The Priceline Group
Priceline Group Inc. (Form: 10-Q, Received: 08/04/2016 17:20:14)


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 June 30, 2016
 
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 July 28, 2016 :
Common Stock, par value $0.008 per share
 
49,426,956
(Class)
 
(Number of Shares)





The Priceline Group Inc.
Form 10-Q
 
For the Three Months Ended June 30, 2016
 
PART I - FINANCIAL INFORMATION
 
 
 
Item 1. Financial Statements
 
 
Consolidated Balance Sheets (unaudited) at June 30, 2016 and December 31, 2015
Consolidated Statements of Operations (unaudited) For the Three and Six Months Ended June 30, 2016 and 2015
Consolidated Statements of Comprehensive Income (unaudited) For the Three and Six Months Ended June 30, 2016 and 2015
Consolidated Statement of Changes in Stockholders' Equity (unaudited) For the Six Months Ended June 30, 2016
Consolidated Statements of Cash Flows (unaudited) For the Six Months Ended June 30, 2016 and 2015
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)
 
 
 
June 30,
2016
 
December 31,
2015
ASSETS
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
2,693,718

 
$
1,477,265

Restricted cash
 
823

 
806

Short-term investments
 
1,677,242

 
1,171,246

Accounts receivable, net of allowance for doubtful accounts of $17,197 and $15,014, respectively
 
982,993

 
645,169

Prepaid expenses and other current assets
 
559,691

 
258,751

Total current assets
 
5,914,467

 
3,553,237

Property and equipment, net
 
320,450

 
274,786

Intangible assets, net
 
2,082,120

 
2,167,533

Goodwill
 
3,360,585

 
3,375,000

Long-term investments
 
7,954,414

 
7,931,363

Other assets
 
55,134

 
118,656

Total assets
 
$
19,687,170

 
$
17,420,575

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
431,870

 
$
322,842

Accrued expenses and other current liabilities
 
1,019,513

 
681,587

Deferred merchant bookings
 
758,268

 
434,881

Total current liabilities
 
2,209,651

 
1,439,310

Deferred income taxes
 
803,935

 
892,576

Other long-term liabilities
 
143,674

 
134,777

Long-term debt
 
7,255,205

 
6,158,443

  Total liabilities
 
10,412,465

 
8,625,106

 
 
 
 
 
Stockholders' equity:
 
 

 
 

Common stock, $0.008 par value; authorized 1,000,000,000 shares, 62,343,686 and 62,039,516 shares issued, respectively
 
484

 
482

Treasury stock, 12,865,743 and 12,427,945 shares, respectively
 
(6,385,308
)
 
(5,826,640
)
Additional paid-in capital
 
5,377,160

 
5,184,910

Retained earnings
 
10,146,927

 
9,191,865

Accumulated other comprehensive income
 
135,442

 
244,852

  Total stockholders’ equity
 
9,274,705

 
8,795,469

Total liabilities and stockholders’ equity
 
$
19,687,170

 
$
17,420,575



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
June 30,
 
Six Months Ended
June 30,
 
 
2016
 
2015
 
2016
 
2015
Agency revenues
 
$
1,852,961

 
$
1,582,153

 
$
3,352,990

 
$
2,781,501

Merchant revenues
 
517,867

 
546,013

 
987,899

 
1,040,688

Advertising and other revenues
 
185,074

 
152,231

 
363,132

 
298,902

Total revenues
 
2,555,902

 
2,280,397

 
4,704,021

 
4,121,091

Cost of revenues
 
126,084

 
187,491

 
254,753

 
355,949

Gross profit
 
2,429,818

 
2,092,906

 
4,449,268

 
3,765,142

Operating expenses:
 
 
 
 
 
 

 
 

Performance advertising
 
920,763

 
758,690

 
1,700,672

 
1,392,234

Brand advertising
 
112,321

 
78,431

 
182,166

 
151,685

Sales and marketing
 
105,522

 
94,523

 
197,845

 
176,467

Personnel, including stock-based compensation of $54,976, $60,164, $120,976 and $114,172, respectively
 
332,654

 
289,156

 
641,005

 
548,140

General and administrative
 
112,642

 
98,945

 
225,687

 
199,123

Information technology
 
35,797

 
27,156

 
68,585

 
52,517

Depreciation and amortization
 
77,712

 
67,674

 
150,583

 
132,676

Total operating expenses
 
1,697,411

 
1,414,575

 
3,166,543

 
2,652,842

Operating income
 
732,407

 
678,331

 
1,282,725

 
1,112,300

Other income (expense):
 
 
 
 
 
 

 
 

Interest income
 
21,292

 
13,037

 
41,639

 
24,633

Interest expense
 
(50,290
)
 
(41,547
)
 
(97,184
)
 
(75,026
)
Foreign currency transactions and other
 
1,997

 
(1,444
)
 
(10,931
)
 
(6,287
)
Impairment of cost-method investments
 
(12,858
)
 

 
(63,208
)
 

Total other expense
 
(39,859
)
 
(29,954
)
 
(129,684
)
 
(56,680
)
Earnings before income taxes
 
692,548

 
648,377

 
1,153,041

 
1,055,620

Income tax expense
 
111,910

 
131,345

 
197,979

 
205,261

Net income
 
$
580,638

 
$
517,032

 
$
955,062

 
$
850,359

Net income applicable to common stockholders per basic common share
 
$
11.71

 
$
10.02

 
$
19.25

 
$
16.43

Weighted-average number of basic common shares outstanding
 
49,604

 
51,589

 
49,617

 
51,748

Net income applicable to common stockholders per diluted common share
 
$
11.60

 
$
9.94

 
$
19.06

 
$
16.27

Weighted-average number of diluted common shares outstanding
 
50,059

 
52,038

 
50,105

 
52,253



See Notes to Unaudited Consolidated Financial Statements.


4



The Priceline Group Inc.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2016
 
2015
 
2016
 
2015
Net income
 
$
580,638

 
$
517,032

 
$
955,062

 
$
850,359

Other comprehensive income, net of tax
 
 
 
 
 
 
 
 
Foreign currency translation adjustments  (1)
 
(50,285
)
 
56,983

 
27,087

 
(70,028
)
Unrealized (loss) gain on marketable securities (2)
 
(112,038
)
 
124,439

 
(136,497
)
 
286,807

Comprehensive income
 
$
418,315

 
$
698,454

 
$
845,652

 
$
1,067,138


(1) Foreign currency translation adjustments include a tax charge of $26,940 and a tax benefit of $34,156 for the three and six months ended June 30, 2016 , respectively, and a tax benefit of $34,586 and a tax charge of $42,019 for the three and six months ended June 30, 2015 , respectively, associated with net investment hedges (See Note 10 ). The remaining balance in foreign currency translation adjustments excludes income taxes due to the Company's practice and intention to indefinitely reinvest the earnings of its international subsidiaries outside of the United States (See Note 9 ).

(2) Net of tax charges of $5,796 and $34,924 for the three and six months ended June 30, 2016 , respectively, and net of tax benefits of $11,596 and $1,620 for the three and six months ended June 30, 2015 , respectively.


See Notes to Unaudited Consolidated Financial Statements.


5



The Priceline Group Inc.
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2016
(In thousands)
 
 
 
Common Stock
 
Treasury Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Total
Balance, December 31, 2015
 
62,040

 
$
482

 
(12,428
)
 
$
(5,826,640
)
 
$
5,184,910

 
$
9,191,865

 
$
244,852

 
$
8,795,469

Net income
 

 

 

 

 

 
955,062

 

 
955,062

Foreign currency translation adjustments, net of tax benefit of $34,156
 

 

 

 

 

 

 
27,087

 
27,087

Unrealized loss on marketable securities, net of tax charge of $34,924
 

 

 

 

 

 

 
(136,497
)
 
(136,497
)
Exercise of stock options and vesting of restricted stock units and performance share units
 
304

 
2

 

 

 
9,764

 

 

 
9,766

Repurchase of common stock
 

 

 
(438
)
 
(558,668
)
 

 

 

 
(558,668
)
Stock-based compensation and other stock-based payments
 

 

 

 

 
121,016

 

 

 
121,016

Excess tax benefits on stock-based awards and other equity deductions
 

 

 

 

 
61,470

 

 

 
61,470

Balance, June 30, 2016
 
62,344

 
$
484

 
(12,866
)
 
$
(6,385,308
)
 
$
5,377,160

 
$
10,146,927

 
$
135,442

 
$
9,274,705

 

See Notes to Unaudited Consolidated Financial Statements.


6



The Priceline Group Inc.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
 
Six Months Ended
June 30,
 
 
2016
 
2015
OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
955,062

 
$
850,359

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

Depreciation
 
65,157

 
46,695

Amortization
 
85,426

 
85,981

Provision for uncollectible accounts, net
 
16,117

 
13,233

Deferred income tax benefit
 
(79,863
)
 
(41,577
)
Stock-based compensation expense and other stock-based payments
 
121,016

 
115,269

Amortization of debt issuance costs
 
3,744

 
4,218

Amortization of debt discount
 
34,180

 
33,211

Impairment of cost-method investments
 
63,208

 

Changes in assets and liabilities:
 
 
 
 

Accounts receivable
 
(344,147
)
 
(287,940
)
Prepaid expenses and other current assets
 
(286,976
)
 
(300,482
)
Accounts payable, accrued expenses and other current liabilities
 
687,973

 
405,818

Other
 
(10,563
)
 
(13,426
)
Net cash provided by operating activities
 
1,310,334

 
911,359

 
 
 
 
 
INVESTING ACTIVITIES:
 
 
 
 

Purchase of investments
 
(2,701,662
)
 
(4,686,507
)
Proceeds from sale of investments
 
2,176,868

 
2,231,926

Additions to property and equipment
 
(113,699
)
 
(84,351
)
Acquisitions and other investments, net of cash acquired
 
(795
)
 
(45,937
)
Proceeds from foreign currency contracts
 

 
453,818

Payments on foreign currency contracts
 

 
(448,640
)
Change in restricted cash
 
(6
)
 
(225
)
Net cash used in investing activities
 
(639,294
)
 
(2,579,916
)
 
 
 
 
 
FINANCING ACTIVITIES:
 
 
 
 
Proceeds from the issuance of long-term debt
 
994,705

 
1,610,449

Payment of debt issuance costs - revolving credit facility
 

 
(3,770
)
Payments related to conversion of senior notes
 

 
(147,629
)
Repurchase of common stock
 
(525,144
)
 
(986,581
)
Proceeds from exercise of stock options
 
9,766

 
12,825

Excess tax benefits on stock-based awards and other equity deductions
 
61,470

 
68,241

Net cash provided by financing activities
 
540,797

 
553,535

Effect of exchange rate changes on cash and cash equivalents
 
4,616

 
(144,680
)
Net increase (decrease) in cash and cash equivalents
 
1,216,453

 
(1,259,702
)
Cash and cash equivalents, beginning of period
 
1,477,265

 
3,148,651

Cash and cash equivalents, end of period
 
$
2,693,718

 
$
1,888,949

SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
 
Cash paid during the period for income taxes
 
$
496,403

 
$
472,350

Cash paid during the period for interest
 
$
43,727

 
$
13,537

Non-cash investing activity for contingent consideration
 
$

 
$
9,170


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, 2015 .
 
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 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 income " in the accompanying Unaudited Consolidated Balance Sheets.  Foreign currency transaction gains and losses are included in "Foreign currency transactions and other" in the Unaudited Consolidated Statements of Operations.
 
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.

Change in Presentation

In the first quarter of 2016, the Company changed the presentation of advertising expenses from "Advertising - Online" and "Advertising - Offline" to "Performance advertising" and "Brand advertising" in the Unaudited Consolidated Statements of Operations. As a result, brand advertising in online channels is now recorded in "Brand advertising" rather than "Advertising - Online". For the three and six months ended June 30, 2015 , this change in presentation, which had no impact on total advertising expenses, operating income or net income, amounted to $12.1 million and $21.8 million , respectively. The Company believes its new presentation is helpful because it separates performance advertising that is typically managed on a return on investment basis from brand advertising that is generally spent to build brand awareness and managed to a targeted spending level. The descriptions of these new lines are as follows:

Performance advertising - Advertising expenses classified as performance advertising are generally managed by the Company by monitoring return on investment. These expenses primarily consist of: (1) search engine keyword purchases; (2) referrals from meta-search and travel research websites; (3) affiliate programs; and (4) other performance-based advertisements. Performance advertising expense is recognized as incurred.

Brand advertising - Advertising expenses classified as brand advertising are generally managed by the Company to a targeted spending level to drive brand awareness. This includes both online and offline activities such as online videos (for example, on YouTube and Facebook), television advertising, billboards and subway and bus advertisements. Brand advertising expense is generally recognized as incurred with the exception of advertising production costs, which are expensed the first time the advertisement is displayed or broadcast.

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board ("FASB") issued new accounting guidance on the measurement of credit losses for financial assets measured at amortized cost, which includes accounts receivable, and available-for-sale debt securities. For financial assets measured at amortized cost, this new guidance requires an entity to (1) estimate its lifetime expected credit losses upon recognition of the financial assets and establish an allowance to present the net amount expected to be collected, (2) recognize this allowance and changes in the allowance during subsequent periods through net income and (3) consider relevant information about past events, current conditions and reasonable and supportable forecasts in assessing the lifetime expected credit losses. For available-for-sale debt securities, this new guidance made several targeted amendments to the existing other-than-temporary impairment model, including (1) requiring disclosure of the allowance for

8



credit losses, (2) allowing reversals of the previously recognized credit losses until the entity has the intent to sell, is more-likely-than-not required to sell the securities or the maturity of the securities, (3) limiting impairment to the difference between the amortized cost basis and fair value and (4) not allowing entities to consider the length of time that fair value has been less than amortized cost as a factor in evaluating whether a credit loss exists. This update is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact to its Consolidated Financial Statements of adopting this new guidance.

In April 2016, the FASB issued new guidance to improve the accounting for certain aspects of share-based payment transactions as part of its simplification initiative. The key provisions of this accounting update are: (1) recognizing current excess tax benefits in the income statement in the period the benefits are deducted on the income tax return as opposed to an adjustment to additional paid-in capital in the period the benefits are realized by reducing a current income tax liability; (2) allowing an entity-wide election to account for forfeitures related to service conditions as occurred instead of estimating the total number of awards that will be forfeited because the requisite service period will not be rendered; (3) allowing the net settlement of an equity award for statutory tax withholding purposes to not exceed the maximum statutory tax rate by relevant tax jurisdiction instead of withholding taxes for each employee based on a minimum statutory withholding tax rate; and (4) requiring the presentation of excess tax benefits as operating cash flow and cash payments for employee withholding taxes related to vested stock awards as financing cash flow in the consolidated statement of cash flows. For public business entities, this update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods. Early adoption is permitted in any interim or annual period for which financial statements have not been issued but all of the guidance must be adopted in that same period. The Company is currently evaluating the impact to its Consolidated Financial Statements of adopting this new guidance.

In February 2016, the FASB issued a new accounting standard intended to improve the financial reporting of lease transactions.  The new accounting standard requires lessees to recognize an asset and a liability on the balance sheet for the right and obligation created by entering into a lease transaction.  However, the accounting update allows an entity to make an accounting policy election so that short-term leases are not recognized on the balance sheet and the related lease expense is recognized on a straight-line basis over the lease term. The new standard significantly expands qualitative and quantitative disclosures for lessees. The new standard retains the dual-model concept by requiring companies to determine if a lease is an operating or financing lease and the current "bright line" percentages could be used as guidance in applying the new standard. The lessor accounting model remains largely unchanged.  The update is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  Early adoption is allowed. The Company is currently evaluating the impact to its Consolidated Financial Statements of adopting this new guidance.

In January 2016, the FASB issued a new accounting update which amends the guidance on the classification and measurement of financial instruments. Although the accounting update retains many current requirements, it significantly revises accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The accounting update also amends certain fair value disclosures of financial instruments and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale debt securities in combination with the entity’s evaluation of their other deferred tax assets. The update requires entities to carry all investments in equity securities, including other ownership interests such as partnerships, unincorporated joint ventures and limited liability companies at fair value, with fair value changes recognized through net income. This requirement does not apply to investments that qualify for equity method accounting, investments that result in consolidation of the investee or investments in which the entity has elected the practicability exception to fair value measurement. Under current U.S. GAAP, the Company's available-for-sale investments in equity securities with readily identifiable market value are remeasured to fair value each reporting period with changes in fair value recognized in accumulated other comprehensive income (loss). However, under the new accounting literature, fair value adjustments will be recognized through net income and could vary significantly quarter to quarter. For the investments currently accounted for under the cost method, an entity can elect to measure its investments, which do not have a readily determinable fair value, at cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The Company intends to continue to use the cost method of accounting for investments without a readily determinable fair value. Additionally, this accounting update will simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. In addition, this accounting update eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is currently required to be disclosed for financial instruments measured at amortized cost in the balance sheet. This update is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption, although allowed in certain circumstances, is not applicable to the Company.

9



In May 2014, the FASB and the International Accounting Standards Board 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. In March 2016, the FASB issued an amendment to this standard, which provides guidance on assessing whether an entity is a principal or an agent in a revenue transaction. The conclusion determines whether an entity reports revenue on a gross or net basis. The amendment focuses on who controls the good or service in an arrangement before it is transferred to a customer and further clarifies the unit of account and indicators of when an entity is the principal. In April 2016, the FASB further amended this standard by clarifying (1) how an entity should evaluate the nature of its promise in granting a license of intellectual property, which will determine whether it recognizes revenue over time or at a point in time and (2) when a promised good or service is separately identifiable (i.e., distinct within the context of the contract) and allowing entities to disregard items that are immaterial in the context of a contract. In May 2016, the FASB issued additional amendments related to (1) the assessment of collectibility, (2) the definition of completed contracts at transition, (3) the measurement of the fair value of non-cash consideration at contract inception, (4) the presentation of taxes collected from customers and (5) the accounting for contract modifications at transition. The accounting standard was initially effective for public business 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 to its Consolidated Financial Statements of adopting this new guidance.

2.                                       STOCK-BASED EMPLOYEE COMPENSATION
 
Stock-based compensation expense included in personnel expenses in the Unaudited Consolidated Statements of Operations was approximately $55.0 million and $60.2 million for the three months ended June 30, 2016 and 2015 , respectively, and $121.0 million and $114.2 million for the six months ended June 30, 2016 and 2015 , 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 dates.
 
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 six months ended June 30, 2016
Share-Based Awards
 
Shares
 
Weighted-Average Grant Date Fair Value
Unvested at December 31, 2015
 
637,257

 
 
$
1,070.10

 
Granted
 
184,591

 
 
$
1,299.27

 
Vested
 
(279,453
)
 
 
$
830.50

 
Performance Share Units Adjustment
 
3,088

 
 
$
1,267.85

 
Forfeited
 
(59,161
)
 
 
$
1,275.12

 
Unvested at June 30, 2016
 
486,322

 
 
$
1,278.90

 
 
As of June 30, 2016 , there was $380.8 million of total future compensation cost related to unvested share-based awards to be recognized over a weighted-average period of 2.1 years.
 
During the six months ended June 30, 2016 , the Company made broad-based grants of 98,856 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 $128.2 million based on a weighted-average grant date fair value per share of $1,296.68 .

10




In addition, during the six months ended June 30, 2016 , the Company granted 85,735 performance share units to executives and certain other employees.  The performance share units had a total grant date fair value of $111.6 million based upon a weighted-average grant date fair value per share of $1,302.25 .  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 ends December 31, 2018, assuming there is no accelerated vesting for, among other things, a termination of employment under certain circumstances.  As of June 30, 2016 , the estimated number of probable shares to be issued is a total of 80,671 shares, net of performance share units forfeited and vested since the grant date.  If the maximum performance thresholds are met at the end of the performance period, a maximum number of 181,726 total shares could be issued.  If the minimum performance thresholds are not met, 47,626 shares would be issued at the end of the performance period.

2015 Performance Share Units

During the year ended December 31, 2015 , the Company granted 107,623 performance share units with a grant date fair value of $133.2 million , based on a weighted-average grant date fair value per share of $1,237.53 . The actual number of shares to be issued will be determined upon completion of the performance period which generally ends December 31, 2017.

At June 30, 2016 , there were 79,410 unvested 2015 performance share units outstanding, net of performance share units that were forfeited or vested since the grant date. As of June 30, 2016 , 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 130,723 shares. If the maximum performance thresholds are met at the end of the performance period, a maximum of 197,115 total shares could be issued pursuant to these performance share units. If the minimum performance thresholds are not met, 46,327 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 June 30, 2016 , there were 45,198 unvested 2014 performance share units outstanding, net of performance share units that were forfeited or vested since the grant date. As of June 30, 2016 , 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 72,552 shares. If the maximum performance thresholds are met at the end of the performance period, a maximum of 91,160 total shares could be issued pursuant to these performance share units. If the minimum performance thresholds are not met, 35,467 shares would be issued at the end of the performance period.


11



Stock Options

The following table summarizes the activity for stock options during the six months ended  June 30, 2016
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, 2015
 
89,104

 
 
$
383.03

 
 
$
79,474

 
5.4
Exercised
 
(25,962
)
 
 
$
374.66

 
 
 
 
 
Forfeited
 
(1,410
)
 
 
$
253.97

 
 
 
 
 
Balance, June 30, 2016
 
61,732

 
 
$
389.49

 
 
$
53,023

 
5.1
Vested and exercisable as of June 30, 2016
 
56,002

 
 
$
364.94

 
 
$
49,476

 
4.9
Vested and exercisable as of June 30, 2016 and expected to vest thereafter, net of estimated forfeitures
 
61,542

 
 
$
389.69

 
 
$
52,847

 
5.1

The aggregate intrinsic value of employee stock options assumed in acquisitions that were exercised during the six months ended June 30, 2016 was $23.1 million compared to $26.4 million for the six months ended June 30, 2015 . During the six months ended June 30, 2016 , stock options assumed in acquisitions vested for 9,387 shares of common stock with an acquisition-date fair value of $5.9 million , compared to 22,352 shares of common stock vested for stock options assumed in acquisitions with an acquisition-date fair value of $15.1 million for the six months ended June 30, 2015 .

For the three and six months ended June 30, 2016 , the Company recorded stock-based compensation expense related to employee stock options of $2.4 million and $5.3 million , respectively, compared to $7.6 million and $15.0 million for the three and six months ended June 30, 2015 , respectively. As of June 30, 2016 , there was $3.3 million of total future compensation costs related to unvested employee stock options to be recognized over a weighted-average period of 1.1 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.
 

12



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
June 30,
 
Six Months Ended
June 30,
 
 
2016
 
2015
 
2016
 
2015
Weighted-average number of basic common shares outstanding
 
49,604

 
51,589

 
49,617

 
51,748

Weighted-average dilutive stock options, restricted stock units and performance share units
 
167

 
229

 
230

 
273

Assumed conversion of Convertible Senior Notes
 
288

 
220

 
258

 
232

Weighted-average number of diluted common and common equivalent shares outstanding
 
50,059

 
52,038

 
50,105

 
52,253

Anti-dilutive potential common shares
 
2,591

 
2,775

 
2,566

 
2,769

 
Anti-dilutive potential common shares for both the three and six months ended June 30, 2016 include approximately 2.0 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 prices for the convertible notes exceed the Company's average stock price.


4.                                       INVESTMENTS
 
Short-term and Long-term Investments in Available-for-Sale Securities

The following table summarizes, by major security type, the Company's investments as of June 30, 2016 (in thousands): 
 
 
Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Fair
  Value
Short-term investments:
 
 
 
 
 
 
 
 
Foreign government securities
 
$
287,229

 
$
94

 
$
(211
)
 
$
287,112

U.S. government securities
 
427,344

 
194

 
(3
)
 
427,535

Corporate debt securities
 
949,907

 
1,382

 
(78
)
 
951,211

Commercial paper
 
8,012

 

 
(5
)
 
8,007

U.S. government agency securities
 
3,376

 
1

 

 
3,377

Total short-term investments
 
$
1,675,868

 
$
1,671

 
$
(297
)
 
$
1,677,242

 
 
 
 
 
 
 
 
 
Long-term investments:
 
 
 
 
 
 
 
 
Foreign government securities
 
$
641,671

 
$
4,766

 
$

 
$
646,437

U.S. government securities
 
541,307

 
5,923

 

 
547,230

Corporate debt securities
 
4,535,904

 
47,999

 
(556
)
 
4,583,347

U.S. municipal securities
 
1,064

 
10

 

 
1,074

U.S. government agency securities
 
1,000

 

 

 
1,000

Ctrip convertible debt securities
 
1,250,000

 
92,975

 
(36,500
)
 
1,306,475

Ctrip equity securities
 
630,311

 
238,540

 

 
868,851

Total long-term investments
 
$
7,601,257

 
$
390,213

 
$
(37,056
)
 
$
7,954,414

 
The Company's investment policy seeks to preserve capital and maintain sufficient liquidity to meet operational and other needs of the business.  As of June 30, 2016 , the weighted-average life of the Company’s fixed income investment portfolio, excluding the Company's investment in Ctrip convertible debt securities, was approximately 1.8 years with an average credit quality of A+/A1/A+.


13



The Company invests in foreign government securities with high credit quality. As of June 30, 2016 , investments in foreign government securities principally included debt securities issued by the governments of the Netherlands, Germany, France, Belgium and Austria. 

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"). On December 11, 2015, the Company invested $500 million in a Ctrip ten -year senior convertible note issued at par value, which included a put option allowing the Company to require a prepayment in cash from Ctrip at the end of the sixth year of the note. As of June 30, 2016 , the Company had also invested $630.3 million of its international cash in Ctrip American Depositary Shares ("ADSs"). The convertible debt and equity securities of Ctrip have been marked-to-market in accordance with the accounting guidance for available-for-sale securities.

In connection with the Company's investments in Ctrip's convertible notes, Ctrip granted the Company the right to appoint an observer to its board of directors and permission to acquire its shares (through the acquisition of Ctrip ADSs in the open market) so that combined with ADSs issuable upon conversion of the August 2014 and May 2015 convertible notes, the Company could hold up to an aggregate of 15% of Ctrip's outstanding equity. As of June 30, 2016 , the Company did not have significant influence over Ctrip.

The following table summarizes, by major security type, the Company's investments as of December 31, 2015 (in thousands): 
 
 
Cost
 
Gross 
Unrealized 
Gains
 
Gross 
Unrealized
  Losses
 
Fair
  Value
Short-term investments:
 
 
 
 
 
 
 
 
Foreign government securities
 
$
395,404

 
$
497

 
$
(104
)
 
$
395,797

U.S. government securities
 
457,001

 

 
(507
)
 
456,494

Corporate debt securities
 
305,654

 
25

 
(419
)
 
305,260

Commercial paper
 
11,688

 

 

 
11,688

U.S. government agency securities
 
2,009

 

 
(2
)
 
2,007

Total short-term investments
 
$
1,171,756

 
$
522

 
$
(1,032
)
 
$
1,171,246

 
 
 
 
 
 
 
 
 
Long-term investments:
 
 
 
 
 
 
 
 
Foreign government securities
 
$
718,947

 
$
1,367

 
$
(683
)
 
$
719,631

U.S. government securities
 
580,155

 
277

 
(1,982
)
 
578,450

Corporate debt securities
 
4,294,282

 
1,273

 
(18,941
)
 
4,276,614

U.S. municipal securities
 
1,080

 
3

 

 
1,083

Ctrip convertible debt securities
 
1,250,000

 
158,600

 
(30,050
)
 
1,378,550

Ctrip equity securities
 
630,311

 
346,724

 

 
977,035

Total long-term investments
 
$
7,474,775

 
$
508,244

 
$
(51,656
)
 
$
7,931,363

 
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 " 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 net realized gains of $2.1 million and net realized losses of $0.8 million related to investments for the three and six months ended June 30, 2016 , respectively, compared to net realized gains of $1.6 million and $3.4 million for the three and six months ended June 30, 2015 , respectively.

Cost-method Investments

The Company held investments in equity securities of private companies, which are typically at an early stage of development, of approximately $0.6 million and $62.3 million as of June 30, 2016 and December 31, 2015 , respectively. The investments are accounted for under the cost method and reported in "Other assets" in the Company's Unaudited Consolidated Balance Sheets. The Company evaluates its investments quarterly to determine if any indicators of other-than-temporary impairment exist.

14




In March 2016, the Company received an operating performance update from Hotel Urbano, which showed disappointing 2015 results, significantly reduced forecasts and the need for additional funding in the near term. This update combined with increased political turmoil, the declaration of a public health emergency related to the Zika virus and sustained poor macroeconomic conditions in Brazil in the first quarter of 2016 indicated a potential other-than-temporary impairment in the fair value of the Company’s investment. As a result, the Company analyzed all information available and based on the best estimate of the fair value of this investment, recognized an impairment of approximately $50 million for the three months ended March 31, 2016. In the second quarter of 2016, after discussions with Hotel Urbano's management, the Company reviewed their additional funding needs and based on its business prospects, the Company recognized an impairment of approximately $10 million for the three months ended June 30, 2016 to write-off the remainder of its investment in Hotel Urbano.

In addition, the Company recognized an impairment of approximately $3 million for an investment in another private company during the three months ended June 30, 2016 .


5.                                       FAIR VALUE MEASUREMENTS
 
Financial assets and liabilities carried at fair value as of June 30, 2016 are classified in the tables below in the categories described below (in thousands): 
 
 
Level 1
 
Level 2
 
Total
ASSETS:
 
 

 
 

 
 

Cash equivalents:
 
 
 
 
 
 
Money market funds
 
$
1,344,815

 
$

 
$
1,344,815

U.S. government securities
 

 
222,264

 
222,264

Commercial paper
 

 
5,560

 
5,560

Short-term investments:
 
 

 
 

 
 

Foreign government securities
 

 
287,112

 
287,112

U.S. government securities
 

 
427,535

 
427,535

Corporate debt securities
 

 
951,211

 
951,211

Commercial paper
 

 
8,007

 
8,007

U.S. government agency securities
 

 
3,377

 
3,377

Foreign exchange derivatives
 

 
782

 
782

Long-term investments:
 
 
 
 
 
 
Foreign government securities
 

 
646,437

 
646,437

U.S. government securities
 

 
547,230

 
547,230

Corporate debt securities
 

 
4,583,347

 
4,583,347

U.S. municipal securities
 

 
1,074

 
1,074

U.S. government agency securities
 

 
1,000

 
1,000

Ctrip convertible debt securities
 

 
1,306,475

 
1,306,475

Ctrip equity securities
 
868,851

 

 
868,851

Total assets at fair value
 
$
2,213,666

 
$
8,991,411

 
$
11,205,077

 
 
 
Level 1
 
Level 2
 
Total
LIABILITIES:
 
 

 
 

 
 

Foreign exchange derivatives
 
$

 
$
351

 
$
351

 



15



Financial assets and liabilities carried at fair value as of December 31, 2015 are classified in the tables below in the categories described below (in thousands):
 
 
Level 1
 
Level 2
 
Total
ASSETS:
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
Money market funds
 
$
99,117

 
$

 
$
99,117

Foreign government securities
 

 
10,659

 
10,659

U.S. government securities
 

 
90,441

 
90,441

Corporate debt securities
 

 
1,855

 
1,855

Commercial paper
 

 
335,663

 
335,663

Short-term investments:
 
 
 
 
 
 
Foreign government securities
 

 
395,797

 
395,797

U.S. government securities
 

 
456,494

 
456,494

Corporate debt securities
 

 
305,260

 
305,260

Commercial paper
 

 
11,688

 
11,688

U.S. government agency securities
 

 
2,007

 
2,007

Foreign exchange derivatives
 

 
363

 
363

Long-term investments:
 
 
 
 
 
 
Foreign government securities
 

 
719,631

 
719,631

U.S. government securities
 

 
578,450

 
578,450

Corporate debt securities
 

 
4,276,614

 
4,276,614

U.S. municipal securities
 

 
1,083

 
1,083

Ctrip convertible debt securities
 

 
1,378,550

 
1,378,550

Ctrip equity securities
 
977,035

 

 
977,035

Total assets at fair value
 
$
1,076,152

 
$
8,564,555

 
$
9,640,707

 
 
 
Level 1
 
Level 2
 
Total
LIABILITIES:
 
 

 
 

 
 

Foreign exchange derivatives
 
$

 
$
644

 
$
644

 
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.
 

16



As of June 30, 2016 and December 31, 2015 , the Company's cash consisted of bank deposits.  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 June 30, 2016 and December 31, 2015 , the Company held investments in equity securities of private companies and these investments are accounted for under the cost method of accounting (see Note 4). See Note 4 for information on the carrying value of available-for-sale investments and Note 7 for the estimated fair value of the Company's outstanding Senior Notes. See Note 11 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 currency translation adjustment from Euro-denominated net assets held by certain subsidiaries and are recognized in the Unaudited Consolidated Balance Sheets in " Accumulated other comprehensive income ."
 
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 enters into average-rate derivative contracts to hedge translation risk from short-term foreign exchange fluctuations for the Euro, British Pound Sterling and certain other currencies versus the U.S. Dollar.  As of June 30, 2016 and December 31, 2015 , there were no outstanding derivative contracts related to foreign currency translation risk.  Foreign exchange gains of $3.9 million and $0.3 million for the three and six months ended June 30, 2016 , respectively, compared to foreign exchange losses of $1.7 million and foreign exchange gains of $0.2 million for the three and six months ended June 30, 2015 , respectively, are recorded related to these derivatives 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 June 30, 2016 associated with foreign currency transaction risks resulted in a net asset of $0.4 million , with an asset in the amount of $0.8 million recorded in "Prepaid expenses and other current assets" and a liability in the amount of $0.4 million recorded in "Accrued expenses and other current liabilities" in the Unaudited Consolidated Balance Sheet. Foreign exchange derivatives outstanding as of December 31, 2015 associated with foreign exchange transactions resulted in a net liability of $0.3 million , with a liability in the amount of $0.7 million recorded in "Accrued expenses and other current liabilities" in the Unaudited Consolidated Balance Sheet and an asset in the amount of $0.4 million recorded in "Prepaid expenses and other current assets."  Derivatives associated with these transaction risks resulted in foreign exchange gains of $3.6 million and $16.0 million for the three and six months ended June 30, 2016 , respectively, compared to foreign exchange gains of $6.0 million and foreign exchange losses of $26.0 million for the three and six months ended June 30, 2015 , 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 losses of $2.6 million and $0.2 million for the three months ended June 30, 2016 and 2015 , respectively, and net losses of $7.0 million and $6.3 million for the six months ended June 30, 2016 and 2015 , 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 a net cash inflow of $23.6 million for the six months ended June 30, 2016 compared to a net cash outflow of $27.7 million for the six months ended June 30, 2015 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 June 30, 2016 or December 31, 2015 . A net cash inflow of $5.2 million for the six months ended June 30, 2015 related to foreign currency forward contracts designated as hedges of the Company's net investment in a foreign subsidiary is reported within " Net cash used in investing activities " in the Unaudited Consolidated Statement of Cash Flows.


17



6.                                       INTANGIBLE ASSETS AND GOODWILL
 
The Company's intangible assets at June 30, 2016 and December 31, 2015 consisted of the following (in thousands): 
 
June 30, 2016
 
December 31, 2015
 
 
 
 
 
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
$
822,590

 
$
(254,189
)
 
$
568,401

 
$
824,932

 
$
(227,994
)
 
$
596,938

 
10 - 20 years
 
16 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Technology
113,045

 
(71,616
)
 
41,429

 
112,639

 
(61,404
)
 
51,235

 
1 - 5 years
 
5 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Patents
1,623

 
(1,580
)
 
43

 
1,623

 
(1,562
)
 
61

 
15 years
 
15 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Internet domain names
41,680

 
(23,946
)
 
17,734

 
40,352

 
(20,954
)
 
19,398

 
2 - 20 years
 
8 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trade names
1,669,712

 
(222,391
)
 
1,447,321

 
1,671,356

 
(183,101
)
 
1,488,255

 
4 - 20 years
 
20 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-compete agreements
21,900

 
(14,708
)
 
7,192

 
22,847

 
(11,201
)
 
11,646

 
3 - 4 years
 
3 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other

 

 

 
135

 
(135
)
 

 

 

Total intangible assets
$
2,670,550

 
$
(588,430
)
 
$
2,082,120

 
$
2,673,884

 
$
(506,351
)
 
$
2,167,533

 
 
 
 
 
Intangible assets with determinable lives are amortized on a straight-line basis.  Intangible asset amortization expense was approximately $43.0 million and $85.4 million for the three and six months ended June 30, 2016 , respectively, and $42.7 million and $86.0 million for the three and six months ended June 30, 2015 , respectively.

The amortization expense for intangible assets for the remainder of 2016 , the annual expense for the next five years, and the expense thereafter is expected to be as follows (in thousands): 
2016
$
83,923

2017
160,767

2018
142,185

2019
131,884

2020
124,684

2021
119,659

Thereafter
1,319,018

 
$
2,082,120

 
The change in goodwill for the six months ended June 30, 2016 consists of the following (in thousands): 
Balance at December 31, 2015
$
3,375,000

Currency translation adjustments
(14,415
)
Balance at June 30, 2016
$
3,360,585

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



18



7.                                       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 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 June 30, 2016 and December 31, 2015 , there were no borrowings outstanding under the facility. As of June 30, 2016 and December 31, 2015 , there were approximately $3.6 million and $2.5 million of letters of credit issued under the facility, respectively.

Outstanding Long-term Debt
 
Outstanding long-term debt as of June 30, 2016 consisted of the following (in thousands): 
June 30, 2016
 
Outstanding
  Principal 
Amount
 
Unamortized Debt
Discount and Debt
Issuance Cost
 
Carrying
  Value
Long-term debt:
 
 
 
 
 
 
1.0% Convertible Senior Notes due March 2018
 
$
1,000,000

 
$
(45,711
)
 
$
954,289

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

 
(102,670
)
 
897,330

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

 
(115,004
)
 
884,996

2.15% (€750 Million) Senior Notes due November 2022
 
833,611

 
(5,901
)
 
827,710

2.375% (€1 Billion) Senior Notes due September 2024
 
1,111,482

 
(14,090
)
 
1,097,392

3.65% Senior Notes due March 2025
 
500,000

 
(3,943
)
 
496,057

3.6% Senior Notes due June 2026
 
1,000,000

 
(8,105
)
 
991,895

1.8% (€1 Billion) Senior Notes due March 2027
 
1,111,482

 
(5,946
)
 
1,105,536

Total long-term debt
 
$
7,556,575

 
$
(301,370
)
 
$
7,255,205

 
Outstanding long-term debt as of December 31, 2015 consisted of the following (in thousands): 
December 31, 2015
 
Outstanding
 Principal 
Amount
 
Unamortized Debt
Discount and Debt
Issuance Cost
 
Carrying
  Value
Long-term debt:
 
 
 
 
 
 
1.0% Convertible Senior Notes due March 2018
 
$
1,000,000

 
$
(58,929
)
 
$
941,071

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

 
(114,898
)
 
885,102

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

 
(125,258
)
 
874,742

2.15% (€750 Million) Senior Notes due November 2022
 
815,217

 
(6,555
)
 
808,662

2.375% (€1 Billion) Senior Notes due September 2024
 
1,086,957

 
(14,688
)
 
1,072,269

3.65% Senior Notes due March 2025
 
500,000

 
(4,160
)
 
495,840

1.8% (€1 Billion) Senior Notes due March 2027
 
1,086,957

 
(6,200
)
 
1,080,757

Total long-term debt
 
$
6,489,131

 
$
(330,688
)
 
$
6,158,443

 
Based upon the closing price of the Company's common stock for the prescribed measurement periods during the three months ended June 30, 2016 and December 31, 2015 , the respective contingent conversion thresholds of the 2018 Notes (as

19



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.

Fair Value of Long-term Debt

As of June 30, 2016 and December 31, 2015 , the estimated fair value of all outstanding Senior Notes was approximately $8.2 billion and $7.0 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 fair 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 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 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

20



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 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 were convertible, subject to certain conditions, into the Company's common stock at a conversion price of approximately $303.06 per share.  In March 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.

Cash-settled convertible debt, such as the Company's Convertible Senior Notes, is separated into debt and equity components at issuance and each component is 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 rate 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 3.18% for the 2021 Notes, 3.13% for the 2020 Notes and 3.50% for the 2018 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) less 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) less 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) less 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.

For the three months ended June 30, 2016 and 2015 , the Company recognized interest expense of $23.5 million and $23.0 million , respectively, related to convertible notes.  Interest expense related to convertible notes for the three months ended June 30, 2016 and 2015 was comprised of $5.6 million for the contractual coupon interest for each period, $16.8 million and $16.3 million , respectively, related to the amortization of debt discount, and $1.1 million related to the amortization of debt issuance costs for each period.  For the three months ended June 30, 2016 and 2015 , 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 period until the stated maturity dates for the respective debt. The weighted-average effective interest rate related to convertible notes was 3.4% for both the three months ended June 30, 2016 and 2015 .

For the six months ended June 30, 2016 and 2015 , the Company recognized interest expense of $46.9 million and $46.3 million , respectively, related to convertible notes.  Interest expense related to convertible notes for the six months ended June 30, 2016 and 2015 was comprised of $11.2 million and $11.4 million , respectively, for the contractual coupon interest, $33.5 million and $32.7 million , respectively, related to the amortization of debt discount, and $2.2 million related to the amortization of debt issuance costs for each period.  For the six months ended June 30, 2016 and 2015 , included in the amortization of debt discount mentioned above was $1.4 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 period until the stated maturity dates for the respective debt. The weighted-average effective interest rate was 3.4% for both the six months ended June 30, 2016 and 2015 .


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Other Long-term Debt

In May 2016, the Company issued Senior Notes due June 1, 2026, with an interest rate of 3.6% (the "2026 Notes") for an aggregate principal amount of $1.0 billion . The 2026 Notes were issued with an initial discount of $1.9 million . In addition, the Company paid $5.9 million in debt issuance costs during the three months ended June 30, 2016. Interest on the 2026 Notes is payable semi-annually on June 1 and December 1, beginning December 1, 2016.

In November 2015, the Company issued Senior Notes due November 25, 2022, with an interest rate of 2.15% (the "2022 Notes") for an aggregate principal amount of 750 million Euros. The 2022 Notes were issued with an initial discount of 2.2 million Euros. In addition, the Company paid $3.7 million in debt issuance costs during the year ended December 31, 2015. Interest on the 2022 Notes is payable annually on November 25, beginning November 25, 2016. Subject to certain limited exceptions, all payments of interest and principal, including payments made upon any redemption of the 2022 Notes will be made in Euros.

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 year ended December 31, 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 year ended December 31, 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 2022 Notes, 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 income " in the Unaudited Consolidated Balance Sheets. 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 income "in the Unaudited Consolidated Balance Sheets. 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 rate 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 3.62% for the 2026 Notes, 2.20% for the 2022 Notes, 3.68% for the 2025 Notes, 1.80% for the 2027 Notes and 2.48% for the 2024 Notes.

For the three months ended June 30, 2016 and 2015 , the Company recognized interest expense of $25.5 million and $16.7 million , respectively, related to other long-term debt which was comprised of $24.6 million and $16.1 million , respectively, for the contractual coupon interest, $0.3 million and $0.2 million , respectively, related to the amortization of debt discount and $0.6 million and $0.4 million , respectively, related to the amortization of debt issuance costs. The remaining period for amortization of debt discount and debt issuance costs is the period until the stated maturity dates for the respective debt.

For the six months ended June 30, 2016 and 2015 , the Company recognized interest expense of $46.9 million and $26.2 million , respectively, related to other long-term debt which was comprised of $45.1 million and $25.1 million , respectively, for the contractual coupon interest, $0.7 million and $0.5 million , respectively, related to the amortization of debt discount and $1.1 million and $0.6 million , respectively, related to the amortization of debt issuance costs. The remaining period for amortization of debt discount and debt issuance costs is the period until the stated maturity dates for the respective debt.


22



In March 2016, the Company received a ten -year loan from the State of Connecticut in the amount of $2.5 million with an interest rate of 1% in connection with the construction of office space in Connecticut.  As of June 30, 2016 , the loan is reported in " Other long-term liabilities " in the Unaudited Consolidated Balance Sheet. The loan will be forgiven if certain employment and salary conditions are met.


8.                                       TREASURY STOCK
 
In the first quarter of 2016, the Company's Board of Directors authorized a program to repurchase up to $3.0 billion of the Company's common stock. In the six months ended June 30, 2016 , the Company repurchased 318,257 shares of its common stock in the open market for an aggregate cost of $402.9 million , which included stock repurchases in June 2016 of 27,320 shares for an aggregate cost of $33.5 million that were settled in July 2016. As a result, the Unaudited Consolidated Balance Sheet at June 30, 2016 includes $33.5 million in "Accrued expenses and other current liabilities" for these unsettled stock repurchases. The Unaudited Consolidated Statement of Cash Flows for the six months ended June 30, 2016 excludes the impact of these stock repurchases settled in July 2016.

As of June 30, 2016 , the Company had a remaining authorization of $2.6 billion 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 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 119,509 shares and 57,332 shares at aggregate costs of $155.8 million and $70.9 million in the six months ended June 30, 2016 and 2015 , respectively, to satisfy employee withholding taxes related to stock-based compensation.
 
As of June 30, 2016 , there were 12,865,743 shares of the Company's common stock held in treasury.


9.                                       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 six months ended June 30, 2016 and 2015 , a substantial majority of the Company's income was generated in the Netherlands.  Income tax expense for the three and six months ended June 30, 2016 and 2015 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. The effective tax rate was lower for the three and six months ended June 30, 2016 , compared to the three and six months ended June 30, 2015 , primarily due to U.S. state tax law changes which resulted in a decrease to our deferred tax liabilities associated with acquired intangible assets and an increased proportion of our income being taxed at lower international tax rates due to the growth of our international businesses, offset by an increase in the tax rate that arises because there is no tax benefit on the impairment of our Hotel Urbano investment of approximately $50 million in the first quarter of 2016 and an additional impairment of approximately $10 million in the second quarter of 2016 (see Note 4).

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 six months ended June 30, 2016 and 2015 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 including U.S. net operating loss carryforwards ("NOLs"). At December 31, 2015 , the Company had approximately $847.9 million of available NOLs for U.S. federal income tax purposes, comprised of $25.6 million of NOLs generated from operating losses and approximately $822.3 million of NOLs generated from equity-related transactions, including equity-based compensation and stock warrants. The majority of these NOLs expire from December 31, 2019 to December 31, 2021 . At December 31, 2015 , the Company had approximately $620.9 million of U.S. state NOLs that expire mainly between December 31, 2020 and December 31, 2034. The utilization of these NOLs is

23



dependent upon the Company's ability to generate sufficient future taxable income in the United States. Pursuant to current 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. Under the new accounting standard issued in April 2016 (see Note 1), all previously unrecognized excess tax benefits will be recognized as a deferred tax asset, net of any valuation allowance, with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption of this standard. In addition, under the new accounting standard, prospectively all excess tax benefits will be recognized in the income statement in the year in which equity deductions are claimed on the Company's income tax return. 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 intention of the Company to indefinitely reinvest the earnings of its international subsidiaries outside of the United States. As a result, at June 30, 2016 , no provision had been made for U.S. taxes on cumulative undistributed international earnings.  At December 31, 2015 , international earnings intended to be indefinitely reinvested amounted to approximately $9.9 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.

10.                                       ACCUMULATED OTHER COMPREHENSIVE INCOME
 
The table below provides the balances for each classification of accumulated other comprehensive income as of June 30, 2016 and December 31, 2015 (in thousands): 
 
 
June 30,
2016
 
December 31,
2015
Foreign currency translation adjustments, net of tax (1)
 
$
(190,176
)
 
$
(217,263
)
Net unrealized gain on marketable securities, net of tax (2)
 
325,618

 
462,115

Accumulated other comprehensive income
 
$
135,442

 
$
244,852

 
(1) Foreign currency translation adjustments, net of tax, include net losses from fair value adjustments of $34.8 million after tax ( $52.6 million before tax) associated with derivatives designated as net investment hedges at both June 30, 2016 and December 31, 2015 (see Note 5 ).

Foreign currency translation adjustments, net of tax, include foreign currency transaction gains of $93.8 million after tax ( $153.3 million before tax) and $126.8 million after tax ( $220.5 million before tax) associated with the Company's 2022 Notes, 2024 Notes and 2027 Notes at June 30, 2016 and December 31, 2015 , respectively. The 2022 Notes, 2024 Notes and 2027 Notes are Euro-denominated debt and are designated as hedges of certain of the Company's Euro-denominated net assets (see Note 7 ).

The remaining balance in foreign currency translation adjustments excludes income taxes as a result of the Company's intention to indefinitely reinvest the earnings of its international subsidiaries outside of the United States.
 
(2) The unrealized gains before tax at June 30, 2016 were $354.6 million , of which unrealized gains of $238.7 million were exempt from tax in the Netherlands and unrealized gains of $115.8 million were taxable. The unrealized gains before tax at December 31, 2015 were $456.1 million , of which unrealized gains of $481.3 million were exempt from tax in the Netherlands and unrealized losses of $25.2 million were taxable.


11.                                       COMMITMENTS AND CONTINGENCIES
 
Competition Reviews

The online travel industry has become the subject of investigations by various national competition authorities ("NCAs"), particularly in Europe. The Company is or has been involved in investigations predominately related to whether Booking.com's contractual parity arrangements with accommodation providers, sometimes also referred to as "most favored nation" or "MFN" provisions, are anti-competitive because they require accommodation providers to provide Booking.com

24



with room rates that are at least as low as those offered to other online travel companies ("OTCs") or through the accommodation provider's website.

In Europe, investigations into Booking.com's price parity provisions were initiated in 2013 and 2014 by NCAs in France, Germany, Italy, Austria, Sweden, Ireland and Switzerland. A number of other NCAs have also looked at these issues. On April 21, 2015, the French, Italian and Swedish NCAs, working in close cooperation with the European Commission, announced that they had accepted "commitments" offered by Booking.com to resolve and close the investigations in France, Italy and Sweden. Under the commitments, Booking.com replaced its existing price parity agreements with accommodation providers with "narrow" price parity agreements. Under a "narrow" price parity agreement, subject to certain exceptions, an accommodation provider is still required to offer the same or better rates on Booking.com as it offers to a consumer directly online, but it is no longer required to offer the same or better rates on Booking.com as it offers to other OTCs. The commitments also allow an accommodation provider to, among other things, offer different terms and conditions (e.g., free WiFi) and availability to consumers that book with online travel companies that offer lower rates of commission or other benefits, offer lower rates to consumers that book through offline channels and continue to discount through, among other things, accommodation loyalty programs, as long as those rates are not published or marketed online. The commitments apply to accommodations in France, Italy and Sweden and were effective on July 1, 2015. The foregoing description is a summary only and is qualified in its entirety by reference to the commitments published by the NCAs on April 21, 2015.

On July 1, 2015, Booking.com voluntarily implemented the commitments given to the French, Italian and Swedish NCAs throughout the European Economic Area and Switzerland. In October 2015, the Irish NCA closed its investigation on the basis of commitments by Booking.com identical to those given to the French, Italian and Swedish NCAs. In November 2015, the Swiss NCA closed its investigation, prohibiting any reintroduction of Booking.com's old "wide" parity agreements but permitting Booking.com to retain its existing "narrow" parity agreements with accommodations in Switzerland. The Austrian NCA stated in March 2016 that it will close its investigation against Booking.com in light of the move to "narrow" price parity. Nearly all NCAs in the European Economic Area have now closed their investigations following Booking.com's implementation of the commitments in their jurisdictions. Booking.com has also recently resolved the concerns of the Australia NCA based on implementation of the "narrow" price parity clause in Australia. Booking.com is in ongoing discussions with various NCAs in other countries regarding their concerns. The Company is currently unable to predict the long-term impact the implementation of these commitments will have on Booking.com's business, on investigations by other countries, or on industry practice more generally.

On December 23, 2015, the German NCA issued a final decision prohibiting Booking.com's "narrow" price parity agreements with accommodations in Germany. The German NCA did not issue a fine, but has reserved its position regarding an order for disgorgement of profits. Booking.com is appealing the German NCA's decision. Booking.com filed an application to the Dusseldorf Court requesting the Court to order the suspension of the effects of the prohibition decision for the duration of the appeal. This application was rejected by the Dusseldorf Court on May 9, 2016; however, this outcome does not affect Booking.com's main appeal against the German NCA's decision. An Italian hotel association has appealed the Italian NCA's decision to accept the commitments by Booking.com.

A working group of 10 European NCAs (France, Germany, Belgium, Hungary, Ireland, Italy, the Netherlands, Czech Republic, the United Kingdom and Sweden) has been established by the European Commission to monitor the effects of the narrow price parity clause in Europe. The working group will issue questionnaires to market players, including Booking.com and Expedia, about the narrow price parity clause, and is expected to report its results by the end of the year.

The Company is unable to predict how these appeals and the remaining investigations in other countries will ultimately be resolved, or whether further action in Europe will be taken as a result of the working group's findings. 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.

In August 2015, French legislation known as the "Macron Law" became effective. Among other things, the Macron Law makes price parity agreements illegal, including the "narrow" price parity agreements agreed to by the French NCA in April 2015. Legislation prohibiting "narrow" price parity agreements was approved by the Italian Senate in June 2016 and is expected to be passed by the Italian Parliament during summer 2016 and become effective in September 2016. Similar legislation has been proposed in Austria. It is not yet clear how the Macron Law, the Italian law or the proposed Austrian legislation may affect our business in the long term in France, Italy and Austria, respectively.


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Litigation Related to Travel Transaction Taxes

The Company and certain third-party OTCs are currently involved in approximately thirty 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.) related to the priceline.com business. 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 Company believes that the laws at issue generally 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. However, the Company has been involved in this type of litigation for many years, and state and local jurisdictions where these issues have not been resolved could assert that the Company is subject to travel transaction taxes and could seek to collect such taxes, retroactively and/or prospectively. From time to time, the Company has found it expedient 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.  The Company may also settle current or future travel transaction tax claims.

Litigation is subject to uncertainty and there could be adverse developments in these pending or future cases and proceedings. 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 attorneys’ fees and costs. An adverse outcome in one or more of these unresolved proceedings could have an adverse effect on the Company's results of operations or cash flows in any given operating period. However, the Company believes that even if the Company 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 its liquidity or financial condition.

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 $27 million as of June 30, 2016 and December 31, 2015 . 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.

Patent Infringement

On February 9, 2015, International Business Machines Corporation ("IBM") filed a complaint in the U.S. District Court for the District of Delaware against The Priceline Group Inc. and its subsidiaries KAYAK Software Corporation, OpenTable, Inc. and priceline.com LLC (the "Subject Companies"). In the complaint, IBM alleges that the Subject Companies have infringed and continue to willfully infringe certain IBM patents that IBM claims relate to the presentation of applications and advertising in an interactive service, preserving state information in online transactions and single sign-on processes in a computing environment and seeks unspecified damages (including a request that the amount of compensatory damages be trebled), injunctive relief and costs and reasonable attorneys’ fees. The Subject Companies believe the claims to be without merit and are contesting them. The Subject Companies moved the District Court to dismiss the case due to lack of patentable subject matter in the asserted patents, and on March 30, 2016 that motion was denied without prejudice to refiling later in the case. Concurrently with the litigation, the Subject Companies filed four Inter Partes Review ("IRP") petitions and four Covered Business Method petitions for the patents-in-suit with the U.S. Patent and Trademark Office (the "PTAB"). The PTAB denied one of the IPR petitions, and the Subject Companies are awaiting decisions from the PTAB on the other filings. 
 
French and Italian Tax Matters

French tax authorities recently concluded an audit of Booking.com that started in 2013 of the years 2003 through 2012. They are asserting that Booking.com has a permanent establishment in France and are seeking to recover what they claim are unpaid income taxes and value-added taxes. In December 2015, the French tax authorities issued Booking.com assessments for approximately 356 million Euros, the majority of which would represent penalties and interest. The Company believes that Booking.com has been, and continues to be, in compliance with French tax law, and the Company intends to contest the assessments. If the Company is unable to resolve the matter with the French authorities, it would expect to challenge the assessments in the French courts. The Company may be required to pay, upfront, the full amount or a significant part of any such assessments, though any such payment would not constitute an admission by it that it owes the tax. French authorities may decide to also audit subsequent tax years, which could result in additional assessments.

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Italian tax authorities have initiated a process to determine whether Booking.com should be subject to additional tax obligations in Italy. Italian tax authorities may determine that the Company owes additional taxes, and may also assess penalties and interest. The Company believes that it has been, and continues to be, in compliance with Italian tax law.

Other

The Company accrues for certain legal contingencies where it is probable that a loss has been incurred and the amount can be reasonably estimated. Such accrued amounts 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. An estimate for a reasonably possible loss or range of loss in excess of the amount accrued cannot be reasonably made.

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 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 Acquisition

As of June 30, 2016 and December 31, 2015 , the Company's Unaudited Consolidated Balance Sheets include a long-term liability of approximately $9 million for estimated contingent consideration for a business acquisition. The contingent liability is based upon a probability-weighted average of payments for specific performance outcomes from the acquisition date through the performance period, which ends at March 31, 2019. The range of undiscounted outcomes for the contingent consideration is $0 to $90 million .



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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, and the Section entitled " Special Note Regarding Forward-Looking Statements " at the end of Management's Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report.  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. The information on our websites is not a part of this Quarterly Report and is not incorporated herein by reference.

We evaluate our results of operations on both an as-reported and constant-currency basis. We calculate constant currency by converting our current-year period financial results for transactions recorded in currencies other than U.S. Dollars using the corresponding prior-year period monthly average exchange rates rather than the current-year period monthly average exchange rates.
 
Overview
 
We help people experience the world by providing consumers, travel service providers and restaurants with leading travel and restaurant reservation and related services. Through our online travel companies ("OTCs"), we connect consumers wishing to make travel reservations with providers of travel services around the world. We are the leader in the worldwide online accommodation reservation market based on room nights booked. We offer consumers a broad array of 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. We provide restaurants with reservation management services and consumers with the ability to make restaurant reservations at participating restaurants through OpenTable, a leading provider of online restaurant reservations. We refer to our company and all of our subsidiaries and brands, including Booking.com, priceline.com, KAYAK, agoda.com, Rentalcars.com, OpenTable and various smaller brands, 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 five other primary, independently operated brands: Booking.com, KAYAK, agoda.com, Rentalcars.com and OpenTable.  Our principal goal is to help people experience the world by serving both consumers and our travel service provider and restaurant partners with worldwide leadership in online reservation and related 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 internationally-based websites of KAYAK and OpenTable (in each case regardless of where the consumer resides, where the consumer is physically located while using our services or the location of the travel service provider or restaurant). During the year ended December 31, 2015 , our international business (the substantial majority of which is generated by Booking.com) represented approximately 86% of our consolidated gross profit. A significant majority of our gross profit is earned in connection with facilitating accommodation reservations.

We derive substantially all of our gross profit from the following sources:

Commissions earned from facilitating reservations of accommodations, rental cars, cruises and other travel services;
Transaction gross profit and customer processing fees from our accommodation, rental car, airline ticket and vacation package reservation services;
Advertising revenues primarily earned by KAYAK from sending referrals to OTCs and travel service providers, as well as from advertising placement