The Priceline Group
Priceline Group Inc. (Form: 10-Q, Received: 11/04/2014 08:42:14)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q  
(Mark One)
 
ý        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

For the quarterly period ended September 30, 2014
 
OR
 
o           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  

For the transition period from to
 
Commission File Number 0-25581
 
The Priceline Group Inc.
(Exact name of Registrant as specified in its charter) 
Delaware
06-1528493
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
 
800 Connecticut Avenue
Norwalk, Connecticut 06854
(address of principal executive offices)
 
(203) 299-8000
(Registrant's telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed, since last report)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.   Yes ý No o .
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes ý No  o .
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (Check one): 
Large accelerated filer ý
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes o No ý

Number of shares of Common Stock outstanding at October 27, 2014 :
Common Stock, par value $0.008 per share
 
52,356,024
(Class)
 
(Number of Shares)





The Priceline Group Inc.
Form 10-Q
 
For the Three Months Ended September 30, 2014
 
PART I - FINANCIAL INFORMATION
 
 
 
Item 1. Financial Statements
 
 
Consolidated Balance Sheets (unaudited) at September 30, 2014 and December 31, 2013
Consolidated Statements of Operations (unaudited) For the Three and Nine Months Ended September 30, 2014 and 2013
Consolidated Statements of Comprehensive Income (unaudited) For the Three and Nine Months Ended September 30, 2014 and 2013
Consolidated Statement of Changes in Stockholders' Equity (unaudited) For the Nine Months Ended September 30, 2014
Consolidated Statements of Cash Flows (unaudited) For the Nine Months Ended September 30, 2014 and 2013
Notes to Unaudited Consolidated Financial Statements
 
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
 
Item 4. Controls and Procedures
 
 
PART II - OTHER INFORMATION
 
 
 
Item 1. Legal Proceedings
 
 
Item 1A. Risk Factors
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
 
Item 6. Exhibits
 
 
SIGNATURES

2



PART I — FINANCIAL INFORMATION
Item 1.  Financial Statements

The Priceline Group Inc.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
 
 
 
September 30,
2014
 
December 31,
2013
ASSETS
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
5,043,724

 
$
1,289,994

Restricted cash
 
903

 
10,476

Short-term investments
 
1,193,353

 
5,462,720

Accounts receivable, net of allowance for doubtful accounts of $13,175 and $14,116, respectively
 
843,560

 
535,962

Prepaid expenses and other current assets
 
166,308

 
107,102

Deferred income taxes
 
56,017

 
74,687

Total current assets
 
7,303,865

 
7,480,941

Property and equipment, net
 
203,790

 
135,053

Intangible assets, net
 
2,175,214

 
1,019,985

Goodwill
 
3,483,144

 
1,767,912

Long-term investments
 
1,965,182

 

Deferred income taxes
 
4,714

 
7,055

Other assets
 
48,471

 
33,514

Total assets
 
$
15,184,380

 
$
10,444,460

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
525,441

 
$
247,345

Accrued expenses and other current liabilities
 
609,071

 
545,342

Deferred merchant bookings
 
416,852

 
437,127

Convertible debt
 
37,781

 
151,931

Total current liabilities
 
1,589,145

 
1,381,745

Deferred income taxes
 
866,167

 
326,425

Other long-term liabilities
 
107,938

 
75,981

Long-term debt
 
3,887,243

 
1,742,047

Total liabilities
 
6,450,493

 
3,526,198

 
 
 
 
 
Convertible debt
 
776

 
8,533

 
 
 
 
 
Stockholders' equity:
 
 

 
 

Common stock, $0.008 par value; authorized 1,000,000,000 shares, 61,800,076 and 61,265,160 shares issued, respectively
 
480

 
476

Treasury stock, 9,444,868 and 9,256,721 shares, respectively
 
(2,232,663
)
 
(1,987,207
)
Additional paid-in capital
 
4,848,824

 
4,592,979

Accumulated earnings
 
6,188,674

 
4,218,752

Accumulated other comprehensive income (loss)
 
(72,204
)
 
84,729

Total stockholders' equity
 
8,733,111

 
6,909,729

Total liabilities and stockholders' equity
 
$
15,184,380

 
$
10,444,460


See Notes to Unaudited Consolidated Financial Statements.

3



The Priceline Group Inc.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2014
 
2013
 
2014
 
2013
Agency revenues
 
$
2,099,629

 
$
1,576,434

 
$
4,615,169

 
$
3,411,002

Merchant revenues
 
613,535

 
620,904

 
1,707,786

 
1,729,692

Advertising and other revenues
 
123,333

 
72,565

 
278,919

 
111,459

Total revenues
 
2,836,497

 
2,269,903

 
6,601,874

 
5,252,153

Cost of revenues
 
216,519

 
280,838

 
692,429

 
869,568

Gross profit
 
2,619,978

 
1,989,065

 
5,909,445

 
4,382,585

Operating expenses:
 
 

 
 

 
 

 
 

Advertising — Online
 
699,814

 
533,164

 
1,860,317

 
1,399,452

Advertising — Offline
 
71,593

 
39,891

 
183,093

 
99,750

Sales and marketing
 
86,092

 
65,274

 
225,456

 
177,392

Personnel, including stock-based compensation of $46,136, $34,551, $120,108 and $90,996, respectively
 
259,471

 
186,443

 
675,854

 
486,658

General and administrative
 
97,902

 
63,113

 
261,950

 
178,195

Information technology
 
24,802

 
18,536

 
72,068

 
48,717

Depreciation and amortization
 
57,599

 
35,747

 
136,262

 
80,854

Total operating expenses
 
1,297,273

 
942,168

 
3,415,000

 
2,471,018

Operating income
 
1,322,705

 
1,046,897

 
2,494,445

 
1,911,567

Other income (expense):
 
 

 
 

 
 

 
 

Interest income
 
2,490

 
867

 
5,165

 
2,882

Interest expense
 
(22,953
)
 
(24,135
)
 
(57,804
)
 
(61,097
)
Foreign currency transactions and other
 
3,347

 
(3,278
)
 
(4,399
)
 
(7,002
)
Total other income (expense)
 
(17,116
)
 
(26,546
)
 
(57,038
)
 
(65,217
)
Earnings before income taxes
 
1,305,589

 
1,020,351

 
2,437,407

 
1,846,350

Income tax expense
 
243,336

 
187,362

 
467,485

 
331,629

Net income
 
1,062,253

 
832,989

 
1,969,922

 
1,514,721

Less: net income attributable to noncontrolling interests
 

 

 

 
135

Net income applicable to common stockholders
 
$
1,062,253

 
$
832,989

 
$
1,969,922

 
$
1,514,586

Net income applicable to common stockholders per basic common share
 
$
20.27

 
$
16.22

 
$
37.65

 
$
29.88

Weighted average number of basic common shares outstanding
 
52,405

 
51,363

 
52,319

 
50,690

Net income applicable to common stockholders per diluted common share
 
$
20.03

 
$
15.72

 
$
37.13

 
$
29.00

Weighted average number of diluted common shares outstanding
 
53,024

 
52,984

 
53,048

 
52,226

 
See Notes to Unaudited Consolidated Financial Statements.


4



The Priceline Group Inc.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
1,062,253

 
$
832,989

 
$
1,969,922

 
$
1,514,721

Other comprehensive income, net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustments  (1)
(124,412
)
 
114,366

 
(130,997
)
 
52,547

Unrealized gain (loss) on marketable securities (2)
(26,127
)
 
977

 
(25,936
)
 
476

Comprehensive income
911,714

 
948,332

 
1,812,989

 
1,567,744

Less: Comprehensive loss attributable to noncontrolling interests

 

 

 
(10,279
)
Comprehensive income attributable to common stockholders
$
911,714

 
$
948,332

 
$
1,812,989

 
$
1,578,023


(1) Net of tax of $18,046 and $33,391 for the three and nine months ended September 30, 2014 , respectively, and net of tax benefit of $42,253 and $27,969 for the three and nine months ended 2013 , respectively, associated with net investment hedges. See Note 12.

(2) Net of tax benefit of $8,747 and $8,693 for the three and nine months ended September 30, 2014 , respectively, and net of tax of $452 and $201 for the three and nine months ended 2013 , respectively.


See Notes to Unaudited Consolidated Financial Statements.


5



The Priceline Group Inc.
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014
(In thousands)
 
 
 
Common Stock
 
Treasury Stock
 
Additional Paid-In Capital
 
Accumulated Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Total
Balance, December 31, 2013
 
61,265

 
$
476

 
(9,257
)
 
$
(1,987,207
)
 
$
4,592,979

 
$
4,218,752

 
$
84,729

 
$
6,909,729

Net income applicable to common stockholders
 

 

 

 

 

 
1,969,922

 

 
1,969,922

Foreign currency translation adjustments, net of tax of $33,391
 

 

 

 

 

 

 
(130,997
)
 
(130,997
)
Unrealized loss on marketable securities, net of tax benefit of $8,693
 

 

 

 

 

 

 
(25,936
)
 
(25,936
)
Reclassification adjustment for convertible debt in mezzanine
 

 

 

 

 
7,757

 

 

 
7,757

Exercise of stock options and vesting of restricted stock units and performance share units
 
235

 
2

 

 

 
12,432

 

 

 
12,434

Repurchase of common stock
 

 

 
(188
)
 
(245,456
)
 

 

 

 
(245,456
)
Stock-based compensation and other stock-based payments
 

 

 

 

 
122,120

 

 

 
122,120

Conversion of debt
 
300

 
2

 

 

 
520

 

 

 
522

Issuance of convertible senior notes
 

 

 

 

 
85,126

 

 

 
85,126

Stock options and restricted stock units assumed in acquisitions
 

 

 

 

 
13,751

 

 

 
13,751

Excess tax benefit on stock-based compensation
 

 

 

 

 
14,139

 

 

 
14,139

Balance, September 30, 2014
 
61,800

 
$
480

 
(9,445
)
 
$
(2,232,663
)
 
$
4,848,824

 
$
6,188,674

 
$
(72,204
)
 
$
8,733,111

 
See Notes to Unaudited Consolidated Financial Statements.


6



The Priceline Group Inc.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
 
Nine Months Ended
September 30,
 
 
2014
 
2013
OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
1,969,922

 
$
1,514,721

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation
 
54,704

 
33,965

Amortization
 
81,558

 
46,889

Provision for uncollectible accounts, net
 
14,150

 
12,678

Deferred income taxes
 
46,451

 
11,450

Stock-based compensation expense and other stock-based payments
 
122,120

 
91,810

Amortization of debt issuance costs
 
3,818

 
4,352

Amortization of debt discount
 
39,079

 
41,225

Loss on early extinguishment of debt
 
6,254

 

Changes in assets and liabilities:
 
 
 
 
Accounts receivable
 
(353,357
)
 
(283,961
)
Prepaid expenses and other current assets
 
(35,341
)
 
(8,514
)
Accounts payable, accrued expenses and other current liabilities
 
209,557

 
280,945

Other
 
202

 
1,403

Net cash provided by operating activities
 
2,159,117

 
1,746,963

INVESTING ACTIVITIES:
 
 
 
 
Purchase of investments
 
(7,327,635
)
 
(7,100,081
)
Proceeds from sale of investments
 
9,703,032

 
5,341,488

Additions to property and equipment
 
(90,725
)
 
(56,958
)
Acquisitions and other equity investments, net of cash acquired
 
(2,496,084
)
 
(331,557
)
Proceeds from foreign currency contracts
 
14,354

 
3,266

Payments on foreign currency contracts
 
(94,661
)
 
(56,045
)
Change in restricted cash
 
9,309

 
(1,506
)
Net cash used in investing activities
 
(282,410
)
 
(2,201,393
)
FINANCING ACTIVITIES:
 
 
 
 
Proceeds from revolving credit facility
 
995,000

 

Payments related to revolving credit facility
 
(995,000
)
 

Proceeds from the issuance of long-term debt
 
2,282,217

 
980,000

Payment of debt issuance costs
 
(16,241
)
 
(910
)
Payments related to conversion of senior notes
 
(121,925
)
 
(8
)
Repurchase of common stock
 
(245,456
)
 
(883,008
)
Payments to purchase subsidiary shares from noncontrolling interests
 

 
(192,530
)
Payments of stock issuance costs
 

 
(1,191
)
Proceeds from exercise of stock options
 
12,434

 
86,310

Excess tax benefit on stock-based compensation
 
14,139

 
13,318

Net cash provided by financing activities
 
1,925,168

 
1,981

Effect of exchange rate changes on cash and cash equivalents
 
(48,145
)
 
12,194

Net increase (decrease) in cash and cash equivalents
 
3,753,730

 
(440,255
)
Cash and cash equivalents, beginning of period
 
1,289,994

 
1,536,349

Cash and cash equivalents, end of period
 
$
5,043,724

 
$
1,096,094

SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
 
Cash paid during the period for income taxes
 
$
412,185

 
$
265,303

Cash paid during the period for interest
 
$
14,531

 
$
18,614

Non-cash fair value increase for redeemable noncontrolling interests
 
$

 
$
42,522

Non-cash investing activity for contingent consideration
 
$
13,310

 
$

Non-cash financing activity for acquisitions
 
$
13,752

 
$
1,546,748

 See Notes to Unaudited Consolidated Financial Statements.

7



The Priceline Group Inc.
Notes to Unaudited Consolidated Financial Statements
 
1.                                       BASIS OF PRESENTATION
 
On April 1, 2014, the Company changed its name from priceline.com Incorporated to The Priceline Group Inc. The Priceline Group Inc. (the "Company") is responsible for the Unaudited Consolidated Financial Statements included in this document.  The Unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and include all normal and recurring adjustments that management of the Company considers necessary for a fair presentation of its financial position and operating results.  The Company prepared the Unaudited Consolidated Financial Statements following the requirements of the Securities and Exchange Commission for interim reporting.  As permitted under those rules, the Company condensed or omitted certain footnotes or other financial information that are normally required by GAAP for annual financial statements.  These statements should be read in combination with the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2013 .
 
The Unaudited Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries, including its primary brands of Booking.com, priceline.com, agoda.com, rentalcars.com, OpenTable, Inc. ("OpenTable") since its acquisition on July 24, 2014 and KAYAK Software Corporation ("KAYAK") since its acquisition on May 21, 2013. All inter-company accounts and transactions have been eliminated in consolidation.  The functional currency of the Company's foreign subsidiaries is generally the respective local currency.  Assets and liabilities are translated into U.S. Dollars at the rate of exchange existing at the balance sheet date.  Income statement amounts are translated at the average exchange rates for the period.  Translation gains and losses are included as a component of "Accumulated other comprehensive income (loss)" on the accompanying Unaudited Consolidated Balance Sheets.  Foreign currency transaction gains and losses are included on the Unaudited Consolidated Statements of Operations in "Foreign currency transactions and other."
 
Revenues, expenses, assets and liabilities can vary during each quarter of the year.  Therefore, the results and trends in these interim financial statements may not be the same as those for the full year.

Recent Accounting Pronouncements
 
In July 2013, the Financial Accounting Standards Board ("FASB") issued an accounting update which provides guidance on financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward or a tax credit carryforward exists in the same taxing jurisdiction. Per this guidance, an entity must present the unrecognized tax benefit as a reduction to a deferred tax asset, except when the carryforward is not available as of the reporting date under the governing tax law to settle taxes or the entity does not intend to use the deferred tax asset for this purpose. This amendment does not impact the recognition or measurement of uncertain tax positions or the disclosure reconciliation of gross unrecognized tax benefits. The update is effective for public companies beginning after December 15, 2013. The Company adopted this update in the first quarter of 2014 and this accounting update did not have an impact on the Company's consolidated balance sheet.
In April 2014, the FASB issued an accounting update which amends the definition of a discontinued operation. The new definition limits discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have or will have a major effect on an entity's operations and financial results. The new definition includes an acquired business that is classified as held for sale at the date of acquisition. The accounting update requires new disclosures of both discontinued operations and a disposal of an individually significant component of an entity. The accounting update is effective for annual and interim periods beginning on or after December 15, 2014. Early adoption is permitted but only for disposals that have not been reported in financial statements previously issued.
In May 2014, the FASB and the International Accounting Standards Board ("IASB") issued a new accounting standard on the recognition of revenue from contracts with customers that is designed to create greater comparability for financial statement users across industries and jurisdictions. The core principle of the standard is that an "entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services". Additionally, the new guidance specifies the accounting for some costs to obtain or fulfill a contract with a customer. The new standard will also require enhanced disclosures. The accounting standard is effective for public entities for annual and interim periods beginning after December 15, 2016. Early adoption is not permitted under U.S. GAAP and retrospective application is permitted but not required. The Company is currently evaluating the impact on its consolidated financial statements of adopting this new guidance.


8



2.                                       STOCK-BASED EMPLOYEE COMPENSATION
 
Stock-based compensation expense included in personnel expenses in the Unaudited Consolidated Statements of Operations was approximately $46.1 million and $34.6 million for the three months ended September 30, 2014 and 2013 , respectively, and $120.1 million and $91.0 million for the nine months ended September 30, 2014 and 2013 , respectively.

The cost of stock-based transactions is recognized in the financial statements based upon fair value. Fair value is recognized as expense on a straight line basis, net of estimated forfeitures, over the employee requisite service period. The fair value of performance share units and restricted stock units is determined based on the number of units granted and the quoted price of the Company's common stock as of the grant date. Stock-based compensation related to performance share units reflects the estimated probable outcome at the end of the performance period. The fair value of employee stock options assumed in acquisitions was determined using the Black-Scholes model and the market value of the Company's common stock at the respective acquisition date.
 
Restricted Stock Units and Performance Share Units

The following table summarizes the activity of restricted stock units and performance share units ("share-based awards") during the nine months ended September 30, 2014
Share-Based Awards
 
Shares
 
Weighted Average Grant Date Fair Value
Unvested at December 31, 2013
 
534,319

 
 
$
615.10

 
Granted
 
121,534

 
 
$
1,316.18

 
Assumed in an acquisition
 
43,993

 
 
$
1,238.68

 
Vested
 
(184,678
)
 
 
$
477.07

 
Performance Share Units Adjustment
 
28,516

 
 
$
787.71

 
Forfeited
 
(6,661
)
 
 
$
919.88

 
Unvested at September 30, 2014
 
537,023

 
 
$
877.70

 
 
As of September 30, 2014 , there was $261.3 million of total future compensation cost related to unvested share-based awards to be recognized over a weighted average period of 1.7 years.
 
During the nine months ended September 30, 2014 , the Company made broad-based grants of 49,941 restricted stock units that generally vest after three years. These share-based awards had a total grant date fair value of $64.7 million based on a weighted average grant date fair value per share of $1,295.42 .

In addition, during the nine months ended September 30, 2014 , the Company granted 71,593 performance share units to executives and certain other employees.  The performance share units had a total grant date fair value of $95.3 million based upon a weighted average grant date fair value per share of $1,330.66 .  The performance share units are payable in shares of the Company's common stock upon vesting. Subject to certain exceptions for terminations other than for "cause," for "good reason" or on account of death or disability, recipients of these performance share units must continue their service through the three year requisite service period in order to receive any shares.  Stock-based compensation related to performance share units reflects the estimated probable outcome at the end of the performance period.  The actual number of shares to be issued on the vesting date will be determined upon completion of the performance period, which, for most of these performance share units, ends December 31, 2016, assuming there is no accelerated vesting for, among other things, a termination of employment under certain circumstances.  As of September 30, 2014 , the estimated number of probable shares to be issued is a total of 71,593 shares.  If the maximum performance thresholds are met at the end of the performance period, a maximum number of 144,714 total shares could be issued.  If the minimum performance thresholds are not met, 50,636 shares would be issued at the end of the performance period.
 
2013 Performance Share Units

During the year ended December 31, 2013 , the Company granted 104,865 performance share units with a grant date fair value of $74.4 million , based on a weighted average grant date fair value per share of $709.74 . The actual number of shares to be issued will be determined upon completion of the performance period which ends December 31, 2015.


9



At September 30, 2014 , there were 103,104 unvested 2013 performance share units outstanding, net of performance share units that were forfeited or vested since the grant date. As of September 30, 2014 , the number of shares estimated to be issued pursuant to these performance share units at the end of the performance period is a total of 195,337 shares. If the maximum thresholds are met at the end of the performance period, a maximum of 225,778 total shares could be issued pursuant to these performance share units. If the minimum performance thresholds are not met, 40,408 shares would be issued at the end of the performance period.

2012 Performance Share Units
 
During the year ended December 31, 2012 , the Company granted 60,365 performance share units with a grant date fair value of $39.0 million , based on a weighted average grant date fair value per share of $645.86 .  The actual number of shares to be issued will be determined upon completion of the performance period which ends December 31, 2014.
 
At September 30, 2014 , there were 57,927 unvested 2012 performance share units outstanding, net of performance share units that were forfeited or vested since the grant date.  As of September 30, 2014 , the number of shares estimated to be issued pursuant to these performance share units at the end of the performance period is a total of 100,856 shares.  If the maximum performance thresholds are met at the end of the performance period, a maximum of 115,854 total shares could be issued pursuant to these performance share units. If the minimum performance thresholds are not met, 36,173 shares would be issued at the end of the performance period.

Stock Options - Other than Stock Options Assumed in Acquisitions

During the nine months ended September 30, 2014 , stock options, other than those assumed in acquisitions, were exercised for 7,150 shares of common stock with a weighted average exercise price per share of $22.42 and an aggregate intrinsic value of $8.6 million .  As of September 30, 2014 , the aggregate number of shares subject to stock options outstanding and exercisable, other than those assumed in acquisitions, was 1,850 , with a weighted average exercise price per share of $23.08 , a weighted average remaining term of 0.8 years and an aggregate intrinsic value of $2.1 million .

Stock Options Assumed in Acquisitions

The following table summarizes the activity for the nine months ended  September 30, 2014 for employee stock options assumed in acquisitions: 
Assumed Employee Stock Options
 
Number of Shares
 
Weighted Average
 Exercise Price
 
Aggregate
 Intrinsic Value (in thousands)
 
Weighted Average Remaining Contractual Term
(in years)
Balance, December 31, 2013
 
128,708

 
 
$
335.83

 
 
$
106,386

 
6.9
Assumed in acquisitions
 
61,897

 
 
$
457.67

 
 
 
 
 
Exercised
 
(36,322
)
 
 
$
324.18

 
 
 
 
 
Forfeited
 
(928
)
 
 
$
599.98

 
 
 
 
 
Balance, September 30, 2014
 
153,355

 
 
$
386.16

 
 
$
118,453

 
6.8
Vested and exercisable as of September 30, 2014
 
80,425

 
 
$
289.79

 
 
$
69,873

 
5.8
Vested and exercisable as of September 30, 2014 and unvested expected to vest thereafter, net of estimated forfeitures
 
152,028

 
 
$
386.04

 
 
$
117,447

 
6.8

The aggregate intrinsic value of employee stock options assumed in acquisitions that were exercised during the nine months ended September 30, 2014 was $35.1 million . During the nine months ended September 30, 2014 , assumed unvested employee stock options vested for 26,765 shares of common stock with an acquisition date fair value of $13.5 million .

For the three and nine months ended September 30, 2014 , the Company recorded stock-based compensation expense related to these unvested assumed employee stock options of $8.1 million and $14.9 million , respectively, compared to $12.0 million and $23.0 million for the three and nine months ended September 30, 2013 , respectively. For the nine months ended September 30, 2014 , employee stock options assumed in acquisitions had a total acquisition date fair value of $45.5 million

10



based on a weighted average acquisition date fair value of $734.76 per share. As of September 30, 2014 , there was $44.4 million of total future compensation costs related to unvested assumed employee stock options to be recognized over a weighted average period of 1.8 years.


3.                                       NET INCOME PER SHARE
 
The Company computes basic net income per share by dividing net income by the weighted average number of common shares outstanding during the period.  Diluted net income per share is based upon the weighted average number of common and common equivalent shares outstanding during the period.
 
Common equivalent shares related to stock options, restricted stock units and performance share units are calculated using the treasury stock method.  Performance share units are included in the weighted average common equivalent shares based on the number of shares that would be issued if the end of the reporting period were the end of the performance period, if the result would be dilutive.
 
The Company's convertible debt issues have net share settlement features requiring the Company upon conversion to settle the principal amount of the debt for cash and the conversion premium for cash or shares of the Company's common stock, at the Company's option.  The convertible notes are included in the calculation of diluted net income per share if their inclusion is dilutive under the treasury stock method.
 
A reconciliation of the weighted average number of shares outstanding used in calculating diluted earnings per share is as follows (in thousands): 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2014
 
2013
 
2014
 
2013
Weighted average number of basic common shares outstanding
 
52,405

 
51,363

 
52,319

 
50,690

Weighted average dilutive stock options, restricted stock units and performance share units
 
272

 
338

 
308

 
359

Assumed conversion of Convertible Senior Notes
 
347

 
1,283

 
421

 
1,177

Weighted average number of diluted common and common equivalent shares outstanding
 
53,024

 
52,984

 
53,048

 
52,226

Anti-dilutive potential common shares
 
2,628

 
2,923

 
2,577

 
2,931

 
Anti-dilutive potential common shares for the nine months ended September 30, 2014 include approximately 2.1 million shares that could be issued under the Company's outstanding convertible notes.  Under the treasury stock method, the convertible notes will generally have a dilutive impact on net income per share if the Company's average stock price for the period exceeds the conversion price for the convertible notes.



11



4.                                       INVESTMENTS
 
The following table summarizes, by major security type, the Company's investments as of September 30, 2014 (in thousands): 
 
 
Cost
 
Gross 
Unrealized 
Gains
 
Gross 
Unrealized
  Losses
 
Fair
  Value
Available for sale securities:
 
 

 
 

 
 

 
 

Short-term investments:
 
 
 
 
 
 
 
 
Foreign government securities
 
$
189,491

 
$
24

 
$

 
$
189,515

U.S. government securities
 
650,518

 
2

 
(7
)
 
650,513

U.S. commercial paper
 
182,788

 
5

 
(163
)
 
182,630

U.S. government agency securities
 
170,708

 
1

 
(14
)
 
170,695

Total short-term investments
 
$
1,193,505

 
$
32

 
$
(184
)
 
$
1,193,353

 
 
 
 
 
 
 
 
 
Long-term investments:
 
 
 
 
 
 
 
 
U.S. government securities
 
$
232,951

 
$

 
$
(960
)
 
$
231,991

U.S. corporate debt securities
 
1,045,353

 
178

 
(1,754
)
 
1,043,777

U.S. government agency securities
 
70,257

 
12

 
(23
)
 
70,246

Ctrip corporate debt securities
 
500,000

 

 
(20,500
)
 
479,500

Ctrip equity securities
 
150,914

 

 
(11,246
)
 
139,668

Total long-term investments
 
$
1,999,475

 
$
190

 
$
(34,483
)
 
$
1,965,182

 
As of September 30, 2014 , foreign government securities included investments in debt securities issued by the governments of the Netherlands and Belgium. 

In August 2014, the Company used its non-U.S. cash to invest in a five -year Senior Convertible Note issued by Ctrip.com International Ltd. ("Ctrip"). In connection with the purchase of the convertible note, Ctrip granted the Company the right to appoint an observer to Ctrip's board of directors and permission to acquire Ctrip shares (including through the acquisition of Ctrip American Depositary Shares ("ADSs")) in the open market over the twelve months following the purchase date, so that combined with ADSs issuable upon conversion of the note, the Company may hold up to 10% of Ctrip's outstanding equity. The note was issued at par in an aggregate principal amount of $500 million . Additionally, during the three months ended September 30, 2014 , the Company invested $150.9 million of its non-U.S. cash in Ctrip ADSs. As of October 17, 2014 , the Company beneficially owned 7.9% of Ctrip's outstanding equity (calculated in accordance with SEC rules, which include the ADSs issuable upon conversion of the note). The convertible debt and equity securities of Ctrip have been marked to market in accordance with the accounting guidance for available-for-sale securities and at September 30, 2014 show a $20.5 million and $11.2 million unrealized loss, respectively, as a result of decreases in Ctrip's publicly traded shares since the convertible debt and equity purchases were made.

The following table summarizes, by major security type, the Company's investments as of December 31, 2013 (in thousands): 
 
 
Cost
 
Gross
  Unrealized
  Gains
 
Gross
  Unrealized
  Losses
 
Fair
  Value
Available for sale securities:
 
 

 
 

 
 

 
 

Short-term investments:
 
 
 
 
 
 
 
 
Foreign government securities
 
$
4,019,530

 
$
233

 
$
(356
)
 
$
4,019,407

U.S. government securities
 
1,443,083

 
250

 
(20
)
 
1,443,313

Total
 
$
5,462,613

 
$
483

 
$
(376
)
 
$
5,462,720

 
The Company has classified its investments as available-for-sale securities. These securities are carried at estimated fair value with the aggregate unrealized gains and losses related to these investments, net of taxes, reflected as a part of "Accumulated other comprehensive income (loss)" on the Unaudited Consolidated Balance Sheets. Classification as short-term or long-term is based upon the maturity of the debt securities.

12




There were no significant realized gains or losses related to investments for the three and nine months ended September 30, 2014 and no realized gains or losses in 2013 .


5.                                       FAIR VALUE MEASUREMENTS
 
Financial assets and liabilities carried at fair value as of September 30, 2014 are classified in the tables below in the categories described below (in thousands): 
 
 
Level 1
 
Level 2
 
Total
ASSETS:
 
 

 
 

 
 

Cash equivalents:
 
 
 
 
 
 
Money market funds
 
$
69,430

 
$

 
$
69,430

Foreign government securities
 

 
838,090

 
838,090

U.S. government securities
 

 
2,135,978

 
2,135,978

U.S. commercial paper
 

 
731,788

 
731,788

U.S. government agency securities
 

 
262,467

 
262,467

Short-term investments:
 
 

 
 

 
 

Foreign government securities
 

 
189,515

 
189,515

U.S. government securities
 

 
650,513

 
650,513

U.S. commercial paper
 

 
182,630

 
182,630

U.S. government agency securities
 

 
170,695

 
170,695

Foreign exchange derivatives
 

 
423

 
423

Long-term investments:
 
 
 
 
 
 
U.S. government securities
 

 
231,991

 
231,991

U.S. corporate debt securities
 

 
1,043,777

 
1,043,777

U.S. government agency securities
 

 
70,246

 
70,246

Ctrip corporate debt securities
 

 
479,500

 
479,500

Ctrip equity securities
 
139,668

 

 
139,668

Total assets at fair value
 
$
209,098

 
$
6,987,613

 
$
7,196,711

 
 
 
Level 1
 
Level 2
 
Total
LIABILITIES:
 
 

 
 

 
 

Foreign exchange derivatives
 
$

 
$
1,044

 
$
1,044

 
Financial assets and liabilities carried at fair value as of December 31, 2013 are classified in the tables below in the categories described below (in thousands):
 
 
Level 1
 
Level 2
 
Total
ASSETS:
 
 

 
 

 
 

Cash equivalents:
 
 
 
 
 
 
Money market funds
 
$
273,850

 
$

 
$
273,850

Foreign government securities
 

 
238,202

 
238,202

U.S. government securities
 

 
28,000

 
28,000

Short-term investments:
 
 

 
 

 
 

Foreign government securities
 

 
4,019,407

 
4,019,407

U.S. government securities
 

 
1,443,313

 
1,443,313

Foreign exchange derivatives
 

 
292

 
292

Total assets at fair value
 
$
273,850

 
$
5,729,214

 
$
6,003,064

 

13



 
 
Level 1
 
Level 2
 
Total
LIABILITIES:
 
 

 
 

 
 

Foreign exchange derivatives
 
$

 
$
122,091

 
$
122,091

 
There are three levels of inputs to measure fair value.  The definition of each input is described below:
 
Level 1 :
Quoted prices in active markets that are accessible by the Company at the measurement date for
identical assets and liabilities.

Level 2 :
Inputs that are observable, either directly or indirectly.  Such prices may be based upon quoted
prices for identical or comparable securities in active markets or inputs not quoted on active
markets, but corroborated by market data.

Level 3 :
Unobservable inputs are used when little or no market data is available.

Investments in sovereign debt, government agency securities, corporate debt securities and commercial paper are considered "Level 2 " valuations because the Company has access to quoted prices, but does not have visibility to the volume and frequency of trading for all of these investments.  For the Company's investments, a market approach is used for recurring fair value measurements and the valuation techniques use inputs that are observable, or can be corroborated by observable data, in an active marketplace. 
 
The Company's derivative instruments are valued using pricing models.  Pricing models take into account the contract terms as well as multiple inputs where applicable, such as interest rate yield curves, option volatility and currency rates. Derivatives are considered "Level 2 " fair value measurements. The Company's derivative instruments are typically short-term in nature.
 
As of September 30, 2014 and December 31, 2013 , the Company's cash consisted of bank deposits and cash held in investment accounts.  Other financial assets and liabilities, including restricted cash, accounts receivable, accounts payable, accrued expenses and deferred merchant bookings are carried at cost which approximates their fair value because of the short-term nature of these items.  See Note 4 for information on the carrying value of investments and Note 8 for the estimated fair value of the Company's outstanding Senior Notes.
 
In the normal course of business, the Company is exposed to the impact of foreign currency fluctuations.  The Company limits these risks by following established risk management policies and procedures, including the use of derivatives.  The Company does not use derivatives for trading or speculative purposes.  All derivative instruments are recognized on the Unaudited Consolidated Balance Sheets at fair value.  Gains and losses resulting from changes in the fair value of derivative instruments which are not designated as hedging instruments for accounting purposes are recognized on the Unaudited Consolidated Statements of Operations in the period that the changes occur.  Changes in the fair value of derivatives designated as net investment hedges are recorded as currency translation adjustments to offset a portion of the translation adjustment of the international subsidiary's net assets and are recognized on the Unaudited Consolidated Balance Sheets in "Accumulated other comprehensive income (loss)."
 
Derivatives Not Designated as Hedging Instruments — The Company is exposed to adverse movements in currency exchange rates as the operating results of its international operations are translated from local currency into U.S. Dollars upon consolidation.  The Company's derivative contracts principally address short-term foreign exchange fluctuations for the Euro and British Pound Sterling versus the U.S. Dollar.  As of September 30, 2014 and December 31, 2013 , there were no outstanding derivative contracts associated with foreign currency translation risk.  Foreign exchange gains of $8.3 million and $12.5 million for the three and nine months ended September 30, 2014 , respectively, compared to foreign exchange losses of $1.1 million and foreign exchange gains of $1.0 million for the three and nine months ended September 30, 2013 , respectively, are recorded in "Foreign currency transactions and other" in the Unaudited Consolidated Statements of Operations.
 
The Company also enters into foreign currency forward contracts to hedge its exposure to the impact of movements in currency exchange rates on its transactional balances denominated in currencies other than the functional currency. Foreign exchange derivatives outstanding as of September 30, 2014 associated with hedging these risks resulted in a net liability of $0.6 million , with $1.0 million recorded in "Accrued expenses and other current liabilities" and $0.4 million recorded in "Prepaid expenses and other current assets" on the Unaudited Consolidated Balance Sheet. Foreign exchange derivatives outstanding as of December 31, 2013 associated with hedging these risks resulted in a net liability of $0.5 million , with $0.6 million recorded in "Accrued expenses and other current liabilities" and $0.1 million recorded in "Prepaid expenses and other current assets" on

14



the Unaudited Consolidated Balance Sheet.  Foreign exchange losses of $15.0 million and $19.0 million for the three and nine months ended September 30, 2014 , respectively, compared to foreign exchange gains of $1.5 million and $1.9 million for the three and nine months ended September 30, 2013 , respectively, are recorded related to these derivatives in "Foreign currency transactions and other" in the Unaudited Consolidated Statements of Operations.
 
The settlement of derivative contracts not designated as hedging instruments resulted in a net cash outflow of $10.0 million for the nine months ended September 30, 2014 compared to a net cash inflow of $3.6 million for the nine months ended September 30, 2013 , and are reported within "Net cash provided by operating activities" on the Unaudited Consolidated Statements of Cash Flows.
 
Derivatives Designated as Hedging Instruments — The Company had no foreign currency forward contracts designated as hedges of its net investment in a foreign subsidiary outstanding as of September 30, 2014 . As of December 31, 2013 , the Company had outstanding foreign currency forward contracts with a notional value of 3.0 billion Euros to hedge a portion of its net investment in a foreign subsidiary.  These contracts were all short-term in nature.  Hedge ineffectiveness is assessed and measured based on changes in forward exchange rates.  The fair value of these derivatives at December 31, 2013 was a net liability of $121.3 million , with $121.5 million recorded in "Accrued expenses and other current liabilities" and $0.2 million recorded in "Prepaid expenses and other current assets" on the Unaudited Consolidated Balance Sheet.  Net cash outflows of $80.3 million and $52.8 million for the nine months ended September 30, 2014 and 2013 , respectively, are reported within "Net cash provided by (used in) investing activities" on the Unaudited Consolidated Statements of Cash Flows.


6.                                       INTANGIBLE ASSETS AND GOODWILL
 
The Company's intangible assets at September 30, 2014 and December 31, 2013 consisted of the following (in thousands): 
 
September 30, 2014
 
December 31, 2013
 
 
 
 
 
Gross 
Carrying 
Amount
 
Accumulated
Amortization
 
Net 
Carrying 
Amount
 
Gross 
Carrying 
Amount
 
Accumulated
Amortization
 
Net 
Carrying 
Amount
 
Amortization
Period
 
Weighted 
Average 
Useful Life
Supply and distribution agreements
$
813,292

 
$
(180,535
)
 
$
632,757

 
$
581,742

 
$
(160,499
)
 
$
421,243

 
10 - 20 years
 
16 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Technology
107,706

 
(39,606
)
 
68,100

 
93,322

 
(29,271
)
 
64,051

 
1 - 5 years
 
5 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Patents
1,623

 
(1,513
)
 
110

 
1,623

 
(1,478
)
 
145

 
15 years
 
15 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Internet domain names
43,170

 
(16,086
)
 
27,084

 
45,799

 
(12,112
)
 
33,687

 
2 - 20 years
 
8 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trade names
1,525,972

 
(78,813
)
 
1,447,159

 
548,243

 
(47,388
)
 
500,855

 
5 - 20 years
 
20 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other
141

 
(137
)
 
4

 
141

 
(137
)
 
4

 
3 - 10 years
 
3 years
Total intangible assets
$
2,491,904

 
$
(316,690
)
 
$
2,175,214

 
$
1,270,870

 
$
(250,885
)
 
$
1,019,985

 
 
 
 
 
Intangible assets with determinable lives are amortized on a straight-line basis.  Intangible asset amortization expense was approximately $35.8 million and $81.6 million for the three and nine months ended September 30, 2014 , respectively, and $22.9 million and $46.9 million for the three and nine months ended September 30, 2013 , respectively.


15



The amortization expense for intangible assets for the remainder of 2014 , the annual expense for the next five years, and the expense thereafter is expected to be as follows (in thousands): 
2014
$
39,464

2015
154,542

2016
151,316

2017
147,477

2018
132,055

2019
122,102

Thereafter
1,428,258

 
$
2,175,214

 
The change in goodwill for the nine months ended September 30, 2014 consists of the following (in thousands): 
Balance at December 31, 2013
$
1,767,912

Acquisitions
1,733,134

Currency translation adjustments
(17,902
)
Balance at September 30, 2014
$
3,483,144

 
During the three months ended September 30, 2014 , the Company performed its annual goodwill impairment testing and concluded there was no impairment of goodwill. A substantial portion of the intangibles and goodwill relates to the acquisition of OpenTable in July 2014 and KAYAK in May 2013. See Note 14 for further information on the acquisition of OpenTable. The fair values of the Company's other reporting units substantially exceed their respective carrying values.


7.                                       OTHER ASSETS
 
Other assets at September 30, 2014 and December 31, 2013 consisted of the following (in thousands): 
 
 
September 30,
2014
 
December 31,
2013
Deferred debt issuance costs
 
$
28,012

 
$
16,465

Security deposits
 
12,697

 
10,617

Other
 
7,762

 
6,432

Total
 
$
48,471

 
$
33,514

 
Deferred debt issuance costs arose from (i) the $1.0 billion aggregate principal amount of 1.0% Convertible Senior Notes, due March 15, 2018 , issued in March 2012 ; (ii) a $1.0 billion revolving credit facility entered into in October 2011 ; (iii) the $575.0 million aggregate principal amount of 1.25% Convertible Senior Notes, due March 15, 2015 , issued in March 2010 ; (iv) the $1.0 billion aggregate principal amount of 0.35% Convertible Senior Notes, due June 15, 2020 , issued in May 2013; (v) the $1.0 billion aggregate principal amount of 0.9% Convertible Senior Notes, due September 15, 2021 , issued in August 2014; and (vi) the 1.0 billion Euro aggregate principal amount of 2.375% Senior Notes, due September 23, 2024 , issued in September 2014.  Deferred debt issuance costs are being amortized using the effective interest rate method and the period of amortization was determined at inception of the related debt agreements based upon the stated maturity dates. Unamortized debt issuance costs written off to interest expense in the nine months ended  September 30, 2014  related to early conversion of convertible debt amounted to $0.5 million . Security deposits principally relate to the Company's leased office spaces.


8.                                       DEBT
 
Revolving Credit Facility

In October 2011 , the Company entered into a $1.0 billion five -year unsecured revolving credit facility with a group of lenders. Borrowings under the revolving credit facility will bear interest, at the Company's option, at a rate per annum equal to either (i) the adjusted LIBOR for the interest period in effect for such borrowing plus an applicable margin ranging from 1.00% to 1.50% ; or (ii) the greatest of (a) JPMorgan Chase Bank, National Association's prime lending rate , (b) the federal funds rate plus 0.50% , and (c) an adjusted LIBOR for an interest period of one month plus 1.00% , plus an applicable margin ranging from

16



0.00% to 0.50% . Undrawn balances available under the revolving credit facility are subject to commitment fees at the applicable rate ranging from 0.10% to 0.25% .
 
The revolving credit facility provides for the issuance of up to $100.0 million of letters of credit as well as borrowings of up to $50.0 million on same-day notice, referred to as swingline loans. Borrowings under the revolving credit facility may be made in U.S. Dollars, Euros, British Pounds Sterling and any other foreign currency agreed to by the lenders. The proceeds of loans made under the facility will be used for working capital and general corporate purposes.

The Company funded the acquisition of OpenTable in July 2014 from cash on hand in the United States and $995 million borrowed under the Company's revolving credit facility, which the Company had repaid as of September 30, 2014 . As of December 31, 2013 , there were no borrowings under the facility. As of September 30, 2014 and December 31, 2013 , there were approximately $4.0 million and $2.2 million of letters of credit issued under the facility, respectively. 

Outstanding Debt
 
Outstanding debt as of September 30, 2014 consisted of the following (in thousands): 
September 30, 2014
 
Outstanding
  Principal 
Amount
 
Unamortized
  Debt
  Discount
 
Carrying
  Value
Short-term debt:
 
 
 
 
 
 
1.25% Convertible Senior Notes due March 2015
 
$
38,557

 
$
(776
)
 
$
37,781

 
 
 
 
 
 
 
Long-term debt:
 
 
 
 
 
 
1.0% Convertible Senior Notes due March 2018
 
$
1,000,000

 
$
(80,397
)
 
$
919,603

0.35% Convertible Senior Notes due June 2020
 
1,000,000

 
(143,942
)
 
856,058

0.9% Convertible Senior Notes due September 2021
 
1,000,000

 
(139,869
)
 
860,131

2.375% Senior Notes due September 2024
 
1,263,264

 
(11,813
)
 
1,251,451

Total long-term debt
 
$
4,263,264

 
$
(376,021
)
 
$
3,887,243

 
Outstanding debt as of December 31, 2013 consisted of the following (in thousands): 
December 31, 2013
 
Outstanding
  Principal 
Amount
 
Unamortized
  Debt
  Discount
 
Carrying
  Value
Short-term debt:
 
 
 
 
 
 
1.25% Convertible Senior Notes due March 2015
 
$
160,464

 
$
(8,533
)
 
$
151,931

 
 
 
 
 
 
 
Long-term debt:
 
 
 
 
 
 
1.0% Convertible Senior Notes due March 2018
 
$
1,000,000

 
$
(96,797
)
 
$
903,203

0.35% Convertible Senior Notes due June 2020
 
1,000,000

 
(161,156
)
 
838,844

Total long-term debt
 
$
2,000,000

 
$
(257,953
)
 
$
1,742,047

 
Based upon the closing price of the Company's common stock for the prescribed measurement period during the three months ended September 30, 2014 and December 31, 2013 , the contingent conversion threshold on the 2015 Notes (as defined below) was exceeded.  Therefore, the 2015 Notes were convertible at the option of the holders. Accordingly, the Company reported the carrying value of the 2015 Notes as a current liability as of September 30, 2014 and December 31, 2013 . Since these notes are convertible at the option of the holders and the principal amount is required to be paid in cash, the difference between the principal amount and the carrying value is reflected as convertible debt in the mezzanine section on the Company's Unaudited Consolidated Balance Sheets. Therefore, the Company reclassified the unamortized debt discount for these 1.25% Notes in the amount of $0.8 million and $8.5 million before tax as of September 30, 2014 and December 31, 2013 , respectively, from additional paid-in capital to convertible debt in the mezzanine section on the Company's Unaudited Consolidated Balance Sheets. The 2015 Notes become convertible on December 15, 2014, at the option of the holders, and will remain convertible until the scheduled trading day immediately preceding the maturity date of March 15, 2015, regardless of the Company's stock price.


17



The contingent conversion thresholds on the 2018 Notes (as defined below), the 2020 Notes (as defined below) and the 2021 Notes (as defined below) were not exceeded at September 30, 2014 or December 31, 2013 , and therefore these Notes are reported as a non-current liability on the Unaudited Consolidated Balance Sheets.

Fair Value of Debt

As of September 30, 2014 and December 31, 2013 , the estimated market value of all outstanding Senior Notes was approximately $4.8 billion and $3.1 billion , respectively, and was considered a "Level 2 " fair value measurement (see Note 5). Fair value was estimated based upon actual trades at the end of the reporting period or the most recent trade available as well as the Company's stock price at the end of the reporting period.  A substantial portion of the market value of the Company's debt in excess of the outstanding principal amount relates to the conversion premium on the Convertible Senior Notes.

Convertible Debt

If the note holders exercise their option to convert, the Company delivers cash to repay the principal amount of the notes and delivers shares of common stock or cash, at its option, to satisfy the conversion value in excess of the principal amount.  In cases where holders decide to convert prior to the maturity date, the Company writes off the proportionate amount of remaining debt issuance costs to interest expense. For the nine months ended September 30, 2014 , the Company paid $121.9 million to satisfy the aggregate principal amount due and issued 299,657 shares of its common stock in satisfaction of the conversion value in excess of the principal amount for debt converted prior to maturity. As of October 27, 2014 , the Company had received early conversion notices for the 1.25% Convertible Senior Notes due March 2015 that will be settled in the fourth quarter of 2014 for an aggregate principal amount of approximately $1.0 million .

Description of Senior Convertible Notes  

In August 2014, the Company issued in a private placement $1.0 billion aggregate principal amount of Convertible Senior Notes due September 15, 2021, with an interest rate of 0.9% (the "2021 Notes"). The Company paid $10.9 million in debt issuance costs during the nine months ended September 30, 2014 , related to this offering. The 2021 Notes are convertible, subject to certain conditions, into the Company's common stock at a conversion price of approximately $2,055.50 per share. The 2021 Notes are convertible, at the option of the holder, prior to September 15, 2021, upon the occurrence of specific events, including but not limited to a change in control, or if the closing sales price of the Company's common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is more than 150% of the applicable conversion price in effect for the notes on the last trading day of the immediately preceding quarter. In the event that all or substantially all of the Company's common stock is acquired on or prior to the maturity of the 2021 Notes in a transaction in which the consideration paid to holders of the Company's common stock consists of all or substantially all cash, the Company would be required to make additional payments in the form of additional shares of common stock to the holders of the 2021 Notes in an aggregate value ranging from $0 to approximately $375 million depending upon the date of the transaction and the then current stock price of the Company. As of June 15, 2021, holders will have the right to convert all or any portion of the 2021 Notes. The 2021 Notes may not be redeemed by the Company prior to maturity.  The holders may require the Company to repurchase the 2021 Notes for cash in certain circumstances.  Interest on the 2021 Notes is payable on March 15 and September 15 of each year.

In May 2013, the Company issued in a private placement $1.0 billion aggregate principal amount of Convertible Senior Notes due June 15, 2020, with an interest rate of 0.35% (the "2020 Notes"). The 2020 Notes were issued with an initial discount of $20.0 million . The Company paid $1.0 million in debt issuance costs during the year ended December 31, 2013, related to this offering. The 2020 Notes are convertible, subject to certain conditions, into the Company's common stock at a conversion price of approximately $1,315.10 per share. The 2020 Notes are convertible, at the option of the holder, prior to June 15, 2020, upon the occurrence of specific events, including but not limited to a change in control, or if the closing sales price of the Company's common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is more than 150% of the applicable conversion price in effect for the notes on the last trading day of the immediately preceding quarter. In the event that all or substantially all of the Company's common stock is acquired on or prior to the maturity of the 2020 Notes in a transaction in which the consideration paid to holders of the Company's common stock consists of all or substantially all cash, the Company would be required to make additional payments in the form of additional shares of common stock to the holders of the 2020 Notes in an aggregate value ranging from $0 to approximately $397 million depending upon the date of the transaction and the then current stock price of the Company. As of March 15, 2020, holders will have the right to convert all or any portion of the 2020 Notes. The 2020 Notes may not be redeemed by the Company prior to maturity.  The holders may require the Company to repurchase the 2020 Notes for cash in certain circumstances.  Interest on the 2020 Notes is payable on June 15 and December 15 of each year.


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In March 2012 , the Company issued in a private placement $1.0 billion aggregate principal amount of Convertible Senior Notes due March 15, 2018 , with an interest rate of 1.0% (the "2018 Notes"). The Company paid $20.9 million in debt issuance costs during the year ended December 31, 2012, related to this offering. The 2018 Notes are convertible, subject to certain conditions, into the Company's common stock at a conversion price of approximately $944.61 per share. The 2018 Notes are convertible, at the option of the holder, prior to March 15, 2018, upon the occurrence of specific events, including but not limited to a change in control, or if the closing sales price of the Company's common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is more than 150% of the applicable conversion price in effect for the notes on the last trading day of the immediately preceding quarter. In the event that all or substantially all of the Company's common stock is acquired on or prior to the maturity of the 2018 Notes in a transaction in which the consideration paid to holders of the Company's common stock consists of all or substantially all cash, the Company would be required to make additional payments in the form of additional shares of common stock to the holders of the 2018 Notes in aggregate value ranging from $0 to approximately $344 million depending upon the date of the transaction and the then current stock price of the Company. As of December 15, 2017 , holders will have the right to convert all or any portion of the 2018 Notes. The 2018 Notes may not be redeemed by the Company prior to maturity.  The holders may require the Company to repurchase the 2018 Notes for cash in certain circumstances.  Interest on the 2018 Notes is payable on March 15 and September 15 of each year.

In March 2010 , the Company issued in a private placement $575.0 million aggregate principal amount of Convertible Senior Notes due March 15, 2015 , with an interest rate of 1.25% (the "2015 Notes").  The Company paid $13.3 million in debt issuance costs associated with the 2015 Notes for the year ended December 31, 2010 .  The 2015 Notes are convertible, subject to certain conditions, into the Company's common stock at a conversion price of approximately $303.06 per share.  The 2015 Notes are convertible, at the option of the holder, prior to March 15, 2015 upon the occurrence of specified events, including, but not limited to a change in control, or if the closing sales price of the Company's common stock for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is more than 150% of the applicable conversion price in effect for the notes on the last trading day of the immediately preceding quarter. The 2015 Notes are currently convertible, at the option of the holders, based on the Company's stock price and will become convertible on December 15, 2014 and will remain convertible until the trading day prior to the maturity date of March 15, 2015, regardless of the Company's stock price. The 2015 Notes may not be redeemed by the Company prior to maturity.  The holders may require the Company to repurchase the 2015 Notes for cash in certain circumstances.  Interest on the 2015 Notes is payable on March 15 and September 15 of each year.

Accounting guidance requires that cash-settled convertible debt, such as the Company's Convertible Senior Notes, be separated into debt and equity components at issuance and each be assigned a value.  The value assigned to the debt component is the estimated fair value, as of the issuance date, of a similar bond without the conversion feature.  The difference between the bond cash proceeds and this estimated fair value, representing the value assigned to the equity component, is recorded as a debt discount.  Debt discount is amortized using the effective interest method over the period from the origination date through the stated maturity date.  The Company estimated the straight debt borrowing rates at debt origination to be 5.89% for the 2015 Notes, 3.50% for the 2018 Notes, 3.13% for the 2020 Notes and 3.18% for the 2021 Notes.  The yield to maturity was estimated at an at-market coupon priced at par.

Debt discount after tax of $86.7 million ( $142.9 million before tax) and financing costs associated with the equity component of convertible debt of $1.6 million after tax were recorded in additional paid-in capital related to the 2021 Notes at September 30, 2014. Debt discount after tax of $92.4 million ( $154.3 million before tax) and financing costs associated with the equity component of convertible debt of $0.1 million after tax were recorded in additional paid-in capital related to the 2020 Notes at June 30, 2013. Debt discount after tax of $80.9 million ( $135.2 million before tax) and financing costs associated with the equity component of convertible debt of $2.8 million after tax were recorded in additional paid-in capital related to the 2018 Notes at March 31, 2012. Debt discount after tax of $69.1 million ( $115.2 million before tax) and financing costs associated with the equity component of convertible debt of $1.6 million after tax were recorded in additional paid-in-capital related to the 2015 Notes at March 31, 2010.

For the three months ended September 30, 2014 and 2013 , the Company recognized interest expense of $20.4 million and $23.5 million , respectively, related to convertible notes.  Interest expense related to convertible notes for the three months ended September 30, 2014 and 2013 was comprised of $4.6 million and $5.2 million , respectively, for the contractual coupon interest, $14.8 million and $17.0 million , respectively, related to the amortization of debt discount, and $1.0 million and $1.3 million , respectively, related to the amortization of debt issuance costs.  For the three months ended September 30, 2014 and 2013 , included in the amortization of debt discount mentioned above was $0.7 million and $0.6 million , respectively, of original issuance discount related to the 2020 Notes. The remaining period for amortization of debt discount and debt issuance costs is the stated maturity dates for the respective debt. The effective interest rate for the three months ended September 30, 2014 and 2013 was 3.6% and 4.1% , respectively.

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For the nine months ended September 30, 2014 and 2013 , the Company recognized interest expense of $53.9 million and $59.1 million , respectively, related to convertible notes.  Interest expense related to convertible notes for the nine months ended September 30, 2014 and 2013 was comprised of $11.6 million and $14.1 million , respectively, for the contractual coupon interest, $39.1 million and $41.2 million , respectively, related to the amortization of debt discount, and $3.2 million and $3.8 million , respectively, related to the amortization of debt issuance costs.  For the nine months ended September 30, 2014 and 2013 , included in the amortization of debt discount mentioned above was $2.0 million and $0.8 million , respectively, of original issuance discount related to the 2020 Notes. In addition, the Company incurred interest expense of $0.5 million related to debt conversions in the nine months ended September 30, 2014 . The remaining period for amortization of debt discount and debt issuance costs is the stated maturity dates for the respective debt. The effective interest rate for the nine months ended September 30, 2014 and 2013 was 3.6% and 4.4% , respectively.

In addition, if the Company's convertible debt is redeemed or converted prior to maturity, a gain or loss on extinguishment is recognized.  The gain or loss is the difference between the fair value of the debt component immediately prior to extinguishment and its carrying value.  To estimate the fair value of the debt at the conversion date, the Company estimated its straight debt borrowing rate, considering its credit rating and straight debt of comparable corporate issuers.  For the nine months ended September 30, 2014 , the Company recognized a non-cash loss of $6.3 million ( $3.8 million after tax) in "Foreign currency transactions and other" in the Unaudited Consolidated Statements of Operations in connection with the conversion of the 2015 Notes.

Euro Denominated Debt

In September 2014, the Company issued Senior Notes due September 23, 2024, with an interest rate of 2.375% (the "2024 Notes") for an aggregate principal amount of 1.0 billion Euros. The 2024 Notes were issued with an initial discount of 9.4 million Euros. In addition, the Company paid $5.3 million in debt issuance costs during the three months ended September 30, 2014 . Interest on the 2024 Notes is payable annually on September 23, beginning September 23, 2015. Subject to certain limited exceptions, all payments of interest and principal, including payments made upon any redemption of the 2024 Notes, will be made in Euros.

The aggregate principal value of the 2024 Notes and accrued interest thereon are designated as a hedge of the Company's net investment in a Euro functional currency subsidiary. The foreign currency transaction gains or losses on these liabilities are measured based on changes in spot rates and are recorded in accumulated other comprehensive income (loss). The Euro denominated net assets of the subsidiary are translated into U.S. Dollars at each balance sheet date, with effects of foreign currency changes also reported in accumulated other comprehensive income (loss). Since the notional amount of the recorded Euro denominated debt and related interest are not greater than the notional amount of the Company's net investment, the Company does not expect to incur any ineffectiveness on this hedge.
For the three months ended September 30, 2014 , the Company recognized interest expense of $0.7 million related to the 2024 Notes.  The remaining period for amortization of debt discount and debt issuance costs is the stated maturity date for this debt. The effective interest rate for the three months ended September 30, 2014 was 2.5% .


9.                                       TREASURY STOCK
 
In the second quarter of 2013, the Company's Board of Directors authorized the repurchase of up to $1.0 billion of the Company's common stock, in addition to amounts previously authorized. In the second quarter of 2013 the Company repurchased 431,910 shares for an aggregate cost of $345.5 million in privately negotiated, off-market transactions and in the third quarter of 2014, the Company repurchased 114,645 shares for an aggregate cost of $147.3 million in privately negotiated, off-market transactions related to this authorization.

As of September 30, 2014 , the Company had a remaining authorization of $507.2 million to purchase its common stock.  The Company may make additional repurchases of shares under its stock repurchase programs, depending on prevailing market conditions, alternate uses of capital and other factors. Whether and when to initiate and/or complete any purchase of common stock and the amount of common stock purchased will be determined in the Company's complete discretion.

In the third quarter of 2013, the Company repurchased 484,361 shares for an aggregate cost of $459.2 million . These shares were covered under our remaining authorizations as of December 31, 2012 to repurchase common stock.


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The Board of Directors has given the Company the general authorization to repurchase shares of its common stock to satisfy employee withholding tax obligations related to stock-based compensation.  The Company repurchased 73,502 shares and 113,052 shares at aggregate costs of $98.2 million and $78.3 million in the nine months ended September 30, 2014 and 2013 , respectively, to satisfy employee withholding taxes related to stock-based compensation.
 
As of September 30, 2014 , there were approximately 9.4 million shares of the Company's common stock held in treasury.


10.                                       INCOME TAXES
 
Income tax expense consists of U.S. and international income taxes, determined using an estimate of the Company's annual effective tax rate.  A deferred tax liability is recognized for all taxable temporary differences, and a deferred tax asset is recognized for all deductible temporary differences and operating loss and tax credit carryforwards.  A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.
 
The Company recognizes income tax expense based upon the applicable tax rates and tax laws of the countries in which the income is generated.  During the three and nine months ended September 30, 2014 and 2013 , a substantial majority of the Company's non-U.S. sourced income was generated in the Netherlands.  Income tax expense for the nine months ended September 30, 2014 and 2013 differs from the expected tax expense at the U.S. federal statutory rate of 35% , primarily due to lower non-U.S. tax rates, including the Innovation Box Tax benefit discussed below, partially offset by U.S. state income taxes and certain non-deductible expenses. 
 
According to Dutch corporate income tax law, income generated from qualifying "innovative" activities is taxed at a rate of 5% ("Innovation Box Tax") rather than the Dutch statutory rate of 25% .  Booking.com obtained a ruling from the Dutch tax authorities confirming that a portion of its earnings is eligible for Innovation Box Tax treatment. The ruling from the Dutch tax authorities is valid through December 31, 2017.

The Company has significant deferred tax assets, resulting principally from U.S. net operating loss carryforwards ("NOLs"). The amount of NOLs available for the Company's use is limited by Section 382 of the U.S. Internal Revenue Code ("IRC Section 382 "). At December 31, 2013 , after considering the impact of IRC Section 382 , the Company had approximately $1.4 billion of available NOLs for U.S. federal income tax purposes, comprised of $0.3 billion of NOLs generated from operating losses and approximately $1.1 billion of NOLs generated from equity-related transactions, including equity-based compensation and stock warrants. The NOLs mainly expire from December 31, 2019 to December 31, 2021 . The utilization of these NOLs is dependent upon the Company's ability to generate sufficient future taxable income in the United States. The Company periodically evaluates the likelihood of the realization of deferred tax assets, and reduces the carrying amount of these deferred tax assets by a valuation allowance to the extent it believes a portion will not be realized. The Company considers many factors when assessing the likelihood of future realization of the deferred tax assets, including its recent cumulative earnings experience by taxing jurisdiction, expectations of future income, the carryforward periods available for tax reporting purposes, and other relevant factors. 


11.                                       REDEEMABLE NONCONTROLLING INTERESTS
 
On May 18, 2010 , the Company, through its wholly-owned subsidiary, priceline.com International Ltd. ("PIL"), purchased a controlling interest of the outstanding equity of TravelJigsaw Holdings Limited and its operating subsidiary, TravelJigsaw Limited (now known as the rentalcars.com business), a Manchester, U.K.-based international rental car reservation service.
 
Certain key members of rentalcars.com's management team retained a noncontrolling ownership interest in rentalcars.com.  In addition, certain key members of the management team of Booking.com purchased a 3% ownership interest in rentalcars.com from PIL in June 2010 (together with rentalcars.com management's investment, the "Redeemable Shares"). Subject to certain exceptions, one-third of the Redeemable Shares were subject to put and call options in each of 2011, 2012 and 2013.  In April 2013, in connection with the exercise of the March 2013 put and call options, PIL purchased the remaining outstanding shares underlying redeemable noncontrolling interests for an aggregate purchase price of approximately $192.5 million .


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A reconciliation of redeemable noncontrolling interests for the nine months ended September 30, 2013 is as follows (in thousands):

 
 
Nine Months Ended September 30, 2013
Balance, beginning of period
 
$
160,287

Net income attributable to noncontrolling interests
 
135

Fair value adjustments (1)  
 
42,522

Purchases of subsidiary shares at fair value (1)
 
(192,530
)
Currency translation adjustments
 
(10,414
)
Balance, end of period
 
$


(1) The fair value of the redeemable noncontrolling interests was determined by industry peer comparable analysis and a discounted cash flow valuation model.


12.                                       ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
 
The table below provides the balances for each classification of accumulated other comprehensive income (loss) as of September 30, 2014 and December 31, 2013 (in thousands): 
 
 
September 30,
2014
 
December 31,
2013
Foreign currency translation adjustments, net of tax (1)
 
$
(46,399
)
 
$
84,598

Net unrealized gain (loss) on marketable securities, net of tax (2)
 
(25,805
)
 
131

Accumulated other comprehensive income (loss)
 
$
(72,204
)
 
$
84,729

 
(1) Foreign currency translation adjustments, net of tax, includes net losses from fair value adjustments at September 30, 2014 of $37.8 million after tax ( $57.8 million before tax) and net losses from fair value adjustments at December 31, 2013 of $58.7 million after tax ( $98.8 million before tax) associated with derivatives designated as net investment hedges (see Note 5).

Foreign currency translation adjustments, net of tax, includes foreign currency transaction gains at September 30, 2014 of $17.6 million after tax ( $30.8 million before tax) associated with the Company's 2024 Notes, which are Euro denominated debt, designated as a net investment hedge (see Note 8).

The remaining balance in currency translation adjustments excludes income taxes as a result of the Company's intention to indefinitely reinvest the earnings of its non-U.S. subsidiaries outside of the United States.
 
(2) The unrealized loss before tax at September 30, 2014 was $34.4 million compared to the unrealized gain before tax of $0.2 million at December 31, 2013 .


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13.                                       COMMITMENTS AND CONTINGENCIES
 
Litigation Related to Travel Transaction Taxes
 
The Company and certain third-party online travel companies ("OTCs") are currently involved in approximately forty lawsuits, including certified and putative class actions, brought by or against U.S. states, cities and counties over issues involving the payment of travel transaction taxes (e.g., hotel occupancy taxes, excise taxes, sales taxes, etc.).  The Company's subsidiaries priceline.com LLC, Lowestfare.com LLC and Travelweb LLC are named in some but not all of these cases.  Generally, the complaints allege, among other things, that the OTCs violated each jurisdiction's respective relevant travel transaction tax ordinance with respect to the charge and remittance of amounts to cover taxes under each law.  The complaints typically seek compensatory damages, disgorgement, penalties available by law, attorneys' fees and other relief.  In addition, approximately seventy-nine municipalities or counties, and at least eleven states, have initiated audit proceedings (including proceedings initiated by more than forty municipalities in California, which have been inactive for several years), issued proposed tax assessments or started inquiries relating to the payment of travel transaction taxes.  Additional state and local jurisdictions are likely to assert that the Company is subject to travel transaction taxes and could seek to collect such taxes, retroactively and/or prospectively.

With respect to the principal claims in these matters, the Company believes that the laws at issue do not apply to the services it provides, namely the facilitation of travel reservations, and, therefore, that it does not owe the taxes that are claimed to be owed.  Rather, the Company believes that the laws at issue generally impose travel transaction taxes on entities that own, operate or control hotels (or similar businesses) or furnish or provide hotel rooms or similar accommodations or other travel services.  In addition, in many of these matters, the taxing jurisdictions have asserted claims for "conversion" - essentially, that the Company has collected a tax and wrongfully "pocketed" those tax dollars - a claim that the Company believes is without basis and has vigorously contested.  The taxing jurisdictions that are currently involved in litigation and other proceedings with the Company, and that may be involved in future proceedings, have asserted contrary positions and will likely continue to do so.  From time to time, the Company has found it expedient to settle, and may in the future agree to settle, claims pending in these matters without conceding that the claims at issue are meritorious or that the claimed taxes are in fact due to be paid.
 
In connection with some of these tax audits and assessments, the Company may be required to pay any assessed taxes, which amounts may be substantial, prior to being allowed to contest the assessments and the applicability of the laws in judicial proceedings.  This requirement is commonly referred to as "pay to play" or "pay first."  For example, the City and County of San Francisco assessed the Company approximately $3.4 million (an amount that includes interest and penalties) relating to hotel occupancy taxes, which the Company paid in July 2009, and issued a second assessment totaling approximately $2.7 million , which the Company paid in January 2013.  Payment of these amounts, if any, is not an admission that the Company believes it is subject to such taxes.  In the San Francisco action, for example, the court ruled in February 2013 that the Company and OTCs do not owe transient accommodations tax to the city and ordered the city to refund the amount paid in July 2009; the Company also is seeking a refund of the amount paid in January 2013. San Francisco has appealed the court's ruling. The matter has been stayed while the appeal in another case with the City of San Diego is pending before the California Supreme Court.

Litigation is subject to uncertainty and there could be adverse developments in pending or future cases and proceedings.  For example, in January 2013, the Tax Appeal Court for the State of Hawaii held that the Company and other OTCs are not liable for the State's transient accommodations tax, but held that the OTCs, including the Company, are liable for the State's general excise tax on the full amount the OTC collects from the customer for a hotel room reservation, without any offset for amounts passed through to the hotel. The Company recorded an accrual for travel transaction taxes (including estimated interest and penalties), with a corresponding charge to cost of revenues, of approximately $16.5 million in December 2012 and approximately $18.7 million in the three months ended March 31, 2013, primarily related to this ruling. During the year ended December 31, 2013 and nine months ended September 30, 2014 , the Company paid approximately $20.6 million and $1.8 million , respectively, to the State of Hawaii related to this ruling. The Company has filed an appeal now pending before the Hawaii Supreme Court.

Other adverse rulings include a decision in September 2012, in which the Superior Court in the District of Columbia granted summary judgment in favor of the District and against the OTCs ruling that tax is due on the OTCs' margin and service fees, which the Company is appealing. As a result, the Company increased its accrual for travel transaction taxes (including estimated interest), with a corresponding charge to cost of revenues, by approximately $4.8 million in September 2012 and by approximately $5.6 million in the three months ended March 31, 2013. Also, in July 2013, the Circuit Court of Cook County, Illinois, ruled that the Company and the other OTCs are liable for tax and other obligations under the Chicago Hotel Accommodations Tax. In July 2014, the Company resolved all claims in this case through settlement and the claims against the

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Company were dismissed September 3, 2014. In addition, in October 2009, a jury in a San Antonio class action found that the Company and the other OTCs that are defendants in the lawsuit "control" hotels for purposes of the local hotel occupancy tax ordinances at issue and are, therefore, subject to the requirements of those ordinances. The Company intends to vigorously appeal the trial court's judgment when it becomes final.
 
An unfavorable outcome or settlement of pending litigation may encourage the commencement of additional litigation, audit proceedings or other regulatory inquiries and also could result in substantial liabilities for past and/or future bookings, including, among other things, interest, penalties, punitive damages and/or attorney fees and costs.  There have been, and will continue to be, substantial ongoing costs, which may include "pay first" payments, associated with defending the Company's position in pending and any future cases or proceedings.  An adverse outcome in one or more of these unresolved proceedings could have a material adverse effect on the Company's business and could be material to the Company's results of operations or cash flow in any given operating period. However, the Company believes that even if it were to suffer adverse determinations in the near term in more of the pending proceedings than currently anticipated, given results to date it would not have a material impact on the Company's liquidity because of the Company's available cash.
 
To the extent that any tax authority succeeds in asserting that the Company's services are subject to travel transaction taxes and that the Company has a tax collection responsibility for those taxes, or the Company determines that it has such a responsibility, with respect to future transactions, the Company may collect any such additional tax obligation from its customers, which would have the effect of increasing the cost of travel reservations to its customers and, consequently, could make the Company's travel reservation services less competitive (as compared to the services of other OTCs or travel service providers) and reduce the Company's travel reservation transactions; alternatively, the Company could choose to reduce the compensation for its services.  Either action could have a material adverse effect on the Company's business and results of operations.
 
In many of the judicial and other proceedings initiated to date, the taxing jurisdictions seek not only historical taxes that are claimed to be owed on the Company's gross profit, but also, among other things, interest, penalties, punitive damages and/or attorney fees and costs.  Therefore, any liability associated with travel transaction tax matters is not constrained to the Company's liability for tax owed on its historical gross profit, but may also include, among other things, penalties, interest and attorneys' fees.  To date, the majority of the taxing jurisdictions in which the Company facilitates hotel reservations have not asserted that these taxes are due and payable.  With respect to taxing jurisdictions that have not initiated proceedings to date, it is possible that they will do so in the future or that they will seek to amend their tax statutes and seek to collect taxes from the Company only on a prospective basis.
 
Accrual for Travel Transaction Taxes
 
As a result of this litigation and other attempts by jurisdictions to levy similar taxes, the Company has established an accrual (including estimated interest and penalties) for the potential resolution of issues related to travel transaction taxes in the amount of approximately $51 million at September 30, 2014 and $55 million at December 31, 2013 (which includes, among other things, amounts related to the litigation in the State of Hawaii, San Antonio, District of Columbia and Chicago). The accrual is based on the Company's estimate of the probable cost of resolving these issues. The Company's legal expenses for these matters are expensed as incurred and are not reflected in the amount accrued. The actual cost may be less or greater, potentially significantly, than the liabilities recorded. An estimate for a reasonably possible loss or range of loss in excess of the amount accrued cannot be reasonably made.
 
OFT Inquiry and Other Competition Reviews

In July 2012, the Office of Fair Trading (the "OFT"), the predecessor competition authority in the United Kingdom to the Competition and Markets Authority ("CMA"), issued a "Statement of Objections" ("SO") to Booking.com, which set out the OFT's preliminary views on why it believed Booking.com and others in the online hotel reservation industry were allegedly in breach of E.U. and U.K. competition law.  The SO alleged, among other things, that there were agreements or concerted practices between hotels and Booking.com and between hotels and at least one other OTC that restricted Booking.com's (and the other OTC's) ability to discount hotel room reservations, which the OFT alleged was a form of resale price maintenance.  The Company disputes the allegations in the SO. 

On January 31, 2014, the OFT announced that it had accepted commitments offered by Booking.com, as well as Expedia and Intercontinental Hotel Group, (the "Commitments") to close the investigation on the basis that they address the OFT's competition concerns.  The OFT closed its investigation with no finding of infringement or admission of wrongdoing and no imposition of a fine.
 

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The Commitments provide, among other things, that hotels will continue to be able to set retail prices for hotel room reservations on all OTC websites, such as Booking.com.  Under the Commitments, OTCs, such as Booking.com, have the flexibility to discount a hotel's retail price, but only to members of closed groups, a concept that is defined in the Commitments, who have previously made a reservation through the OTC.  The discount may be up to Booking.com's commission.  In addition, the Commitments provide that Booking.com will not require rate parity from hotels in relation to discounted rates that are provided by other OTCs or hotels to members of their closed groups, provided the discounted rate is not made public.  The Commitments apply to bookings by European Economic Area residents at U.K. hotels.

On March 31, 2014, Skyscanner, a meta-search site based in the United Kingdom, filed an appeal in the Competition Appeal Tribunal ("CAT") against the OFT's decision to accept the Commitments. Booking.com intervened in support of the CMA in the CAT. In its decision dated September 26, 2014, the CAT found that the CMA was wrong to reject Skyscanner's arguments about the negative impact of the Commitments on its business and price transparency generally without properly exploring these arguments. The CAT's decision vacates the CMA's Commitments decision and remits the matter to the CMA for reconsideration in accordance with the CAT's ruling. It is uncertain what action the CMA will take in response to the CAT's ruling, which could involve re-opening, closing or suspending the investigation. The CMA did not appeal the CAT's decision.

Investigations have also been opened by the national competition authorities in the Czech Republic, France, Germany, Italy, Austria, Hungary, Sweden, Ireland, Denmark and Switzerland that focus on Booking.com's rate parity clause in its contracts with accommodation providers in those jurisdictions.  Competition related inquiries have also been received from the competition authority in China. The Company is in ongoing discussions with the relevant regulatory authorities regarding their concerns.  The Company is currently unable to predict the outcome of these investigations or how the Company's business may be affected.  Possible outcomes include requiring Booking.com to amend or remove its rate parity clause from its contracts with accommodation providers in those jurisdictions and/or the imposition of fines.

Lawsuits Alleging Antitrust Violations

On August 20, 2012, one complaint was filed on behalf of a putative class of persons who purchased hotel room reservations from certain hotels (the "Hotel Defendants") through certain OTC defendants, including the Company.  The initial complaint, Turik v. Expedia, Inc. , Case No. 12-cv-4365, filed in the U.S. District Court for the Northern District of California, alleged that the Hotel Defendants and the OTC defendants violated U.S. federal and state laws by entering into a conspiracy to enforce a minimum resale price maintenance scheme pursuant to which putative class members paid inflated prices for hotel room reservations that they purchased through the OTC defendants.  Thirty-one other complaints containing similar allegations were filed in a number of federal jurisdictions across the country. Plaintiffs in these actions seek treble damages and injunctive relief. 

The Judicial Panel on Multidistrict Litigation ("JPML") consolidated all of the pending cases under 28 U.S.C. §1407 before Judge Boyle in the U.S. District Court for the Northern District of Texas. On May 1, 2013, an amended consolidated complaint was filed.

On February 18, 2014, Judge Boyle dismissed the amended consolidated complaint without prejudice. On March 20, 2014, plaintiffs moved for leave to file a proposed Second Consolidated Amended Complaint (the "proposed SCAC"), naming only the OTC defendants as defendants and alleging that the OTC defendants violated U.S. federal and state laws by entering into minimum resale price maintenance agreements with the Hotel Defendants and by conspiring to enforce the terms of those resale price maintenance agreements. On April 3, 2014, the OTC defendants filed an opposition to plaintiffs' motion for leave to file the proposed SCAC. On October 27, 2014 the court denied plaintiffs' motion for leave to file the proposed SCAC, and on October 28, 2014 the court issued a final judgment dismissing the case with prejudice. The court's October 27, 2014 decision is appealable.

Other

The Company intends to defend vigorously against the claims in all of the proceedings described in this Note 13.  The Company has accrued for certain legal contingencies where it is probable that a loss has been incurred and the amount can be reasonably estimated.  Except as disclosed, such amounts accrued are not material to the Company's consolidated balance sheets and provisions recorded have not been material to the Company's consolidated results of operations or cash flows.  The Company is unable to estimate a reasonably possible range of loss.
 
From time to time, the Company has been, and expects to continue to be, subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of third party intellectual property rights.  Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources, divert

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management's attention from the Company's business objectives and adversely affect the Company's business, results of operations, financial condition and cash flows.

Contingent Consideration for Business Acquisitions (see Note 14)


14.                                       ACQUISITIONS

On July 24, 2014, the Company acquired OpenTable, Inc., a leading online restaurant reservation business, in a cash transaction. The purchase price of OpenTable was approximately $2.5 billion (approximately $2.4 billion net of cash acquired) or $103.00 per share of OpenTable common stock. The Company funded the acquisition from cash on hand in the United States and $995 million borrowed under the Company's revolving credit facility, which the Company had repaid as of September 30, 2014 (see Note 8 for a description of the credit facility). Also, in connection with this acquisition, the Company assumed unvested employee stock options and restricted stock units with an acquisition fair value of approximately $95 million (see Note 2). The Company's consolidated financial statements include the accounts of OpenTable starting on July 24, 2014.

OpenTable has built a strong brand helping diners secure restaurant reservations online at over 31,000 restaurants across the United States and select non-U.S. markets.  OpenTable also helps restaurants manage their reservations and connect directly with their customers.  The Company believes that OpenTable has significant global potential and intends to leverage its international experience and capabilities in support of OpenTable's international growth.

The purchase price allocations were not completed as of September 30, 2014 and are pending the completion of the valuation of the identifiable intangible assets. The Company plans to complete the valuation of these identifiable intangibles in the fourth quarter of 2014. The aggregate purchase price was preliminarily allocated to the assets acquired and liabilities assumed as follows (in millions):
Current assets  (1)
 
$
202

Identifiable intangible assets (2)
 
1,245

Goodwill (3)
 
1,612

Other long-term assets
 
54

Total liabilities  (4)
 
(584
)
Total consideration
 
$
2,529


(1) Includes cash acquired of $126 million .

(2) Acquired definite-lived intangibles, with a weighted average life of 18.8 years , consisted of trade names of $980 million with an estimated useful life of 20 years, supply and distribution agreements of $250 million with an estimated useful life of 15 years, and technology of $15 million with estimated useful life of 5 years.

(3) Goodwill is not tax deductible.

(4) Includes deferred tax liabilities of $477 million .

OpenTable's revenues and earnings since the acquisition date and pro forma results of operations have not been presented separately as such financial information is not material to the Company's results of operations.

In the second quarter of 2014, the Company acquired certain businesses which provide hotel marketing services. The Company's consolidated financial statements include the accounts of these businesses starting at their respective acquisition dates. The Company paid approximately $98 million , net of cash acquired, to purchase these businesses. The purchase price allocations were not completed as of September 30, 2014 . As of September 30, 2014 , the Company recognized a liability of approximately $13 million for estimated contingent payments related to these acquisitions. The estimated contingent payments are based upon probability weighted average payments for specific performance factors from the acquisition dates through December 31, 2018. The range of undiscounted outcomes for the estimated contingent payments is approximately $0 to $71 million .

The Company incurred $6.9 million of professional fees for the nine months ended September 30, 2014 related to these consummated acquisitions.

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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion should be read in conjunction with our Unaudited Consolidated Financial Statements, including the notes to those statements, included elsewhere in this Quarterly Report on Form 10-Q, and the Section entitled " Special Note Regarding Forward-Looking Statements " in this Quarterly Report on Form 10-Q.  As discussed in more detail in the Section entitled " Special Note Regarding Forward-Looking Statements, " this discussion contains forward-looking statements, which involve risks and uncertainties.  Our actual results may differ materially from the results discussed in the forward-looking statements.  Factors that might cause those differences include those discussed in " Risk Factors " and elsewhere in this Quarterly Report on Form 10-Q.
 
Overview

     We are a leading provider of online travel and travel related services. We connect consumers wishing to make travel reservations with providers of travel services around the world. We offer consumers accommodation reservations (including hotels, bed and breakfasts, hostels, apartments, vacation rentals and other properties) through our Booking.com, priceline.com and agoda.com brands. Our priceline.com brand also offers consumers reservations for rental cars, airline tickets, vacation packages and cruises. We offer rental car reservations worldwide through rentalcars.com. We also allow consumers to easily compare airline ticket, hotel reservation and rental car reservation information from hundreds of travel websites at once through KAYAK's websites and mobile applications (or "apps"). We recently acquired OpenTable, a leading provider of online restaurant reservations. We believe that the online restaurant reservation business is complementary to our online travel businesses, and that both OpenTable and our travel businesses will benefit from adding OpenTable to The Priceline Group. We refer to our company and all of our subsidiaries and brands, including Booking.com, priceline.com, agoda.com, KAYAK, rentalcars.com and, as of July 24, 2014, OpenTable, collectively as "The Priceline Group," the "Company," "we," "our" or "us."

We launched our business in the United States in 1998 under the priceline.com brand and have since expanded our operations to include Booking.com, agoda.com, KAYAK, rentalcars.com and OpenTable, which are independently managed and operated brands.  Our principal goal is to serve consumers and our travel service provider and restaurant partners with worldwide leadership in online reservation services.  Our business is driven primarily by international results, which consist of the results of Booking.com, agoda.com and rentalcars.com and the results of the international based websites of KAYAK and, as of July 24, 2014, OpenTable (in each case regardless of where the consumer is resident, from where the consumer makes a reservation or where the service is provided). During the year ended December 31, 2013 , our international business (the substantial majority of which is generated by Booking.com) represented approximately 85% of our gross bookings (an operating and statistical metric referring to the total dollar value, generally inclusive of all taxes and fees, of all travel services purchased by our customers), and approximately 94% of our consolidated operating income. A significant majority of our gross profit is earned in connection with facilitating accommodation reservations.

For the three and nine months ended September 30, 2014 , we derived substantially all of our gross profit from the following sources:

Commissions earned from facilitating reservations of accommodations, rental cars, cruises and other travel services;