Expedia 2011 Annual Report Download - page 62

The indenture governing our $400 million aggregate principal amount of 8.5% senior notes due 2016 (the
“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 price was equal to 100% of the principal amount plus a make-whole premium as of, and accrued and
unpaid interest to, the redemption date. The redemption date is defined as 30 days after the Notice of Redemption
is given. In order to complete the Notice of Redemption, we were required to irrevocably deposit, with the
Trustee, funds sufficient to pay the redemption price plus accrued interest on the 8.5% Notes (approximately
$451 million). The 8.5% Notes were fully redeemed on January 19, 2012 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 $25 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 will be recorded within
discontinued operations in the first quarter of 2012, as that is the period in which the bonds were legally
extinguished. The debt extinguishment was completed, in part, using the approximately $400 million of cash
distributed to us from TripAdvisor in connection with the spin-off.
Our credit ratings are periodically reviewed by rating agencies. In April 2011, in response to our
announcement of the TripAdvisor spin-off, Moody’s affirmed its Ba1 rating and changed its outlook to from
“positive” to “stable,” while S&P and Fitch placed the Company’s ratings on Credit Watch with negative
implications and Rating Watch Negative, respectively. In October 2011, Fitch affirmed its rating at BBB- and
removed the rating from Rating Watch Negative, with an outlook of “stable.” In December 2011, S&P affirmed
the Company’s BBB- rating and removed the ratings from Credit Watch, with an outlook of “stable”. 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.
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. 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 may counteract or intensify these anticipated seasonal fluctuations.
As of December 31, 2011, we had a deficit in our working capital of $279 million, compared to a deficit of
$188 million as of December 31, 2010. The change in deficit is primarily due to share repurchases, dividend
payments and purchases of marketable securities classified as long-term investments, partially offset by cash
generated by operations during 2011.
We continue to invest in the development and expansion of our operations. Ongoing investments include but
are not limited to improvements to infrastructure, which include our servers, networking equipment and software,
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