The Priceline Group
Priceline Group Inc. (Form: 10-Q, Received: 11/07/2016 17:35:47)


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

For the quarterly period ended September 30, 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 October 31, 2016 :
Common Stock, par value $0.008 per share
 
49,345,008
(Class)
 
(Number of Shares)





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

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
2,422,269

 
$
1,477,265

Restricted cash
 
857

 
806

Short-term investments
 
1,956,047

 
1,171,246

Accounts receivable, net of allowance for doubtful accounts of $21,859 and $15,014, respectively
 
1,105,086

 
645,169

Prepaid expenses and other current assets
 
349,323

 
258,751

Total current assets
 
5,833,582

 
3,553,237

Property and equipment, net
 
339,805

 
274,786

Intangible assets, net
 
2,040,213

 
2,167,533

Goodwill
 
2,416,338

 
3,375,000

Long-term investments
 
9,296,417

 
7,931,363

Other assets
 
107,429

 
118,656

Total assets
 
$
20,033,784

 
$
17,420,575

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
494,607

 
$
322,842

Accrued expenses and other current liabilities
 
882,081

 
681,587

Deferred merchant bookings
 
568,304

 
434,881

Convertible debt
 
960,984

 

Total current liabilities
 
2,905,976

 
1,439,310

Deferred income taxes
 
802,433

 
892,576

Other long-term liabilities
 
141,096

 
134,777

Long-term debt
 
6,347,205

 
6,158,443

  Total liabilities
 
10,196,710

 
8,625,106

 
 
 
 
 
Convertible debt
 
34,504

 

 
 
 
 
 
Stockholders' equity:
 
 

 
 

Common stock, $0.008 par value; authorized 1,000,000,000 shares, 62,362,948 and
62,039,516 shares issued, respectively
 
484

 
482

Treasury stock, 13,009,773 and 12,427,945 shares, respectively
 
(6,584,117
)
 
(5,826,640
)
Additional paid-in capital
 
5,410,913

 
5,184,910

Retained earnings
 
10,652,944

 
9,191,865

Accumulated other comprehensive income
 
322,346

 
244,852

  Total stockholders’ equity
 
9,802,570

 
8,795,469

Total liabilities and stockholders’ equity
 
$
20,033,784

 
$
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
September 30,
 
Nine Months Ended
September 30,
 
 
2016
 
2015
 
2016
 
2015
Agency revenues
 
$
2,892,449

 
$
2,345,673

 
$
6,245,439

 
$
5,127,174

Merchant revenues
 
620,290

 
596,503

 
1,608,189

 
1,637,191

Advertising and other revenues
 
177,813

 
160,725

 
540,945

 
459,627

Total revenues
 
3,690,552

 
3,102,901

 
8,394,573

 
7,223,992

Cost of revenues
 
101,489

 
155,619

 
356,242

 
511,568

Gross profit
 
3,589,063

 
2,947,282

 
8,038,331

 
6,712,424

Operating expenses:
 
 
 
 
 
 

 
 

Performance advertising
 
1,040,149

 
784,729

 
2,740,821

 
2,176,963

Brand advertising
 
72,792

 
67,858

 
254,958

 
219,543

Sales and marketing
 
124,865

 
93,069

 
322,710

 
269,536

Personnel, including stock-based compensation of $54,074, $58,274, $175,050 and $172,446, respectively
 
347,610

 
305,329

 
988,615

 
853,469

General and administrative
 
114,586

 
109,706

 
340,273

 
308,829

Information technology
 
36,389

 
28,830

 
104,974

 
81,347

Depreciation and amortization
 
78,745

 
69,054

 
229,328

 
201,730

Impairment of goodwill
 
940,700

 

 
940,700

 

Total operating expenses
 
2,755,836

 
1,458,575

 
5,922,379

 
4,111,417

Operating income
 
833,227

 
1,488,707

 
2,115,952

 
2,601,007

Other income (expense):
 
 
 
 
 
 

 
 

Interest income
 
24,218

 
14,682

 
65,857

 
39,315

Interest expense
 
(55,480
)
 
(41,436
)
 
(152,664
)
 
(116,462
)
Foreign currency transactions and other
 
(4,431
)
 
(5,783
)
 
(15,362
)
 
(12,070
)
Impairment of cost-method investments
 

 

 
(63,208
)
 

Total other expense
 
(35,693
)
 
(32,537
)
 
(165,377
)
 
(89,217
)
Earnings before income taxes
 
797,534

 
1,456,170

 
1,950,575

 
2,511,790

Income tax expense
 
291,517

 
259,438

 
489,496

 
464,699

Net income
 
$
506,017

 
$
1,196,732

 
$
1,461,079

 
$
2,047,091

Net income applicable to common stockholders per basic common share
 
$
10.24

 
$
23.67

 
$
29.49

 
$
39.87

Weighted-average number of basic common shares outstanding
 
49,420

 
50,550

 
49,548

 
51,344

Net income applicable to common stockholders per diluted common share
 
$
10.13

 
$
23.41

 
$
29.19

 
$
39.40

Weighted-average number of diluted common shares outstanding
 
49,975

 
51,130

 
50,048

 
51,952



See Notes to Unaudited Consolidated Financial Statements.


4



The Priceline Group Inc.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2016
 
2015
 
2016
 
2015
Net income
 
$
506,017

 
$
1,196,732

 
$
1,461,079

 
$
2,047,091

Other comprehensive income, net of tax
 
 
 
 
 
 
 
 
Foreign currency translation adjustments  (1)
 
13,539

 
(8,043
)
 
40,626

 
(78,071
)
Unrealized gain (loss) on marketable securities (2)
 
173,365

 
(134,299
)
 
36,868

 
152,508

Comprehensive income
 
$
692,921

 
$
1,054,390

 
$
1,538,573

 
$
2,121,528


(1) Foreign currency translation adjustments include a tax benefit of $12,867 and $47,023 for the three and nine months ended September 30, 2016 , respectively, and a tax benefit of $89 and a tax charge of $41,930 for the three and nine months ended September 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 $1,900 and $36,824 for the three and nine months ended September 30, 2016 , respectively, and net of tax benefits of $2,184 and $3,804 for the three and nine months ended September 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 NINE MONTHS ENDED SEPTEMBER 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
 

 

 

 

 

 
1,461,079

 

 
1,461,079

Foreign currency translation adjustments, net of tax benefit of $47,023
 

 

 

 

 

 

 
40,626

 
40,626

Unrealized gain on marketable securities, net of tax charge of $36,824
 

 

 

 

 

 

 
36,868

 
36,868

Exercise of stock options and vesting of restricted stock units and performance share units
 
323

 
2

 

 

 
13,260

 

 

 
13,262

Repurchase of common stock
 

 

 
(582
)
 
(757,477
)
 

 

 

 
(757,477
)
Stock-based compensation and other stock-based payments
 

 

 

 

 
175,131

 

 

 
175,131

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

 

 

 

 
72,116

 

 

 
72,116

Reclassification adjustment for convertible debt
 
 
 
 
 
 
 
 
 
(34,504
)
 
 
 
 
 
(34,504
)
Balance, September 30, 2016
 
62,363

 
$
484

 
(13,010
)
 
$
(6,584,117
)
 
$
5,410,913

 
$
10,652,944

 
$
322,346

 
$
9,802,570

 

See Notes to Unaudited Consolidated Financial Statements.


6



The Priceline Group Inc.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
 
Nine Months Ended
September 30,
 
 
2016
 
2015
OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
1,461,079

 
$
2,047,091

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

Depreciation
 
101,953

 
73,520

Amortization
 
127,375

 
128,210

Provision for uncollectible accounts, net
 
32,401

 
17,242

Deferred income tax benefit
 
(71,972
)
 
(63,675
)
Stock-based compensation expense and other stock-based payments
 
175,131

 
174,068

Amortization of debt issuance costs
 
5,747

 
5,913

Amortization of debt discount
 
51,512

 
49,868

Impairment of goodwill
 
940,700

 

Impairment of cost-method investments
 
63,208

 

Changes in assets and liabilities:
 
 
 
 

Accounts receivable
 
(470,295
)
 
(289,604
)
Prepaid expenses and other current assets
 
(104,097
)
 
(86,808
)
Accounts payable, accrued expenses and other current liabilities
 
526,414

 
191,881

Other
 
(20,968
)
 
(26,547
)
Net cash provided by operating activities
 
2,818,188

 
2,221,159

 
 
 
 
 
INVESTING ACTIVITIES:
 
 
 
 

Purchase of investments
 
(4,820,737
)
 
(5,597,897
)
Proceeds from sale of investments
 
2,835,570

 
3,180,981

Additions to property and equipment
 
(168,076
)
 
(126,637
)
Acquisitions and other investments, net of cash acquired
 
(811
)
 
(135,664
)
Acquisition of land use rights
 
(48,494
)
 

Proceeds from foreign currency contracts
 

 
453,818

Payments on foreign currency contracts
 

 
(448,640
)
Change in restricted cash
 
(28
)
 

Net cash used in investing activities
 
(2,202,576
)
 
(2,674,039
)
 
 
 
 
 
FINANCING ACTIVITIES:
 
 
 
 
Proceeds from the issuance of long-term debt
 
994,705

 
1,610,449

Payment of debt issuance costs - revolving credit facility
 

 
(4,005
)
Payments related to conversion of senior notes
 

 
(147,629
)
Repurchase of common stock
 
(757,477
)
 
(2,267,384
)
Payments of contingent consideration
 

 
(10,700
)
Proceeds from exercise of stock options
 
13,262

 
19,139

Excess tax benefits on stock-based awards and other equity deductions
 
72,116

 
90,935

Net cash provided by (used in) financing activities
 
322,606

 
(709,195
)
Effect of exchange rate changes on cash and cash equivalents
 
6,786

 
(144,918
)
Net increase (decrease) in cash and cash equivalents
 
945,004

 
(1,306,993
)
Cash and cash equivalents, beginning of period
 
1,477,265

 
3,148,651

Cash and cash equivalents, end of period
 
$
2,422,269

 
$
1,841,658

SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
 
Cash paid during the period for income taxes
 
$
612,612

 
$
499,421

Cash paid during the period for interest
 
$
87,427

 
$
50,400

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 nine months ended September 30, 2015 , this change in presentation, which had no impact on total advertising expenses, operating income or net income, amounted to $16.4 million and $38.2 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 October 2016, the Financial Accounting Standards Board ("FASB") issued new accounting guidance on income tax accounting associated with intra-entity transfers of assets other than inventory. This accounting update, which is part of the FASB's simplification initiative, is intended to reduce diversity in practice and the complexity of tax accounting, particularly for those transfers involving intellectual property. This new guidance requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. For public business entities, this update is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods. The Company expects to early adopt this update in the fourth quarter of 2016 and the adoption of this accounting update will have an immaterial impact to the Company's Consolidated Financial Statements.

8




In June 2016, the 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 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 accounting 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 they occur 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. Under the new accounting standard, all previously unrecognized equity deductions 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. 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. The Company expects to adopt this accounting update in the first quarter of 2017, but may consider adopting it in the fourth quarter of 2016.

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

9



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.
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 $54.1 million and $58.3 million for the three months ended September 30, 2016 and 2015 , respectively, and $175.1 million and $172.4 million for the nine months ended September 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.
 

10



Restricted Stock Units and Performance Share Units

The following table summarizes the activity of restricted stock units and performance share units ("share-based awards") during the nine months ended September 30, 2016
Share-Based Awards
 
Shares
 
Weighted-Average Grant Date Fair Value
Unvested at December 31, 2015
 
637,257

 
 
$
1,070.10

 
Granted
 
193,601

 
 
$
1,304.28

 
Vested
 
(286,354
)
 
 
$
840.45

 
Performance Share Units Adjustment
 
2,865

 
 
$
1,269.87

 
Forfeited
 
(66,232
)
 
 
$
1,276.01

 
Unvested at September 30, 2016
 
481,137

 
 
$
1,281.80

 
 
As of September 30, 2016 , there was $328.9 million of total future compensation cost related to unvested share-based awards to be recognized over a weighted-average period of 1.9 years.
 
During the nine months ended September 30, 2016 , the Company made broad-based grants of 107,866 restricted stock units that generally have a three -year vesting period, 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 $140.9 million based on a weighted-average grant date fair value per share of $1,305.90 .

In addition, during the nine months ended September 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 September 30, 2016 , the estimated number of probable shares to be issued is a total of 79,412 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 179,208 total shares could be issued.  If the minimum performance thresholds are not met, 46,367 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 September 30, 2016 , there were 78,470 unvested 2015 performance share units outstanding, net of performance share units that were forfeited or vested since the grant date. As of September 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 129,623 shares. If the maximum performance thresholds are met at the end of the performance period, a maximum of 193,624 total shares could be issued pursuant to these performance share units. If the minimum performance thresholds are not met, 46,192 shares would be issued at the end of the performance period.
 
2014 Performance Share Units

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

At September 30, 2016 , there were 44,532 unvested 2014 performance share units outstanding, net of performance share units that were forfeited or vested since the grant date. As of September 30, 2016 , the number of shares estimated to be

11



issued pursuant to these performance share units at the end of the performance period is a total of 71,993 shares. If the maximum performance thresholds are met at the end of the performance period, a maximum of 89,828 total shares could be issued pursuant to these performance share units. If the minimum performance thresholds are not met, 34,801 shares would be issued at the end of the performance period.

Stock Options

All outstanding employee stock options were assumed in acquisitions. The following table summarizes the activity for stock options during the nine months ended  September 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
 
(34,523
)
 
 
$
380.49

 
 
 
 
 
Forfeited
 
(1,814
)
 
 
$
230.59

 
 
 
 
 
Balance, September 30, 2016
 
52,767

 
 
$
389.93

 
 
$
57,071

 
4.8
Vested and exercisable as of September 30, 2016
 
49,430

 
 
$
366.11

 
 
$
54,639

 
4.6
Vested and exercisable as of September 30, 2016 and expected to vest thereafter, net of estimated forfeitures
 
52,677

 
 
$
389.98

 
 
$
56,971

 
4.8

The aggregate intrinsic value of employee stock options assumed in acquisitions that were exercised during the nine months ended September 30, 2016 was $31.8 million compared to $42.8 million for the nine months ended September 30, 2015 . During the nine months ended September 30, 2016 , stock options assumed in acquisitions vested for 11,376 shares of common stock with an acquisition-date fair value of $7.1 million , compared to 29,527 shares of common stock with an acquisition-date fair value of $19.9 million for the nine months ended September 30, 2015 .

For the three and nine months ended September 30, 2016 , the Company recorded stock-based compensation expense related to employee stock options of $1.0 million and $6.3 million , respectively, compared to $4.8 million and $19.8 million for the three and nine months ended September 30, 2015 , respectively. As of September 30, 2016 , there was $1.8 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
September 30,
 
Nine Months Ended
September 30,
 
 
2016
 
2015
 
2016
 
2015
Weighted-average number of basic common shares outstanding
 
49,420

 
50,550

 
49,548

 
51,344

Weighted-average dilutive stock options, restricted stock units and performance share units
 
171

 
326

 
212

 
367

Assumed conversion of Convertible Senior Notes
 
384

 
254

 
288

 
241

Weighted-average number of diluted common and common equivalent shares outstanding
 
49,975

 
51,130

 
50,048

 
51,952

Anti-dilutive potential common shares
 
2,472

 
2,627

 
2,538

 
2,641

 
Anti-dilutive potential common shares for the three and nine months ended September 30, 2016 include approximately 1.9 million shares and 2.0 million shares, respectively, 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 during the applicable period.


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 September 30, 2016 (in thousands): 
 
 
Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Fair
  Value
Short-term investments:
 
 
 
 
 
 
 
 
Foreign government securities
 
$
327,812

 
$
112

 
$
(80
)
 
$
327,844

U.S. government securities
 
365,437

 
99

 
(36
)
 
365,500

Corporate debt securities
 
1,251,523

 
1,127

 
(232
)
 
1,252,418

U.S. government agency securities
 
10,285

 
1

 
(1
)
 
10,285

Total short-term investments
 
$
1,955,057

 
$
1,339

 
$
(349
)
 
$
1,956,047

 
 
 
 
 
 
 
 
 
Long-term investments:
 
 
 
 
 
 
 
 
Foreign government securities
 
$
614,328

 
$
4,405

 
$
(97
)
 
$
618,636

U.S. government securities
 
717,041

 
3,481

 
(194
)
 
720,328

Corporate debt securities
 
5,496,709

 
39,567

 
(3,924
)
 
5,532,352

U.S. government agency securities
 
8,995

 
1

 

 
8,996

Ctrip convertible debt securities
 
1,275,000

 
147,127

 
(13,450
)
 
1,408,677

Ctrip equity securities
 
655,311

 
352,117

 

 
1,007,428

Total long-term investments
 
$
8,767,384

 
$
546,698

 
$
(17,665
)
 
$
9,296,417

 
The Company's investment policy seeks to preserve capital and maintain sufficient liquidity to meet operational and other needs of the business.  As of September 30, 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 2.0 years with an average credit quality of A+/A1/A+.

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


13



On August 7, 2014 and May 26, 2015, the Company invested $500 million and $250 million , respectively, in five -year senior convertible notes issued at par value 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. On September 12, 2016, the Company invested $25 million in a Ctrip six -year senior convertible note issued at par value, which included a put option allowing the Company to require prepayment in cash from Ctrip at the end of the third year of the note. The conversion feature associated with this September 2016 Ctrip convertible note met the definition of an embedded derivative (see Note 5). As of September 30, 2016 , the Company had also invested $630.3 million and $25.0 million of its international cash in Ctrip American Depositary Shares ("ADSs") and Ctrip ordinary shares, respectively. 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 September 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 $0.9 million and $0.1 million related to investments for the three and nine months ended September 30, 2016 , respectively, compared to net realized losses of $0.3 million and net realized gains of $3.1 million for the three and nine months ended September 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 September 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 September 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
 
$
991,623

 
$

 
$
991,623

Foreign government securities
 

 
12,987

 
12,987

U.S. government securities
 

 
182,162

 
182,162

Commercial paper
 

 
18,011

 
18,011

Short-term investments:
 
 

 
 

 
 

Foreign government securities
 

 
327,844

 
327,844

U.S. government securities
 

 
365,500

 
365,500

Corporate debt securities
 

 
1,252,418

 
1,252,418

U.S. government agency securities
 

 
10,285

 
10,285

Long-term investments:
 
 
 
 
 
 
Foreign government securities
 

 
618,636

 
618,636

U.S. government securities
 

 
720,328

 
720,328

Corporate debt securities
 

 
5,532,352

 
5,532,352

U.S. government agency securities
 

 
8,996

 
8,996

Ctrip convertible debt securities
 

 
1,408,677

 
1,408,677

Ctrip equity securities
 
1,007,428

 

 
1,007,428

Derivatives:
 
 
 
 
 
 
Foreign exchange derivatives
 

 
248

 
248

Total assets at fair value
 
$
1,999,051

 
$
10,458,444

 
$
12,457,495

 
 
 
Level 1
 
Level 2
 
Total
LIABILITIES:
 
 

 
 

 
 

Foreign exchange derivatives
 
$

 
$
564

 
$
564

 



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

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

Derivatives:
 
 
 
 
 
 
Foreign exchange derivatives
 

 
363

 
363

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 September 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 September 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 liability associated with a business acquisition.
 
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 September 30, 2016 and December 31, 2015 , there were no outstanding derivative contracts related to foreign currency translation risk.  Foreign exchange losses related to these derivatives of $6.4 million and $6.2 million for the three and nine months ended September 30, 2015 , respectively, are recorded in "Foreign currency transactions and other" in the Unaudited Consolidated Statements of Operations. The impact of foreign exchange fluctuations was insignificant for the three and nine months ended September 30, 2016.
 
The Company also enters into foreign currency forward contracts to hedge its exposure to the impact of movements in currency exchange rates on its transactional balances denominated in currencies other than the functional currency. Foreign exchange derivatives outstanding as of September 30, 2016 associated with foreign currency transaction risks resulted in a net liability of $0.3 million , with a liability in the amount of $0.6 million recorded in "Accrued expenses and other current liabilities" and an asset in the amount of $0.3 million recorded in "Prepaid expenses and other current assets" 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 $5.0 million and $21.0 million for the three and nine months ended September 30, 2016 , respectively, compared to foreign exchange gains of $13.4 million and foreign exchange losses of $12.6 million for the three and nine months ended September 30, 2015 , respectively. 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 foreign exchange losses of $3.6 million and net foreign exchange gains $3.4 million for the three months ended September 30, 2016 and 2015 , respectively, and net foreign exchange losses of $10.6 million and $2.9 million for the nine months ended September 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 $34.3 million for the nine months ended September 30, 2016 compared to a net cash outflow of $20.1 million for the nine months ended September 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 September 30, 2016 or December 31, 2015 . A net cash inflow of $5.2 million for the nine months ended September 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.

Embedded Derivative — In September 2016, the Company invested $25 million in a Ctrip convertible note (see Note 4). The Company determined that the conversion option for this note met the definition of an embedded derivative. At

17



September 30, 2016, the embedded derivative had an estimated fair value of $3.1 million and is reported in the balance sheet with its host contract in "Long-term investments." The embedded derivative is bifurcated for measurement purposes only and the mark-to-market for the three and nine months ended September 30, 2016 were insignificant.


6.                                       INTANGIBLE ASSETS AND GOODWILL
 
The Company's intangible assets at September 30, 2016 and December 31, 2015 consisted of the following (in thousands): 
 
September 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
$
822,559

 
$
(267,855
)
 
$
554,704

 
$
824,932

 
$
(227,994
)
 
$
596,938

 
10 - 20 years
 
16 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Technology
113,278

 
(76,662
)
 
36,616

 
112,639

 
(61,404
)
 
51,235

 
1 - 5 years
 
5 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Patents
1,623

 
(1,589
)
 
34

 
1,623

 
(1,562
)
 
61

 
15 years
 
15 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Internet domain names
42,024

 
(25,401
)
 
16,623

 
40,352

 
(20,954
)
 
19,398

 
2 - 20 years
 
8 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trade names
1,669,250

 
(242,399
)
 
1,426,851

 
1,671,356

 
(183,101
)
 
1,488,255

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

 
(16,515
)
 
5,385

 
22,847

 
(11,201
)
 
11,646

 
3 - 4 years
 
3 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other

 

 

 
135

 
(135
)
 

 

 

Total intangible assets
$
2,670,634

 
$
(630,421
)
 
$
2,040,213

 
$
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 $42.0 million and $127.4 million for the three and nine months ended September 30, 2016 , respectively, and $42.2 million and $128.2 million for the three and nine months ended September 30, 2015 , respectively.


18



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
$
41,964

2017
160,768

2018
142,125

2019
131,788

2020
124,689

2021
119,710

Thereafter
1,319,169

 
$
2,040,213

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

Impairment
(940,700
)
Currency translation adjustments
(17,962
)
Balance at September 30, 2016
$
2,416,338

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

As of September 30, 2016, the Company performed its annual goodwill impairment testing. Other than OpenTable, the fair values of the Company’s reporting units substantially exceeded their respective carrying values. For OpenTable, the Company recognized a non-cash impairment charge for goodwill of $940.7 million , which is not tax deductible, resulting in an adjusted carrying value of OpenTable goodwill of $580.1 million as of September 30, 2016. The goodwill impairment charge was included in operating expenses in the Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2016. OpenTable’s estimated fair value was determined using a combination of standard valuation techniques, including an income approach (discounted cash flows) and market approaches (EBITDA multiples of comparable publicly-traded companies and precedent transactions). Also, the Company tested the recoverability of OpenTable’s other long-lived assets and concluded there was no impairment as of September 30, 2016.

The goodwill impairment is primarily the result of a change in OpenTable’s business strategy that occurred during the third quarter 2016. OpenTable’s post-acquisition strategy was premised on significant and rapid investment in international expansion and various other growth initiatives, resulting in near-term reduced earnings and profit margins but with the goal of achieving significantly increased revenues and profitability in the long term. This strategy has resulted in limited progress to date. As a result, while OpenTable intends to continue to pursue and invest in international expansion and its other growth initiatives, it intends to do so in a more measured and deliberate manner. This change in strategy resulted in OpenTable updating its forecasted financial results to reflect (a) a material reduction in forecasted long-term financial results from these initiatives, partially offset by (b) improved earnings and profit margins in the near term as a result of the reduced investments. Based on the updated forecast, the Company has estimated a significant reduction in the fair value of the OpenTable business and recorded the goodwill impairment discussed above.


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% .


19



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. The Company paid $4.0 million in debt issuance costs related to the facility during the nine months ended September 30, 2015. As of September 30, 2016 and December 31, 2015 , there were no borrowings outstanding under the facility. As of September 30, 2016 and December 31, 2015 , there were approximately $3.8 million and $2.5 million of letters of credit issued under the facility, respectively.

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

 
$
(39,016
)
 
$
960,984

 
 
 
 
 
 
 
Long-term debt:
 
 
 
 
 
 
0.35% Convertible Senior Notes due June 2020
 
1,000,000

 
(96,485
)
 
903,515

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

 
(109,818
)
 
890,182

2.15% (€750 Million) Senior Notes due November 2022
 
842,850

 
(5,699
)
 
837,151

2.375% (€1 Billion) Senior Notes due September 2024
 
1,123,800

 
(13,781
)
 
1,110,019

3.65% Senior Notes due March 2025
 
500,000

 
(3,835
)
 
496,165

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

 
(7,814
)
 
992,186

1.8% (€1 Billion) Senior Notes due March 2027
 
1,123,800

 
(5,811
)
 
1,117,989

Total long-term debt
 
$
6,590,450

 
$
(243,243
)
 
$
6,347,207

 
Outstanding 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 September 30, 2016 , the contingent conversion threshold on the 2018 Notes (as defined below) was exceeded. Therefore, the 2018 Notes are currently convertible at the option of the holders, and accordingly the Company reported the carrying value of the 2018 Notes as a current liability in the Unaudited Consolidated Balance Sheet as of September 30, 2016 . Since these notes are convertible at the option of the holders and the principal amount is required to be paid in cash, the Company reclassified the unamortized debt discount for the 2018 Notes in the amount of $34.5 million before tax as of September 30, 2016 from additional paid-in-capital to convertible debt in the mezzanine section in the Company's Unaudited Consolidated Balance Sheet. The contingent conversion threshold on the 2018 Notes was not exceeded at December 31, 2015 , therefore, the 2018 Notes were reported as non-current liabilities in the Unaudited Consolidated Balance Sheet. The determination of whether or not the 2018 Notes are convertible is performed on a quarterly basis. Consequently, the 2018 Notes may not be convertible in future quarters, and therefore, may again be classified as long-term debt if the contingent conversion threshold is not met in such quarters.

20




The contingent conversion thresholds on the 2020 Notes (as defined below) and the 2021 Notes (as defined below) were not exceeded at September 30, 2016 and December 31, 2015 , and therefore these notes were reported as non-current liabilities in the Unaudited Consolidated Balance Sheets.

Fair Value of Debt

As of September 30, 2016 and December 31, 2015 , the estimated fair value of all outstanding Senior Notes was approximately $8.8 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

21



certain conditions, into the Company's common stock at a conversion price of approximately $944.61 per share. The 2018 Notes are convertible, at the option of the holder, prior to March 15, 2018, upon the occurrence of specific events, including but not limited to a change in control, or if the closing sales price of the Company's common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is more than 150% of the 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 was 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 was 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 was recorded in additional paid-in capital related to the 2018 Notes at March 31, 2012.

For the three months ended September 30, 2016 and 2015 , the Company recognized interest expense of $23.7 million and $23.1 million , respectively, related to convertible notes.  Interest expense related to convertible notes for the three months ended September 30, 2016 and 2015 was comprised of $5.6 million for the contractual coupon interest for each period, $16.9 million and $16.4 million , respectively, related to the amortization of debt discount, and $1.2 million and $1.1 million , respectively, related to the amortization of debt issuance costs.  For the three months ended September 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 September 30, 2016 and 2015 .

For the nine months ended September 30, 2016 and 2015 , the Company recognized interest expense of $70.6 million and $69.4 million , respectively, related to convertible notes.  Interest expense related to convertible notes for the nine months ended September 30, 2016 and 2015 was comprised of $16.8 million and $17.0 million , respectively, for the contractual coupon interest, $50.4 million and $49.1 million , respectively, related to the amortization of debt discount, and $3.4 million and $3.3 million , respectively, related to the amortization of debt issuance costs.  For the nine months ended September 30, 2016 and 2015 , included in the amortization of debt discount mentioned above was $2.1 million and $2.0 million , respectively, of original issuance discount related to the 2020 Notes. The remaining period for amortization of debt discount and debt issuance costs is the period until the stated maturity dates for the respective debt. The weighted-average effective interest rate was 3.4% for both the nine months ended September 30, 2016 and 2015 .

22




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 $6.2 million in debt issuance costs during the nine months ended September 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.

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. 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. 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 September 30, 2016 and 2015 , the Company recognized interest expense of $30.8 million and $16.8 million , respectively, related to other long-term debt which was comprised of $29.7 million and $16.2 million , respectively, for the contractual coupon interest, $0.4 million and $0.2 million , respectively, related to the amortization of debt discount and $0.7 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 nine months ended September 30, 2016 and 2015 , the Company recognized interest expense of $77.7 million and $43.0 million , respectively, related to other long-term debt which was comprised of $74.8 million and $41.3 million , respectively, for the contractual coupon interest, $1.1 million and $0.7 million , respectively, related to the amortization of debt discount and $1.8 million and $1.0 million , respectively, related to the amortization of debt issuance costs. The remaining period for amortization of debt discount and debt issuance costs is the period until the stated maturity dates for the respective debt.


23



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 September 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. As of September 30, 2016 , the Company had a remaining authorization of $2.4 billion to purchase its common stock.

In the nine months ended September 30, 2016 , the Company repurchased 459,694 shares of its common stock in the open market for an aggregate cost of $598.0 million . The Company may make additional repurchases of shares under its stock repurchase program, 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 122,134 shares and 62,463 shares at aggregate costs of $159.5 million and $77.4 million in the nine months ended September 30, 2016 and 2015 , respectively, to satisfy employee withholding taxes related to stock-based compensation.
 
As of September 30, 2016 , there were 13,009,773 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, which is based upon the applicable tax rates and tax laws of the countries in which the income is generated.  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 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.
 
The Company’s effective tax rate for the three and nine months ended September 30, 2016 was 36.6% and 25.1% , respectively, compared to 17.8% and 18.5% for the three and nine months ended September 30, 2015, respectively. The 2016 effective tax rate differs from the U.S. federal statutory tax rate of 35% , due to the non-deductible impairment charge for goodwill of $940.7 million related to OpenTable recognized in the third quarter of 2016 (see Note 6), the impairment of the Company's cost-method investment in Hotel Urbano recognized in the first half of 2016 (see Note 4) and U.S. state income taxes, offset by lower international tax rates. The 2015 effective tax rate differed from the U.S. federal statutory rate as a result of lower international tax rates, partially offset by U.S. state income taxes.

The non-deductible impairment charges referred to above have caused the effective tax rate to be higher for the three and nine months ended September 30, 2016 , compared to the three and nine months ended September 30, 2015. This increase has been partially offset by the favorable impact of an increased proportion of the Company’s income being taxed at lower international tax rates due to the growth of the Company’s international businesses. In addition, the increase for the nine months ended September 30, 2016, was also partially offset by tax benefits recorded in the second quarter of 2016 arising from U.S. state tax law changes resulting in a net decrease to deferred tax liabilities, mostly associated with acquired intangible assets.

During the three and nine months ended September 30, 2016 and 2015, a substantial majority of the Company's income was generated in the Netherlands. According to Dutch corporate income tax law, income generated from qualifying innovative activities is taxed at a rate of 5% ("Innovation Box Tax") rather than the Dutch statutory rate of 25% . A portion of Booking.com's earnings during the three and nine months ended September 30, 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.


24



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 dependent upon the Company's ability to generate sufficient future taxable income in the United States. Until the U.S. NOLs are utilized or expire, most of the Company’s U.S. income will not be subject to a cash tax liability, other than U.S. federal alternative minimum tax and state income taxes. However, the Company expects to pay foreign taxes on its international income except in countries where the Company has NOLs to offset taxable income.

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 September 30, 2016 , no provision had been made for U.S. taxes on cumulative undistributed international earnings.  If that intention changes and the Company decides to repatriate undistributed international earnings to the United States, whether due to cash needs in the United States or otherwise, the Company would incur related U.S. income tax expense, but would only make income tax payments when it repatriates the 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 September 30, 2016 and December 31, 2015 (in thousands): 
 
 
September 30,
2016
 
December 31,
2015
Foreign currency translation adjustments, net of tax (1)
 
$
(176,637
)
 
$
(217,263
)
Net unrealized gain on marketable securities, net of tax (2)
 
498,983

 
462,115

Accumulated other comprehensive income
 
$
322,346

 
$
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 September 30, 2016 and December 31, 2015 (see Note 5 ).

Foreign currency translation adjustments, net of tax, include foreign currency transaction gains of $72.5 million after tax ( $119.2 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 September 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 September 30, 2016 were $529.8 million , of which unrealized gains of $406.4 million were exempt from tax in the Netherlands and unrealized gains of $123.4 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

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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 has issued questionnaires to online travel agencies, including Booking.com and Expedia, meta-search sites and hotels about the narrow price parity clause, and is expected to report its results by the end of the year. Separately, the French NCA is conducting a review of the effect of the narrow price parity clause, and is expected to report on its findings in early 2017.