our worldwide customers through a variety of brands including: Expedia.com and Hotels.com in the United States and localized Expedia and Hotels.com websites throughout the world, Expedia Affiliate Network, Hotwire.com, Venere, eLong, trivago and Classic Vacations. Our Egencia segment provides managed travel services to corporate customers in North America, Europe, and the Asia Pacific region.

We determined our operating segments based on how our chief operating decision makers manage our business, make operating decisions and evaluate operating performance. Our primary operating metric is adjusted EBITDA. Adjusted EBITDA for our Leisure and Egencia segments includes allocations of certain expenses, primarily cost of revenue and facilities, and our Leisure segment includes the total costs of our global supply organizations as well as the realized foreign currency gains or losses related to the forward contracts hedging a component of our net merchant hotel revenue. We base the allocations primarily on transaction volumes and other usage metrics. We do not allocate certain shared expenses such as accounting, human resources, information technology and legal to our reportable segments. We include these expenses in Corporate. Our allocation methodology is periodically evaluated and may change.

Corporate also includes unallocated corporate functions and expenses. In addition, we record amortization of intangible assets and any related impairment, as well as stock-based compensation expense, restructuring charges, legal reserves, occupancy tax and other, and other items excluded from segment operating performance in Corporate. Such amounts are detailed in our segment reconciliation below.

 

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Table of Contents

Notes to Consolidated Financial Statements – (Continued)

 

The following tables present our segment information for the three and six months ended June 30, 2013 and 2012. As a significant portion of our property and equipment is not allocated to our operating segments and depreciation is not included in our segment measure, we do not report the assets by segment as it would not be meaningful. We do not regularly provide such information to our chief operating decision makers.

 

     Three months ended June 30, 2013  
     Leisure     Egencia     Corporate     Total  
     (In thousands)  

Revenue

   $ 1,109,709      $  95,308      $ —        $ 1,205,017   

Adjusted EBITDA

   $ 264,853      $ 17,562      $ (90,713   $ 191,702   

Depreciation

     (25,507     (3,335     (22,297     (51,139

Amortization of intangible assets

     —          —          (18,837     (18,837

Stock-based compensation

     —          —          (16,086     (16,086

Legal reserves, occupancy tax and other

     —          —          (6,246     (6,246

Realized gain on revenue hedges

     (5,108     —          —          (5,108
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

   $ 234,238      $ 14,227      $ (154,179     94,286   
  

 

 

   

 

 

   

 

 

   

Other expense, net

           (6,863
        

 

 

 

Income from continuing operations before income taxes

           87,423   

Provision for income taxes

           (24,408
        

 

 

 

Net income

           63,015   

Net loss attributable to noncontrolling interests

           8,485   
        

 

 

 

Net income attributable to Expedia, Inc.

         $ 71,500   
        

 

 

 
     Three months ended June 30, 2012  
     Leisure     Egencia     Corporate     Total  
     (In thousands)  

Revenue

   $ 964,252      $ 75,728      $ —        $  1,039,980   

Adjusted EBITDA

   $ 283,053      $ 17,820      $ (77,972   $ 222,901   

Depreciation

     (17,565     (2,739     (18,362     (38,666

Amortization of intangible assets

     —          —          (8,631     (8,631

Stock-based compensation

     —          —          (16,621     (16,621

Legal reserves, occupancy tax and other

     —          —          (3,350     (3,350

Realized gain on revenue hedges

     (1,192     —          —          (1,192
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

   $ 264,296      $ 15,081      $ (124,936     154,441   
  

 

 

   

 

 

   

 

 

   

Other expense, net

           (19,577
        

 

 

 

Income from continuing operations before income taxes

           134,864   

Provision for income taxes

           (28,755
        

 

 

 

Net income

           106,109   

Net income attributable to noncontrolling interests

           (868
        

 

 

 

Net income attributable to Expedia, Inc.

         $ 105,241   
        

 

 

 

 

17


Table of Contents

Notes to Consolidated Financial Statements – (Continued)

 

     Six months ended June 30, 2013  
     Leisure     Egencia     Corporate     Total  
     (In thousands)  

Revenue

   $  2,033,557      $  183,827      $ —        $  2,217,384   

Adjusted EBITDA

   $ 442,951      $ 29,690      $ (175,811   $ 296,830   

Depreciation

     (48,568     (7,032     (44,405     (100,005

Amortization of intangible assets

     —          —          (31,407     (31,407

Stock-based compensation

     —          —          (91,164     (91,164

Legal reserves, occupancy tax and other

     —          —          (67,804     (67,804

Acquistion-related and other

     —          —          (9,829     (9,829

Realized gain on revenue hedges

     (7,963     —          —          (7,963
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

   $ 386,420      $ 22,658      $ (420,420     (11,342
  

 

 

   

 

 

   

 

 

   

Other expense, net

           (20,506
        

 

 

 

Loss from continuing operations before income taxes

           (31,848

Provision for income taxes

           (12,505
        

 

 

 

Net loss

           (44,353

Net loss attributable to noncontrolling interests

           11,627   
        

 

 

 

Net loss attributable to Expedia, Inc.

         $ (32,726
        

 

 

 
     Six months ended June 30, 2012  
     Leisure     Egencia     Corporate     Total  
     (In thousands)  

Revenue

   $ 1,728,065      $ 128,403      $ —        $ 1,856,468   

Adjusted EBITDA

   $ 454,275      $ 27,722      $ (157,278   $ 324,719   

Depreciation

     (33,257     (4,745     (34,978     (72,980

Amortization of intangible assets

     —          —          (12,053     (12,053

Stock-based compensation

     —          —          (33,572     (33,572

Legal reserves, occupancy tax and other

     —          —          (3,074     (3,074

Realized loss on revenue hedges

     84        —          —          84   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

   $ 421,102      $ 22,977      $ (240,955     203,124   
  

 

 

   

 

 

   

 

 

   

Other expense, net

           (41,433
        

 

 

 

Income from continuing operations before income taxes

           161,691   

Provision for income taxes

           (33,995
        

 

 

 

Income from continuing operations

           127,696   

Discontinued operations, net of taxes

           (23,889
        

 

 

 

Net income

           103,807   

Net income attributable to noncontrolling interests

           (1,847
        

 

 

 

Net income attributable to Expedia, Inc.

         $ 101,960   
        

 

 

 

 

18


Table of Contents

Notes to Consolidated Financial Statements – (Continued)

 

Note 12 – Guarantor and Non-Guarantor Supplemental Financial Information

Condensed consolidating financial information of Expedia, Inc. (the “Parent”), our subsidiaries that are guarantors of our debt facility and instruments (the “Guarantor Subsidiaries”), and our subsidiaries that are not guarantors of our debt facility and instruments (the “Non-Guarantor Subsidiaries”) is shown below. The debt facility and instruments are guaranteed by certain of our wholly-owned domestic subsidiaries and rank equally in right of payment with all of our existing and future unsecured and unsubordinated obligations. The guarantees are full, unconditional, joint and several with the exception of certain customary automatic subsidiary release provisions. In this financial information, the Parent and Guarantor Subsidiaries account for investments in their wholly-owned subsidiaries using the equity method.

CONDENSED CONSOLIDATING STATEMENT OF OPERATION

Three months ended June 30, 2013

 

     Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  
     (In thousands)  

Revenue

   $ —        $ 974,513      $ 242,095      $ (11,591   $ 1,205,017   

Costs and expenses:

          

Cost of revenue

     —          205,011        56,126        1,470        262,607   

Selling and marketing

     —          392,961        210,580        (13,073     590,468   

Technology and content

     —          94,046        46,637        (1     140,682   

General and administrative

     —          47,198        44,680        13        91,891   

Amortization of intangible assets

     —          1,168        17,669        —          18,837   

Legal reserves, occupancy tax and other

     —          6,246        —          —          6,246   

Acquistion-related and other

     —          —          —          —          —     

Intercompany (income) expense, net

     —          236,796        (236,796     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     —          (8,913     103,199        —          94,286   

Other income (expense):

          

Equity in pre-tax earnings of consolidated subsidiaries

     84,609        79,229        —          (163,838     —     

Other, net

     (20,797     15,238        (1,304     —          (6,863
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     63,812        94,467        (1,304     (163,838     (6,863
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     63,812        85,554        101,895        (163,838     87,423   

Provision for income taxes

     7,688        (2,825     (29,271     —          (24,408
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     71,500        82,729        72,624        (163,838     63,015   

Net loss attributable to noncontrolling interests

     —          —          8,485        —          8,485   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Expedia, Inc.

   $ 71,500      $ 82,729      $ 81,109      $ (163,838   $ 71,500   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Expedia, Inc.

   $ 71,500      $ 81,568      $ 84,438      $ (163,838   $ 73,668   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

Notes to Consolidated Financial Statements – (Continued)

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATION

Three months ended June 30, 2012

 

     Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  
     (In thousands)  

Revenue

   $ —        $ 901,215      $ 139,728      $ (963   $ 1,039,980   

Costs and expenses:

          

Cost of revenue

     —          186,929        42,680        132        229,741   

Selling and marketing

     —          335,070        111,085        (1,582     444,573   

Technology and content

     —          87,071        29,344        (389     116,026   

General and administrative

     —          54,733        27,609        876        83,218   

Amortization of intangible assets

     —          1,573        7,058        —          8,631   

Legal reserves, occupancy tax and other

     —          3,350        —          —          3,350   

Intercompany (income) expense, net

     —          171,914        (171,914     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     —          60,575        93,866        —          154,441   

Other income (expense):

          

Equity in pre-tax earnings of consolidated subsidiaries

     117,025        104,448        —          (221,473     —     

Other, net

     (20,895     (35,556     36,874        —          (19,577
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     96,130        68,892        36,874        (221,473     (19,577
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     96,130        129,467        130,740        (221,473     134,864   

Provision for income taxes

     9,111        (11,324     (26,542     —          (28,755
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     105,241        118,143        104,198        (221,473     106,109   

Net income attributable to noncontrolling interests

     —          —          (868     —          (868
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Expedia, Inc.

   $  105,241      $ 118,143      $ 103,330      $ (221,473   $ 105,241   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Expedia, Inc.

   $ 105,241      $ 117,868      $ 79,852      $ (221,473   $ 81,488   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATION

Six months ended June 30, 2013

 
     Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  
     (In thousands)  

Revenue

   $ —        $ 1,824,612      $ 409,230      $ (16,458   $ 2,217,384   

Costs and expenses:

          

Cost of revenue

     —          400,491        110,548        2,149        513,188   

Selling and marketing

     —          748,927        356,363        (18,667     1,086,623   

Technology and content

     —          193,009        85,954        2        278,965   

General and administrative

     —          104,827        79,382        58        184,267   

Amortization of intangible assets

     —          2,481        28,926        —          31,407   

Legal reserves, occupancy tax and other

     —          67,804        —          —          67,804   

Acquistion-related and other

     —          —          66,472        —          66,472   

Intercompany (income) expense, net

     —          399,240        (399,240     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     —          (92,167     80,825        —          (11,342

Other income (expense):

          

Equity in pre-tax earnings (losses) of consolidated subsidiaries

     (8,666     40,901        —          (32,235     —     

Other, net

     (41,680     18,205        2,969        —          (20,506
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     (50,346     59,106        2,969        (32,235     (20,506
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (50,346     (33,061     83,794        (32,235     (31,848

Provision for income taxes

     17,620        23,880        (54,005     —          (12,505
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (32,726     (9,181     29,789        (32,235     (44,353

Net loss attributable to noncontrolling interests

     —          —          11,627        —          11,627   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Expedia, Inc.

   $ (32,726   $ (9,181   $ 41,416      $ (32,235   $ (32,726
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Expedia, Inc.

   $ (32,726   $ (10,558   $ 26,157      $ (32,235   $ (49,362
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

20


Table of Contents

Notes to Consolidated Financial Statements – (Continued)

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATION

Six months ended June 30, 2012

 

     Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  
     (In thousands)  

Revenue

   $ —        $ 1,624,735      $ 234,400      $ (2,667   $ 1,856,468   

Costs and expenses:

          

Cost of revenue

     —          356,026        73,358        455        429,839   

Selling and marketing

     —          616,118        209,226        (3,699     821,645   

Technology and content

     —          169,804        55,541        (408     224,937   

General and administrative

     —          106,458        54,353        985        161,796   

Amortization of intangible assets

     —          3,333        8,720        —          12,053   

Legal reserves, occupancy tax and other

     —          3,074        —          —          3,074   

Intercompany (income) expense, net

     —          314,661        (314,661     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     —          55,261        147,863        —          203,124   

Other income (expense):

          

Equity in pre-tax earnings of consolidated subsidiaries

     149,369        138,610        —          (287,979     —     

Other, net

     (41,701     (35,693     35,961        —          (41,433
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     107,668        102,917        35,961        (287,979     (41,433
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     107,668        158,178        183,824        (287,979     161,691   

Provision for income taxes

     18,181        (7,005     (45,171     —          (33,995
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     125,849        151,173        138,653        (287,979     127,696   

Discontinued operations, net of taxes

     (23,889     —          —          —          (23,889
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     101,960        151,173        138,653        (287,979     103,807   

Net income attributable to noncontrolling interests

     —          —          (1,847     —          (1,847
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Expedia, Inc.

   $  101,960      $ 151,173      $ 136,806      $ (287,979   $ 101,960   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Expedia, Inc.

   $ 101,960      $ 151,659      $ 126,909      $ (287,979   $ 92,549   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CONDENSED CONSOLIDATING BALANCE SHEET

June 30, 2013

 
     Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  
     (In thousands)  

ASSETS

  

Total current assets

   $ 155,576      $ 3,664,948      $ 282,616      $ (839,430   $ 3,263,710   

Investment in subsidiaries

     4,303,928        1,218,834        —          (5,522,762     —     

Intangible assets, net

     —          632,373        513,027        —          1,145,400   

Goodwill

     —          2,436,533        1,206,663        —          3,643,196   

Other assets, net

     4,430        520,630        166,730        —          691,790   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL ASSETS

   $ 4,463,934      $ 8,473,318      $ 2,169,036      $ (6,362,192   $ 8,744,096   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY           

Total current liabilities

   $ 876,343      $ 3,726,825      $ 447,174      $ (839,430   $ 4,210,912   

Long-term debt

     1,249,378        —          —          —          1,249,378   

Other liabilities

     —          433,994        511,599        —          945,593   

Stockholders’ equity

     2,338,213        4,312,499        1,210,263        (5,522,762     2,338,213   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 4,463,934      $ 8,473,318      $ 2,169,036      $ (6,362,192   $ 8,744,096   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

Notes to Consolidated Financial Statements – (Continued)

 

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2012

     Parent      Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  
     (In thousands)  
ASSETS              

Total current assets

   $ 137,942       $ 2,674,496       $ 675,026       $ (872,962   $ 2,614,502   

Investment in subsidiaries

     4,277,954         1,188,871         —           (5,466,825     —     

Intangible assets, net

     —           634,853         186,566         —          821,419   

Goodwill

     —           2,436,533         579,137         —          3,015,670   

Other assets, net

     4,790         473,439         155,375         —          633,604   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

TOTAL ASSETS

   $ 4,420,686       $ 7,408,192       $ 1,596,104       $ (6,339,787   $ 7,085,195   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY              

Total current liabilities

   $ 781,953       $ 2,708,755       $ 364,565       $ (872,962   $ 2,982,311   

Long-term debt

     1,249,345         —           —           —          1,249,345   

Other liabilities

     —           415,465         48,686         —          464,151   

Stockholders’ equity

     2,389,388         4,283,972         1,182,853         (5,466,825     2,389,388   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 4,420,686       $ 7,408,192       $ 1,596,104       $ (6,339,787   $ 7,085,195   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Six months ended June 30, 2013

 

     Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidated  
     (In thousands)  

Operating activities:

        

Net cash provided by operating activities from continuing operations

   $ —        $ 558,831      $ 640,777      $ 1,199,608   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities:

        

Capital expenditures, including internal-use software and website development

     —          (117,537     (40,303     (157,840

Purchases of investments

     —          (919,107     (210,682     (1,129,789

Sales and maturities of investments

     —          554,098        218,719        772,817   

Acquisitions, net of cash acquired

     —          —          (540,489     (540,489

Other, net

     —          24,189        (43     24,146   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities from continuing operations

     —          (458,357     (572,798     (1,031,155
  

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities:

        

Purchases of treasury stock

     (134,238     —          —          (134,238

Proceeds from issuance of treasury stock

     25,273        —          —          25,273   

Proceeds from exercise of equity awards

     33,566        —          1,047        34,613   

Transfers (to) from related parties

     83,521        (83,521     —          —     

Other, net

     (8,122     (7,595     37        (15,680
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities from continuing operations

     —          (91,116     1,084        (90,032
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by continuing operations

     —          9,358        69,063        78,421   

Effect of exchange rate changes on cash and cash equivalents

     —          (47,685     (12,080     (59,765
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     —          (38,327     56,983        18,656   

Cash and cash equivalents at beginning of period

     —          1,007,156        286,005        1,293,161   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ —        $ 968,829      $ 342,988      $ 1,311,817   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Notes to Consolidated Financial Statements – (Continued)

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Six months ended June 30, 2012

 

     Parent     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidated  
     (In thousands)  

Operating activities:

        

Net cash provided by operating activities from continuing operations

   $ —        $ 1,290,763      $ 109,832      $ 1,400,595   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities:

        

Capital expenditures, including internal-use software and website development

     —          (95,786     (21,431     (117,217

Purchases of investments

     —          (773,654     (234,091     (1,007,745

Sales and maturities of investments

     —          461,527        212,788        674,315   

Acquisitions, net of cash acquired

     —          —          (199,267     (199,267

Other, net

     —          10,460        (1,999     8,461   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities from continuing operations

     —          (397,453     (244,000     (641,453
  

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities:

        

Purchases of treasury stock

     (297,704     —          —          (297,704

Proceeds from exercise of equity awards

     224,425        —          345        224,770   

Transfers (to) from related parties

     80,768        (80,768     —          —     

Other, net

     (7,489     (5,491     25        (12,955
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities from continuing operations

     —          (86,259     370        (85,889
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) continuing operations

     —          807,051        (133,798     673,253   

Net cash used in discontinued operations

     —          (7,607     —          (7,607

Effect of exchange rate changes on cash and cash equivalents

     —          (8,088     (3,346     (11,434
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     —          791,356        (137,144     654,212   

Cash and cash equivalents at beginning of period

     —          357,252        331,882        689,134   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ —        $ 1,148,608      $ 194,738      $ 1,343,346   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Part I. Item 2. Management’s Discussion and Analysis of Financial

Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the views of our management regarding current expectations and projections about future events and are based on currently available information. Actual results could differ materially from those contained in these forward-looking statements for a variety of reasons, including, but not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 31, 2012, Part I, Item 1A, “Risk Factors,” as well as those discussed elsewhere in this report. Other unknown or unpredictable factors also could have a material adverse effect on our business, financial condition and results of operations. Accordingly, readers should not place undue reliance on these forward-looking statements. The use of words such as “anticipates,” “estimates,” “expects,” “intends,” “plans” and “believes,” among others, generally identify forward-looking statements; however, these words are not the exclusive means of identifying such statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. We are not under any obligation to, and do not intend to, publicly update or review any of these forward-looking statements, whether as a result of new information, future events or otherwise, even if experience or future events make it clear that any expected results expressed or implied by those forward-looking statements will not be realized. Please carefully review and consider the various disclosures made in this report and in our other reports filed with the Securities and Exchange Commission (“SEC”) that attempt to advise interested parties of the risks and factors that may affect our business, prospects and results of operations.

The information included in this management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes included in this Quarterly Report, and the audited consolidated financial statements and notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2012.

Overview

Expedia, Inc. is an online travel company, empowering business and leisure travelers with the tools and information they need to efficiently research, plan, book and experience travel. We have created a global travel marketplace used by a broad range of leisure and corporate travelers, offline retail travel agents and travel service providers. We make available, on a stand-alone and package basis, travel products and services provided by numerous airlines, lodging properties, car rental companies, destination service providers, cruise lines and other travel product and service companies. We also offer travel and non-travel advertisers access to a potential source of incremental traffic and transactions through our various media and advertising offerings.

Our portfolio of brands includes Expedia.com®, Hotels.com®, Hotwire.comTM, Expedia Affiliate Network (“EAN”), Classic Vacations, Expedia Local ExpertTM, Expedia® CruiseShipCenters®, Egencia TM, eLongTM, Venere Net SpA (“Venere”) and trivago GmbH (“trivago”), a leading hotel metasearch company based in Germany acquired during the first quarter of 2013. In addition, many of these brands have related international points of sale. For additional information about our portfolio of brands, see “Portfolio of Brands” in Part I, Item 1, “Business,” in our Annual Report on Form 10-K for the year ended December 31, 2012.

All percentages within this section are calculated on actual, unrounded numbers.

Trends

The travel industry, including offline agencies, online agencies and other suppliers of travel products and services, has historically been characterized by intense competition, as well as rapid and significant change. Generally, 2012 represented a year of gradual improvement for the travel industry. However, natural disasters, such as Hurricane Sandy that impacted the northeast United States, ongoing sovereign debt and economic issues in several European countries as well as uncertainty regarding the timing of a possible pullback in U.S. Federal Reserve’s quantitative easing program and sequestration, all contribute to a somewhat uncertain forward environment for the travel industry.

 

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Online Travel

Increased usage and familiarity with the internet have driven rapid growth in online penetration of travel expenditures. According to PhoCusWright, an independent travel, tourism and hospitality research firm, in 2012, approximately 59% of U.S. leisure, unmanaged and corporate travel expenditures occur online, compared with approximately 44% of European travel. Online penetration in the emerging markets, such as Asia Pacific and Latin American regions are estimated to be approximately 20%, lagging behind that of Europe. These penetration rates have increased over the past few years, and are expected to continue growing. This significant growth has attracted many competitors to online travel. This competition has intensified in recent years, and the industry is expected to remain highly competitive for the foreseeable future. In addition to the growth of online travel agencies, airlines and lodging companies have aggressively pursued direct online distribution of their products and services, and supplier growth outpaced online agency growth for several years. Competitive entrants such as “metasearch” companies, including Kayak.com (which Priceline.com acquired in May 2013), trivago.com (in which Expedia acquired a majority ownership interest in March 2013) as well as TripAdvisor (completed its conversion to a metasearch site in June 2013) introduced differentiated features, pricing and content compared with the legacy online travel agency companies and thus have rapidly grown traffic to their respective sites. In addition, models, such as daily deals and private sale sites remain popular with price sensitive consumers. Finally, we have seen increased interest in the online travel industry from search engine companies as evidenced by recent innovations and proposed and actual acquisitions by companies such as Google and Microsoft.

The online travel industry has also seen the development of alternative business models and variations in the timing of payment by travelers and to suppliers, which in some cases place pressure on historical business models. In particular, the agency hotel model has seen rapid adoption in Europe. Expedia has both a merchant and an agency hotel offer for our hotel supply partners and we expect our use of these models to continue to evolve. During 2012, Expedia introduced the Expedia Traveler Preference (“ETP”) program to hotel suppliers in the United States and Europe and is now in the process of rolling the program out globally. ETP offers travelers the choice of whether to pay Expedia at the time of booking or pay the hotel at the time of stay.

Intense competition has also historically led to aggressive online marketing spend by the travel suppliers and intermediaries, and a meaningful reduction in our overall marketing efficiencies and operating margins. During the second quarter of 2013, numerous travel brands launched offline advertising campaigns in the United States for the first time thus increasing the number of participants in the travel advertising space increasing competition for share of voice. We manage our selling and marketing spending on a brand basis at the local or regional level, making decisions in each market that we think are appropriate based on the relative growth opportunity, the expected returns and the competitive environment. In certain cases, particularly in emerging markets, we are pursuing and expect to continue to pursue long-term growth opportunities for which our marketing efficiency is lower than that for our consolidated business but for which we still believe the opportunity to be attractive.

Hotel

We generate the majority of our revenue through the marketing and distribution of hotel rooms (stand-alone and package bookings). Our relationships and negotiated total economics with our hotel supply partners have remained broadly stable in the past few years. We have, however, implemented new customer loyalty and discount programs and have eliminated or reduced some fees in that timeframe and, as such, the margin of revenue we earn per booking has declined. In addition, as part of the introduction of ETP, we reduced negotiated economics in certain instances to compensate for hotel supply partners absorbing expenses such as credit card fees and customer service costs. Therefore, we believe the global rollout of ETP could negatively impact the margin of revenue we earn per booking in the future.

Since our hotel supplier agreements are generally negotiated on a percentage basis, any increase or decrease in average daily rates (“ADRs”) has an impact on the revenue we earn per room night. Over the course of the last two years, occupancies and ADRs in the lodging industry have generally increased in a gradually improving overall travel environment. Currently occupancy rates are near 2007 peaks and there is very little new, net hotel supply being added in the U.S. lodging market with large chains focusing their development opportunities in international markets. This may help hoteliers with their objective of continuing to grow ADRs and could lead to pressure in negotiations with hoteliers and may ultimately lead to pressure on

 

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terms for us and our OTA competitors. In international markets, hotel supply is being added at a much faster rate as hotel owners and operators try to take advantage of opportunities in faster growing regions such as China and India, among others. We have had success adding supply to our marketplace with approximately 220,000 hotels on our global websites, including eLong, as of the end of the second quarter of 2013. In addition, our room night growth has been healthy, with room nights growing 18% in 2011, 27% in 2012 and 23% for the first half of 2013. ADRs for rooms booked on Expedia sites grew 5% in 2011, declined 2% in 2012, and were essentially flat for the first half of 2013.

Air

The airline sector in particular has historically experienced significant turmoil. In recent years, there has been increased air carrier consolidation, generally resulting in lower overall capacity and higher fares. In addition, air carriers have made significant efforts to keep seat capacity relatively low in order to ensure that demand for seats remains high and that flights are as full as possible. Reduced seating capacities are generally negative for Expedia as there is less air supply available on our websites, and in turn less opportunity to facilitate hotel rooms, car rental and other services on behalf of air travelers. Ticket prices on Expedia sites were essentially flat for the first half of 2013 and increased 4% and 11% in 2012 and 2011. We are encountering pressure on air remuneration as certain supply agreements renew, and as air carriers and GDS intermediaries re-negotiate their long-term agreements. In addition, some U.S. air carriers introduced various incentives for customers to book directly with the carrier versus via online travel agencies. Examples of these incentives include lower fees, advance seat assignments and greater earning potential for frequent flier miles.

In part as a result of sharply rising average ticket prices, our ticket volumes decreased by 8% in 2011 after having grown by 11% in 2010. Air ticket volumes grew 8% for the first half of 2013 and 4% in 2012, largely due to strong growth in corporate ticket volumes at Egencia.

From a product perspective for the first six months of 2013, over 70% of our revenue comes from transactions involving the booking of hotel reservations, with 9% of our revenue derived from the sale of airline tickets. We believe that the hotel product is the most profitable of the products we distribute and represents our best overall growth opportunity.

Growth Strategy

Product Innovation. Each of our leading brands was a pioneer in online travel and has been responsible for driving key innovations in the space over the past two decades. They each operate a dedicated technology team, which drives innovations that make researching and shopping for travel increasingly easier and helps customers find and book the best possible travel options. In the past several years, we made key investments in technology, including significant development of our technological platforms that makes it possible for us to deliver innovations at a faster pace. For example, we launched our new Hotels.com global platform in the first quarter of 2010, enabling us to significantly increase the innovation cycle for that brand. Since then, we have been successful in improving conversion and driving much faster growth rates for the Hotels.com brand. We are in the midst of a similar transformation for Brand Expedia, having rolled out its new hotel platform in the second half of 2011, followed by the air platform rollout during the first half of 2012 and the new package platform in the first quarter of 2013.

Global Expansion. Our Expedia, Hotels.com, Egencia, EAN, and Hotwire brands operate both domestically and through international points of sale, including in Europe, Asia Pacific, Canada and Latin America. We own a majority share of eLong, which is the second largest online travel company in China. We also own Venere, a European brand, which focuses on marketing hotel rooms in Europe. Egencia, our corporate travel business, operates in over 60 countries around the world and continues to expand, including its 2012 acquisition of VIA Travel. We also partner in a 50/50 joint venture with AirAsia – a low cost carrier serving the Asia-Pacific region – to jointly grow an online travel agency business. Although the results for the joint venture are not consolidated in our financial statements, we consider this business to be a key part of our Asia Pacific strategy. In 2012, approximately 41% of our worldwide gross bookings and 45% of worldwide revenue were international up from 22% for both worldwide gross bookings and revenue in 2005. In the first half of 2013, 43% of our worldwide gross bookings and 45% of worldwide revenue were international. We have a stated goal of driving more than half of our revenue through international points of sale.

 

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During the six months ended June 30, 2013, we completed our majority acquisition of trivago, GmbH (“trivago”), a Dusseldorf, Germany-based leading hotel metasearch company featuring price comparison from over 600,000 hotels on over 150 booking sites worldwide. Officially launched in 2005, trivago is already one of the best known travel brands in Europe. trivago will continue to operate independently, and plans to rapidly grow revenue through global expansion.

In expanding our global reach, we leverage significant investments in technology, operations, brand building, supplier relationships and other initiatives that we have made since the launch of Expedia.com in 1996. We intend to continue leveraging these investments when launching additional points of sale in new countries, introducing new website features, adding supplier products and services including new business model offerings, as well as proprietary and user-generated content for travelers.

Our scale of operations enhances the value of technology innovations we introduce on behalf of our travelers and suppliers. We believe that our size and scale affords the company the ability to negotiate competitive rates with our supply partners, provide breadth of choice and travel deals to our traveling customers through an increasingly larger supply portfolio and creates opportunities for new value added offers for our customers such as our loyalty programs. The size of Expedia’s worldwide traveler base makes our sites an appealing channel for travel suppliers to reach customers. In addition, the sheer size of our user base and search query volume allows us to test new technology very quickly in order to determine which innovations are most likely to improve the travel research and booking process, and then roll those features out to our worldwide audience in order to drive improvements to conversion.

New Channel Penetration. Today, the vast majority of online travel bookings are generated through typical desktop and laptop computers. However, technological innovations and developments are creating new opportunities including travel bookings made through mobile devices. In the past few years, each of our brands made significant progress creating new mobile websites and mobile/tablet applications that are receiving strong reviews and solid download trends. In 2010, we bought a leading travel application company called Mobiata® which is responsible for several top travel applications, such as FlightTrackTM, FlightTrack ProTM and FlightBoardTM, and is now integrated into Brand Expedia. We believe mobile bookings via smartphones present an opportunity for incremental growth as they are typically completed within one day of the travel or stay which is a much shorter booking window than we have historically experienced via more traditional online booking methods. During the last year, customers’ behaviors and preferences on tablet devices began to show differences from trends seen on smartphones. For example, the booking window on a smartphone typically is much shorter than the emerging trend on the tablet device and historical average on a desktop or laptop. We have a stated goal of booking 20% of our transactions through mobile devices before the end of 2014.

Virtually all of our leisure brands continue to conduct experiments with ‘daily deals’ and social media as part of our efforts to drive business through new distribution channels. We believe daily deals may represent incremental travel bookings as it typically represents an impulse purchase compared to historical travel purchasing activity which tends to be a highly considered and deliberate transaction. In addition, we anticipate the importance of social media channels to consumers and to our industry to increase over time. It is our intention to grow our ‘social’ efforts alongside this trend.

Seasonality

We generally experience seasonal fluctuations in the demand for our travel products and services. For example, traditional leisure travel bookings are generally the highest in the first three quarters as travelers plan and book their spring, summer and holiday travel. The number of bookings typically decreases in the fourth quarter. Because revenue in the merchant business is generally recognized when the travel takes place rather than when it is booked, revenue typically lags bookings by several weeks or longer. The seasonal revenue impact is exacerbated with respect to income by the more stable nature of our fixed costs. As a result, revenue and income are typically the lowest in the first quarter and highest in the third quarter. The continued growth of our international operations or a change in our product mix may influence the typical trend of the seasonality in the future.

 

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Critical Accounting Policies and Estimates

Critical accounting policies and estimates are those that we believe are important in the preparation of our consolidated financial statements because they require that we use judgment and estimates in applying those policies. We prepare our consolidated financial statements and accompanying notes in accordance with generally accepted accounting principles in the United States (“GAAP”). Preparation of the consolidated financial statements and accompanying notes requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements as well as revenue and expenses during the periods reported. We base our estimates on historical experience, where applicable, and on other assumptions that we believe are reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions.

There are certain critical estimates that we believe require significant judgment in the preparation of our consolidated financial statements. We consider an accounting estimate to be critical if:

 

   

It requires us to make an assumption because information was not available at the time or it included matters that were highly uncertain at the time we were making the estimate; and

 

   

Changes in the estimate or different estimates that we could have selected may have had a material impact on our financial condition or results of operations.

For additional information about our critical accounting policies and estimates, see the disclosure included in our Annual Report on Form 10-K for the year ended December 31, 2012.

Occupancy Taxes

We are currently involved in thirty-eight lawsuits brought by or against states, cities and counties over issues involving the payment of hotel occupancy taxes. We continue to defend these lawsuits vigorously. With respect to the principal claims in these matters, we believe that the ordinances at issue do not apply to the services we provide, namely the facilitation of hotel reservations, and, therefore, that we do not owe the taxes that are claimed to be owed. We believe that the ordinances at issue generally impose occupancy and other taxes on entities that own, operate or control hotels (or similar businesses) or furnish or provide hotel rooms or similar accommodations.

Recent developments include:

 

   

City of Chicago, Illinois Litigation. On June 21, 2013, the trial court entered an order (supplemented by a subsequent June 28, 2013 order) holding that the online travel companies are liable to pay hotel occupancy taxes to the city of Chicago.

 

   

Branson, Missouri Litigation. On April 30, 2013, the Missouri Supreme Court denied the city of Branson’s request that the court review the lower court’s dismissal of the city’s claims for payment of hotel occupancy tax.

 

   

State of North Carolina Litigation. On May 28, 2013, the court held that the online travel companies may proceed with their state law claims against the state and city that no taxes are due.

 

   

Settlements in principle have been reached in the City of Gallup, New Mexico and Village of Rosemont, Illinois litigation and the parties entered into a settlement agreement in the Baltimore County, Maryland litigation.

 

   

State of Kentucky Litigation. The Department of Revenue, Finance and Administration Cabinet, Commonwealth of Kentucky, filed a lawsuit in Kentucky state court against a number of online travel companies, including Expedia, Hotels.com and Hotwire.

For additional information on these and other legal proceedings, see Part II, Item 1, Legal Proceedings.

We have established a reserve for the potential settlement of issues related to hotel occupancy tax litigation, consistent with applicable accounting principles and in light of all current facts and circumstances, in the amount of $42 million as of June 30, 2013, which includes amounts expected to be paid in connection with the developments described above, and $35 million as of December 31, 2012. In addition, as of June 30, 2013, we had an accrual totaling $1 million related to court decisions and final settlements.

 

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Certain jurisdictions may require us to pay tax assessments, including occupancy tax assessments, prior to contesting any such assessments. This requirement is commonly referred to as “pay-to-play.” Payment of these amounts is not an admission by the taxpayer that it believes it is subject to such taxes. During 2009, we expensed $48 million related to monies paid in advance of litigation in occupancy tax proceedings with the city of San Francisco. The city of San Francisco has issued additional assessments of tax, penalties and interest for the time period from the fourth quarter of 2007 through the fourth quarter of 2011 against the online travel companies, including $22 million against Expedia, Hotels.com and Hotwire. The additional assessments, including the prepayment of such assessments, have been contested by the online travel companies. The city has agreed, subject to documentation, that this second assessment need not be paid and may be placed under a bond. During 2010, we expensed $3 million related to monies paid in advance of litigation in occupancy tax proceedings in the city of Santa Monica; these funds were returned to us by the city in December 2011 in exchange for a letter of credit. The online travel companies subsequently prevailed in the litigation and the letter of credit in favor of the city has been voided. Hotels.com is currently under audit by the State of Texas, which imposes a pay-to-play requirement to challenge an adverse audit result in court.

We do not believe that the amounts we retain as compensation are subject to the cities’ hotel occupancy tax ordinances. If we prevail in the litigation, for which a pay-to-play payment was made, the jurisdiction collecting the payment will be required to repay such amounts, plus interest. However, any significant pay-to-play payment or litigation loss could negatively impact our liquidity.

Certain jurisdictions, including the states of New York, North Carolina, Minnesota and Oregon, the city of New York, and the District of Columbia, have enacted legislation seeking to tax online travel company services as part of sales taxes for hotel occupancy. We are currently remitting taxes to the city of New York, the state of New York, the state and local jurisdictions of South Carolina, the State of Minnesota, the District of Columbia, and the state and local jurisdictions of Georgia.

Other Tax Litigation

Hawaii Tax Court Litigation (General Excise Tax). On January 11, 2013, the Hawaii tax court ruled that certain online travel companies, including Expedia, Hotels.com and Hotwire (“the Expedia Subsidiaries”), are obligated to remit past Hawaii general excise taxes with interest, which the Hawaii Director of Taxation has claimed totals $110 million for the Expedia Subsidiaries, comprised of $78 million relating to tax liability from January 2000 to December 2011 and $32 million in interest from January 2000 to December 2012. On March 15, 2013, the Hawaii tax court issued penalties against the online travel companies. Under this ruling, the state is seeking penalties and interest totaling $60 million against the Expedia Subsidiaries, representing 50% of the Expedia Subsidiaries’ tax liability plus interest thereon. On April 22, 2013, the Hawaii Supreme Court denied the online travel companies’ petition for mandamus requesting review of the tax court’s ruling that online travel companies must remit tax on gross bookings and therefore subject the hotel’s charge for the room to double taxation. A conference before the tax court is set for August 12, 2013 regarding the remaining issue of whether interest is due on the penalties claimed by the state. The case will then proceed on appeal. The online travel companies had previously filed an appeal, but it was dismissed as premature. In addition, on May 20, 2013, the state issued final assessments against the online travel companies, including the Expedia Subsidiaries, for general excise taxes that the state claims are due for the year 2012. The total of these assessments against the Expedia Subsidiaries is $20.5 million

During the year ended December 31, 2012, we expensed $110 million, and during the six months ended June 30, 2013, we expensed an additional $60 million for amounts required to be paid prior to appealing the tax court’s ruling. During the three months ended June 30, 2013, we paid $153 million in advance of litigation. As of June 30, 2013, we have $17 million remaining in accrued expenses and other liabilities for interest on penalties related to this matter. It is also reasonably possible that we will incur amounts in excess of the amounts expensed, which we estimate could be up to $25 million. The ultimate resolution of these contingencies may be greater or less than the liabilities recorded and our estimate of possible additional assessments.

 

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Segments

We have two reportable segments: Leisure and Egencia. Our Leisure segment provides a full range of travel and advertising services to our worldwide customers through a variety of brands including: Expedia.com and Hotels.com in the United States and localized Expedia and Hotels.com websites throughout the world, EAN, Hotwire.com, Venere, eLong, trivago and Classic Vacations. Our Egencia segment provides managed travel services to corporate customers in North America, Europe, and the Asia Pacific region.

Operating Metrics

Our operating results are affected by certain metrics, such as gross bookings and revenue margin, which we believe are necessary for understanding and evaluating us. Gross bookings represent the total retail value of transactions booked for both agency and merchant transactions, recorded at the time of booking reflecting the total price due for travel by travelers, including taxes, fees and other charges, and are generally reduced for cancellations and refunds. As travelers have increased their use of the internet to book travel arrangements, we have generally seen our gross bookings increase, reflecting the growth in the online travel industry, our organic market share gains and our business acquisitions. Revenue margin is defined as revenue as a percentage of gross bookings.

Gross Bookings and Revenue Margin

 

     Three months ended June 30,           Six months ended June 30,        
     2013     2012     % Change     2013     2012     % Change  
     ($ in millions)           ($ in millions)        

Gross Bookings

            

Leisure

   $ 8,933      $ 8,019        11   $ 17,598      $ 15,684        12

Egencia

     1,188        938        27     2,304        1,693        36
  

 

 

   

 

 

     

 

 

   

 

 

   

Total gross bookings

   $ 10,121      $ 8,957        13   $ 19,902      $ 17,377        15
  

 

 

   

 

 

     

 

 

   

 

 

   

Revenue Margin

            

Leisure

     12.4     12.0       11.6     11.0  

Egencia

     8.0     8.1       8.0     7.6  

Total revenue margin

     11.9     11.6       11.1     10.7  

The increase in worldwide gross bookings for the three and six months ended June 30, 2013, as compared to the same periods in 2012, was primarily due to a 19% and 23% increase in hotel room nights due to continued momentum at Brand Expedia and eLong as well as a 7% and 8% increase in air tickets sold.

The increase in revenue margin for the three and six months ended June 30, 2013, as compared to the same periods in 2012, was primarily due to a favorable mix shift to our higher margin products, including hotel and advertising and media revenue, partially offset by mix shifts within our hotel product.

Results of Operations

Revenue

 

     Three months ended June 30,            Six months ended June 30,         
     2013      2012      % Change     2013      2012      % Change  
     ($ in millions)            ($ in millions)         

Revenue by Segment

                

Leisure

   $ 1,110       $ 964         15   $ 2,033       $ 1,728         18

Egencia

     95         76         26     184         128         43
  

 

 

    

 

 

      

 

 

    

 

 

    

Total revenue

   $ 1,205       $ 1,040         16   $ 2,217       $ 1,856         19
  

 

 

    

 

 

      

 

 

    

 

 

    

Revenue increased for the three and six months ended June 30, 2013, compared to the same periods in 2012, primarily due to an increase in worldwide hotel revenue within our Leisure segment. Acquisitions added approximately 6% to the period-over-period growth rates in total revenue for both the three and six months ended June 30, 2013.

 

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Worldwide hotel revenue increased 12% and 17% for the three and six months ended June 30, 2013, compared to the same periods in 2012. The increases were primarily due to a 19% and 23% increase in room nights stayed due to the continued momentum at Brand Expedia and eLong, partially offset by a 6% and 5% decrease in revenue per room night. Revenue per room night decreased for both periods primarily due to changes in our hotel product mix, of which mix shift to Asia-Pacific remains a significant component. The declines were partially offset by higher ADRs in other regions.

Worldwide air revenue increased 8% and 11% for the three and six months ended June 30, 2013, compared to the same periods in 2012, due to a 7% and 8% increase in air tickets sold and a 1% and 3% increase in revenue per air ticket. The increase in air ticket sold was due to strong growth in air ticket volumes at Egencia. Revenue per air ticket increased for both periods due to a change in package refund policy, partially offset by lower net supplier economics. In addition, an increase in variable incentives from suppliers also impacted the increase for the six months ended June 30, 2013.

The remaining worldwide revenue, other than hotel and air discussed above, increased by 37% and 33% for the three and six months ended June 30, 2013, compared to the same periods in 2012, primarily due to strong growth in advertising and media revenue generated by trivago as well as fees related to our corporate travel business.

In addition to the above segment and product revenue discussion, our revenue by business model is as follows:

 

     Three months ended June 30,            Six months ended June 30,         
     2013      2012      % Change     2013      2012      % Change  
     ($ in millions)            ($ in millions)         

Revenue by Business Model

                

Merchant

   $ 855       $ 787         9   $ 1,588       $ 1,390         14

Agency

     270         221         23     503         403         25

Advertising and media

     80         32         147     126         63         98
  

 

 

    

 

 

      

 

 

    

 

 

    

Total revenue

   $ 1,205       $ 1,040         16   $ 2,217       $ 1,856         19
  

 

 

    

 

 

      

 

 

    

 

 

    

Merchant revenue increased for the three and six months ended June 30, 2013, compared to the same periods in 2012, due to the increase in merchant hotel revenue primarily driven by an increase in room nights stayed.

Agency revenue increased for the three and six months ended June 30, 2013, compared to the same periods in 2012, due to the growth in agency hotel as well as our corporate travel business as a result of the VIA Travel acquisition.

Advertising and media revenue increased for the three and six months ended June 30, 2013, compared to the same periods in 2012, primarily due to our acquisition of trivago.

Cost of Revenue

 

     Three months ended June 30,           Six months ended June 30,        
     2013     2012     % Change     2013     2012     % Change  
     ($ in millions)           ($ in millions)        

Customer operations

   $ 125      $ 113        10   $ 247      $ 210        17

Credit card processing

     89        71        26     170        132        28

Data center and other

     49        46        6     96        88        12
  

 

 

   

 

 

     

 

 

   

 

 

   

Total cost of revenue

   $ 263      $ 230        14   $ 513      $ 430        19
  

 

 

   

 

 

     

 

 

   

 

 

   

% of revenue

     21.8     22.1       23.1     23.2  

Cost of revenue primarily consists of (1) customer operations, including our customer support and telesales as well as fees to air ticket fulfillment vendors, (2) credit card processing, including merchant fees, charge backs and fraud, and (3) other costs, primarily including data center costs to support our websites, destination supply, and stock-based compensation.

During the three months ended June 30, 2013, the increase in cost of revenue expense was driven by $18 million of higher net credit card processing costs, including fraud, related to our merchant bookings as well as a $12 million increase in customer operations expenses primarily due to an increase in headcount costs.

During the six months ended June 30, 2013, the increase in cost of revenue expense was primarily driven by an increase of $37 million in customer operations expenses, of which higher headcount costs related to our VIA Travel acquisition as well as our global customer organizations accounted for over 80% of the total increase. In addition, higher net credit card processing costs, including fraud, related to our merchant bookings drove an additional $38 million increase.

 

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Selling and Marketing

 

     Three months ended June 30,           Six months ended June 30,        
     2013     2012     % Change     2013     2012     % Change  
     ($ in millions)           ($ in millions)        

Direct costs

   $ 473      $ 345        37   $ 854      $ 627        36

Indirect costs

     117        100        18     233        195        19
  

 

 

   

 

 

     

 

 

   

 

 

   

Total selling and marketing

   $ 590      $ 445        33   $ 1,087      $ 822        32
  

 

 

   

 

 

     

 

 

   

 

 

   

% of revenue

     49.0     42.7       49.0     44.3  

Selling and marketing expense primarily relates to direct costs, including traffic generation costs from search engines and internet portals, television, radio and print spending, private label and affiliate program commissions, public relations and other costs. The remainder of the expense relates to indirect costs, including personnel and related overhead in our global supply organization, Egencia and various Leisure brands and stock-based compensation costs.

Selling and marketing expenses increased $145 million and $265 million during the three months ended June 30, 2013, compared to the same periods in 2012, driven by $128 million and $227 million of direct costs increases, of which offline marketing, online marketing and mobile download spend at trivago, Brand Expedia and Hotels.com as well as higher affiliate marketing expenses at EAN accounted for approximately 80% of the total increases for both periods, as well as higher personnel expenses of $17 million and $38 million driven by additional headcount from the trivago acquisition as well as our supply organization, eLong and other transaction brands. The trivago acquisition added approximately 11% to year-on-year selling and marketing expense growth for the second quarter of 2013, and 7% of the growth for the year-to-date period.

Technology and Content

 

     Three months ended June 30,           Six months ended June 30,        
     2013     2012     % Change     2013     2012     % Change  
     ($ in millions)           ($ in millions)        

Personnel and overhead

   $ 74      $ 64        15   $ 152      $ 125        21

Depreciation and amortization of technology assets

     38        27        40     74        50        48

Other

     29        25        17     53        50        7
  

 

 

   

 

 

     

 

 

   

 

 

   

Total technology and content

   $ 141      $ 116        21   $ 279      $ 225        24
  

 

 

   

 

 

     

 

 

   

 

 

   

% of revenue

     11.7     11.2       12.6     12.1  

Technology and content expense includes product development and content expense, as well as information technology costs to support our infrastructure, back-office applications and overall monitoring and security of our networks, and is principally comprised of personnel and overhead, depreciation and amortization of technology assets including hardware, and purchased and internally developed software, and other costs including licensing and maintenance expense and stock-based compensation.

The increase of $25 million and $54 million in technology and content expense during the three and six months ended June 30, 2013, compared to the same periods in 2012, was primarily due to increased personnel costs of $10 million and $27 million for increased headcount to support key technology projects for Brand Expedia, our corporate technology function and supply organization as well as increased depreciation and amortization of technology assets of $11 million and $24 million.

 

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General and Administrative

 

     Three months ended June 30,           Six months ended June 30,        
     2013     2012     % Change     2013     2012     % Change  
     ($ in millions)           ($ in millions)        

Personnel and overhead

   $ 59      $ 53        11   $ 119      $ 104        14

Professional fees and other

     33        30        9     65        58        13
  

 

 

   

 

 

     

 

 

   

 

 

   

Total general and administrative

   $ 92      $ 83        10   $ 184      $ 162        14
  

 

 

   

 

 

     

 

 

   

 

 

   

% of revenue

     7.6     8.0       8.3     8.7  

General and administrative expense consists primarily of personnel-related costs, including our executive leadership, finance, legal and human resource functions as well as fees for external professional services including legal, tax and accounting, and other costs including stock-based compensation.

The $9 million and $22 million increase in general and administrative expense during the three and six months ended June 30, 2013, compared to the same periods in 2012, was due primarily to higher personnel expenses of $6 million and $15 million, of which additional headcount costs drove approximately 70% and 65% of the total increases. Acquisitions, including VIA Travel and trivago, added approximately 3% to quarter-to-date general and administrative expense growth for the second quarter of 2013 and 5% for the year-to-date period.

Amortization of Intangible Assets

 

     Three months ended June 30,           Six months ended June 30,        
     2013     2012     % Change     2013     2012     % Change  
     ($ in millions)           ($ in millions)        

Amortization of intangible assets

   $ 19      $ 9        118   $ 31      $ 12        161

% of revenue

     1.6     0.8       1.4     0.6  

The increase in amortization of intangible assets during the three and six months ended June 30, 2013 was due to amortization related to new business acquistions, including trivago in March 2013 and VIA Travel in April 2012. In addition, amortization for the six months ended June 30, 2012 included an approximate $2 million reduction related to a change in the estimated value of contingent purchase consideration for one of our prior acquisitions.

Legal Reserves, Occupancy Tax and Other

 

     Three months ended June 30,           Six months ended June 30,        
     2013     2012     % Change     2013     2012     % Change  
     ($ in millions)           ($ in millions)        

Legal reserves, occupancy tax and other

   $ 6      $ 3        86   $ 68      $ 3        2,106

% of revenue

     0.5     0.3       3.1     0.2  

Legal reserves, occupancy tax and other consists of changes in our reserves for court decisions and the potential and final settlement of issues related to hotel occupancy taxes, expenses recognized related to monies paid in advance of occupancy tax proceedings (“pay-to-play”) as well as certain other legal reserves.

For the six months ended June 30, 2013, we recognized approximately $60 million for amounts paid or expected to be paid in advance of litigation related to penalties and interest in connection with Hawaii’s general excise tax litigation.

Acquisition-related and other

During the first quarter of 2013, we recorded approximately$57 million of stock-based compensation to acquisition-related and other expense in connection with the trivago acquisition as well as $10 million related to the upfront consideration paid to settle a portion of an employee compensation plan of trivago. For additional information, see Note 2 – Acquisitions and Dispositions in the notes to the consolidated financial statements.

 

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Operating Income (Loss)

 

     Three months ended June 30,           Six months ended June 30,        
     2013     2012     % Change     2013     2012     % Change  
     ($ in millions)           ($ in millions)        

Operating income (loss)

   $ 94      $ 154        (39 %)    $ (11   $ 203        (106 %) 

% of revenue

     7.8     14.9       (0.5 %)      10.9  

Operating income decreased for the three and six months ended June 30, 2013, compared to the same periods in 2012, due primarily to increases in operating expenses in excess of revenue as described above. For the six months ended June 30, 2013, the increase in operating expenses included the charges related to the Hawaii general excise tax litigation and acquisition-related and other expenses.

Interest Income and Expense

 

     Three months ended June 30,           Six months ended June 30,        
     2013     2012     % Change     2013     2012     % Change  
     ($ in millions)           ($ in millions)        

Interest income

   $ 7      $ 7        3   $ 13      $ 13        3

Interest expense

     (22     (22     (2 %)      (43     (43     (0 %) 

Interest income and interest expense was consistent for the three and six months ended June 30, 2013, compared to the same periods in 2012.

Other, Net

Other, net changed to income of $7 million for the three months ended June 30, 2013 from a loss of $5 million for the three months ended June 30, 2012 primarily due to net foreign exchange rate gains of $9 million in the current period compared to net foreign exchange rate losses of $1 million in the prior period as well as $3 million in lower equity method operating losses in the current period.

Other, net changed to income of $10 million for the six months ended June 30, 2013 from a loss of $11 million for the six months ended June 30, 2012 primarily due to net foreign exchange rate gains of $12 million in the current period compared to net foreign exchange rate losses of $4 million in the prior period as well as $5 million in lower equity method operating losses in the current period.

Provision for Income Taxes

 

     Three months ended June 30,           Six months ended June 30,        
     2013     2012     % Change     2013     2012     % Change  
     ($ in millions)           ($ in millions)        

Provision for income taxes

   $ 24      $ 29        (15 %)    $ 13      $ 34        (63 %) 

Effective tax rate

     27.9     21.3       (39.3 %)      21.0  

We determine our provision for income taxes for interim periods using an estimate of our annual effective rate. We record any changes to the estimated annual rate in the interim period in which the change occurs, including discrete tax items.

Our effective tax rate was 27.9% for the three months ended June 30, 2013, which was lower than the 35% federal statutory rate primarily due to estimated earnings in jurisdictions outside the United States where our effective rate is lower, and was higher than the effective tax rate for the three months ended June 30, 2012 primarily due to the recording of a valuation allowance related to foreign deferred tax assets. For the six months ended June 30, 2013, we recorded $13 million of income tax expense on pre-tax losses as a result of non-deductible stock-based compensation recorded in relation to the trivago acquisiton and non-deductible penalties included in the Hawaii pay-to-play assessments.

Our effective tax rate was 21.3% and 21.0% for the three and six months ended June 30, 2012, which was lower than the 35% federal statutory rate primarily due to estimated earnings in jurisdictions outside the United States.

 

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Discontinued Operations, Net of Taxes

On December 20, 2011, following the close of trading on the Nasdaq Stock Market, we completed the spin-off of TripAdvisor, Inc. (“TripAdvisor”), which consisted of the domestic and international operations previously associated with our TripAdvisor Media Group, to Expedia stockholders. During the six months ended June 30, 2012, we incurred a loss from early extinguishment of our 8.5% senior notes due 2016 (the “8.5% Notes”) resulting directly from the spin-off of TripAdvisor. The pre-tax loss was approximately $38 million (or $24 million net of tax), which included an early redemption premium of $33 million and the write-off of $5 million of unamortized debt issuance and discount costs. This loss was recorded within discontinued operations in the first quarter of 2012, as that was the period in which the 8.5% Notes were legally extinguished.

Financial Position, Liquidity and Capital Resources

Our principal sources of liquidity are cash flows generated from operations; our cash and cash equivalents and short-term investment balances, which were $2.3 billion and $1.9 billion at June 30, 2013 and December 31, 2012, including $315 million and $309 million of cash and short-term investment balances of majority-owned subsidiaries as well as $80 million and $57 million held in foreign subsidiaries related to earnings indefinitely invested outside the United States; and our $1 billion revolving credit facility, which expires in November 2017. As of June 30, 2013, $982 million was available under the facility representing the total $1 billion facility less $18 million of outstanding stand-by letters of credit. The revolving credit facility bears interest based on the Company’s credit ratings, with drawn amounts bearing interest at LIBOR plus 150 basis points, and the commitment fee on undrawn amounts at 20 basis points as of June 30, 2013.

Our credit ratings are periodically reviewed by rating agencies. As of June 30, 2013, Moody’s rating was Ba1 with an outlook of “stable,” S&P’s rating was BBB- with an outlook of “stable” and Fitch’s rating was BBB- with an outlook of “stable.” Changes in our operating results, cash flows, financial position, capital structure, financial policy or capital allocations to share repurchase, dividends, investments and acquisitions could impact the ratings assigned by the various rating agencies. Should our credit ratings be adjusted downward, we may incur higher costs to borrow and/or limited access to capital markets, which could have a material impact on our financial condition and results of operations.

Under the merchant model, we receive cash from travelers at the time of booking and we record these amounts on our consolidated balance sheets as deferred merchant bookings. We pay our airline suppliers related to these merchant model bookings generally within a few weeks after completing the transaction, but we are liable for the full value of such transactions until the flights are completed. For most other merchant bookings, which is primarily our merchant hotel business, we generally pay after the travelers’ use and, in some cases, subsequent billing from the hotel suppliers. Therefore, generally we receive cash from the traveler prior to paying our supplier, and this operating cycle represents a working capital source of cash to us. As long as the merchant hotel business grows, we expect that changes in working capital related to merchant hotel transactions will positively impact operating cash flows. However, we continue to evaluate the use of the merchant model versus the agency model in each of our markets. If the merchant hotel model declines relative to our other business models that generally consume working capital such as agency hotel, managed corporate travel or media, or if there are changes to the merchant model or booking patterns which compress the time of receipts of cash from travelers to payment to suppliers, such as with mobile bookings via smartphones, our overall working capital benefits could be reduced, eliminated, or even reversed.

For example, we have continued to see positive momentum in the global roll out of the ETP program first launched in 2012. As this program continues to expand, and depending on relative supplier and traveler adoption rates and customer payment preferences, among other things, the introduction of ETP could negatively impact near term working capital cash balances, cash flow over time, liquidity and the hotel revenue margin.

Seasonal fluctuations in our merchant hotel bookings affect the timing of our annual cash flows. During the first half of the year, hotel bookings have traditionally exceeded stays, resulting in much higher cash flow related to working capital. During the second half of the year, this pattern reverses and cash flows are typically negative. While we expect the impact of seasonal fluctuations to continue, merchant hotel growth rates, changes to the model or booking patterns, as well as changes in the relative mix of merchant hotel transactions compared with transactions in our working capital consuming businesses, including ETP, may counteract or intensify the anticipated seasonal fluctuations.

 

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As of June 30, 2013, we had a deficit in our working capital of $947 million, compared to a deficit of $368 million as of December 31, 2012. The change in deficit was primarily due to financing and investing activities, including business acquisitions and share repurchases during the first half of 2013.

We continue to invest in the development and expansion of our operations. Ongoing investments include but are not limited to improvements in infrastructure, which include our servers, networking equipment and software, release improvements to our software code, platform migrations and consolidation and search engine marketing and optimization efforts. Our future capital requirements may include capital needs for acquisitions, share repurchases, dividend payments or expenditures in support of our business strategy; thus reducing our cash balance and/or increasing our debt. Our capital expenditures for full year 2013 are expected to be above 2012 spending levels.

Our cash flows are as follows:

 

     Six months ended June 30,        
     2013     2012     $ Change  
     (In millions)        

Cash provided by (used in) continuing operations:

      

Operating activities

   $ 1,200      $ 1,401      $ (201

Investing activities

     (1,031     (641     (390

Financing activities

     (90     (86     (4

Net cash used in discontinued operations

     —           (8     8   

Effect of foreign exchange rate changes on cash and cash equivalents

     (60     (11     (49

For the six months ended June 30, 2013, net cash provided by operating activities decreased by $201 million primarily due to an increase in general excise tax assessments and income tax payments.

For the six months ended June 30, 2013, cash used in investing activities increased by $390 million primarily due to an increase of cash used for acquisitions of $341 million, an increase in capital expenditures of $41 million, which includes a 50% ownership interest in an aircraft for which we paid $23 million, as well as an increase in net purchases of investments of $24 million.

Cash used in financing activities for the six months ended June 30, 2013 primarily included cash paid to acquire shares of $134 million, including the repurchased shares under the 2012 authorization discussed below, and $36 million cash dividend payment, partially offset by $60 million of proceeds from the exercise of options and the issuance of treasury stock. Cash used in financing activities for the six months ended June 30, 2012 primarily included cash paid to acquire shares of $298 million, including the repurchased shares under the 2010 authorization, as well as a $24 million cash dividend payment, partially offset by $225 million of proceeds from the exercise of equity awards, including $175 million for warrants exercised during the second quarter of 2012.

In 2010, the Executive Committee, acting on behalf of the Board of Directors, authorized a repurchase of up to 20 million outstanding shares of our common stock. This authorization was exhausted in the second quarter of 2012. In 2012, the Executive Committee, acting on behalf of the Board of Directors, authorized an additional repurchase of up to 20 million outstanding shares of our common stock. During the six months ended June 30, 2013 and 2012, we repurchased, through open market transactions, 2.0 million and 8.8 million shares under these authorizations for a total cost of $127 million and $291 million, excluding transaction costs. As of June 30, 2013, 16.1 million shares remain authorized for repurchase under the 2012 authorization with no fixed termination date for the repurchases.

 

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In the first half of 2013 and 2012, the Executive Committee, acting on behalf of the Board of Directors, declared and we paid the following dividends:

 

Declaration Date

   Dividend
Per Share
     Record Date      Total Amount
(in  thousands)
     Payment Date  

Six months ended June 30, 2013:

  

     

February 5, 2013

   $ 0.13         March 11, 2013       $ 17,983         March 28, 2013   

    April 24, 2013

     0.13         May 30, 2013         17,638         June 19, 2013   

Six months ended June 30, 2012:

           

February 9, 2012

   $ 0.09         March 12, 2012       $ 12,204         March 30, 2012   

    April 25, 2012

     0.09         May 30, 2012         12,205         June 19, 2012   

In addition, on July 24, 2013, the Executive Committee, acting on behalf of the Board of Directors, declared a quarterly cash dividend of $0.15 per share of outstanding common stock payable on September 18, 2013 to stockholders of record as of the close of business on August 28, 2013. Future declarations of dividends are subject to final determination of our Board of Directors.

The effect of foreign exchange on our cash balances denominated in foreign currency for the six months ended June 30, 2013, compared to the same period in 2012, showed a net change of $49 million reflecting depreciations in foreign currencies in the current year period.

In our opinion, available cash, funds from operations and available borrowings will provide sufficient capital resources to meet our foreseeable liquidity needs. There can be no assurance, however, that the cost or availability of future borrowings, including refinancings, if any, will be available on terms acceptable to us.

Contractual Obligations, Commercial Commitments and Off-balance Sheet Arrangements

There have been no material changes outside the normal course of business to our contractual obligations and commercial commitments since December 31, 2012. Other than our contractual obligations and commercial commitments, we did not have any off-balance sheet arrangements as of June 30, 2013 or December 31, 2012.

Certain Relationships and Related Party Transactions

For a discussion of certain relationships and related party transactions, see Note 10 — Related Party Transactions in the notes to the consolidated financial statements.

 

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Part I. Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market Risk Management

There has been no material changes in our market risk during the three and six months ended June 30, 2013. For additional information, see Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in Part II of our Annual Report on Form 10-K for the year ended December 31, 2012.

 

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Part I. Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures.

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management, including our Chairman and Senior Executive, Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, our Chairman and Senior Executive, Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.

Changes in internal control over financial reporting.

There were no changes to our internal control over financial reporting that occurred during the quarter ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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Part II. Item 1. Legal Proceedings

In the ordinary course of business, Expedia and its subsidiaries are parties to legal proceedings and claims involving property, personal injury, contract, alleged infringement of third party intellectual property rights and other claims. A discussion of certain legal proceedings can be found in the section titled “Legal Proceedings,” of our Annual Report on Form 10-K for the year ended December 31, 2012 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013. The following are developments regarding such legal proceedings:

Litigation Relating to Hotel Occupancy Taxes

Actions Filed by Individual States, Cities and Counties

City of Chicago, Illinois Litigation. On June 21, 2013 and subsequently on June 28, 2013, the court entered an order and a supplemental order resolving the parties pending cross motions for summary judgment. The court denied the defendant online travel companies’ motion for summary judgment and granted in part and denied in part the city of Chicago’s motion for summary judgment holding the online travel companies liable for hotel occupancy taxes.

San Antonio, Texas Litigation. On April 4, 2013, the court entered a final judgment holding the online travel companies liable for hotel occupancy taxes to counties and cities in the statewide class. The online travel companies have filed a motion for judgment as a matter of law or, in the alternative, for a new trial. The cities have filed a motion to amend the judgment regarding calculation of penalties. These motions remain pending.

City of Gallup, New Mexico Litigation. The parties have reached a settlement in principle.

Nassau County, New York Litigation. On April 11, 2013, the court granted plaintiff’s motion for class certification. The online travel company defendants have appealed both the court’s certification order and its prior order denying their motion to dismiss. Defendants sought a stay of proceedings in the trial court pending resolution of their appeals to the Appellate Division of the Supreme Court of the State of New York, Second Judicial Department. The Appellate Division denied that request on June 3, 2013. Defendants’ appeal remains pending.

Branson, Missouri Litigation. After the Missouri Court of Appeals denied the city’s Motion for Rehearing of its petition for review, the city filed an application for transfer to the Missouri Supreme Court. On April 30, 2013, the Missouri Supreme Court denied the city’s application for transfer to the Missouri Supreme Court.

Village of Rosemont, Illinois Litigation. The parties have reached a settlement in principle.

Pine Bluff, Arkansas Litigation. On March 8, 2013, defendants filed a notice of appeal from the trial court’s decision to grant class certification. That appeal remains pending.

Leon County, Florida et al. Litigation. The plaintiff counties have petitioned the Florida Supreme Court for review of the court of appeals decision that affirmed the trial court decision that online travel companies are not liable for hotel occupancy taxes. On April 16, 2013, the court of appeals certified the issue presented in the lawsuit to the Florida Supreme Court for consideration. The Florida Supreme Court has not yet informed the parties whether it will consider the case.

Baltimore County, Maryland Litigation. The parties entered into a settlement agreement in May 2013 and the case was dismissed on June 7, 2013.

McAllister, Arkansas Litigation. On May 22, 2013, the court granted the online travel companies’ motion for reconsideration of the court’s February 6, 2012 denial of their motion to dismiss or, in the alternative, for judgment on the pleadings and dismissal of the lawsuit. On June 19, 2013, plaintiff filed a notice of appeal to the Arkansas Supreme Court. That appeal remains pending.

District of Columbia Litigation. On May 14, 2013, the District of Columbia filed a motion for partial summary judgment on damages. That motion remains pending.

 

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Part II. Item 1. Legal Proceedings

 

City of Fargo, North Dakota Litigation. On July 1, 2013, the online travel company defendants filed a motion to dismiss the City of Fargo’s complaint alleging that online travel companies are liable for hotel occupancy taxes.

City of Warrenville, Illinois Litigation. On April 5, 2013, a number of Illinois municipalities filed a putative class action in Illinois federal court against a number of online travel companies, including Expedia, Hotels.com and Hotwire. On July 8, 2013, the plaintiff municipalities voluntarily dismissed their federal court lawsuit and filed a similar putative class action lawsuit in Illinois state court. City of Bedford Park, et al. v. Expedia, Inc., et al. (Circuit Court of Cook County, Illinois, Chancery Division).

In addition, the following new case has been filed:

State of Kentucky Litigation. On July 15, 2013, the Department of Revenue, Finance and Administration Cabinet, Commonwealth of Kentucky, filed a lawsuit in Kentucky state court against a number of online travel companies, including Expedia, Hotels.com and Hotwire. Department of Revenue, Finance and Administration Cabinet, Commonwealth of Kentucky, v. Expedia, Inc. et al., Case No. 13-CI-912 (Franklin Circuit Court, Commonwealth of Kentucky). The complaint alleges claims for declaratory judgment, injunctive relief, violations of state sales tax laws, breach of fiduciary duty requiring an accounting, conversion, assumpsit for money had and received, imposition of a constructive trust, damages and punitive damages.

Notices of Audit or Tax Assessments

At various times, the Company has also received notices of audit, or tax assessments from municipalities and other taxing jurisdictions concerning our possible obligations with respect to state and local hotel occupancy or related taxes, which are listed in the section titled “Legal Proceedings” of our Annual Report on Form 10-K for the year ended December 31, 2012 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013.

The Company believes that the claims discussed above lack merit and will continue to defend vigorously against them.

Actions Filed by Expedia

State of North Carolina Litigation. On May 28, 2013, the court denied in part and granted in part the defendants State of North Carolina and Durham County’s motions to dismiss the online travel companies claims; specifically, the court denied the motion to dismiss as to the online travel company plaintiffs’ state law claims but granted the motion as to plaintiffs’ federal claims. Plaintiffs filed a motion to reconsider the court’s dismissal of their federal claims or, in the alternative, to certify for immediate appeal. On June 21, 2013, the court denied the online travel companies’ motion to reconsider but granted their motion to certify for immediate appeal to the North Carolina Court of Appeals.

Hawaii Tax Court Litigation (Transient Accommodations Tax). The state’s previously filed appeal of the tax court decision that online travel companies do not owe transient accommodation taxes was dismissed by the Hawaii Court of Appeals as premature on June 7, 2013. On May 20, 2013, the state issued final assessments against the Expedia subsidiaries, for transient accommodations tax that the state claims are due for the year 2012. See discussion of “Other Tax Litigation” below for information relating to General Excise Tax.

City of Portland, Oregon Litigation. After the court granted their motion for leave to amend, the city and county filed their amended answer, affirmative defenses and counterclaims on June 11, 2013. The court has set October 14, 2013 as trial date for the case.

Denver, Colorado Litigation. Both the city and county of Denver and the online travel companies have appealed from the trial court’s March 12, 2013 decision. These appeals remain pending.

 

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Part II. Item 1. Legal Proceedings

 

State of Wyoming Litigation. On April 23, 2013, the Wyoming Supreme Court accepted review of the online travel companies’ appeal from the February 28, 2013 ruling of the Wyoming Board of Equalization that the online travel companies are liable for sales tax on their online services to the State of Wyoming.

Other Tax Litigation

Hawaii Tax Court Litigation (General Excise Tax). A conference before the court is set for August 12, 2013 regarding the remaining issue of whether interest is due on the penalties claimed by the state. The case will then proceed on appeal. The online travel companies had previously filed an appeal, but it was dismissed as premature. The state has dismissed without prejudice its common law claims for recovery of taxes. On May 20, 2013, the state issued final assessments against the online travel companies, including the Expedia Subsidiaries, for general excise taxes that the state claims are due for the year 2012.

 

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Part II. Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed below and in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2012, which could materially affect our business, financial condition or future results. The risks described below and in our Annual Report on Form 10-K are not the only risks facing the Company. 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 operating results.

 

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

Share Repurchases

During 2012, our Board of Directors, or the Executive Committee, acting on behalf of the Board of Directors, authorized a repurchase of up to 20 million outstanding shares of our common stock. A summary of the repurchase activity for the second quarter of 2013 is as follows:

 

Period

   Total Number of
Shares  Purchased
     Average Price
Paid Per Share
     Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs
     Maximum
Number of
Shares that
May Yet Be
Purchased
Under Plans or
Programs
 
     (In thousands, except per share data)                

April 1-30, 2012

     260       $  61.80         260         16,065   

May 1-31, 2012

     —            —            —            16,065   

June 1-30, 2012

     —            —            —            16,065   
  

 

 

       

 

 

    

Total

     260       $ 61.80         260      
  

 

 

       

 

 

    

 

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Part II. Item 6. Exhibits

The exhibits listed below are filed as part of this Quarterly Report on Form 10-Q.

 

Exhibit   Exhibit Description    Filed      Incorporated by Reference                
No.        Herewith      Form      SEC File No.      Exhibit      Filing Date  
10.1  

Second Amended and Restated Expedia, Inc. 2005 Stock and Annual Incentive Plan

        DEF14A         000-51447         Appendix A         04/30/2013   
10.2  

Expedia, Inc. 2013 Employee Stock Purchase Plan

        DEF14A         000-51447         Appendix B         04/30/2013   
10.3  

Expedia, Inc. 2013 International Employee Stock Purchase Plan

        DEF14A         000-51447         Appendix C         04/30/2013   
31.1  

Certification of the Chairman and Senior Executive pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

     X               
31.2  

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

     X               
31.3  

Certification of the Chief Financial Officer pursuant Section 302 of the Sarbanes-Oxley Act of 2002

     X               
32.1  

Certification of the Chairman and Senior Executive pursuant Section 906 of the Sarbanes-Oxley Act of 2002

     X               
32.2  

Certification of the Chief Executive Officer pursuant Section 906 of the Sarbanes-Oxley Act of 2002

     X               
32.3  

Certification of the Chief Financial Officer pursuant Section 906 of the Sarbanes-Oxley Act of 2002

     X               
101*  

The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, formatted in XBRL: (i) Consolidated Statements of Operations, (ii) Consolidated Statements of Comprehensive Income (Loss), (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements.

              

 

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Signature

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 hereunto duly authorized.

 

July 25, 2013     Expedia, Inc.
      By:   /s/ MARK D. OKERSTROM
       

Mark D. Okerstrom

Chief Financial Officer

 

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