Expedia 2014 Annual Report Download

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Table of contents

  • Page 1

  • Page 2
    ... herein and in our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may impact future results. The logos on the front cover are service marks or trademarks of Expedia, Inc. and/or its affiliated companies.

  • Page 3
    ... NE Bellevue, WA 98004 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (425) 679-7200 Securities registered pursuant to Section 12(b) of the Act: Title of each class: Name of each exchange on which registered: Common stock, $0.0001 par value...

  • Page 4
    ... Supplementary Data Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A Controls and Procedures Item 9B Other Information Part III Item 10 Directors, Executive Officers and Corporate Governance Item 11 Executive Compensation Item 12 Security Ownership...

  • Page 5
    ... reports filed with the Securities and Exchange Commission ("SEC") that attempt to advise interested parties of the risks and factors that may affect our business, prospects and results of operations. Management Overview General Description of our Business Expedia, Inc. is an online travel company...

  • Page 6
    ... travel.com.au, Asia Web Direct®, LateStays.com, GoDo.com.au and Arnold Travel Technology; CarRentals.com™, the premier car rental booking company on the web; Classic Vacations®, a top luxury travel specialist; Expedia Local Expert® ("LX"), a provider of online and in-market concierge services...

  • Page 7
    ... and verified traveler reviews) and book travel products and services on Expediabranded websites and mobile apps, including airline tickets, lodging, car rentals, cruises, insurance and many local expert services - such as airport transfers, local attractions, activities and tours - from a large...

  • Page 8
    ... online travel companies and airline suppliers. EAN offers an Application Programming Interface and template solution and generally compensates partners on a revenue or gross profit-share basis. Egencia. Our full-service travel management company offers travel products and services to corporations...

  • Page 9
    ... third-party retail travel agents. Classic delivers a full line of premium vacation packages - air, hotels, car rentals, activities, cruises and private transportation - to create customized luxury vacations in Hawaii, the Caribbean, Mexico, Costa Rica, Europe, Australia, New Zealand, Fiji, Maldives...

  • Page 10
    ... points of sale, including in Europe, Asia Pacific, Canada and Latin America. We own a majority share of eLong, a leading online travel company in China. We also own Venere, a European brand, which focuses on marketing hotel rooms in Southern Europe. Egencia, our corporate travel business, operates...

  • Page 11
    ... the package product to continue to be marketed primarily using the merchant model. Relationships with Travel Partners Overview. We make travel products and services available from a variety of hotel companies, large and small commercial airlines, car rental companies, cruise lines and destination...

  • Page 12
    ... third-party affiliate partners, including a number of leading travel companies, pursuant to which we pay a commission for bookings originated from their websites. Operations and Technology We provide 24-hour-a-day, seven-day-a-week traveler sales and support by telephone or via e-mail. For purposes...

  • Page 13
    ...and corporate travelers, including travel agencies, tour operators, travel supplier direct websites and their call centers, consolidators and wholesalers of travel products and services, large online portals and search websites, certain travel meta-search websites, mobile travel applications, social...

  • Page 14
    ..., industry specific value-added tax regimes and laws regulating the provision of travel packages. For example, the European Economic Community Council Directive on Package Travel, Package Holidays and Package Tours imposes various obligations upon marketers of travel packages, such as disclosure...

  • Page 15
    ... traditional travel agencies, wholesalers and tour operators, travel suppliers, including hotels and air, large online portal and search websites, travel metasearch websites, corporate travel management service providers, mobile platform travel applications, social media websites, eCommerce websites...

  • Page 16
    ... loyalty programs, such as points and miles. Many of these competitors, such as airlines, hotel and rental car companies, have been steadily focusing on increasing online demand on their own websites and mobile applications in lieu of third-party distributors such as the various Expedia sites. For...

  • Page 17
    ...market share to existing competitors or new entrants and our future growth and results of operations could be adversely affected. Social media websites: Social media websites, including Facebook, continue to develop search functionality for data included within their websites and mobile applications...

  • Page 18
    ...term hotel and airline contracts. No assurances can be given that travel suppliers or GDS partners will not further reduce or eliminate compensation, attempt to implement costly direct connections, charge travel agencies for or otherwise restrict access to content, credit card fees or other services...

  • Page 19
    ... and systems as quickly as we would like or in a cost-effective manner. We have been engaged in a multi-year effort, to migrate key portions of our consumer, affiliate, and corporate travel sites and back office application functionality to new technology platforms to enable us to improve conversion...

  • Page 20
    ... not be successful; Diversion of management's attention or other resources from our existing businesses; Difficulties and expenses in assimilating the operations, products, technology, privacy protection systems, information systems or personnel of the acquired company; Impairment of relationships...

  • Page 21
    ... to anti-corruption, antitrust or competition, economic sanctions, data content and privacy, consumer protection, labor laws and advertising and promotions; Compliance with additional U.S. laws applicable to U.S. companies operating internationally; Differences, inconsistent interpretations and...

  • Page 22
    ...is a leading online travel service provider in China and is a separately listed company on Nasdaq. The success of eLong and of our other current and future business and investments in China is subject to commercial risks relating to the highly dynamic and intensely competitive market in China, which...

  • Page 23
    ... Fair Trading ("OFT"), the competition authority in the United Kingdom, issued a Statement of Objections alleging that Expedia and Booking.com entered into separate agreements with InterContinental Hotels Group PLC ("IHG") that restricted each online travel company's ability to discount the price of...

  • Page 24
    ...over unfair trading practices, also has brought a lawsuit in France against the Expedia entities objecting to certain most favored nations clauses in contracts with French hotels. This case is scheduled to go to trial in April 2015. In addition to the OFT investigation above, a number of competition...

  • Page 25
    ... Expedia, Hotels.com and Hotwire, including: an assessment of $20.5 million for 2012 tax year non-commissioned hotel reservations, an assessment of $29.2 million (including a duplicative assessments) for tax years 2000 through 2012 noncommissioned travel agency services relating to rental cars...

  • Page 26
    ... budgets for both business and leisure travelers, which slow spending on the services we provide and have a negative impact on our revenue growth. Additionally, if individual countries or regions experience deteriorating credit and economic conditions, and/or significant fluctuations of currency...

  • Page 27
    ... relief to affected travelers by refunding the price or fees associated with airline tickets, hotel reservations and other travel products and services. We are subject to payments-related and fraud risks. We have agreements with companies that process customer credit and debit card transactions, the...

  • Page 28
    ...agency credit rating actions or pronouncements; Reaction to our earnings releases and conference calls, or presentations by executives at investor and industry conferences; Changes in our capital structure; Changes in market valuations of other internet or online service companies; Changes in search...

  • Page 29
    ... of our operating cash flow and is dependent on several factors, including the rate of growth of our merchant hotel business and the relative growth of businesses which consume rather than generate working capital, such as our agency hotel, advertising and managed corporate travel businesses and...

  • Page 30
    ... to the collection and exchange of information online. In addition, the European Union is in the process of proposing reforms to its existing data protection legal framework, which may result in a greater compliance burden for companies, including Expedia, with users in Europe and increased costs of...

  • Page 31
    ... the services of Mr. Diller, Mr. Khosrowshahi or any other member of our senior management or key employees, the loss of whom could seriously harm our business. Competition for well-qualified employees in certain aspects of our business, including software engineers, developers, product management...

  • Page 32
    ... with business partners, including in connection with significant commercial arrangements and joint ventures, and through our Expedia Affiliate Network business. We also rely on third-party service providers for certain customer care, fulfillment, processing, systems development, technology and...

  • Page 33
    ... for us to optimally capitalize and manage the cash flow for our businesses; Limiting our flexibility in planning for, or reacting to, changes in our businesses and the markets in which we operate; Placing us at a competitive disadvantage compared to our competitors that have less debt; and Limiting...

  • Page 34
    ... by others, including potential competitors. Our websites and mobile applications rely on content, brands and technology, much of which is proprietary. We establish and protect our intellectual property by relying on a combination of trademark, copyright, trade secret and patent laws in the U.S. and...

  • Page 35
    ... review and decision by the California Supreme Court in the City of San Diego, California Litigation. City of Chicago Litigation. On November 1, 2005, the city of Chicago, Illinois filed an action in state court against a number of online travel companies, including Hotels.com, Hotwire and Expedia...

  • Page 36
    .... The cities' motion remains pending. Nassau County, New York Litigation. On October 24, 2006, the county of Nassau, New York filed a putative statewide class action in federal court against a number of online travel companies, including Hotels.com, Hotwire, and Expedia. Nassau County, New York, et...

  • Page 37
    ...18, 2014, the North Carolina Supreme Court denied plaintiffs' petition. City and County of San Francisco, California Litigation. On May 13, 2008, San Francisco instituted an audit of a number of online travel companies, including Expedia, Hotels.com, and Hotwire, for hotel occupancy taxes claimed to...

  • Page 38
    ...in the City of San Diego, California Litigation. Pine Bluff, Arkansas Litigation. On September 25, 2009, Pine Bluff Advertising and Promotion Commission and Jefferson County filed a class action against a number of online travel companies, including Expedia, Inc., Hotels.com, and Hotwire. Pine Bluff...

  • Page 39
    ... of Fargo, North Dakota brought a lawsuit against a number of online travel companies, including Expedia, Hotels.com and Hotwire, for hotel occupancy taxes. City of Fargo v. Expedia, Inc., et al. (District Court, County of Cass, North Dakota). The complaint alleges claims for failure to pay taxes in...

  • Page 40
    ...against a number of online travel companies, including Expedia, Hotels.com and Hotwire. Puerto Rico Tourism Company v. Priceline.com, Incorporated, et al., Case No. 14-cv-01318 (D. Puerto Rico). The complaint alleges claims for declaratory judgment, injunctive relief, violations of the Room Tax laws...

  • Page 41
    ... County, Arkansas; the city of North Little Rock, Arkansas; the cities of Los Angeles, San Diego, San Francisco, West Hollywood, South Lake Tahoe, Palm Springs, Monterey, Sacramento, Long Beach, Napa, Newport Beach, Oakland, Irvine, Fresno, La Quinta, Dana Point, Laguna Beach, Riverside, Eureka, La...

  • Page 42
    ... lodging tax statute, and the applicability of that law to amounts charged by the online travel companies for their services. The parties have filed cross-motions for summary judgment, which motions remain pending. Osceola, Florida Litigation. On January 24, 2011, Expedia, Hotels.com and Hotwire...

  • Page 43
    ... totaling $52.5 million for non-commissioned travel agency services relating to hotel reservations and car rental for tax year 2013. The online travel companies protested the assessments and requested additional support from the state of Hawaii for the numbers included in the assessments. On...

  • Page 44
    ... totaling $28.5 million for non-commissioned travel agency services relating to hotel reservations and car rental for tax year 2013. The online travel companies protested the assessments and requested additional support from the State for the numbers included in the assessments. On December...

  • Page 45
    ... United Kingdom competition law in relation to the online supply of hotel room accommodations. The Statement of Objections alleges that Expedia and Booking.com entered into separate agreements with IHG that restricted each online travel company's ability to discount the price of IHG hotel rooms. The...

  • Page 46
    ... sites with the most competitive room rates available on other sites. More than thirty putative class action lawsuits, which refer to the OFT's Statement of Objections, were initiated in the United States by consumer plaintiffs alleging claims against the online travel companies, including Expedia...

  • Page 47
    ... the Nasdaq Global Select Market under the ticker symbol "EXPE." Our Class B common stock is not listed and there is no established public trading market. As of January 23, 2015, there were approximately 2,810 holders of record of our common stock and the closing price of our common stock was $87.44...

  • Page 48
    ...share dilution management, legal risks, tax policies, capital requirements relating to research and development, investments and acquisitions, challenges to our business model and other factors that the Board of Directors may deem relevant. In addition, our credit agreement limits our ability to pay...

  • Page 49
    ... Graph The graph shows a five-year comparison of cumulative total return, calculated on a dividend reinvested basis, for Expedia common stock, the NASDAQ Composite Index, the RDG (Research Data Group) Internet Composite Index and the S&P 500. The graph assumes an investment of $100 in each of...

  • Page 50
    ... and Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. SELECTED FINANCIAL DATA 2014 Year Ended December 31,(1) 2013 2012 2011 (in thousands, except per share data) 2010 Consolidated Statements of Operations Data: Revenue $ 5,763,485 $ 4,771,259...

  • Page 51
    ... on a stand-alone and package basis, travel products and services provided by numerous lodging properties, airlines, car rental companies, destination service providers, cruise lines and other travel product and service companies. We also offer travel and non-travel advertisers access to a potential...

  • Page 52
    ... gradually improving overall travel environment. Currently occupancy rates are near 2007 peaks and there is very little new, net hotel supply being added in the U.S. lodging market with large chains focusing their development opportunities in international markets. This may help hoteliers with their...

  • Page 53
    ... conversion and driving faster growth rates, for those brands. In 2013, Expedia signed an agreement to power the technology, supply, and customer service platforms for Travelocity-branded sites in the United States and Canada, enabling Expedia to leverage its investments in each of these key...

  • Page 54
    ... points of sale, including in Europe, Asia Pacific, Canada and Latin America. We own a majority share of eLong, a leading online travel company in China. We also own Venere, a European brand, which focuses on marketing hotel rooms in Southern Europe. Egencia, our corporate travel business, operates...

  • Page 55
    ... our customers, who connect ot our websites and apps across multiple devices and platforms throughout their travel planning process. We also believe in the future mobile is likely to represent an efficient marketing channel given the opportunity for direct traffic acquisition, increase in share of...

  • Page 56
    ... traded firms in similar lines of business. Our significant estimates in the market approach model include identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment and assessing comparable revenue and operating income multiples...

  • Page 57
    ... businesses, future changes in income tax law, tax sharing agreements or variances between our actual and anticipated operating results, we make certain judgments and estimates. Therefore, actual income taxes could materially vary from these estimates. We record liabilities to address uncertain tax...

  • Page 58
    ... books a room through one of our travel services, we collect a tax recovery charge from the customer which we pay to the hotel. We calculate the tax recovery charge by applying the occupancy tax rate supplied to us by the hotels to the amount that the hotel has agreed to receive for the rental...

  • Page 59
    ... seeking to tax online travel company services as part of sales taxes for hotel occupancy. We are currently remitting taxes to a number of jurisdictions, including to the state of New York, South Carolina, North Carolina, Minnesota, the District of Columbia and the city of New York, as well...

  • Page 60
    ... Expedia companies for non-commissioned travel agency services relating to rental cars totaling $29.2 million for the tax years 2000 through 2012. These assessments include a duplicative assessment for Expedia and Hotels.com totaling $9.3 million and thus are overstated. The online travel companies...

  • Page 61
    ... Expedia and Hotels.com websites throughout the world, Expedia Affiliate Network, Hotwire.com, Wotif Group, Venere, eLong, trivago and Classic Vacations. Our Egencia segment provides managed travel services to corporate customers in North America, Europe, and the Asia Pacific region. Operating...

  • Page 62
    ... increase in air tickets sold primarily relates to growth at Brand Expedia and Egencia. The remaining worldwide revenue, other than hotel and air discussed above, which includes advertising and media, car rental, destination services and fees related to our corporate travel business, increased by 29...

  • Page 63
    ... card processing, including merchant fees, charge backs and fraud, and (3) other costs, primarily including data center costs to support our websites, supplier operations, destination supply, certain pre-purchased hotel supply, and stock-based compensation. In 2014, the increase in cost of revenue...

  • Page 64
    ... as stock-based compensation costs. Selling and marketing expenses increased $612 million in 2014 compared to 2013 driven by increase of $542 million in direct costs, including online and offline marketing expenses. Brand Expedia, including commissions related to the Travelocity agreement, trivago...

  • Page 65
    ..., including our executive leadership, finance, legal and human resource functions as well as fees for external professional services including legal, tax and accounting, and other costs including stock-based compensation. General and administrative expense increased $48 million in 2014 compared to...

  • Page 66
    ... 2013 2013 vs 2012 Operating income % of revenue $518 $366 $ 432 9.0% 7.7% 10.7% 41% (15%) In 2014, operating income increased due to the growth in revenue, acquisition-related and other expenses in 2013 that did not recur and lower legal reserve, occupancy tax and other charges in the current...

  • Page 67
    ... of a valuation allowance related to deferred tax assets of certain French entities in 2012 as well as nondeductible charges in 2013 in connection with the trivago acquisition and Hawaii pay-to-play assessments mentioned above. In 2013, our effective tax rate was lower than the 35% federal statutory...

  • Page 68
    ...Operations, Net of Taxes On December 20, 2011, following the close of trading on the Nasdaq Stock Market, we completed the spinoff of TripAdvisor, which consisted of the domestic and international operations previously associated with our TripAdvisor Media Group, to Expedia stockholders. During 2012...

  • Page 69
    ... using both the merchant model and the agency model in many of our markets. If the merchant hotel model declines relative to our other business models that generally consume working capital such as agency hotel, managed corporate travel, advertising or certain Expedia Affiliate Network relationships...

  • Page 70
    ... from a decrease in the rate of growth in our merchant hotel business compared to the prior year, a working capital detriment due to changes in non-merchant accounts payable as well as an increase in general excise tax assessments and income tax payments. In 2014, cash used in investing activities...

  • Page 71
    ... determination by our Board of Directors. During 2012, we issued 8.0 million shares of Expedia, Inc. common stock as a result of the exercise of 32 million privately held warrants at a weighted average exercise price of $23.91 for total proceeds to the Company of approximately $191 million. As of...

  • Page 72
    ...foreign exchange rates and market prices. Our exposure to market risk includes our long-term debt, our revolving credit facility, derivative instruments and cash and cash equivalents, accounts receivable, intercompany receivables, investments, merchant accounts payable and deferred merchant bookings...

  • Page 73
    ... December 31, 2014, 2013 or 2012. Foreign Exchange Risk We conduct business in certain international markets, primarily in Australia, Canada, China and the European Union. Because we operate in international markets, we have exposure to different economic climates, political arenas, tax systems and...

  • Page 74
    ... by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management has concluded that, as of December 31, 2014, the Company's internal control over financial reporting was effective. Management has reviewed its assessment with the Audit Committee. Ernst...

  • Page 75
    .... We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2014 consolidated financial statements of Expedia, Inc. and our report dated February 5, 2015 expressed an unqualified opinion thereon. /s/ Seattle, Washington February...

  • Page 76
    ... relating to our 2015 annual meeting of stockholders (the "2015 Proxy Statement"), which will be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended December 31, 2014. Part III. Item 10. Directors, Executive Officers and Corporate Governance The...

  • Page 77
    ... Agreement, dated as of October 25, 2011, between Expedia, Inc. and Mellon Investor Services LLC, as equity warrant agent. Indenture, dated as of August 21, 2006, among Expedia, Inc., as Issuer, the Subsidiary Guarantors from time to time parties thereto, and The Bank of New York Trust Company...

  • Page 78
    ... of New York Trust Company, N.A., as Trustee Form of Note (included as Exhibit A to the First Supplemental Indenture in Exhibit 4.6) Amended and Restated Governance Agreement among Expedia, Inc., Liberty Interactive Corporation and Barry Diller, dated as of December 20, 2011 Tax Sharing Agreement by...

  • Page 79
    ... Stockholders Agreement between Liberty Interactive Corporation and Barry Diller, dated as of December 20, 2011 Second Amended and Restated Expedia, Inc. 2005 Stock and Annual Incentive Plan Expedia, Inc. 2013 Employee Stock Purchase Plan Expedia, Inc. 2013 International Employee Stock Purchase Plan...

  • Page 80
    ... 2009 First Amendment of the Executed Deferred Compensation Plan, effective as of December 31, 2014 Employment Agreement between Dara Khosrowshahi and Expedia, Inc., effective as of August 2, 2012 Second Amended and Restated Expedia, Inc. Restricted Stock Unit Agreement for Dara Khosrowshahi, dated...

  • Page 81
    ... of the Chief Financial Officer pursuant Section 906 of the Sarbanes-Oxley Act of 2002 101 The following financial statements from the Company's Annual Report on Form 10-K for the year ended December 31, 2014, formatted in XBRL: (i) Consolidated Statements of Operations, (ii) Consolidated Statements...

  • Page 82
    ... on its behalf by the undersigned hereunto duly authorized. Expedia, Inc. By: /s/ DARA KHOSROWSHAHI Dara Khosrowshahi Chief Executive Officer February 5, 2015 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf...

  • Page 83
    INDEX TO CONSOLIDATED FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Consolidated Statements of Operations Consolidated Statements of Comprehensive Income Consolidated Balance Sheets Consolidated Statements of ...

  • Page 84
    ... Public Company Accounting Oversight Board (United States), Expedia, Inc.'s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013...

  • Page 85
    ... 2012 (In thousands, except for per share data) Revenue Costs and expenses: Cost of revenue(1) Selling and marketing(1) Technology and content(1) General and administrative(1) Amortization of intangible assets Legal reserves, occupancy tax and other Restructuring and related reorganization charges...

  • Page 86
    EXPEDIA, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year ended December 31, 2014 2013 2012 (In thousands) Net income Other comprehensive income (loss), net of tax Currency translation adjustments and other Unrealized gains (losses) on available for sale securities, net of taxes Other ...

  • Page 87
    ...' EQUITY Current liabilities: Accounts payable, merchant Accounts payable, other Deferred merchant bookings Deferred revenue Income taxes payable Accrued expenses and other current liabilities Total current liabilities Long-term debt Deferred income taxes Other long-term liabilities Commitments and...

  • Page 88
    ... to vesting of equity instruments Common stock repurchases Cash dividends paid Adjustment to the fair value of redeemable noncontrolling interests Changes in ownership of noncontrolling interests Stock-based compensation expense Other Balance as of December 31, 2012 Net income (excludes $7,130 of...

  • Page 89
    EXPEDIA, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (In thousands, except share data) Common stock Shares Amount Class B Additional common stock paid-in Shares Amount capital Treasury stock Shares Amount Retained earnings (deficit) Accumulated other Non-redeemable comprehensive ...

  • Page 90
    ... current liabilities Tax payable/receivable, net Deferred merchant bookings Deferred revenue Net cash provided by operating activities from continuing operations Investing activities: Capital expenditures, including internal-use software and website development Purchases of investments Sales and...

  • Page 91
    ... related international points of sale. We refer to Expedia, Inc. and its subsidiaries collectively as "Expedia," the "Company," "us," "we" and "our" in these consolidated financial statements. TripAdvisor Spin-Off On December 20, 2011, following the close of trading on the Nasdaq Stock Market, we...

  • Page 92
    ... in China in order to comply with Chinese laws and regulations, which restricts foreign investment in the air-ticketing, travel agency and internet content provision businesses. Through a series of contractual agreements with these affiliates and their shareholders, eLong is the primary beneficiary...

  • Page 93
    ... stand-alone and package basis primarily through the following business models: the merchant model, the agency model and the advertising model. Under the merchant model, we facilitate the booking of hotel rooms, airline seats, car rentals and destination services from our travel suppliers and we are...

  • Page 94
    ... entered into an exclusive, long-term strategic marketing agreement with Travelocity, whereby Expedia powered the technology platforms for Travelocity's existing websites in the United States and Canada, while providing Travelocity access to our supply and customer services. Travelocity was focusing...

  • Page 95
    ... costs incurred during the application development stage related to the development of internal use software. We expense costs incurred related to the planning and post-implementation phases of development as incurred. We compute depreciation using the straight-line method over the estimated...

  • Page 96
    ... traded firms in similar lines of business. Our significant estimates in the market approach model include identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment and assessing comparable revenue and operating income multiples...

  • Page 97
    ... tax law, tax sharing agreements or variances between our actual and anticipated operating results, we make certain judgments and estimates. Therefore, actual income taxes could materially vary from these estimates. We account for uncertain tax positions based on a two-step process of evaluating...

  • Page 98
    ... for speculative or trading purposes. Foreign Currency Translation and Transaction Gains and Losses Certain of our operations outside of the United States use the related local currency as their functional currency. We translate revenue and expense at average rates of exchange during the period...

  • Page 99
    ...® program and our Brand Expedia Expedia® + rewards. Welcome Rewards offers travelers one free night at any Hotels.com partner property after that traveler stays 10 nights, subject to certain restrictions. Expedia+ rewards enables participating travelers to earn points on all hotel, flight, package...

  • Page 100
    ... on relationships with travel suppliers, primarily airlines and hotels, dependence on third-party technology providers, exposure to risks associated with online commerce security and payment related fraud. We also rely on global distribution system partners and third-party service providers for...

  • Page 101
    ... books a room through one of our travel services, we collect a tax recovery charge from the customer which we pay to the hotel. We calculate the tax recovery charge by applying the occupancy tax rate supplied to us by the hotels to the amount that the hotel has agreed to receive for the rental...

  • Page 102
    ... Australian-based online travel company. The total consideration received by Wotif Group shareholders of $703 million Australian dollars ("A$") or A$3.30 per share (approximately $612 million or $2.87 per share based on November 13, 2014 exchange rates) was comprised of A$51 million special dividend...

  • Page 103
    ... number of shares of Expedia common stock was calculated based on the aggregate value of â,¬43 million using a thirty-day trailing average of closing trading prices and exchange rates prior to acquisition. During the first quarter of 2014, we issued the first increment of 175,040 shares of Expedia...

  • Page 104
    ... accounted for approximately 4% of consolidated revenue for the year. 2012 Acquisition Activity During 2012, we acquired VIA Travel, a travel management company in the Nordics. The following table summarizes the allocation of the purchase price, in thousands: Goodwill Intangible assets with definite...

  • Page 105
    ... and investments using quoted market prices or alternative pricing sources and models utilizing market observable inputs. Valuation of the foreign currency forward contracts is based on foreign currency exchange rates in active markets, a Level 2 input. As of December 31, 2014 and 2013, our cash...

  • Page 106
    ... nondelivery of travel services in that country. Of the total time deposits, $261 million and $283 million as of December 31, 2014 and 2013 related to balances held by our majority-owned subsidiaries. We use foreign currency forward contracts to economically hedge certain merchant revenue exposures...

  • Page 107
    ... of our intangible assets with definite lives as of December 31, 2014 and 2013: December 31, 2014 Accumulated Amortization December 31, 2013 Accumulated Amortization Cost Net Cost (In thousands) Net Supplier relationships Technology Customer lists Affiliate agreements Other Total $ 357,022 257...

  • Page 108
    ... 4.5% Notes was approximately $504 million as of December 31, 2014. These fair values were based on quoted market prices in less active markets (Level 2 inputs). Credit Facility Expedia, Inc. maintains a $1 billion unsecured revolving credit facility with a group of lenders, which is unconditionally...

  • Page 109
    ... stock awards, RSUs, stock options and other stock-based awards to directors, officers, employees and consultants. As of December 31, 2014, we had approximately 8 million shares of common stock reserved for new stock-based awards under the 2005 Stock and Annual Incentive Plan. We issue new shares...

  • Page 110
    ... were 400,000 of RSUs awarded to our Chief Executive Officer, for which vesting was tied to achievement of performance targets. These awards vested and were released during 2012. In 2014, 2013 and 2012, we recognized total stock-based compensation expense of $85 million, $130 million and $65 million...

  • Page 111
    ... 85% of the fair market value of the stock on the last day of each three-month period. Eligible employees are allowed to contribute up to 10% of their base compensation. During 2014 and 2013, approximately 102,000 shares and 69,000 shares were purchased under this plan for an average price of $68.70...

  • Page 112
    ... expenses Loyalty rewards reserve Occupancy tax reserve Net operating loss and tax credit carryforwards Stock-based compensation Other Total deferred tax assets Less valuation allowance Net deferred tax assets Deferred tax liabilities: Prepaid merchant bookings and prepaid expenses Intangible assets...

  • Page 113
    ..., 2014 2013 2012 (In thousands) Income tax expense at the federal statutory rate of 35% Foreign tax rate differential State income taxes, net of effect of federal tax benefit Unrecognized tax benefits and related interest Change in valuation allowance Pay-to-play penalties trivago acquisition stock...

  • Page 114
    ... interests contain certain rights, whereby we may acquire and the minority shareholders may sell to us the additional shares of the companies. A reconciliation of redeemable noncontrolling interest for the years ended December 31, 2014, 2013 and 2012 is as follows: Year ended December 31...

  • Page 115
    ... similar companies with comparable business factors and assessing comparable revenue and operating multiples in estimating the fair value of the business. NOTE 13 - Stockholders' Equity Common Stock and Class B Common Stock Our authorized common stock consists of 1.6 billion shares of common stock...

  • Page 116
    ... 17, 2014 December 11, 2014 In addition, on February 4, 2015, the Executive Committee, acting on behalf of the Board of Directors, declared a quarterly cash dividend of $0.18 per share of outstanding common stock payable on March 26, 2015 to the stockholders of record as of the close of business on...

  • Page 117
    ... held in escrow. Diluted Earnings Per Share For the years ended December 31, 2014, 2013 and 2012, we computed diluted earnings per share using (i) the number of shares of common stock and Class B common stock used in the basic earnings per share calculation as indicated above (ii) if dilutive, the...

  • Page 118
    ... during 2012. The earnings per share amounts are the same for common stock and Class B common stock because the holders of each class are legally entitled to equal per share distributions whether through dividends or in liquidation. NOTE 15 - Restructuring and Related Reorganization Charges In...

  • Page 119
    ... claims made against any stand-by LOCs during the years ended December 31, 2014, 2013 and 2012. In addition, our redeemable noncontrolling interest in trivago contains certain put/call rights whereby we may acquire and the minority shareholders may sell to us the minority shares of the company...

  • Page 120
    ... course of business, we are a party to various lawsuits. Management does not expect these lawsuits to have a material impact on the liquidity, results of operations, or financial condition of Expedia. We also evaluate other potential contingent matters, including value-added tax, federal excise...

  • Page 121
    ... Expedia companies for non-commissioned travel agency services relating to rental cars totaling $29.2 million for the tax years 2000 through 2012. These assessments include a duplicative assessment for Expedia and Hotels.com totaling $9.3 million and thus are overstated. The online travel companies...

  • Page 122
    ... case pending review and decision by the California Supreme Court of the City of San Diego, California Litigation. Other Jurisdictions. In December 2014, the City of Portland and Multnomah County, Oregon assessed certain online travel companies, including Expedia, Hotels.com and Hotwire, for hotel...

  • Page 123
    ... sites with the most competitive room rates available on other sites. More than thirty putative class action lawsuits, which refer to the OFT's Statement of Objections, were initiated in the United States by consumer plaintiffs alleging claims against the online travel companies, including Expedia...

  • Page 124
    ... and localized Expedia and Hotels.com websites throughout the world, Expedia Affiliate Network, Hotwire.com, Venere, eLong, trivago, Wotif Group and Classic Vacations. Our Egencia segment provides managed travel services to corporate customers in North America, Europe, and the Asia Pacific region...

  • Page 125
    ... December 31, 2014 Egencia Corporate (In thousands) Total Revenue Adjusted EBITDA Depreciation Amortization of intangible assets Stock-based compensation Legal reserves, occupancy tax and other Restructuring and related reorganization charges Realized gain on revenue hedges Operating income (loss...

  • Page 126
    ... assets Stock-based compensation Legal reserves, occupancy tax and other Realized loss on revenue hedges Operating income (loss) Other expense, net Income from continuing operations before income taxes Provision for income taxes Income from continuing operations Discontinued operations, net of taxes...

  • Page 127
    ...made on our website related to the use of fraudulent credit cards "charged-back" due to payment disputes and cancellation fees. Balance of Beginning of Period Charges to Earnings Charges to Other Accounts(1) Deductions (In thousands) Balance at End of Period Description 2014 Allowance for doubtful...

  • Page 128
    ... 31 (In thousands, except per share data) Year ended December 31, 2014 Revenue Operating income (loss)(1) Net income (loss) attributable to Expedia, Inc. Basic earnings (loss) per share(2) Diluted earnings (loss) per share(2) Year ended December 31, 2013 Revenue Operating income (loss) Net income...

  • Page 129
    ... and expenses: Cost of revenue Selling and marketing Technology and content General and administrative Amortization of intangible assets Legal reserves, occupancy tax and other Restructuring and related reorganization charges Intercompany (income) expense, net Operating income Other income (expense...

  • Page 130
    ... Costs and expenses: Cost of revenue Selling and marketing Technology and content General and administrative Amortization of intangible assets Acquistion-related and other Legal reserves, occupancy tax and other Intercompany (income) expense, net Operating income Other income (expense): Equity...

  • Page 131
    ...Costs and expenses: Cost of revenue Selling and marketing Technology and content General and administrative Amortization of intangible assets Legal reserves, occupancy tax and other Intercompany (income) expense, net Operating income Other income (expense): Equity in pre-tax earnings of consolidated...

  • Page 132
    ... 31, 2014 Parent Guarantor Subsidiaries Non-Guarantor Subsidiaries (In thousands) Eliminations Consolidated ASSETS Total current assets Investment in subsidiaries Intangible assets, net Goodwill Other assets, net TOTAL ASSETS LIABILITIES AND STOCKHOLDERS' EQUITY Total current liabilities Long-term...

  • Page 133
    ..., including internal-use software and website development Purchases of investments Sales and maturities of investments Acquisitions, net of cash acquired Other, net Net cash used in investing activities from continuing operations Financing activities: Proceeds from issuance of long-term debt...

  • Page 134
    ...including internal-use software and website development Purchases of investments Sales and maturities of investments Acquisitions, net of cash acquired Other, net Net cash provided by (used in) investing activities from continuing operations Financing activities: Purchases of treasury stock Proceeds...

  • Page 135
    ..., including internal-use software and website development Purchases of investments Sales and maturities of investments Acquisitions, net of cash acquired Other, net Net cash used in investing activities from continuing operations Financing activities: Purchases of treasury stock Payment of...

  • Page 136
    ...of Operations Lance A. Soliday Vice President, Chief Accounting Officer and Controller STOCKHOLDER INFORMATION Annual Meeting The annual meeting of stockholders will be held on June 16, 2015 at 8:00 a.m. local time, at 8800 West Sunset Boulevard West Hollywood, California 90069 Stock Market Listing...

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