The Priceline Group
Priceline Group Inc. (Form: 10-Q, Received: 11/09/2015 08:37:52)


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, 2015
 
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 1-36691
 
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 November 2, 2015 :
Common Stock, par value $0.008 per share
 
49,783,883
(Class)
 
(Number of Shares)





The Priceline Group Inc.
Form 10-Q
 
For the Three Months Ended September 30, 2015
 
PART I - FINANCIAL INFORMATION
 
 
 
Item 1. Financial Statements
 
 
Consolidated Balance Sheets (unaudited) at September 30, 2015 and December 31, 2014
Consolidated Statements of Operations (unaudited) For the Three and Nine Months Ended September 30, 2015 and
   2014
Consolidated Statements of Comprehensive Income (unaudited) For the Three and Nine Months Ended September 30, 2015 and 2014
Consolidated Statement of Changes in Stockholders' Equity (unaudited) For the Nine Months Ended September 30,
   2015
Consolidated Statements of Cash Flows (unaudited) For the Nine Months Ended September 30, 2015 and 2014
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,
2015
 
December 31,
2014
ASSETS
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
1,841,658

 
$
3,148,651

Restricted cash
 
827

 
843

Short-term investments
 
1,211,184

 
1,142,182

Accounts receivable, net of allowance for doubtful accounts of $17,149 and $14,212, respectively
 
890,532

 
643,894

Prepaid expenses and other current assets
 
264,256

 
178,050

Deferred income taxes
 
90,500

 
153,754

Total current assets
 
4,298,957

 
5,267,374

Property and equipment, net
 
257,135

 
198,953

Intangible assets, net
 
2,203,270

 
2,334,761

Goodwill
 
3,386,519

 
3,326,474

Long-term investments
 
6,327,630

 
3,755,653

Other assets
 
141,259

 
57,348

Total assets
 
$
16,614,770

 
$
14,940,563

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
388,528

 
$
281,480

Accrued expenses and other current liabilities
 
780,784

 
600,758

Deferred merchant bookings
 
413,495

 
460,558

Convertible debt
 

 
37,195

Total current liabilities
 
1,582,807

 
1,379,991

Deferred income taxes
 
952,388

 
1,040,260

Other long-term liabilities
 
131,474

 
103,533

Long-term debt
 
5,421,328

 
3,849,756

Total liabilities
 
8,087,997

 
6,373,540

 
 
 
 
 
Convertible debt
 

 
329

 
 
 
 
 
Stockholders' equity:
 
 

 
 

Common stock, $0.008 par value; authorized 1,000,000,000 shares, 62,026,743 and 61,821,097 shares issued, respectively
 
482

 
480

Treasury stock, 11,847,933 and 9,888,024 shares, respectively
 
(5,073,400
)
 
(2,737,585
)
Additional paid-in capital
 
5,097,560

 
4,923,196

Accumulated earnings
 
8,687,596

 
6,640,505

Accumulated other comprehensive loss
 
(185,465
)
 
(259,902
)
Total stockholders' equity
 
8,526,773

 
8,566,694

Total liabilities and stockholders' equity
 
$
16,614,770

 
$
14,940,563



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,
 
 
2015
 
2014
 
2015
 
2014
Agency revenues
 
$
2,345,673

 
$
2,099,629

 
$
5,127,174

 
$
4,615,169

Merchant revenues
 
596,503

 
613,535

 
1,637,191

 
1,707,786

Advertising and other revenues
 
160,725

 
123,333

 
459,627

 
278,919

Total revenues
 
3,102,901

 
2,836,497

 
7,223,992

 
6,601,874

Cost of revenues
 
155,619

 
216,519

 
511,568

 
692,429

Gross profit
 
2,947,282

 
2,619,978

 
6,712,424

 
5,909,445

Operating expenses:
 
 

 
 

 
 

 
 

Advertising — Online
 
801,147

 
699,814

 
2,215,181

 
1,860,317

Advertising — Offline
 
51,440

 
71,593

 
181,325

 
183,093

Sales and marketing
 
93,069

 
86,092

 
269,536

 
225,456

Personnel, including stock-based compensation of $58,274, $46,136, $172,446 and $120,108, respectively
 
305,329

 
259,471

 
853,469

 
675,854

General and administrative
 
109,706

 
97,902

 
308,829

 
261,950

Information technology
 
28,830

 
24,802

 
81,347

 
72,068

Depreciation and amortization
 
69,054

 
57,599

 
201,730

 
136,262

Total operating expenses
 
1,458,575

 
1,297,273

 
4,111,417

 
3,415,000

Operating income
 
1,488,707

 
1,322,705

 
2,601,007

 
2,494,445

Other income (expense):
 
 

 
 

 
 

 
 

Interest income
 
14,682

 
2,490

 
39,315

 
5,165

Interest expense
 
(41,436
)
 
(22,953
)
 
(116,462
)
 
(57,804
)
Foreign currency transactions and other
 
(5,783
)
 
3,347

 
(12,070
)
 
(4,399
)
Total other income (expense)
 
(32,537
)
 
(17,116
)
 
(89,217
)
 
(57,038
)
Earnings before income taxes
 
1,456,170

 
1,305,589

 
2,511,790

 
2,437,407

Income tax expense
 
259,438

 
243,336

 
464,699

 
467,485

Net income
 
$
1,196,732

 
$
1,062,253

 
$
2,047,091

 
$
1,969,922

Net income applicable to common stockholders per basic common share
 
$
23.67

 
$
20.27

 
$
39.87

 
$
37.65

Weighted-average number of basic common shares outstanding
 
50,550

 
52,405

 
51,344

 
52,319

Net income applicable to common stockholders per diluted common share
 
$
23.41

 
$
20.03

 
$
39.40

 
$
37.13

Weighted-average number of diluted common shares outstanding
 
51,130

 
53,024

 
51,952

 
53,048


 
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,
 
2015
 
2014
 
2015
 
2014
Net income
$
1,196,732

 
$
1,062,253

 
$
2,047,091

 
$
1,969,922

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustments  (1)
(8,043
)
 
(124,412
)
 
(78,071
)
 
(130,997
)
Unrealized gain (loss) on marketable securities (2)
(134,299
)
 
(26,127
)
 
152,508

 
(25,936
)
Comprehensive income
$
1,054,390

 
$
911,714

 
$
2,121,528

 
$
1,812,989


(1) Net of tax benefit of $89 and tax of $41,930 for the three and nine months ended September 30, 2015 , respectively, and net of tax of $18,046 and $33,391 for the three and nine months ended September 30, 2014 , respectively, associated with net investment hedges. See Note 11.

(2) Net of tax benefit of $2,184 and $3,804 for the three and nine months ended September 30, 2015 , respectively, and net of tax benefit of $8,747 and $8,693 for the three and nine months ended September 30, 2014 , 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, 2015
(In thousands)
 
 
 
Common Stock
 
Treasury Stock
 
Additional Paid-In Capital
 
Accumulated Earnings
 
Accumulated Other Comprehensive Loss
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Total
Balance, December 31, 2014
 
61,821

 
$
480

 
(9,888
)
 
$
(2,737,585
)
 
$
4,923,196

 
$
6,640,505

 
$
(259,902
)
 
$
8,566,694

Net income applicable to common stockholders
 

 

 

 

 

 
2,047,091

 

 
2,047,091

Foreign currency translation adjustments, net of tax of $41,930
 

 

 

 

 

 

 
(78,071
)
 
(78,071
)
Unrealized gain on marketable securities, net of tax benefit of $3,804
 

 

 

 

 

 

 
152,508

 
152,508

Reclassification adjustment for convertible debt in mezzanine
 

 

 

 

 
329

 

 

 
329

Exercise of stock options and vesting of restricted stock units and performance share units
 
206

 
2

 

 

 
19,137

 

 

 
19,139

Repurchase of common stock
 

 

 
(1,960
)
 
(2,335,815
)
 

 

 

 
(2,335,815
)
Stock-based compensation and other stock-based payments
 

 

 

 

 
174,068

 

 

 
174,068

Conversion of debt
 

 

 

 

 
(110,105
)
 

 

 
(110,105
)
Excess tax benefits on stock-based awards
 

 

 

 

 
90,935

 

 

 
90,935

Balance, September 30, 2015
 
62,027

 
$
482

 
(11,848
)
 
$
(5,073,400
)
 
$
5,097,560

 
$
8,687,596

 
$
(185,465
)
 
$
8,526,773

 

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,
 
 
2015
 
2014
OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
2,047,091

 
$
1,969,922

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 

Depreciation
 
73,520

 
54,704

Amortization
 
128,210

 
81,558

Provision for uncollectible accounts, net
 
17,242

 
14,150

Deferred income taxes
 
(63,675
)
 
46,451

Stock-based compensation expense and other stock-based payments
 
174,068

 
122,120

Amortization of debt issuance costs
 
5,913

 
3,818

Amortization of debt discount
 
49,868

 
39,079

Loss on early extinguishment of debt
 
3

 
6,254

Changes in assets and liabilities:
 
 
 
 

Accounts receivable
 
(289,604
)
 
(353,357
)
Prepaid expenses and other current assets
 
(86,808
)
 
(35,341
)
Accounts payable, accrued expenses and other current liabilities
 
191,881

 
209,557

Other
 
(26,550
)
 
202

Net cash provided by operating activities
 
2,221,159

 
2,159,117

 
 
 
 
 
INVESTING ACTIVITIES:
 
 
 
 

Purchase of investments
 
(5,597,897
)
 
(7,327,635
)
Proceeds from sale of investments
 
3,180,981

 
9,703,032

Additions to property and equipment
 
(126,637
)
 
(90,725
)
Acquisitions and other investments, net of cash acquired
 
(135,664
)
 
(2,496,084
)
Proceeds from foreign currency contracts
 
453,818

 
14,354

Payments on foreign currency contracts
 
(448,640
)
 
(94,661
)
Change in restricted cash
 

 
9,309

Net cash used in investing activities
 
(2,674,039
)
 
(282,410
)
 
 
 
 
 
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
 
1,619,951

 
2,282,217

Payment of debt issuance costs
 
(13,507
)
 
(16,241
)
Payments related to conversion of senior notes
 
(147,629
)
 
(121,925
)
Repurchase of common stock
 
(2,267,384
)
 
(245,456
)
Payments of contingent consideration
 
(10,700
)
 

Proceeds from exercise of stock options
 
19,139

 
12,434

Excess tax benefits on stock-based awards
 
90,935

 
14,139

Net cash (used in) provided by financing activities
 
(709,195
)
 
1,925,168

Effect of exchange rate changes on cash and cash equivalents
 
(144,918
)
 
(48,145
)
Net (decrease) increase in cash and cash equivalents
 
(1,306,993
)
 
3,753,730

Cash and cash equivalents, beginning of period
 
3,148,651

 
1,289,994

Cash and cash equivalents, end of period
 
$
1,841,658

 
$
5,043,724

SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
 
Cash paid during the period for income taxes
 
$
499,421

 
$
412,185

Cash paid during the period for interest
 
$
50,400

 
$
14,531

Non-cash investing activity for contingent consideration
 
$
9,170

 
$
13,310

Non-cash financing activity for acquisitions
 
$

 
$
13,752

See Notes to Unaudited Consolidated Financial Statements.

7



The Priceline Group Inc.
Notes to Unaudited Consolidated Financial Statements
 
1.                                       BASIS OF PRESENTATION
 
Management of 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, 2014 .
 
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, KAYAK, agoda.com, rentalcars.com and, since its acquisition on July 24, 2014, OpenTable, Inc. ("OpenTable"). 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 loss" in the accompanying Unaudited Consolidated Balance Sheets.  Foreign currency transaction gains and losses are included in 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 September 2015, the Financial Accounting Standard (“FASB”) issued a new accounting update which simplifies the accounting for measurement-period adjustments to provisional amounts recognized in a business combination. Under this new guidance, an acquirer must recognize these adjustments in the reporting period in which the adjustment amounts are determined. The new accounting guidance also requires an acquirer to present separately on the face of the income statement, or disclose in the notes, the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to provision amounts had been recognized as of the acquisition date. This update is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been issued. The Company plans to adopt this new accounting standard in the fourth quarter of 2015.
In April 2015, the FASB issued a new accounting update which changes the presentation of debt issuance costs in our financial statements. Under this new guidance, debt issuance costs, excluding costs associated with a revolving credit facility, will be presented in our balance sheets as a direct deduction from the related debt liability rather than as an asset. Unamortized debt issuance costs at September 30, 2015 were $31.1 million . This accounting change is consistent with the current presentation under U.S. GAAP for debt discounts and it also converges the guidance under U.S. GAAP with that in the International Financial Reporting Standards ("IFRS"). Debt issuance costs will reduce the proceeds from debt borrowings in our cash flow statement instead of being presented as a separate caption in the financing section of that statement. Amortization of debt issuance costs will continue to be reported as interest expense in our income statements. This accounting update does not affect the current accounting guidance for the recognition and measurement of debt issuance costs. This update is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is allowed for all entities for financial statements that have not been previously issued. The Company plans to adopt this new accounting standard in the fourth quarter of 2015.
In April 2015, the FASB issued a new accounting update which requires an entity that enters into a cloud computing arrangement to determine if the arrangement contains a software license. The accounting update cites software as a service, platform as a service, infrastructure as a service and other similar hosting arrangements as examples of cloud computing arrangements. A software license arrangement exists if both of the following criteria are met: (1) the customer has a contractual right to take possession of the underlying software without significant penalty and (2) it is feasible for the customer to run the software on their own hardware or to contract with another party unrelated to the vendor to run the software. If the

8



arrangement meets both of these criteria, the customer would need to identify what portion of the cost relates to purchasing the software and what portion relates to paying for the service of hosting the software. The purchased software would be accounted for using the internal-use software guidance and the service costs would be accounted for as an operating expense. If the arrangement does not meet both of the criteria, the cost is an operating expense for a service contract. The guidance in this update does not change the accounting for a service contract. The update is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is allowed for all entities. The Company is currently evaluating the impact on its consolidated financial statements of adopting this new guidance.
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 specified 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. In July 2015, the FASB agreed to defer the effective date of the new revenue standard to annual periods beginning after December 15, 2017 with early adoption permitted as of the original effective date. The Company is currently evaluating the impact on its consolidated financial statements of adopting this new guidance.
In April 2014, the FASB issued an accounting update which amended 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. The Company adopted this update in the first quarter of 2015 and this accounting update did not have an impact on the Company's consolidated financial statements.


2.                                       STOCK-BASED EMPLOYEE COMPENSATION
 
Stock-based compensation expense included in personnel expenses in the Unaudited Consolidated Statements of Operations was approximately $58.3 million and $46.1 million for the three months ended September 30, 2015 and 2014 , respectively, and $172.4 million and $120.1 million for the nine months ended September 30, 2015 and 2014 , respectively.

Stock-based compensation 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's 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, 2015
Share-Based Awards
 
Shares
 
Weighted-Average Grant Date Fair Value
Unvested at December 31, 2014
 
570,315

 
 
$
912.26

 
Granted
 
185,741

 
 
$
1,239.56

 
Vested
 
(153,478
)
 
 
$
742.70

 
Performance Share Units Adjustment
 
(339
)
 
 
$
1,171.04

 
Forfeited
 
(19,879
)
 
 
$
1,078.86

 
Unvested at September 30, 2015
 
582,360

 
 
$
1,058.84

 

9



 
As of September 30, 2015 , there was $327.6 million of total future compensation cost related to unvested share-based awards to be recognized over a weighted-average period of 2.0 years.
 
During the nine months ended September 30, 2015 , the Company made broad-based grants of 78,418 restricted stock units that generally vest after three years, subject to certain exceptions for terminations other than for "cause," for "good reason" or on account of death or disability. These share-based awards had a total grant date fair value of $97.4 million based on a weighted-average grant date fair value per share of $1,242.70 .

In addition, during the nine months ended September 30, 2015 , the Company granted 107,323 performance share units to executives and certain other employees.  The performance share units had a total grant date fair value of $132.8 million based upon a weighted-average grant date fair value per share of $1,237.28 .  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 generally must continue their service through the 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, 2017, assuming there is no accelerated vesting for, among other things, a termination of employment under certain circumstances.  As of September 30, 2015 , the estimated number of probable shares to be issued is a total of 105,982 shares.  If the maximum performance thresholds are met at the end of the performance period, a maximum number of 257,727 total shares could be issued.  If the minimum performance thresholds are not met, 52,368 shares would be issued at the end of the performance period.
 
2014 Performance Share Units

During the year ended December 31, 2014 , the Company granted 72,277 performance share units with a grant date fair value of $96.1 million , based on a weighted-average grant date fair value per share of $1,329.11 . The actual number of shares to be issued will be determined upon completion of the performance period which generally ends December 31, 2016.

At September 30, 2015 , there were 69,767 unvested 2014 performance share units outstanding, net of performance share units that were forfeited or vested since the grant date. As of September 30, 2015 , 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 109,124 shares. If the maximum thresholds are met at the end of the performance period, a maximum of 141,062 total shares could be issued pursuant to these performance share units. If the minimum performance thresholds are not met, 48,810 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.
 
At September 30, 2015 , there were 98,677 unvested 2013 performance share units outstanding, net of performance share units that were forfeited or vested since the grant date.  As of September 30, 2015 , 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 185,318 shares.  If the maximum performance thresholds are met at the end of the performance period, a maximum of 214,397 total shares could be issued pursuant to these performance share units. If the minimum performance thresholds are not met, 38,508 shares would be issued at the end of the performance period.


10



Stock Options

The following table summarizes the activity for the nine months ended  September 30, 2015 for employee stock options: 
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, 2014
 
146,385

 
 
$
380.05

 
 
$
111,277

 
6.5
Assumed in acquisitions
 
1,422

 
 
$
230.37

 
 
 
 
 
Exercised
 
(49,213
)
 
 
$
354.88

 
 
 
 
 
Forfeited
 
(4,103
)
 
 
$
527.59

 
 
 
 
 
Balance, September 30, 2015
 
94,491

 
 
$
384.44

 
 
$
80,546

 
5.8
Vested and exercisable as of September 30, 2015
 
69,473

 
 
$
342.20

 
 
$
62,155

 
5.3
Vested and exercisable as of September 30, 2015 and unvested expected to vest thereafter, net of estimated forfeitures
 
93,852

 
 
$
384.28

 
 
$
80,016

 
5.8

The aggregate intrinsic value of employee stock options exercised during the nine months ended September 30, 2015 was $42.8 million compared to $43.7 million for the nine months ended September 30, 2014 . During the nine months ended September 30, 2015 , stock options assumed in acquisitions vested for 29,527 shares of common stock with an acquisition-date fair value of $19.9 million , compared to 26,765 shares of common stock vested for stock options assumed in acquisitions with an acquisition-date fair value of $13.5 million for the nine months ended September 30, 2014 .

For the three and nine months ended September 30, 2015 , the Company recorded stock-based compensation expense related to employee stock options of $4.8 million and $19.8 million , respectively, compared to $8.1 million and $14.9 million for the three and nine months ended September 30, 2014 , respectively. Employee stock options assumed in acquisitions during the nine months ended September 30, 2015 had a total acquisition-date fair value of $1.4 million based on a weighted-average acquisition date fair value of $1,015.81 per share. As of September 30, 2015 , there was $15.1 million of total future compensation costs related to unvested employee stock options to be recognized over a weighted-average period of 1.3 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 notes 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.
 

11



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,
 
 
2015
 
2014
 
2015
 
2014
Weighted-average number of basic common shares outstanding
 
50,550

 
52,405

 
51,344

 
52,319

Weighted-average dilutive stock options, restricted stock units and performance share units
 
326

 
272

 
367

 
308

Assumed conversion of Convertible Senior Notes
 
254

 
347

 
241

 
421

Weighted-average number of diluted common and common equivalent shares outstanding
 
51,130

 
53,024

 
51,952

 
53,048

Anti-dilutive potential common shares
 
2,627

 
2,628

 
2,641

 
2,577

 
Anti-dilutive potential common shares for both the three and nine months ended September 30, 2015 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 an anti-dilutive impact on net income per share if the conversion price for the convertible notes exceed the Company's average stock price.


4.                                       INVESTMENTS
 
The following table summarizes, by major security type, the Company's investments as of September 30, 2015 (in thousands): 
 
 
Cost
 
Gross 
Unrealized 
Gains
 
Gross 
Unrealized
  Losses
 
Fair
  Value
Available-for-sale securities:
 
 

 
 

 
 

 
 

Short-term investments:
 
 
 
 
 
 
 
 
Foreign government securities
 
$
71,834

 
$
2

 
$
(4
)
 
$
71,832

U.S. government securities
 
638,131

 
263

 

 
638,394

Corporate debt securities
 
497,498

 
134

 
(405
)
 
497,227

Commercial paper
 
1,716

 

 

 
1,716

U.S. government agency securities
 
2,012

 
3

 

 
2,015

Total short-term investments
 
$
1,211,191

 
$
402

 
$
(409
)
 
$
1,211,184

 
 
 
 
 
 
 
 
 
Long-term investments:
 
 
 
 
 
 
 
 
Foreign government securities
 
$
485,783

 
$
381

 
$
(190
)
 
$
485,974

U.S. government securities
 
773,651

 
4,563

 

 
778,214

Corporate debt securities
 
3,749,053

 
6,175

 
(15,001
)
 
3,740,227

U.S. municipal securities
 
1,089

 
6

 

 
1,095

Ctrip convertible debt securities
 
750,000

 

 
(50,525
)
 
699,475

Ctrip equity securities
 
584,099

 
38,546

 

 
622,645

Total long-term investments
 
$
6,343,675

 
$
49,671

 
$
(65,716
)
 
$
6,327,630

 
The Company's investment policy seeks to preserve capital and maintain sufficient liquidity to meet operational and other needs of the business.  As of September 30, 2015 , the weighted-average life of the Company’s fixed income investment portfolio, excluding the Company's investment in Ctrip convertible debt securities, was approximately 1.6 years with an average credit quality of A1/A+.

The Company invests in foreign government securities with high credit quality. As of September 30, 2015 , investments in foreign government securities principally included debt securities issued by the governments of the Netherlands, France, Belgium, Austria and Sweden. 


12



On May 26, 2015 and August 7, 2014, the Company invested $250 million and $500 million , respectively, in five -year senior convertible notes issued at par by Ctrip.com International Ltd. ("Ctrip"). Additionally, as of September 30, 2015 , the Company had invested $584.1 million of its international cash, which includes $22.1 million settled in October 2015, in Ctrip American Depositary Shares ("ADSs"). As a result, the Unaudited Consolidated Balance Sheet at September 30, 2015 includes $22.1 million in "Accrued expenses and other current liabilities" for these unsettled ADS purchases. 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, 2015 show an unrealized loss of $50.5 million and an unrealized gain of $38.5 million , respectively. In connection with the purchase of the convertible note in August 2014, Ctrip granted the Company the right to appoint an observer to Ctrip's board of directors and permission to acquire Ctrip shares (through the acquisition of Ctrip ADSs in the open market) over the twelve months following the purchase date, so that combined with ADSs issuable upon conversion of this note, the Company could hold up to 10% of Ctrip's outstanding equity. In connection with the purchase of the convertible note in May 2015, Ctrip granted the Company permission to acquire additional Ctrip shares (through the acquisition of Ctrip ADSs in the open market) over the twelve months following the purchase date, so that combined with ADSs issuable upon conversion of the two notes, the Company could hold up to an aggregate of 15% of Ctrip's outstanding equity.

The following table summarizes, by major security type, the Company's investments as of December 31, 2014 (in thousands): 
 
 
Cost
 
Gross 
Unrealized 
Gains
 
Gross 
Unrealized
  Losses
 
Fair
  Value
Available-for-sale securities:
 
 

 
 

 
 

 
 

Short-term investments:
 
 
 
 
 
 
 
 
Foreign government securities
 
$
52,524

 
$

 
$
(34
)
 
$
52,490

U.S. government securities
 
364,276

 
24

 
(34
)
 
364,266

Corporate debt securities
 
582,160

 
15

 
(652
)
 
581,523

Commercial paper
 
39,092

 

 

 
39,092

U.S. government agency securities
 
104,829

 

 
(18
)
 
104,811

Total short-term investments
 
$
1,142,881

 
$
39

 
$
(738
)
 
$
1,142,182

 
 
 
 
 
 
 
 
 
Long-term investments:
 
 
 
 
 
 
 
 
Foreign government securities
 
$
12,707

 
$

 
$
(36
)
 
$
12,671

U.S. government securities
 
557,130

 
80

 
(762
)
 
556,448

Corporate debt securities
 
2,332,030

 
2,299

 
(5,296
)
 
2,329,033

U.S. government agency securities
 
95,108

 
97

 
(111
)
 
95,094

U.S. municipal securities
 
1,114

 

 
(12
)
 
1,102

Ctrip convertible debt securities
 
500,000

 

 
(74,039
)
 
425,961

Ctrip equity securities
 
421,930

 

 
(86,586
)
 
335,344

Total long-term investments
 
$
3,920,019

 
$
2,476

 
$
(166,842
)
 
$
3,755,653

 
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 loss" in the Unaudited Consolidated Balance Sheets. Classification as short-term or long-term investment is based upon the maturity of the debt securities.

The Company recognized $0.3 million of net realized losses and $3.1 million of net realized gains related to investments for the three and nine months ended September 30, 2015 , respectively. There were no significant realized gains or losses related to investments for the three and nine months ended September 30, 2014 .



13



5.                                       FAIR VALUE MEASUREMENTS
 
Financial assets and liabilities carried at fair value as of September 30, 2015 are classified in the tables below in the categories described below (in thousands): 
 
 
Level 1
 
Level 2
 
Total
ASSETS:
 
 

 
 

 
 

Cash equivalents:
 
 
 
 
 
 
U.S. Treasury money market funds
 
$
76,282

 
$

 
$
76,282

Foreign government securities
 

 
298,375

 
298,375

U.S. government securities
 

 
525,381

 
525,381

Commercial paper
 

 
20,910

 
20,910

Short-term investments:
 
 

 
 

 
 

Foreign government securities
 

 
71,832

 
71,832

U.S. government securities
 

 
638,394

 
638,394

Corporate debt securities
 

 
497,227

 
497,227

Commercial paper
 

 
1,716

 
1,716

U.S. government agency securities
 

 
2,015

 
2,015

Foreign exchange derivatives
 

 
358

 
358

Long-term investments:
 
 
 
 
 
 
Foreign government securities
 

 
485,974

 
485,974

U.S. government securities
 

 
778,214

 
778,214

Corporate debt securities
 

 
3,740,227

 
3,740,227

U.S. municipal securities
 

 
1,095

 
1,095

Ctrip convertible debt securities
 

 
699,475

 
699,475

Ctrip equity securities
 
622,645

 

 
622,645

Total assets at fair value
 
$
698,927

 
$
7,761,193

 
$
8,460,120

 
 
 
Level 1
 
Level 2
 
Total
LIABILITIES:
 
 

 
 

 
 

Foreign exchange derivatives
 
$

 
$
317

 
$
317

 

14



Financial assets and liabilities carried at fair value as of December 31, 2014 are classified in the tables below in the categories described below (in thousands):
 
 
Level 1
 
Level 2
 
Total
ASSETS:
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
U.S. Treasury money market funds
 
$
155,608

 
$

 
$
155,608

Foreign government securities
 

 
974,855

 
974,855

U.S. government securities
 

 
676,503

 
676,503

Corporate debt securities
 

 
45,340

 
45,340

Commercial paper
 

 
382,544

 
382,544

U.S. government agency securities
 

 
10,000

 
10,000

Short-term investments:
 
 
 
 
 
 
  Foreign government securities
 

 
52,490

 
52,490

  U.S. government securities
 

 
364,266

 
364,266

Corporate debt securities
 

 
581,523

 
581,523

Commercial paper
 

 
39,092

 
39,092

U.S. government agency securities
 

 
104,811

 
104,811

Foreign exchange derivatives
 

 
336

 
336

Long-term investments:
 
 
 
 
 
 
Foreign government securities
 

 
12,671

 
12,671

U.S. government securities
 

 
556,448

 
556,448

Corporate debt securities
 

 
2,329,033

 
2,329,033

U.S. government agency securities
 

 
95,094

 
95,094

U.S. municipal securities
 

 
1,102

 
1,102

Ctrip convertible debt securities
 

 
425,961

 
425,961

Ctrip equity securities
 
335,344

 

 
335,344

Total assets at fair value
 
$
490,952

 
$
6,652,069

 
$
7,143,021

 
 
 
Level 1
 
Level 2
 
Total
LIABILITIES:
 
 

 
 

 
 

Foreign exchange derivatives
 
$

 
$
129

 
$
129

 
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 corporate debt securities, U.S. and foreign government securities, commercial paper, government agency securities, convertible debt securities and municipal securities 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.

15



 
As of September 30, 2015 and December 31, 2014 , 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.  As of September 30, 2015 , the Company held investments in equity securities of private companies of approximately $64 million and these investments are accounted for under the cost method (see Note 7). 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. See Note 12 for the Company's contingent liabilities associated with business acquisitions.
 
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 in the Unaudited Consolidated Balance Sheets at fair value.  Gains and losses resulting from changes in the fair value of derivative instruments that are not designated as hedging instruments for accounting purposes are recognized in 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 from Euro-denominated net assets held by certain subsidiaries and are recognized in the Unaudited Consolidated Balance Sheets in "Accumulated other comprehensive 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, 2015 and December 31, 2014 , there were no outstanding derivative contracts related to foreign currency translation risk.  Foreign exchange losses of $6.4 million and $6.2 million for the three and nine months ended September 30, 2015 , respectively, compared to foreign exchange gains of $8.3 million and $12.5 million for the three and nine months ended September 30, 2014 , 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, 2015 associated with foreign currency transaction risks resulted in a net asset of $0.1 million , with an asset in the amount of $0.4 million recorded in "Prepaid expenses and other current assets" and a liability in the amount of $0.3 million recorded in "Accrued expenses and other current liabilities" in the Unaudited Consolidated Balance Sheet. Foreign exchange derivatives outstanding as of December 31, 2014 associated with foreign exchange transactions resulted in a net asset of $0.2 million , with an asset in the amount of $0.3 million recorded in "Prepaid expenses and other current assets" and a liability in the amount of $0.1 million recorded in "Accrued expenses and other current liabilities" in the Unaudited Consolidated Balance Sheet.  Derivatives associated with these transaction risks resulted in foreign exchange gains of $13.4 million and foreign exchange losses of $12.6 million for the three and nine months ended September 30, 2015 , respectively, compared to foreign exchange losses of $15.0 million and $19.0 million for the three and nine months ended September 30, 2014 , respectively. These mark-to-market adjustments on the derivative contracts, offset by the effect of changes in currency exchange rates on transactions denominated in currencies other than the functional currency, resulted in net gains of $3.4 million and net losses of $4.2 million for the three months ended September 30, 2015 and 2014 , respectively, and net losses of $2.9 million and $7.6 million for the nine months ended September 30, 2015 and 2014 , respectively. The net impacts related to these derivatives are recorded 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 net cash outflows of $20.1 million and $10.0 million for the nine months ended September 30, 2015 and 2014 , respectively, and are reported within "Net cash provided by operating activities" in 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, 2015 or December 31, 2014 . A net cash inflow of $5.2 million for the nine months ended September 30, 2015 compared to a net cash outflow of $80.3 million for the nine months ended September 30, 2014 related to foreign currency forward contracts designated as hedges of the Company's net investment in a foreign subsidiary are reported within "Net cash used in investing activities" in the Unaudited Consolidated Statements of Cash Flows.


16



6.                                       INTANGIBLE ASSETS AND GOODWILL
 
The Company's intangible assets at September 30, 2015 and December 31, 2014 consisted of the following (in thousands): 
 
September 30, 2015
 
December 31, 2014
 
 
 
 
 
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
$
826,860

 
$
(218,654
)
 
$
608,206

 
$
842,642

 
$
(188,441
)
 
$
654,201

 
10 - 20 years
 
16 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Technology
111,483

 
(56,813
)
 
54,670

 
108,987

 
(43,746
)
 
65,241

 
1 - 5 years
 
5 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Patents
1,623

 
(1,553
)
 
70

 
1,623

 
(1,524
)
 
99

 
15 years
 
15 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Internet domain names
38,764

 
(19,910
)
 
18,854

 
41,652

 
(16,895
)
 
24,757

 
2 - 20 years
 
8 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trade names
1,672,122

 
(163,262
)
 
1,508,860

 
1,674,218

 
(100,850
)
 
1,573,368

 
5 - 20 years
 
20 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-compete agreements
21,900

 
(9,290
)
 
12,610

 
21,000

 
(3,908
)
 
17,092

 
3 - 4 years
 
3 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other
135

 
(135
)
 

 
141

 
(138
)
 
3

 

 

Total intangible assets
$
2,672,887

 
$
(469,617
)
 
$
2,203,270

 
$
2,690,263

 
$
(355,502
)
 
$
2,334,761

 
 
 
 
 
Intangible assets with determinable lives are amortized on a straight-line basis.  Intangible asset amortization expense was approximately $42.2 million and $128.2 million for the three and nine months ended September 30, 2015 , respectively, and $35.8 million and $81.6 million for the three and nine months ended September 30, 2014 , respectively.

The amortization expense for intangible assets for the remainder of 2015 , the annual expense for the next five years, and the expense thereafter is expected to be as follows (in thousands): 
2015
$
42,107

2016
167,413

2017
160,088

2018
141,499

2019
131,380

2020
124,089

Thereafter
1,436,694

 
$
2,203,270

 
The change in goodwill for the nine months ended September 30, 2015 consists of the following (in thousands): 
Balance at December 31, 2014
$
3,326,474

Acquisitions
77,720

Currency translation adjustments
(17,675
)
Balance at September 30, 2015
$
3,386,519

 
A substantial portion of the intangibles and goodwill relates to the acquisition of OpenTable in July 2014 and KAYAK in May 2013.


17



As of September 30, 2015 , the Company performed its annual goodwill impairment testing and concluded that there was no impairment of goodwill. Other than OpenTable, the fair values of the Company's reporting units substantially exceeded their respective carrying values as of September 30, 2015 .

As of September 30, 2015 , OpenTable’s carrying value was $2.5 billion , of which $1.5 billion relates to goodwill. The fair value of OpenTable slightly exceeded its carrying value as of September 30, 2015 . OpenTable’s fair value was estimated using a combination of standard valuation techniques, including an income approach (discounted cash flows) and market approaches (EBITDA multiples of comparable publicly-traded companies and for precedent transactions).
 

7.                                       OTHER ASSETS
 
Other assets at September 30, 2015 and December 31, 2014 consisted of the following (in thousands): 
 
 
September 30,
2015
 
December 31,
2014
Deferred debt issuance costs
 
$
34,827

 
$
27,204

Security deposits
 
14,168

 
12,368

Deferred tax assets
 
9,912

 
8,548

Investments
 
63,926

 
588

Other
 
18,426

 
8,640

Total
 
$
141,259

 
$
57,348

 
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) the $1.0 billion aggregate principal amount of 0.35% Convertible Senior Notes, due June 15, 2020, issued in May 2013; (iii) the $1.0 billion aggregate principal amount of 0.9% Convertible Senior Notes, due September 15, 2021 , issued in August 2014; (iv) the 1.0 billion Euro aggregate principal amount of 2.375% Senior Notes, due September 23, 2024 , issued in September 2014; (v) the 1.0 billion Euro aggregate principal amount of 1.8% Senior Notes, due March 3, 2027 , issued in March 2015, (vi) the $500 million aggregate principal amount of 3.65% Senior Notes, due March 15, 2025 , issued in March 2015, and (vii) the $2.0 billion revolving credit facility entered into in June 2015 .  Included in the December 31, 2014 balance were debt issuance costs related to the $575.0 million aggregate principal amount of 1.25% Convertible Senior Notes, due March 15, 2015 , issued in March 2010 and the $1.0 billion revolving credit facility entered into in October 2011 . 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. The termination of the revolving credit facility entered into in October 2011 resulted in a charge to interest expense of $1.0 million in June 2015 to write off the remaining unamortized debt issuance costs (see Note 8).

As of September 30, 2015 , the Company held investments in equity securities of private companies of approximately $64 million , and these investments are accounted for under the cost method. As of September 30, 2015 , the Company did not estimate the fair value of these cost-method investments because there were no identified events or changes in circumstances that may have a significant adverse impact on the carrying values of these investments.


8.                                       DEBT
 
Revolving Credit Facility

In June 2015, the Company entered into a $2.0 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 0.875% to 1.50% ; or (ii) the greatest of (a) Bank of America, N.A.'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 0.00% to 0.50% . Undrawn balances available under the revolving credit facility are subject to commitment fees at the applicable rate ranging from 0.085% to 0.20% .

The revolving credit facility provides for the issuance of up to $70.0 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

18



of loans made under the facility will be used for working capital and general corporate purposes, which could include acquisitions or share repurchases. As of September 30, 2015 , there were no borrowings outstanding and approximately $2.5 million of letters of credit issued under this new facility. The Company paid $4.0 million in debt issuance costs related to the revolving credit facility during the nine months ended September 30, 2015 .

Upon entering into this new revolving credit facility, the Company terminated its $1.0 billion five -year revolving credit facility entered into in October 2011 and recognized interest expense of $1.0 million related to the write-off of the remaining unamortized debt issuance costs. As of December 31, 2014 , there were no borrowings outstanding and approximately $4.0 million of letters of credit issued under this revolving credit facility.

Outstanding Debt
 
Outstanding debt as of September 30, 2015 consisted of the following (in thousands): 
September 30, 2015
 
Outstanding
  Principal 
Amount
 
Unamortized
  Debt
  Discount
 
Carrying
  Value
Long-term debt:
 
 
 
 
 
 
1.0% Convertible Senior Notes due March 2018
 
$
1,000,000

 
$
(57,851
)
 
$
942,149

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

 
(120,355
)
 
879,645

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

 
(122,277
)
 
877,723

2.375% (€1 Billion) Senior Notes due September 2024
 
1,116,445

 
(9,506
)
 
1,106,939

3.65% Senior Notes due March 2025
 
500,000

 
(1,231
)
 
498,769

1.8% (€1 Billion) Senior Notes due March 2027
 
1,116,445

 
(342
)
 
1,116,103

Total long-term debt
 
$
5,732,890

 
$
(311,562
)
 
$
5,421,328

 
Outstanding debt as of December 31, 2014 consisted of the following (in thousands): 
December 31, 2014
 
Outstanding
  Principal 
Amount
 
Unamortized
  Debt
  Discount
 
Carrying
  Value
Short-term debt:
 
 
 
 
 
 
1.25% Convertible Senior Notes due March 2015
 
$
37,524

 
$
(329
)
 
$
37,195

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

 
$
(74,834
)
 
$
925,166

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

 
(138,114
)
 
861,886

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

 
(136,299
)
 
863,701

2.375% (€1 Billion) Senior Notes due September 2024
 
1,210,068

 
(11,065
)
 
1,199,003

Total long-term debt
 
$
4,210,068

 
$
(360,312
)
 
$
3,849,756

 
The 2015 Notes (as defined below) became convertible on December 15, 2014, at the option of the holders, and remained convertible until the scheduled trading day immediately preceding the maturity date of March 15, 2015. Since these notes were 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 was reflected as convertible debt in the mezzanine section in the Company's Unaudited Consolidated Balance Sheet as of December 31, 2014. Therefore, with respect to the 2015 Notes, the Company reclassified the unamortized debt discount for these 1.25% Notes in the amount of $0.3 million before tax as of December 31, 2014 , from additional paid-in capital to convertible debt in the mezzanine section in the Company's Unaudited Consolidated Balance Sheets.

Based upon the closing price of the Company's common stock for the prescribed measurement period during the three months ended September 30, 2015 and December 31, 2014 , the respective contingent conversion thresholds of the 2018 Notes (as defined below), the 2020 Notes (as defined below) and the 2021 Notes (as defined below) were not exceeded and therefore these notes are reported as non-current liabilities in the Unaudited Consolidated Balance Sheets.


19



Fair Value of Debt

As of September 30, 2015 and December 31, 2014 , the estimated market value of all outstanding Senior Notes was approximately $6.1 billion and $4.8 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 charges the proportionate amount of remaining debt issuance costs to interest expense.

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 $11.0 million in debt issuance costs during the year ended December 31, 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.

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

20



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 2015 Notes were convertible, subject to certain conditions, into the Company's common stock at a conversion price of approximately $303.06 per share.  For the three months ended March 31, 2015, in connection with the maturity or conversion prior to maturity of the remaining outstanding 1.25% Convertible Senior Notes, the Company paid $37.5 million to satisfy the aggregate principal amount due and paid an additional $110.1 million in satisfaction of the conversion value in excess of the principal amount, which was charged to additional paid-in capital. During the nine months ended September 30, 2014 , the Company delivered cash of $121.9 million to repay the aggregate principal amount and issued 299,657 shares of its common stock in satisfaction of the conversion value in excess of the principal amount associated with 1.25% Convertible Senior Notes due March 2015 that were converted prior to maturity.

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 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 $82.5 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 December 31, 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, 2015 and 2014 , the Company recognized interest expense of $23.1 million and $20.4 million , respectively, related to convertible notes.  Interest expense related to convertible notes for the three months ended September 30, 2015 and 2014 was comprised of $5.6 million and $4.6 million , respectively, for the contractual coupon interest, $16.4 million and $14.8 million , respectively, related to the amortization of debt discount, and $1.1 million and $1.0 million , respectively, related to the amortization of debt issuance costs.  For the three months ended September 30, 2015 and 2014 , included in the amortization of debt discount mentioned above was $0.7 million of original issuance discount for each period 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 weighted-average effective interest rate for the three months ended September 30, 2015 and 2014 was 3.4% and 3.6% , respectively, related to convertible notes.

For the nine months ended September 30, 2015 and 2014 , the Company recognized interest expense of $69.4 million and $53.9 million , respectively, related to convertible notes.  Interest expense related to convertible notes for the nine months ended September 30, 2015 and 2014 was comprised of $17.0 million and $11.6 million , respectively, for the contractual coupon interest, $49.1 million and $39.1 million , respectively, related to the amortization of debt discount, and $3.3 million and $3.2 million , respectively, for each period related to the amortization of debt issuance costs.  For the nine months ended September 30, 2015 and 2014 , included in the amortization of debt discount mentioned above was $2.0 million of original issuance discount for each period related to the 2020 Notes. In addition, the Company incurred interest expense of $0.5 million related to debt conversions during 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 weighted-average effective interest rate for the nine months ended September 30, 2015 and 2014 was 3.4% and 3.6% , respectively, related to convertible notes.

21



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 three and nine months ended September 30, 2014 , the Company recognized a non-cash loss of $0.2 million ( $0.1 million after tax) and $6.3 million ( $3.8 million after tax), respectively, in "Foreign currency transactions and other" in the Unaudited Consolidated Statements of Operations in connection with the conversion of the 2015 Notes.

Other Long-term Debt

In March 2015, the Company issued Senior Notes due March 15, 2025, with an interest rate of 3.65% (the "2025 Notes") for an aggregate principal amount of $500 million . The 2025 Notes were issued with an initial discount of $1.3 million . In addition, the Company paid $3.2 million in debt issuance costs during the nine months ended September 30, 2015 . Interest on the 2025 Notes is payable semi-annually on March 15 and September 15, beginning September 15, 2015.

In March 2015, the Company issued Senior Notes due March 3, 2027, with an interest rate of 1.8% (the "2027 Notes") for an aggregate principal amount of 1.0 billion Euros. The 2027 Notes were issued with an initial discount of 0.3 million Euros. In addition, the Company paid $6.3 million in debt issuance costs during the nine months ended September 30, 2015 . Interest on the 2027 Notes is payable annually on March 3, beginning March 3, 2016. Subject to certain limited exceptions, all payments of interest and principal for the 2027 Notes will be made in Euros.

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 $6.5 million in debt issuance costs during the year ended December 31, 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 for the 2024 Notes will be made in Euros.

The aggregate principal value of the 2024 Notes and 2027 Notes and accrued interest thereon are designated as a hedge of the Company's net investment in certain Euro functional currency subsidiaries. The foreign currency transaction gains or losses on these liabilities are measured based upon changes in spot rates and are recorded in "Accumulated other comprehensive loss." The Euro-denominated net assets of these subsidiaries are translated into U.S. Dollars at each balance sheet date, with effects of foreign currency changes also reported in "Accumulated other comprehensive 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.

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 effective interest rates at debt origination to be 2.48% for the 2024 Notes, 1.80% for the 2027 Notes and 3.68% for the 2025 Notes.

For the three and nine months ended September 30, 2015 , the Company recognized interest expense of $16.8 million and $43.0 million , respectively, related to other long-term debt which was comprised of $16.2 million and $41.3 million , respectively, for the contractual coupon interest, $0.2 million and $0.7 million , respectively, related to the amortization of debt discount and $0.4 million and $1.0 million , respectively, related to the amortization of debt issuance costs. The remaining period for amortization of debt discount and debt issuance costs is the stated maturity date for the debt.


9.                                       TREASURY STOCK
 
In the first quarter of 2015, the Company's Board of Directors authorized the repurchase of up to $3.0 billion of the Company's common stock, in addition to amounts previously authorized. In the nine months ended September 30, 2015 , the Company repurchased 1,897,446 shares of its common stock in the open market for an aggregate cost of $2.3 billion , which included stock repurchases in September 2015 of 57,241 shares for an aggregate cost of $68.4 million that were settled in October 2015. As a result, the Unaudited Consolidated Balance Sheet at September 30, 2015 includes $68.4 million in "Accrued expenses and other current liabilities" for these unsettled stock repurchases. The Unaudited Consolidated Statement of Cash Flows for the nine months ended September 30, 2015 excludes the impact of these stock repurchases settled in October 2015.

As of September 30, 2015 , the Company had a remaining authorization of $748.8 million to purchase its common stock. During the period from October 1, 2015 through October 30, 2015 , the Company repurchased 397,038 additional shares

22



for an aggregate cost of $519.6 million . 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 at the Company's discretion.

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 62,463 shares and 73,502 shares at aggregate costs of $77.4 million and $98.2 million in the nine months ended September 30, 2015 and 2014 , respectively, to satisfy employee withholding taxes related to stock-based compensation.
 
As of September 30, 2015 , there were approximately 11.8 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, 2015 and 2014 , a substantial majority of the Company's international sourced income was generated in the Netherlands.  Income tax expense for the three and nine months ended September 30, 2015 and 2014 differs from the expected tax expense at the U.S. federal statutory rate of 35% , primarily due to lower international tax rates, 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% . A portion of Booking.com's earnings during the three and nine months ended September 30, 2015 and 2014 qualifies for Innovation Box Tax treatment, which had a significant beneficial impact on the Company's effective tax rate for those periods.

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, 2014 , after considering the impact of IRC Section 382 , the Company had approximately $1.2 billion of available NOLs for U.S. federal income tax purposes, comprised of $22 million of NOLs generated from operating losses and approximately $1.2 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. Pursuant to accounting guidance, tax benefits related to equity deductions will be recognized by crediting additional paid-in capital when they are realized by reducing the Company's current income tax liability. 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, tax planning strategies, the carryforward periods available for tax reporting purposes, and other relevant factors.

It is the practice and current intention of the Company to reinvest the earnings of its international subsidiaries in those operations, therefore, at September 30, 2015 , no provision had been made for U.S. taxes on international earnings.  At December 31, 2014 , international earnings intended to be indefinitely reinvested outside of the United States amounted to approximately $7.3 billion .  It is not practicable to determine the U.S. federal income tax liability that would be payable if such earnings were not indefinitely reinvested.

23



11.                                       ACCUMULATED OTHER COMPREHENSIVE LOSS
 
The table below provides the balances for each classification of accumulated other comprehensive loss as of September 30, 2015 and December 31, 2014 (in thousands): 
 
 
September 30,
2015
 
December 31,
2014
Foreign currency translation adjustments, net of tax (1)
 
$