10-Q 1 trip-10q_20160930.htm FORM 10-Q trip-10q_20160930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

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: 001-35362

 

TRIPADVISOR, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

80-0743202

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

400 1st Avenue

Needham, MA 02494

(Address of principal executive office) (Zip Code)

Registrant’s telephone number, including area code:

(781) 800-5000

 

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      No  

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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

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.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

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

 

Class

 

Outstanding Shares at November 2, 2016

Common Stock, $0.001 par value per share

 

132,901,210 shares

Class B common stock, $0.001 par value per share

 

12,799,999 shares

 

 

 

 


TripAdvisor, Inc.

Form 10-Q

For the Quarter Ended September 30, 2016

Table of Contents

 

 

  

Page

Part I—Financial Information

 

  

 

Item 1. Financial Statements

 

  

 

Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2016 and 2015

  

3

Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2016 and 2015

  

4

Unaudited Condensed Consolidated Balance Sheets at September 30, 2016 and December 31, 2015

  

5

Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2016

  

6

Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015

  

7

Notes to Unaudited Condensed Consolidated Financial Statements

  

8

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

25

Item 3. Quantitative and Qualitative Disclosures about Market Risk

  

42

Item 4. Controls and Procedures

  

42

 

Part II—Other Information

  

 

 

Item 1. Legal Proceedings

  

42

Item 1A. Risk Factors

  

43

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

  

57

Item 3. Defaults Upon Senior Securities

  

58

Item 4. Mine Safety Disclosures

  

58

Item 5. Other Information

  

58

Item 6. Exhibits

  

59

 

Signature

  

60

 

 

 

2


PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

 

TRIPADVISOR, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

 

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenue

 

$

421

 

 

$

415

 

 

$

1,164

 

 

$

1,183

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue (1)

 

 

19

 

 

 

16

 

 

 

55

 

 

 

46

 

Selling and marketing (2)

 

 

210

 

 

 

197

 

 

 

584

 

 

 

546

 

Technology and content (2)

 

 

62

 

 

 

54

 

 

 

185

 

 

 

152

 

General and administrative (2)

 

 

38

 

 

 

37

 

 

 

110

 

 

 

114

 

Depreciation

 

 

18

 

 

 

13

 

 

 

51

 

 

 

42

 

Amortization of intangible assets

 

 

8

 

 

 

10

 

 

 

23

 

 

 

26

 

Total costs and expenses:

 

 

355

 

 

 

327

 

 

 

1,008

 

 

 

926

 

Operating income

 

 

66

 

 

 

88

 

 

 

156

 

 

 

257

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(3

)

 

 

(3

)

 

 

(10

)

 

 

(7

)

Interest income and other, net (Note 14)

 

 

-

 

 

 

13

 

 

 

-

 

 

 

15

 

Total other income (expense), net

 

 

(3

)

 

 

10

 

 

 

(10

)

 

 

8

 

Income before income taxes

 

 

63

 

 

 

98

 

 

 

146

 

 

 

265

 

Provision for income taxes

 

 

(8

)

 

 

(24

)

 

 

(27

)

 

 

(70

)

Net income

 

$

55

 

 

$

74

 

 

$

119

 

 

$

195

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to common stockholders (Note 5):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.38

 

 

$

0.51

 

 

$

0.82

 

 

$

1.35

 

Diluted

 

$

0.37

 

 

$

0.51

 

 

$

0.81

 

 

$

1.34

 

Weighted average common shares outstanding (Note 5):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

146

 

 

 

144

 

 

 

146

 

 

 

144

 

Diluted

 

 

147

 

 

 

146

 

 

 

147

 

 

 

146

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Excludes amortization as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of acquired technology included in amortization of intangible assets

 

$

2

 

 

$

2

 

 

$

5

 

 

$

7

 

Amortization of website development costs included in depreciation

 

 

12

 

 

 

8

 

 

 

33

 

 

 

27

 

 

 

$

14

 

 

$

10

 

 

$

38

 

 

$

34

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2) Includes stock-based compensation expense as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and marketing

 

$

5

 

 

$

4

 

 

$

15

 

 

$

12

 

Technology and content

 

$

11

 

 

$

8

 

 

$

30

 

 

$

20

 

General and administrative

 

$

6

 

 

$

7

 

 

$

19

 

 

$

20

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

 

3


TRIPADVISOR, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net income

 

$

55

 

 

$

74

 

 

$

119

 

 

$

195

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments (1)

 

 

3

 

 

 

(10

)

 

 

4

 

 

 

(29

)

Reclassification adjustment on sale of business included in total other income (expense), net (Note 14)

 

 

-

 

 

 

1

 

 

 

-

 

 

 

1

 

Total other comprehensive income (loss)

 

 

3

 

 

 

(9

)

 

 

4

 

 

 

(28

)

Comprehensive income

 

$

58

 

 

$

65

 

 

$

123

 

 

$

167

 

 

 

(1)

Foreign currency translation adjustments exclude income taxes due to our practice and intention to indefinitely reinvest the earnings of our foreign subsidiaries in those operations.  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

 

4


TRIPADVISOR, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except number of shares and per share amounts)

 

 

 

 

September 30,

 

 

December 31,

 

 

 

 

2016

 

 

 

2015

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents (Note 6)

 

$

611

 

 

$

614

 

Short-term marketable securities (Note 6)

 

 

116

 

 

 

47

 

Accounts receivable, net of allowance for doubtful accounts of $9 and $6, respectively

 

 

221

 

 

 

180

 

Prepaid expenses and other current assets

 

 

18

 

 

 

24

 

Total current assets

 

 

966

 

 

 

865

 

Long-term marketable securities (Note 6)

 

 

29

 

 

 

37

 

Property and equipment, net of accumulated depreciation of $137 and $88, respectively

 

 

262

 

 

 

247

 

Intangible assets, net of accumulated amortization of $77 and $52, respectively

 

 

178

 

 

 

176

 

Goodwill

 

 

744

 

 

 

732

 

Deferred income taxes, net

 

 

44

 

 

 

25

 

Other long-term assets

 

 

54

 

 

 

46

 

TOTAL ASSETS

 

$

2,277

 

 

$

2,128

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

11

 

 

$

10

 

Deferred merchant payables

 

 

152

 

 

 

105

 

Deferred revenue

 

 

69

 

 

 

64

 

Current portion of debt (Note 7)

 

 

76

 

 

 

1

 

Taxes payable

 

 

16

 

 

 

9

 

Accrued expenses and other current liabilities (Note 9)

 

 

126

 

 

 

123

 

Total current liabilities

 

 

450

 

 

 

312

 

Deferred income taxes, net

 

 

20

 

 

 

15

 

Other long-term liabilities

 

 

207

 

 

 

189

 

Long-term debt (Note 7)

 

 

20

 

 

 

200

 

Total Liabilities

 

 

697

 

 

 

716

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value

 

 

-

 

 

 

-

 

Authorized shares: 100,000,000

 

 

 

 

 

 

 

 

Shares issued and outstanding: 0 and 0

 

 

 

 

 

 

 

 

Common stock, $0.001 par value

 

 

-

 

 

 

-

 

Authorized shares: 1,600,000,000

 

 

 

 

 

 

 

 

Shares issued: 134,565,714 and 133,836,242, respectively

 

 

 

 

 

 

 

 

Shares outstanding: 132,822,184 and 132,443,111, respectively

 

 

 

 

 

 

 

 

Class B common stock, $0.001 par value

 

 

-

 

 

 

-

 

Authorized shares: 400,000,000

 

 

 

 

 

 

 

 

Shares issued and outstanding: 12,799,999 and 12,799,999, respectively

 

 

 

 

 

 

 

 

Additional paid-in capital

 

 

808

 

 

 

741

 

Retained earnings

 

 

944

 

 

 

826

 

Accumulated other comprehensive income (loss)

 

 

(59

)

 

 

(63

)

Treasury stock-common stock, at cost, 1,743,530 and 1,393,131 shares, respectively

 

 

(113

)

 

 

(92

)

Total Stockholders’ Equity

 

 

1,580

 

 

 

1,412

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

2,277

 

 

$

2,128

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

5


TRIPADVISOR, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016

(in millions, except number of shares)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class B

 

 

paid-in

 

 

Retained

 

 

comprehensive

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

common stock

 

 

capital

 

 

earnings

 

 

income (loss)

 

 

Treasury Stock

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Total

 

Balance as of December 31, 2015

 

 

133,836,242

 

 

$

-

 

 

 

12,799,999

 

 

$

-

 

 

$

741

 

 

$

826

 

 

$

(63

)

 

 

(1,393,131

)

 

$

(92

)

 

$

1,412

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

119

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

119

 

Cumulative effect adjustment from adoption of ASU 2016-09 (Note 2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4

 

 

 

 

 

 

 

 

 

 

 

4

 

Issuance of common stock related to exercises of options and vesting of RSUs

 

 

729,472

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6

 

Repurchase of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(350,399

)

 

 

(21

)

 

 

(21

)

Withholding taxes on net share settlements of equity awards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

74

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

74

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of September 30, 2016

 

 

134,565,714

 

 

$

-

 

 

 

12,799,999

 

 

$

-

 

 

$

808

 

 

$

944

 

 

$

(59

)

 

 

(1,743,530

)

 

$

(113

)

 

$

1,580

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

6


 

TRIPADVISOR, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

 

 

 

Nine months ended September 30,

 

 

 

2016

 

 

2015

 

Operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

119

 

 

$

195

 

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

 

 

 

 

 

 

 

 

Depreciation of property and equipment, including amortization of internal-use

   software and website development

 

 

51

 

 

 

42

 

Amortization of intangible assets

 

 

23

 

 

 

26

 

Stock-based compensation expense

 

 

64

 

 

 

52

 

Gain on sale of business

 

 

-

 

 

 

(17

)

Deferred tax (benefit) expense

 

 

(14

)

 

 

3

 

Other, net

 

 

5

 

 

 

7

 

Changes in operating assets and liabilities, net of effects from acquisitions and dispositions:

 

 

 

 

 

 

 

 

Accounts receivable, prepaid expenses and other assets

 

 

(40

)

 

 

(75

)

Accounts payable, accrued expenses and other liabilities

 

 

2

 

 

 

24

 

Deferred merchant payables

 

 

42

 

 

 

52

 

Income taxes, net

 

 

19

 

 

 

20

 

Deferred revenue

 

 

6

 

 

 

10

 

Net cash provided by operating activities

 

 

277

 

 

 

339

 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

Capital expenditures, including internal-use software and website development

 

 

(57

)

 

 

(93

)

Acquisitions, net of cash acquired

 

 

(23

)

 

 

(29

)

Proceeds from sale of business, net of cash sold

 

 

-

 

 

 

22

 

Purchases of marketable securities

 

 

(145

)

 

 

(150

)

Sales of marketable securities

 

 

62

 

 

 

72

 

Maturities of marketable securities

 

 

22

 

 

 

52

 

Net cash used in investing activities

 

 

(141

)

 

 

(126

)

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

Repurchase of common stock

 

 

(21

)

 

 

-

 

Proceeds from Chinese credit facilities

 

 

2

 

 

 

4

 

Payments to Chinese credit facilities

 

 

-

 

 

 

(41

)

Principal payments on 2011 credit facility

 

 

-

 

 

 

(300

)

Proceeds from 2015 credit facility, net of financing costs

 

 

10

 

 

 

287

 

Payments to 2015 credit facility

 

 

(190

)

 

 

-

 

Proceeds from 2016 credit facility, net of financing costs

 

 

73

 

 

 

-

 

Proceeds from exercise of stock options

 

 

6

 

 

 

10

 

Payment of withholding taxes on net share settlements of equity awards

 

 

(13

)

 

 

(66

)

Other financing activities, net

 

 

-

 

 

 

13

 

Net cash used in financing activities

 

 

(133

)

 

 

(93

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(6

)

 

 

(8

)

Net (decrease) increase in cash and cash equivalents

 

 

(3

)

 

 

112

 

Cash and cash equivalents at beginning of period

 

 

614

 

 

 

455

 

Cash and cash equivalents at end of period

 

$

611

 

 

$

567

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Capitalization of construction in-process related to build to suit lease obligation

 

$

-

 

 

$

6

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


7


 

TRIPADVISOR, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1: BUSINESS DESCRIPTION AND BASIS OF PRESENTATION

We refer to TripAdvisor, Inc. and our wholly-owned subsidiaries as “TripAdvisor,” “the Company,” “us,” “we” and “our” in these notes to the unaudited condensed consolidated financial statements.

Description of Business

TripAdvisor is an online travel company, empowering users to plan and book the perfect trip. TripAdvisor’s travel platform aggregates reviews and opinions of members about destinations, accommodations, activities and attractions, and restaurants throughout the world so that our users have access to trusted advice wherever their trips take them. Our platform helps users plan their trips with our unique user-generated content and enables users to compare real-time pricing and availability so that they can book hotels, flights, cruises, vacation rentals, activities and attractions, and restaurant reservations.

Our flagship brand is TripAdvisor.  TripAdvisor-branded websites include tripadvisor.com in the United States and localized versions of the website in 47 markets worldwide. In addition to the flagship TripAdvisor brand, we manage and operate the following 24 other media brands, connected by the common goal of providing comprehensive travel resources across the travel sector: www.airfarewatchdog.com, www.bookingbuddy.com, www.citymaps.com, www.cruisecritic.com, www.familyvacationcritic.com, www.flipkey.com, www.gateguru.com, www.holidaylettings.co.uk, www.holidaywatchdog.com, www.housetrip.com, www.independenttraveler.com, www.jetsetter.com, www.thefork.com (including www.lafourchette.com, www.eltenedor.com, www.iens.nl, www.besttables.com, and www.dimmi.com.au), www.niumba.com, www.onetime.com, www.oyster.com, www.seatguru.com, www.smartertravel.com, www.tingo.com, www.travelpod.com, www.tripbod.com, www.vacationhomerentals.com, www.viator.com, and www.virtualtourist.com.

We have two reportable segments: Hotel and Non-Hotel. In the first quarter of 2016, we renamed our “Other” reportable segment “Non-Hotel.” This change had no effect on our consolidated financial statements or to previously reported segment information, as there was no change in the composition of our operating or reportable segments.  Our operating segments are determined based on how our chief operating decision maker manages our business, regularly assesses information and evaluates performance for operating decision-making purposes, including allocation of resources.  For further information on our reportable segments see “Note 12: Segment Information,” in these notes to our unaudited condensed consolidated financial statements.  

We derive the substantial portion of our revenue from our Hotel segment, through the sale of advertising, primarily through click-based advertising and commission-based transactions via our instant booking feature and, to a lesser extent, display-based advertising, subscription-based hotel advertising, room reservations sold through our websites, and content licensing. Our Non-Hotel segment consists of our Vacation Rentals, Restaurants and Attractions businesses. We derive revenue from our Non-Hotel segment from subscription and commission-based transaction offerings from our Vacation Rental business; destination activities primarily sold through Viator; and online restaurant reservations booked primarily through thefork.com.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements present our results of operations, financial position and cash flows on a consolidated basis. The unaudited condensed consolidated financial statements include TripAdvisor, our wholly-owned subsidiaries, and entities we control, or in which we have a variable interest and are the primary beneficiary of expected cash profits or losses. All inter-company accounts and transactions have been eliminated in consolidation.

One of our subsidiaries that operates in China has a variable interest in an affiliated entity in China in order to comply with Chinese laws and regulations, which restrict foreign investment in Internet content provision businesses. Although we do not own the capital stock of this Chinese affiliate, we consolidate its results as we are the primary beneficiary of the cash losses or profits of this variable interest affiliate and have the power to direct the activity of this affiliate. Our variable interest entity is not material for all periods presented.

We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”). In the opinion of management, all adjustments necessary for a fair presentation of the results of the interim period have been included. These adjustments consist of normal recurring items. We prepared the unaudited condensed consolidated financial statements following the requirements of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, we have condensed or omitted certain footnotes or other financial information that are normally required by GAAP for annual financial statements. Our interim unaudited condensed consolidated financial statements are not necessarily indicative of results that may be expected for any other interim period or for the

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full year. These interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2015, previously filed with the SEC.  The condensed consolidated balance sheet as of December 31, 2015 included herein was derived from the audited consolidated financial statements as of that date, but does not include all disclosures including notes required by GAAP.

Reclassifications

Except for the prior period reclassifications noted in our disclosure below in “Note 2— Significant Accounting Policies”, which resulted from our early adoption of ASU 2016-09 during the three months ended September 30, 2016, all other reclassifications made to conform the prior period to the current presentation were not material and had no net effect on our unaudited consolidated financial statements.

Accounting Estimates

We use estimates and assumptions in the preparation of our unaudited condensed consolidated financial statements in accordance with GAAP. Our estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of our unaudited condensed consolidated financial statements. These estimates and assumptions also affect the reported amount of net income or loss during any period. Our actual financial results could differ significantly from these estimates. The significant estimates underlying our unaudited condensed consolidated financial statements include: (i) recognition and recoverability of goodwill, intangible and other long-lived assets; (ii) accounting for income taxes; and (iii) stock-based compensation.

Seasonality

Traveler expenditures in the global travel market tend to follow a seasonal pattern. As such, expenditures by travel advertisers to market to potential travelers, and, therefore, our financial performance, tend to be seasonal as well. As a result, our financial results tend to be seasonally highest in the third quarter of a year, as it is a key period for travel research and trip-taking, compared to the first and fourth quarters which represent seasonal low points. Further significant shifts in our business mix or adverse economic conditions could result in future seasonal patterns that are different from historical trends.

 

NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

New Accounting Pronouncements Not Yet Adopted

In October 2016, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance which requires an entity to recognize at the transaction date the income tax consequences of intercompany asset transfers. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted.  We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.  

In August 2016, the FASB issued new accounting guidance which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. The new guidance specifically addresses the following cash flow topics in an effort to reduce diversity in practice: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon bonds; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted.  We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.  

In February 2016, the FASB issued new accounting guidance on leases that is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. The new guidance will continue to classify leases as either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations.  This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted.  We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.  

In May 2014, the FASB issued new accounting guidance on revenue from contracts with customers.  The new guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This guidance also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs

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incurred to obtain or fulfill a contract.  In March 2016, the FASB issued additional guidance which clarifies principal versus agent considerations and in April 2016, the FASB issued further guidance which clarifies the identification of performance obligations and the implementation guidance for licensing. The updated guidance will replace most existing revenue recognition guidance in GAAP when it becomes effective and permits the use of either a full retrospective approach or a modified retrospective approach, which requires the initial cumulative effect to be recognized at the date of initial application.  This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 and early adoption is permitted for fiscal years beginning after December 15, 2016.  We have not yet selected a transition method and are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.

Recently Adopted Accounting Pronouncements

In March 2016, the FASB issued new accounting guidance on stock compensation, or ASU 2016-09, which changes how companies account for certain aspects of stock-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows.  The new guidance permits recognizing the impact of forfeitures on stock-based compensation as they occur or to recognize stock-based compensation expense net of expected forfeitures, requires companies to record excess tax benefits and tax deficiencies as income tax benefit or expense in the consolidated statement of operations when the awards vest or are settled, and eliminates the requirement to reclassify cash flows related to excess tax benefits from operating activities to financing activities on the consolidated statement of cash flows.  

We elected to early adopt the new guidance in the third quarter of 2016, which requires us to reflect any adjustments as of January 1, 2016, the beginning of the annual period that includes the interim period of adoption. The primary impact of adoption was the recognition of excess tax benefits and tax deficiencies in our provision for income taxes rather than additional paid-in capital for all periods in 2016. There was no impact to our provision for income taxes as previously reported for 2015. Additionally, our consolidated statement of cash flows now present excess tax benefits as an operating activity on a retrospective basis. As a result of the retrospective implementation of this guidance, the impact on the statement of cash flows for the nine months ended September 30, 2015 was an increase of $32 million in cash flows from operating activities with an offsetting reduction in cash flows from financing activities. Finally, we have elected to account for forfeitures as they occur, rather than estimate expected forfeitures. The net cumulative effect of this change was recognized as a $1 million reduction to retained earnings as of January 1, 2016.

Adoption of the new guidance resulted in the recognition of net excess tax expense and benefit in our provision for income taxes rather than additional paid-in capital.  As a result, we recorded $1 million of income tax expense and $2 million of income tax benefit for the three and nine months ended September 30, 2016, respectively, and impacted our previously reported quarterly results for the three months ended March 31, 2016 and June 30, 2016, as follows:

 

 

Three months ended March 31, 2016

 

 

 

As Reported

 

 

As Adjusted (1)(2)

 

 

 

(in millions, except per share data)

 

Consolidated Statement of Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

42

 

 

$

42

 

Provision for income taxes

 

 

(11

)

 

 

(9

)

Net income

 

 

27

 

 

 

29

 

Basic EPS

 

$

0.19

 

 

$

0.20

 

Diluted EPS

 

$

0.18

 

 

$

0.20

 

 

 

 

 

 

 

 

 

 

Consolidated Statement of Cash Flows:

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

120

 

 

$

124

 

Net cash used in financing activities

 

$

(94

)

 

$

(98

)

 

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Three months ended June 30, 2016

 

 

 

As Reported

 

 

As Adjusted (1)

 

 

 

(in millions, except per share data)

 

Consolidated Statement of Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

48

 

 

$

47

 

Provision for income taxes

 

 

(11

)

 

 

(10

)

Net income

 

 

34

 

 

 

34

 

Basic EPS

 

$

0.23

 

 

$

0.23

 

Diluted EPS

 

$

0.23

 

 

$

0.23

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2016

 

 

 

As Reported

 

 

As Adjusted (2)

 

 

 

(in millions)

 

Consolidated Statement of Cash Flows:

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

357

 

 

$

363

 

Net cash used in financing activities

 

$

(123

)

 

$

(129

)

 

(1)

The election to account for forfeitures as they occur did not have a material impact for the three months ended March 31, 2016 and resulted in an increase to stock-based compensation expense of approximately $1 million for the three months ended June 30, 2016.

(2)

Includes the reclassification of cash flows related to excess tax benefits from financing activities to operating activities of $4 million and $2 million for the three months ending March 31, 2016 and June 30, 2016, respectively.

In September 2015, the FASB issued new accounting guidance which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Instead, acquirers must recognize measurement-period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts that would have been recorded in previous periods if the accounting had been completed at the acquisition date. The Company adopted this guidance in the first quarter of 2016. The adoption of this guidance did not have a material impact on our consolidated financial statements and related disclosures.

In April 2015, the FASB issued new accounting guidance which clarifies the accounting for fees paid by a customer in a cloud computing arrangement. This standard clarified whether a customer should account for a cloud computing arrangement as an acquisition of a software license or as a service arrangement by providing characteristics that a cloud computing arrangement must have in order to be accounted for as a software license acquisition. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If the arrangement does not include a software license, the customer should account for a cloud computing arrangement as a service contract.  The company prospectively adopted this guidance in the first quarter of 2016. The adoption of this guidance did not have a material impact on our consolidated financial statements and related disclosures.

There have been no other material changes to our significant accounting policies since December 31, 2015. For additional information about our critical accounting policies and estimates, refer to “Note 2:  Significant Accounting Policies”, in the notes to our consolidated financial statements in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2015.

NOTE 3: ACQUISITIONS

During the nine months ended September 30, 2016, we completed three acquisitions for total purchase price of $27 million.  The Company paid net cash consideration of $22 million, which is net of $3 million of cash acquired, and includes $2 million in future holdback payments. The cash consideration was paid primarily from the U.S. We acquired 100% of the outstanding capital stock of the following companies: Tous Au Restaurant, a leading restaurant event week brand in France, purchased in January 2016; HouseTrip, a European-based vacation rental website, purchased in April 2016; and CityMaps, a social mapping platform, purchased in August 2016.  

These business combinations were accounted for as purchases of businesses under the acquisition method.  The fair value of purchase consideration has been preliminary allocated to tangible and identifiable intangible assets acquired and liabilities assumed, based on their estimated respective fair values on the acquisition date, with the remaining amount recorded to goodwill.  Acquired goodwill represents the premium we paid over the fair value of the net tangible and intangible assets acquired. We paid a premium in each of these transactions for a number of reasons, including expected operational synergies, the assembled workforces, and the future development initiatives of the assembled workforces.  The results of each of these acquired businesses have been included in the

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unaudited condensed consolidated financial statements beginning on the respective acquisition dates. Pro-forma results of operations for these acquisitions have not been presented as the financial impact to our unaudited condensed consolidated financial statements, both individually and in aggregate, is not material.  During the nine months ended September 30, 2016, acquisition-related costs of $1 million were expensed as incurred and recorded in general and administrative expenses on our unaudited condensed consolidated statement of operations.  

The purchase price allocation of our 2016 acquisitions is preliminary and subject to revision as more information becomes available, but in any case will not be revised beyond twelve months after the acquisition date and any change to the fair value of assets acquired or liabilities assumed will lead to a corresponding change to the purchase price allocable to goodwill in the period the adjustment is determined. The primary areas of the purchase price allocation that are not yet finalized are income tax-related balances for all 2016 acquisitions and the estimated fair value of certain identified intangible assets for CityMaps.  

The following table presents the purchase price allocations initially recorded on our unaudited condensed consolidated balance sheet for all 2016 acquisitions (in millions):

 

Total