Expedia 2012 Annual Report Download - page 68

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2012, Fitch affirmed its rating at BBB- with an outlook of “stable.” In December 2012, both S&P and Moody’s
indicated the Company’s planned investment in trivago would not impact its credit ratings. 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 to
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 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. However, we continue to evaluate the use of merchant model versus the agency model in each of our
markets. 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 payment to suppliers, our
overall working capital benefits could be reduced, eliminated or even reversed.
For example, we recently started introducing new technology to our hotel supply partners, which will enable
closer integration of the agency hotel model with our core merchant offering in the United States and Europe.
Depending on relative traveler and 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 margin we earn per booking.
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 these
anticipated seasonal fluctuations.
As of December 31, 2012, we had a deficit in our working capital of $368 million, compared to a deficit of
$279 million as of December 31, 2011. The change in deficit is primarily due to share repurchases and dividend
payments, partially offset by cash generated by operations during 2012.
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,
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 2013 are expected to be above 2012 spending
levels.
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