Expedia 2006 Annual Report Download - page 49

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revolving credit facility, of which $948 million was available to us as of December 31, 2006 representing the
total of the facility less $52 million of outstanding stand-by letters of credit (“LOC”). As of December 31,
2006, we were in compliance with our financial covenants consisting of leverage and minimum net worth
related to the facility.
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 suppliers related to
these bookings generally within two weeks after completing the transaction for air travel and, for all other
merchant bookings, which is primarily our merchant hotel business, after the travelers’ use and subsequent
billing from the supplier. Therefore there is generally a greater time from the receipt of cash from the traveler
to the payment to the supplier, and this operating cycle represents a working capital source of cash to us. As
long as the merchant hotel business continues to grow and our business model does not change, we expect that
changes in working capital will positively impact operating cash flows. If this business declines relative to our
other businesses, or if there are changes to the model which compress the time between receipts of cash from
travelers to payments to suppliers, our working capital benefits could be reduced, as was the case to a certain
degree in 2006 as we increased the efficiency of our supplier payment process.
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. While we expect the
impact of seasonal fluctuations to continue, merchant hotel growth rates or model changes as discussed above
may affect working capital, which might counteract or intensify the anticipated seasonal fluctuations.
As of December 31, 2006, we had a deficit in our working capital of $217.4 million, compared to a
deficit of $848.0 million as of December 31, 2005. The 2005 deficit resulted from the $2.5 billion of net
intercompany receivable balances we extinguished through a non-cash distribution to IAC upon our Spin-Off
on August 9, 2005.
We anticipate continued investment in the development and expansion of our operations. These
investments include but are not limited to improvements to infrastructure, which include our enterprise data
warehouse investment, servers, networking equipment and software, release improvements to our software
code and continuing efforts to build a scaleable, extensible, service-oriented technology platform that will
extend across our portfolio of brands. We expect portions of our worldwide points of sale to migrate to the
new platform beginning in 2007. Capital expenditures are expected to increase 5% to 15% in 2007. Our future
capital requirements may include capital needs for acquisitions or expenditures in support of our business
strategy. In the event we have acquisitions, this may reduce our cash balance and increase our debt. Legal
risks and challenges to our business strategy may also negatively affect our cash balance.
Our cash flows are as follows:
2006 2005 2004 2006 vs 2005 2005 vs 2004
Year Ended December 31, $ Change
(In thousands)
Cash provided by (used in):
Operating activities . . . ..... $617,440 $ 859,187 $ 792,226 $(241,747) $ 66,961
Investing activities ......... (113,500) (801,343) (932,406) 687,843 131,063
Financing activities . . . ..... 9,772 106,507 107,320 (96,735) (813)
Effect of foreign exchange rate
changes on cash and cash
equivalents .............. 42,146 (8,603) (3,141) 50,749 (5,462)
In 2006, net cash provided by operating activities decreased by $241.7 million primarily due to an
increase in tax payments and a decrease in cash flows from operating income as well as a reduced benefit
from working capital. We made tax payments of $126.1 million, an increase of $115.7 million over 2005,
reducing cash provided by operations due primarily to IAC’s payment of taxes on behalf of Expedia prior to
our becoming an independent public company after which point we became responsible for our tax obligations.
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