Expedia 2005 Annual Report Download - page 49

Provision for Income Taxes
Year Ended December 31, % Change
2005 2004 2003 2005 vs 2004 2004 vs 2003
($ in thousands)
Provision for income taxes ÏÏÏÏÏÏÏ $185,977 $106,371 $97,202 75% 9%
% of revenue (as reported)ÏÏÏÏÏÏÏ 9% 6% 4%
% of revenue (on a comparable net
basis)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9% 6% 7%
Our effective tax rate was 45%, 39% and 38% in 2005, 2004 and 2003.
In 2005 and 2004, our effective tax rate was higher than the 35% statutory rate primarily due to state
taxes and an increase in the valuation allowance related to foreign operating losses. In addition, in 2005,
our effective tax rate was affected by non-deductible stock-based compensation expense, unrealized losses
on derivative instruments and loss from the write-off of our long-term investment.
In 2003, our effective tax rate was higher than the 35% statutory rate primarily due to state taxes.
For additional information about income taxes, see Note 13, Income Taxes, in the notes to
consolidated financial statements.
Financial Position, Liquidity and Capital Resources
Sources and Uses of Cash
In July 2005, we entered into a $1.0 billion revolving credit facility. As of December 31, 2005, our
outstanding balance on the revolving credit facility was $230.0 million, which consisted of short-term
borrowings. We repaid this balance during the first quarter of 2006, and as of March 24, 2006, we did not
have any outstanding borrowing under the revolving credit facility. At December 31, 2005, we were in
compliance with all related financial covenants.
In the merchant business, 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 suppliers related
to these bookings approximately one week after completing the transaction for air travel and, for all other
merchant bookings, after the travelers' use and the subsequent billing from the supplier. Therefore,
especially for the hotel business, which represents the majority of our merchant bookings, there is generally
some time from the receipt of the cash from the traveler to the payment to the suppliers.
As long as the merchant hotel business continues to grow, as it has historically, and our business
model does not change, we expect that the change in working capital will continue to be positive. If these
businesses decline or if the model changes, it could negatively affect our working capital. As of
December 31, 2005, we had a deficit in our working capital of $848.0 million, compared to a positive
amount of $1.3 billion as of December 31, 2004. The fluctuation in our working capital was due to the
$2.5 billion net intercompany receivable balance we extinguished through a non-cash distribution to IAC
upon our Spin-Off on August 9, 2005.
Seasonal fluctuations in our merchant bookings affect our 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. While we expect the impact of seasonal
fluctuations to continue, changes in the rate of growth of merchant bookings may affect working capital,
which might counteract or intensify the anticipated seasonal fluctuations.
We anticipate continued investment in the development and expansion of our operations. These
investments include but are not limited to improvements of our product support infrastructure, marketing
and sales strategy, corresponding distribution channels and existing technology. Our future capital
requirements may include capital needs for acquisitions, legal risks and to support our business strategy. In
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