Expedia 2010 Annual Report Download - page 59

a substantial portion was not deductible for income tax purposes. Absent the impairment of goodwill and
intangible assets, our 2008 effective tax rate would have been 41.5%, and our 2009 effective rate was lower than
this rate primarily due to the deduction relating to the closure of a foreign subsidiary and, to a lesser extent, lower
accruals related to uncertain tax positions.
In 2008, our effective tax rate differed from the 35% statutory rate due to the impairment of goodwill, of
which a substantial portion was not deductible for income tax purposes. Absent the impairment of goodwill and
intangible assets, our 2008 effective tax rate would have been 41.5%, which was higher than the 35% statutory
rate primarily due to state income taxes and accruals related to uncertain tax positions.
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 $1.2 billion and $688 million at December 31, 2010 and 2009,
including $153 million and $148 million of cash and short-term investment balances of majority-owned
subsidiaries; and our revolving credit facility.
In August 2010, we privately placed $750 million of senior unsecured notes due in August 2020. In
December 2010, we completed an offer to exchange these notes for registered notes having substantially the
same financial terms and covenants as the original notes (the unregistered and registered notes collectively, 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, beginning
February 15, 2011.
In February 2010, we entered into a new $750 million, three-year revolving credit facility, replacing our
prior credit facility. In August 2010, we amended the new facility, extending the maturity to August 2014,
decreasing the interest rate spreads and fees and modifying certain covenants and other terms. Current pricing is
based on the Company’s credit ratings, with drawn amounts bearing interest at LIBOR plus 250 basis points, and
undrawn amounts bearing interest at 37.5 basis points. As of December 31, 2010, $723 million was available
under the facility representing the total $750 million facility less $27 million of outstanding stand-by letters of
credit.
Our credit ratings are periodically reviewed by rating agencies. In October 2009, our long-term ratings from
Moody’s and Standard and Poor’s were raised to Ba1 and BBB-, respectively. Standard and Poor’s maintains a
stable ratings outlook and Moody’s changed its outlook to positive in August 2010. Changes in our operating
results, cash flows, or financial position could impact the ratings assigned by the various rating agencies. Should
our credit ratings be adjusted downward, we may incur higher costs to borrow, which could have a material
impact on our financial condition and results of operations. However, at any time during which Standard and
Poor’s and Moody’s assign an investment credit rating to the company and no default exists under the 8.5% Note
indenture, certain of the covenants for our 8.5% Notes, including the covenants limiting under certain
circumstances our ability to incur additional indebtedness, pay dividends or make restricted payments and
dispose of assets, will be suspended during that time period.
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 pay after the travelers’ use and 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. If the merchant hotel model declines relative to 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 payments to suppliers,
our overall working capital benefits could be reduced, eliminated or even reversed.
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