10-Q 1 trip-10q_20190331.htm 10-Q trip-10q_20190331.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 March 31, 2019

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 every Interactive Data File required to be submitted 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 such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

  

Small reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common stock

TRIP

NASDAQ

 

Class

 

Outstanding Shares at May 1, 2019

Common Stock, $0.001 par value per share

 

126,229,018 shares

Class B common stock, $0.001 par value per share

 

12,799,999 shares

 

 

 

 


 

TripAdvisor, Inc.

Form 10-Q

For the Quarter Ended March 31, 2019

Table of Contents

 

 

  

Page

Part I—Financial Information

 

  

 

Item 1. Unaudited Condensed Financial Statements

 

  

 

Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018

  

3

Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2019 and 2018

  

4

Unaudited Condensed Consolidated Balance Sheets at March 31, 2019 and December 31, 2018

  

5

Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2019 and 2018

  

6

Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018

  

8

Notes to Unaudited Condensed Consolidated Financial Statements

  

9

 

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

  

29

Item 3. Quantitative and Qualitative Disclosures about Market Risk

  

43

Item 4. Controls and Procedures

  

43

 

Part II—Other Information

  

 

 

Item 1. Legal Proceedings

  

44

Item 1A. Risk Factors

  

44

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

  

63

Item 3. Defaults Upon Senior Securities

  

64

Item 4. Mine Safety Disclosures

  

64

Item 5. Other Information

  

64

Item 6. Exhibits

  

64

Signatures

  

65

 

 

 

2


 

PART I – FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

 

TRIPADVISOR, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

 

 

 

Three months ended March 31,

 

 

 

2019

 

 

2018

 

Revenue (Note 3)

 

$

376

 

 

$

378

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

Cost of revenue (1)

 

 

21

 

 

 

20

 

Selling and marketing (2)

 

 

178

 

 

 

198

 

Technology and content (2)

 

 

73

 

 

 

67

 

General and administrative (2)

 

 

42

 

 

 

42

 

Depreciation

 

 

23

 

 

 

20

 

Amortization of intangible assets

 

 

8

 

 

 

8

 

Total costs and expenses:

 

 

345

 

 

 

355

 

Operating income

 

 

31

 

 

 

23

 

Other income (expense):

 

 

 

 

 

 

 

 

Interest expense

 

 

(2

)

 

 

(3

)

Interest income and other, net

 

 

4

 

 

 

1

 

Total other income (expense), net

 

 

2

 

 

 

(2

)

Income before income taxes

 

 

33

 

 

 

21

 

Provision for income taxes

 

 

(7

)

 

 

(16

)

Net income

 

$

26

 

 

$

5

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to common stockholders (Note 4):

 

 

 

 

 

 

 

 

Basic

 

$

0.19

 

 

$

0.04

 

Diluted

 

$

0.18

 

 

$

0.04

 

Weighted average common shares outstanding (Note 4):

 

 

 

 

 

 

 

 

Basic

 

 

138

 

 

 

139

 

Diluted

 

 

141

 

 

 

140

 

 

 

 

 

 

 

 

 

 

(1) Excludes amortization as follows:

 

 

 

 

 

 

 

 

Amortization of acquired technology included in amortization of intangible assets

 

$

2

 

 

$

2

 

Amortization of website development costs included in depreciation

 

 

16

 

 

 

15

 

 

 

$

18

 

 

$

17

 

 

 

 

 

 

 

 

 

 

(2) Includes stock-based compensation expense as follows (Note 5):

 

 

 

 

 

 

 

 

Selling and marketing

 

$

5

 

 

$

6

 

Technology and content

 

$

12

 

 

$

12

 

General and administrative

 

$

10

 

 

$

11

 

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

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Net income

 

$

26

 

 

$

5

 

Other comprehensive income:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments (1)

 

 

(2

)

 

 

8

 

Total other comprehensive (loss) income

 

 

(2

)

 

 

8

 

Comprehensive income

 

$

24

 

 

$

13

 

 

 

 

(1)

Foreign currency translation adjustments exclude income taxes due to our 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)

 

 

 

 

March 31,

 

 

December 31,

 

 

 

 

2019

 

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents (Note 6)

 

$

771

 

 

$

655

 

Short-term marketable securities (Note 6)

 

 

40

 

 

 

15

 

Accounts receivable and contract assets, net of allowance for doubtful accounts of $23 and $21, respectively (Note 3)

 

 

236

 

 

 

212

 

Prepaid expenses and other current assets

 

 

35

 

 

 

33

 

Total current assets

 

 

1,082

 

 

 

915

 

Property and equipment, net (Note 7)

 

 

257

 

 

 

253

 

Operating lease right-of-use assets (Note 2)

 

 

73

 

 

 

 

Intangible assets, net of accumulated amortization of $147 and $140, respectively

 

 

109

 

 

 

118

 

Goodwill (Note 8)

 

 

754

 

 

 

756

 

Deferred income taxes, net

 

 

20

 

 

 

27

 

Other long-term assets

 

 

100

 

 

 

98

 

TOTAL ASSETS

 

$

2,395

 

 

$

2,167

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

11

 

 

$

15

 

Deferred merchant payables

 

 

263

 

 

 

164

 

Deferred revenue (Note 3)

 

 

101

 

 

 

63

 

Accrued expenses and other current liabilities

 

 

155

 

 

 

151

 

Total current liabilities

 

 

530

 

 

 

393

 

Deferred income taxes, net

 

 

22

 

 

 

21

 

Other long-term liabilities (Note 11)

 

 

336

 

 

 

282

 

Total Liabilities

 

 

888

 

 

 

696

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

Stockholders’ equity: (Note 13)

 

 

 

 

 

 

 

 

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: 138,256,630 and 137,158,010, respectively

 

 

 

 

 

 

 

 

Shares outstanding: 126,199,942 and 125,101,322, 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

 

 

1,046

 

 

 

1,037

 

Retained earnings

 

 

1,072

 

 

 

1,043

 

Accumulated other comprehensive loss

 

 

(64

)

 

 

(62

)

Treasury stock-common stock, at cost, 12,056,688 and 12,056,688 shares, respectively

 

 

(547

)

 

 

(547

)

Total Stockholders’ Equity

 

 

1,507

 

 

 

1,471

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

2,395

 

 

$

2,167

 

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

(in millions, except number of shares)

 

 

 

 

Three months ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class B

 

 

Additional

 

 

 

 

 

 

other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

common stock

 

 

paid-in

 

 

Retained

 

 

comprehensive

 

 

Treasury Stock

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

capital

 

 

earnings

 

 

loss

 

 

Shares

 

 

Amount

 

 

Total

 

Balance as of December 31, 2018

 

 

137,158,010

 

 

$

 

 

 

12,799,999

 

 

$

 

 

$

1,037

 

 

$

1,043

 

 

$

(62

)

 

 

(12,056,688

)

 

$

(547

)

 

$

1,471

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26

 

Cumulative effect adjustment from adoption of new accounting guidance (Note 2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

 

(2

)

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

 

 

1,098,620

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Withholding taxes on net share settlements of equity awards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32

 

Balance as of March 31, 2019

 

 

138,256,630

 

 

$

 

 

 

12,799,999

 

 

$

 

 

$

1,046

 

 

$

1,072

 

 

$

(64

)

 

 

(12,056,688

)

 

$

(547

)

 

$

1,507

 

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

6


 

TRIPADVISOR, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(in millions, except number of shares)

 

 

 

Three months ended March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class B

 

 

Additional

 

 

 

 

 

 

other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

common stock

 

 

paid-in

 

 

Retained

 

 

comprehensive

 

 

Treasury Stock

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

capital

 

 

earnings

 

 

income (loss)

 

 

Shares

 

 

Amount

 

 

Total

 

Balance as of December 31, 2017

 

 

135,617,263

 

 

$

 

 

 

12,799,999

 

 

$

 

 

$

926

 

 

$

926

 

 

$

(42

)

 

 

(9,474,490

)

 

$

(447

)

 

$

1,363

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5

 

Cumulative effect adjustment from adoption of new accounting guidance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8

 

 

 

 

 

 

 

 

 

 

 

8

 

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

 

 

779,609

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase of common stock

(Note 13)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(252,650

)

 

 

(10

)

 

 

(10

)

Withholding taxes on net share settlements of equity awards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32

 

Balance as of March 31, 2018

 

 

136,396,872

 

 

$

 

 

 

12,799,999

 

 

$

 

 

$

946

 

 

$

935

 

 

$

(34

)

 

 

(9,727,140

)

 

$

(457

)

 

$

1,390

 

 

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

 

 

 

7


 

TRIPADVISOR, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

 

 

 

Three months ended March 31,

 

 

 

2019

 

 

2018

 

Operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

26

 

 

$

5

 

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

 

 

23

 

 

 

20

 

Amortization of intangible assets

 

 

8

 

 

 

8

 

Stock-based compensation expense

 

 

27

 

 

 

29

 

Deferred tax expense

 

 

9

 

 

 

 

Other, net

 

 

5

 

 

 

 

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

 

 

 

 

 

 

 

 

Accounts receivable, contract assets, prepaid expenses and other assets

 

 

(27

)

 

 

(55

)

Accounts payable, accrued expenses and other liabilities

 

 

(18

)

 

 

 

Deferred merchant payables

 

 

99

 

 

 

110

 

Income tax receivables/payables, net

 

 

(8

)

 

 

15

 

Deferred revenue

 

 

38

 

 

 

42

 

Net cash provided by operating activities

 

 

182

 

 

 

174

 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

Capital expenditures, including internal-use software and website development

 

 

(17

)

 

 

(15

)

Purchases of marketable securities

 

 

(40

)

 

 

(1

)

Sales of marketable securities

 

 

 

 

 

41

 

Maturities of marketable securities

 

 

15

 

 

 

3

 

Net cash (used in) provided by investing activities

 

 

(42

)

 

 

28

 

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

Repurchase of common stock

 

 

 

 

 

(4

)

Proceeds from 2015 credit facility

 

 

 

 

 

5

 

Payments to 2015 credit facility

 

 

 

 

 

(235

)

Payment of withholding taxes on net share settlements of equity awards

 

 

(23

)

 

 

(12

)

Other financing activities, net

 

 

(1

)

 

 

 

Net cash used in financing activities

 

 

(24

)

 

 

(246

)

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

 

 

 

 

6

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

116

 

 

 

(38

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

655

 

 

 

673

 

Cash, cash equivalents and restricted cash at end of period

 

$

771

 

 

$

635

 

 

 

 

 

 

 

 

 

 

 

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

 


8


 

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 and our mission is to help people around the world plan, book and experience the perfect trip. We seek to achieve our mission by providing consumers and travel partners a global platform of rich content, price comparison tools and online reservation and related services for destinations, accommodations, travel activities and experiences, and restaurants.

TripAdvisor, Inc., by and through its subsidiaries, owns and operates a portfolio of leading online travel brands. Our flagship brand is TripAdvisor. TripAdvisor-branded websites include tripadvisor.com in the United States and localized versions of the website in 48 markets and 28 languages worldwide. TripAdvisor features approximately 760 million reviews and opinions on approximately 8.3 million places to stay, places to eat and things to do – including 1.3 million hotels, inns, B&Bs and specialty lodging, 914,000 rental properties, 5.0 million restaurants and 1.1 million travel activities and experiences worldwide. We also enable consumers to compare prices and book a number of these travel experiences on either a TripAdvisor website or mobile application (“mobile app”), or on the website or mobile app of one of our travel partners. In addition to the flagship TripAdvisor brand, we manage and operate the following other travel media brands: www.airfarewatchdog.com, www.bokun.io, www.bookingbuddy.com, www.cruisecritic.com, www.familyvacationcritic.com, www.flipkey.com, www.thefork.com (including www.lafourchette.com, www.eltenedor.com, and www.restorando.com), www.holidaylettings.co.uk, www.holidaywatchdog.com, www.housetrip.com, www.jetsetter.com, www.niumba.com, www.onetime.com, www.oyster.com, www.seatguru.com, www.smartertravel.com, www.tingo.com, www.vacationhomerentals.com, and www.viator.com.

During the first quarter of 2019, as part of our continuous review of the business, we evaluated our operations and realigned the reportable segment information which our chief operating decision maker, or CODM, regularly assesses to evaluate performance for operating decision-making purposes, including evaluation and allocation of resources. The CODM for the Company is our Chief Executive Officer. The revised segment reporting structure includes the following reportable segments: (1) Hotels, Media & Platform; and (2) Experiences & Dining. For further information on our segments, including the change in segments, and principal revenue streams within these segments refer to “Note 3: Revenue Recognition” and “Note 15: Segment Information,” in these notes to our unaudited condensed consolidated financial statements. All prior period segment disclosure information has been reclassified to conform to the current reporting structure in this Form 10-Q. These reclassifications had no effect on our unaudited condensed consolidated financial statements in any period. 

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 variable interests in affiliated entities 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 these Chinese affiliates, we consolidate their results as we are the primary beneficiary of the cash losses or profits of these variable interest affiliates and have the power to direct the activity of these affiliates. Our variable interest entities’ financials were not material for all periods presented.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“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. 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 condensed or omitted certain footnotes or other financial information that are normally required by GAAP for annual financial statements. Additionally, certain prior period amounts have been reclassified for comparability with the current period presentation. 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 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, 2018, previously filed with the SEC. The

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unaudited condensed consolidated balance sheet as of December 31, 2018 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.

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, definite-lived intangibles and other long-lived assets; and (ii) accounting for income taxes.

Seasonality

Global travel market expenditures tend to follow a seasonal pattern. Correspondingly, advertising investments made by travel partners and, therefore, our revenue and profits, also tend to follow a seasonal pattern. Our financial performance tends to be seasonally highest in the second and third quarters of a given year, which includes the seasonal peak in consumer demand, traveler hotel and rental stays, and travel activities and experiences taken, compared to the first and fourth quarters, which represent seasonal low points. 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 August 2018, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance which require a customer in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract to follow the internal-use software guidance to determine which implementation costs to capitalize as assets or expense as incurred. The accounting for the cost of the hosting component of the arrangement (i.e., service costs the customer pays for the cloud computing service) is not affected by this new guidance. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted, including adoption in any interim period. Entities have the option to apply the guidance retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are currently considering our timing of adoption and the transition application method. We are also in the process of evaluating the impact of adopting this guidance on our consolidated financial statements and related disclosures.

 

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 guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted, including interim periods within those fiscal years beginning after December 15, 2018. We are currently considering our timing of adoption and in the process of evaluating the impact of adopting this guidance on our consolidated financial statements and related disclosures.

 

Recently Adopted Accounting Pronouncements

 

In February 2016, the FASB issued new guidance which revises the accounting for leases (“ASC 842”). The new guidance requires entities that lease assets to recognize right-of-use (ROU) assets representing its right to use the underlying asset for the lease term and lease liabilities related to the rights and obligations created by those leases on the balance sheet regardless of whether they are classified as finance or operating leases, with classification affecting the pattern and presentation of expenses and cash flows on

10


 

our consolidated financial statements. In addition, new disclosures are required to meet the objective of enabling users of the financial statements to better understand the amount, timing, and uncertainty of cash flows arising from leases. We adopted this guidance on January 1, 2019 and elected the modified retrospective transition method that allowed for a cumulative-effect adjustment in the period of adoption. Financial results for reporting periods beginning after January 1, 2019 are presented under the new guidance, while prior period amounts were not adjusted and continue to be reported under the accounting standards in effect for those periods. The Company has also updated its accounting policies to reflect the new guidance and have implemented lease accounting software to support its accounting process, financial reporting, and new financial disclosure requirements.

We elected the following practical expedients that are available in transition upon the adoption of ASC 842 and for the Company’s ongoing accounting policy: 1) the “practical expedients package of three”, which allows us to not reassess the following:  a) whether any expired or existing contracts are or contain a lease as of the adoption date, b) the lease classification for any expired or existing leases as of the adoption date; and c) the accounting treatment for initial direct costs for existing leases as of the adoption date, 2) the “short-term lease recognition exemption”, which allows entities to forego recognition of ROU assets and lease liabilities for leases with a lease term of twelve months or less and which also do not include an option to renew the lease term that the entity is reasonably certain to exercise, 3) elect by asset class as an accounting policy, to combine  lease and non-lease components as a single component and subsequently account for the combined single component as the lease component; and 4) apply the portfolio approach to similar types of leases where the Company does not reasonably expect the outcome to differ materially from applying the new guidance to individual leases.

The adoption of ASC 842 did not have a material impact to our unaudited condensed consolidated statement of operations or unaudited condensed consolidated statement of cash flows during the three months ended March 31, 2019. The effect of the adoption on our unaudited condensed consolidated balance sheet as of January 1, 2019 for the adoption of ASC 842 is as follows:

 

 

 

Balance at December 31, 2018

 

 

Adjustments due to ASC 842

 

 

Balance at January 1, 2019

 

 

 

(in millions)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

$

33

 

 

$

(3

)

 

$

30

 

Property and equipment, net (1)

 

 

253

 

 

 

8

 

 

 

261

 

Operating lease right-of-use assets (1)

 

 

 

 

 

75

 

 

 

75

 

Deferred income taxes, net

 

 

27

 

 

 

(1

)

 

 

26

 

Other long-term assets

 

 

98

 

 

 

(2

)

 

 

96

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accrued expenses and other current liabilities (2)

 

 

151

 

 

 

21

 

 

 

172

 

Other long-term liabilities (1)

 

 

282

 

 

 

53

 

 

 

335

 

Retained earnings (3)

 

$

1,043

 

 

$

3

 

 

$

1,046

 

 

(1)

Refer to the below discussion regarding the transition accounting for operating and finance leases upon adoption of ASC 842.

 

(2)

This adjustment primarily represents the short-term portion of operating and finance lease obligations recorded upon adoption of ASC 842, discussed below.

 

(3)

Represents a cumulative-effect adjustment of $3 million, net of tax to our beginning balance of retained earnings recorded upon adoption of ASC 842.

We lease office space in a number of countries around the world under non-cancelable lease agreements. Our corporate headquarters lease (“Headquarters Lease”) is our most significant office space lease. The Company has also entered into data center and certain equipment, such as network equipment, and other leases, which are not material to our unaudited condensed consolidated financial statements. We determine whether a contract is or contains a lease at inception of a contract. We define a lease as a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. Control over the use of the identified asset means that we have both the right to obtain substantially all of the economic benefits from the use of the asset and the right to direct the use of the asset.

Our lease contracts contain both lease and non-lease components. We account separately for the lease and non-lease components of office space leases and certain other leases, such as data center leases. We allocate the consideration in the contract to the lease and non-lease components based on each component’s relative standalone price. We determine standalone prices for the lease components based on the prices for which other lessors lease similar assets on a standalone basis. We determine standalone prices for the non-lease

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component based on the prices that other suppliers charge for services for similar assets on a standalone basis. If observable standalone prices are not readily available, we estimate the standalone prices based on other available observable information. However, for certain categories of equipment leases, such as network equipment and others, we account for the lease and non-lease components as a single lease component. Additionally, for certain equipment leases that have similar characteristics, we apply a portfolio approach to effectively account for operating lease ROU assets and operating lease liabilities, hence we do not expect the outcome to differ materially from applying the new guidance to individual leases.

The Company uses its estimated incremental borrowing rate as the discount rate in measuring the present value of our lease payments given the rate implicit in our leases is not typically readily determinable. Given we do not currently borrow on a collateralized basis, our incremental borrowing rate is estimated to approximate the interest  rate in which the Company would expect to pay on a collateralized basis over a similar term and payments, and in economic environments where the leased asset is located. We use the portfolio approach to determine the discount rate for leases with similar characteristics or when the Company is reasonably certain that doing so would not materially affect the accounting for those leases to which a single discount rate is applied.

Operating Leases

Our office space leases, exclusive of our Headquarters Lease, are operating leases, which expire at various dates with the latest maturity in June 2027. Based on the present value of the lease payments for the remaining lease term of the Company's existing leases, we recognized $88 million of both operating ROU assets and operating lease liabilities, respectively on our unaudited condensed consolidated balance sheet upon adoption of ASC 842 as of January 1, 2019. These operating ROU assets were then reduced by a net deferred rent balance of $13 million as of January 1, 2019, which primarily consisted of existing deferred and prepaid rent balances.  

Operating lease ROU assets and liabilities commencing after January 1, 2019 are recognized at lease commencement date, or the date the lessor makes the leased asset available for use, based on the present value of lease payments over the lease term using the Company’s estimated incremental borrowing rate. ROU assets related to operating leases comprise the initial lease liability, and are then adjusted for any prepaid or deferred rent payments, unamortized initial direct costs, and lease incentives received. Amortization expense for operating lease ROU assets and interest accretion on operating lease liabilities are recognized as a single operating lease cost in our consolidated statement of operations, which is effectively recognition of rent expense on a straight-line basis over the lease period. The carrying amount of lease liabilities are (1) accreted to reflect interest using the incremental borrowing rate if the rate implicit in the lease is not readily determinable; and (2) reduced to reflect lease payments made during the period. Lease incentives are recognized as reductions of rental expense on a straight-line basis over the term of the lease. Certain of our operating leases include options to extend the lease terms for up to 5 years and/or terminate the leases within 1 year, which we include in our lease term if we are reasonably certain to exercise these options. Payments under our operating leases are primarily fixed, however, certain of our operating lease agreements include rental payments which are adjusted periodically for inflation. We recognize these costs as variable lease costs on our unaudited condensed consolidated statement of operations, which were not material in each of the three months ended March 31, 2019 and 2018. In addition, short-term lease costs, amortization expense of our initial direct costs, and unamortized initial direct costs were not material in any period. As of March 31, 2019, operating lease ROU assets was $73 million on our unaudited condensed consolidated balance sheet.    

Finance Lease

In June 2013, we entered into our Headquarters Lease. Pursuant to the Headquarters Lease, the landlord built an approximately 280,000 square foot rental building in Needham, Massachusetts (the “Premises”), and leased the Premises to the Company as our new corporate headquarters for an initial term of 15 years and 7 months or through December 2030. The Company also has an option to extend the term of the Headquarters Lease for two consecutive terms of five years each. The Company was deemed to be the owner of the Premises for accounting purposes only during the construction period under legacy GAAP accounting rules for lease accounting, or ASC 840. Accordingly, the Company recorded project construction costs during the construction period incurred by the landlord as a construction-in-progress asset and a related construction financing obligation on our consolidated balance sheet. The amounts that the Company incurred for normal tenant improvements and structural improvements had also been recorded to the construction-in-progress asset. Upon completion of construction at the end of the second quarter of 2015, we evaluated the construction-in-progress asset and construction financing obligation for de-recognition under the criteria for “sale-leaseback” treatment under ASC 840. We concluded that it did not meet the provisions for sale-leaseback accounting. Therefore, the Headquarters Lease was accounted for as a financing obligation through December 31, 2018, in which we depreciated the building asset over its estimated useful life and incurred interest expense related to the financing obligation, imputed using the effective interest rate method. 

Upon the adoption of ASC 842 on January 1, 2019, we derecognized the previous assets and liabilities recorded for the Headquarters Lease described above, with the exception of net assets and liabilities of $26 million, primarily related to structural improvements paid by the Company, net of tenant incentives and accumulated amortization, which is classified as net prepaid rent under the new guidance. The Company then assessed the lease classification of our Headquarters Lease and concluded it should be

12


 

classified and accounted for as a finance lease upon adoption on January 1, 2019. Accordingly, on January 1, 2019, we recognized a finance lease ROU asset and a finance lease liability of $114 million and $88 million, respectively, on our unaudited condensed consolidated balance sheet. The difference between the ROU asset and lease liability represents the aforementioned $26 million of net prepaid rent, and is being amortized straight-line over the remaining lease term. As of March 31, 2019, the ROU asset related to our Headquarters Lease was $112 million, net of accumulated amortization of $2 million, and is included in the property and equipment, net on our unaudited condensed consolidated balance sheet.

Finance lease ROU assets and finance lease liabilities commencing after January 1, 2019 are recognized similar to an operating lease, at the lease commencement date or the date the lessor makes the leased asset available for use. Finance lease ROU assets are generally amortized on a straight-line basis over the lease term, and the carrying amount of the finance lease liabilities are (1) accreted to reflect interest using the incremental borrowing rate if the rate implicit in the lease is not readily determinable, and (2) reduced to reflect lease payments made during the period. Amortization expense for finance lease ROU assets and interest accretion on finance lease liabilities are recorded to depreciation and interest expense, respectively, in our consolidated statement of operations.

We did not update any financial information or provide any disclosures required under the new guidance for the three months ended March 31, 2018 or as of December 31, 2018. The disclosures provided below for the three months ended March 31, 2018 or as of December 31, 2018 are based on the disclosure requirements under ASC 840.

The components of lease expense during the three months ended March 31, 2019 were as follows:

 

 

 

Three months ended March 31, 2019

 

 

(in millions)

 

Operating lease cost (1)

 

$

6

 

Finance lease cost:

 

 

 

 

    Amortization of right-of-use assets (2)

 

 

2

 

    Interest on lease liabilities (3)

 

 

1

 

Total finance lease cost

 

$

3

 

Sublease income (1)

 

 

(1

)

Total lease cost, net

 

$

8

 

 

(1)

Operating lease costs, net of sublease income, are included within operating expenses in our unaudited condensed consolidated statement of operations. During the three months ended March 31, 2018, we recorded operating lease expense of $5 million and sublease income of $1 million in our unaudited condensed consolidated statement of operations in accordance with ASC 840.  

 

(2)

Amount is included in depreciation expense in our unaudited condensed consolidated statement of operations. During the three months ended March 31, 2018, we recorded depreciation expense of $1 million related to our Headquarters Lease in our unaudited condensed consolidated statement of operations in accordance with ASC 840.

 

(3)

Amount is included in interest expense in our unaudited condensed consolidated statement of operations. During the three months ended March 31, 2018, we recorded interest expense of $2 million related to our Headquarters Lease in our unaudited condensed consolidated statement of operations in accordance with ASC 840.

Additional information related to our leases during the three months ended March 31, 2019 is as follows:  

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Three months ended March 31, 2019

 

Supplemental Cash Flows Information:

 

 

(in millions)

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

Operating cash flows from operating leases

 

$

7

 

Operating cash flows from finance lease

 

 

1

 

Financing cash flows from finance lease

 

 

1

 

 

 

 

 

 

Right-of-use assets obtained in exchange for lease liabilities:

 

 

 

 

Operating leases (1)

 

$

91

 

Finance lease (2)

 

 

88

 

 

 

 

 

 

 

 

As of March 31, 2019

 

Weighted-average remaining lease term:

 

 

 

 

Operating leases

 

4.8 years

 

Finance lease

 

11.8 years

 

 

 

 

 

 

Weighted-average discount rate:

 

 

 

 

Operating leases