Notes to Unaudited Consolidated Financial Statements
1. BASIS OF PRESENTATION
Management of Booking Holdings 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, 2019.
The Unaudited Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. The functional currency of the Company's subsidiaries is generally the respective local currency. For international operations, 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 monthly average exchange rates applicable for the period. Translation gains and losses are included as a component of "Accumulated other comprehensive loss" in the accompanying 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 any subsequent quarter or the full year, especially during the periods that are impacted by the COVID-19 pandemic.
Impact of COVID-19
In December 2019, a novel strain of coronavirus, COVID-19, was first detected in Wuhan, China, and has since spread to other regions, including Europe and the United States. On March 11, 2020, the World Health Organization declared that the rapidly spreading COVID-19 outbreak was a global pandemic (the "COVID-19 pandemic"). In response to the COVID-19 pandemic, many governments around the world have implemented, and continue to implement, a variety of measures to reduce the spread of COVID-19, including travel restrictions and bans, instructions to residents to practice social distancing, quarantine advisories, shelter-in-place orders and required closures of non-essential businesses. These government mandates have forced many of the customers on whom the Company’s business relies, including hotels and other accommodation providers, airlines and restaurants, to seek government support in order to continue operating, to curtail drastically their service offerings or to cease operations entirely. Further, these measures have materially adversely affected, and may further adversely affect, consumer sentiment and discretionary spending patterns, economies and financial markets, and the Company’s workforce, operations and customers.
The COVID-19 pandemic and the resulting economic conditions and government orders have resulted in a material decrease in consumer spending and an unprecedented decline in travel and restaurant activities and consumer demand for related services. The Company’s financial results and prospects are almost entirely dependent on the sale of such travel and restaurant-related services. The Company’s results for the quarter ended March 31, 2020 have been significantly and negatively impacted as compared to the corresponding period in 2019.
Due to the uncertain and rapidly evolving nature of current conditions around the world, the Company is unable to predict accurately the impact that the COVID-19 pandemic will have on its business going forward. The Company currently expects, however, that the COVID-19 pandemic will impact its financial performance for the quarter ended June 30, 2020, much more significantly than it impacted the quarter ended March 31, 2020, primarily because an increasing number of markets and locations will have been subject to the governmental measures and economic disruptions noted above during the entirety of the second quarter (as compared to the first quarter, when the effects of the outbreak were largely limited to China and certain other Asian markets during January 2020 and much of February 2020). With the spread of COVID-19 to other regions, such as Europe and the United States, the Company expects the COVID-19 pandemic and its effects to continue to have a significant adverse impact on its business for the duration of the pandemic and during the subsequent economic recovery, which could be an extended period of time.
Given the volatility in global markets and the financial difficulties faced by many of the Company's travel service provider and restaurant customers and marketing affiliates, the Company has increased its provision for expected credit losses (also referred to as provision for bad debt or provision for uncollectible accounts) on receivables from and prepayments to its travel service provider and restaurant customers and marketing affiliates (see Note 7). Moreover, due to the high level of cancellations of existing reservations, the Company has incurred, and expects to continue to incur, higher than normal cash outlays to refund consumers for prepaid reservations (see Note 2). Any material increase in the Company’s provision for expected credit losses and any material increase in cash outlays to consumers would have a corresponding adverse effect on the Company's results of operations and related cash flows.
As a result of the deterioration of the Company’s business due to the COVID-19 pandemic, the Company has determined that a portion of its goodwill has experienced a decline in value at March 31, 2020 and recorded a significant impairment charge (see Note 8). In addition, the Company has recorded a significant impairment charge for one of the Company's long-term investments due to the impact of the COVID-19 pandemic on the business of the investee and the Company's estimate of the resulting decline in the value of the investment (see Notes 5 and 6). It is possible that the Company may also have to record additional significant impairment charges in future periods.
See Note 9 for additional information about the Company’s existing debt arrangements, including $4.1 billion of debt issued in April 2020. The Company’s continued access to sources of liquidity depends on multiple factors, including global economic conditions, the condition of global financial markets, the availability of sufficient amounts of financing, the Company’s operating performance and its credit ratings. If the Company’s credit ratings were to be downgraded, or financing sources were to ascribe higher risk to its rating levels, the Company or its industry, the Company’s access to capital and the cost of any financing would be negatively impacted. There is no guarantee that additional debt financing will be available in the future to fund the Company’s obligations, or that it will be available on commercially reasonable terms, in which case the Company may need to seek other sources of funding.
The extent of the effects of the COVID-19 pandemic on the Company’s business, results of operations, cash flows and growth prospects is highly uncertain and will ultimately depend on future developments. These include, but are not limited to, the severity, extent and duration of the pandemic and its impact on the travel and restaurant industries and consumer spending more broadly. Even if economic and operating conditions for the Company’s business improve, the Company cannot predict the long-term effects of the pandemic on its business or the travel and restaurant industries as a whole. If the travel and restaurant industries are fundamentally changed by the COVID-19 pandemic in ways that are detrimental to the Company’s operating model, the Company’s business may continue to be adversely affected even as the broader global economy recovers.
Certain governments have passed or are considering legislation to help businesses weather the COVID-19 pandemic through loans, wage subsidies, tax relief or other financial aid. Subsequent to March 31, 2020. the Company is participating in, or has applied to participate in, the United Kingdom's job retention scheme, the Netherlands' wage subsidy program and certain other jurisdictions' programs, and is assessing whether it will take advantage of any other offerings.
Change in Presentation and Reclassification
In the year ended December 31, 2019 and prior periods, the Company's marketing expenses were presented in the Consolidated Statements of Operations as "Performance marketing" and "Brand marketing" expenses. In the first quarter of 2020, the Company changed the presentation of marketing expenses by combining "Performance marketing" and "Brand marketing" into "Marketing expenses" in the Unaudited Consolidated Statement of Operations because of the increased convergence of performance marketing and brand marketing channels in areas including digital marketing and the Company's view of overall marketing expenditure as its investment in customer acquisition and retention. The change in presentation had no impact on operating income or net income. The Unaudited Statement of Operations for the three months ended March 31, 2019 has been recast to conform to the current year presentation.
In addition to the change in presentation for marketing expenses, certain amounts from prior periods have been reclassified to conform to the current period presentation.
Recent Accounting Pronouncements Adopted
Simplifying the Test for Goodwill Impairment
In January 2017, the Financial Accounting Standards Board ("FASB") issued a new accounting update to simplify the test for goodwill impairment. The revised guidance eliminates the previously required step two of the goodwill impairment test, which required a hypothetical purchase price allocation to measure goodwill impairment. Under the revised guidance, a goodwill impairment loss will be measured at the amount by which a reporting unit’s carrying amount exceeds its fair value,
not to exceed the carrying amount of goodwill. The Company adopted this update in the first quarter of 2020 and applied it on a prospective basis (see Note 8 for further information on the goodwill impairment test performed at March 31, 2020).
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued a new accounting update on the measurement of credit losses for certain financial assets measured at amortized cost and available-for-sale debt securities. For financial assets measured at amortized cost, this update 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 update 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. The Company adopted this update in the first quarter of 2020 and applied this update on a modified retrospective basis. Upon adoption of the new standard on January 1, 2020, the Company recorded a net decrease to its retained earnings of $3 million, net of tax. See Note 7 for further information related to allowance for expected credit losses on accounts receivable and other financial assets and Note 5 for further information related to investments in available-for-sale debt securities.
Other Recent Accounting Pronouncement
Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued a new accounting update relating to income taxes. This update provides an exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. This update also (1) requires an entity to recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax, (2) requires an entity to evaluate when a step-up in the tax basis of goodwill should be considered part of the business combination in which goodwill was originally recognized for accounting purposes and when it should be considered a separate transaction, and (3) requires that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date.
For public business entities, this update is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The amendment related to franchise taxes that are partially based on income should be applied on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. All other amendments should be applied on a prospective basis. The Company is currently evaluating the impact to its Consolidated Financial Statements of adopting this update and does not expect it to have a material impact.
2. REVENUE
Disaggregation of revenue
Geographic Information
The Company's international information consists of the results of Booking.com, agoda and Rentalcars.com in their entirety and the results of the international businesses of KAYAK and OpenTable. This classification is independent of where the consumer resides, where the consumer is physically located while using the Company's services or the location of the travel service provider or restaurant. For example, a reservation made through Booking.com (which is domiciled in the Netherlands) at a hotel in New York by a consumer in the United States is part of the Company's international results. The Company's geographic information is as follows (in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
|
|
United States
|
|
The Netherlands
|
|
Other
|
|
Total
|
Total revenues for the three months ended March 31,
|
|
|
|
|
|
|
|
|
2020
|
|
$
|
285
|
|
|
$
|
1,677
|
|
|
$
|
326
|
|
|
$
|
2,288
|
|
2019 (1)
|
|
366
|
|
|
2,072
|
|
|
399
|
|
|
2,837
|
|
(1) Geographic information for the three months ended March 31, 2019 has been recast to conform to the current period presentation.
Revenue by Type of Service
Approximately 85% and 84% of the Company's revenue for the three months ended March 31, 2020 and 2019, respectively, relates to online accommodation reservation services. Revenue from all other sources of online travel reservation services and advertising and other revenues each represent less than 10% of the Company's total revenues.
Deferred Revenue
Cash payments received from travelers in advance of the Company completing its service obligations are included in "Deferred merchant bookings" in the Company's Consolidated Balance Sheets and are comprised principally of amounts estimated to be payable to the travel service providers as well as the Company's estimated deferred revenue for its commission or margin and fees. The Company expects to complete its service obligation within one year from the reservation date. The amounts are subject to refunds for cancellations.
The following table summarizes the activity of deferred revenue for online travel reservation services for the three months ended March 31, 2020 (in millions):
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|
|
|
|
Balance, December 31, 2019
|
$
|
220
|
|
Revenues recognized from the beginning deferred revenue balance
|
(150
|
)
|
Cancellations
|
(46
|
)
|
Payments received from travelers, net of amounts estimated to be payable to travel service providers, and other
|
120
|
|
Balance, March 31, 2020
|
$
|
144
|
|
Loyalty and Other Incentive Programs
The Company provides loyalty programs where participating consumers are awarded loyalty points on current transactions that can be redeemed in the future. At March 31, 2020 and December 31, 2019, liabilities for loyalty program incentives of $76 million and $80 million, respectively, were included in "Accrued expenses and other current liabilities" in the Consolidated Balance Sheets. The Company’s largest loyalty program is at OpenTable, where points can be redeemed for rewards such as qualifying reservations at participating restaurants, third-party gift cards and accommodation reservations booked through some of the Company’s other platforms. The estimated fair value of the loyalty points that are expected to be redeemed is recognized as a reduction of revenue at the time the incentives are granted.
In addition to the loyalty programs, at March 31, 2020 and December 31, 2019, liabilities of $22 million for other incentive programs, such as referral bonuses, credits and discounts, were included in "Accrued expenses and other current liabilities" in the Consolidated Balance Sheets.
Impact of COVID-19
Due to the high level of cancellations of existing reservations as a result of the COVID-19 pandemic (see Note 1), the Company has incurred, and expects to continue to incur, higher than normal cash outlays to refund travelers for prepaid reservations, including certain situations where the Company has already transferred the prepayment to the travel service provider. For the three months ended March 31, 2020, the Company recorded a reduction in revenue of $63 million for refunds paid or estimated to be payable to travelers where the Company has agreed to provide free cancellation for certain non-refundable reservations without a corresponding estimated expected recovery from the travel service providers.
3. STOCK-BASED EMPLOYEE COMPENSATION
Stock-based compensation expense included in "Personnel" expenses in the Unaudited Consolidated Statements of Operations was $6 million and $74 million for the three months ended March 31, 2020 and 2019, respectively.
Stock-based compensation expense related to performance share units, restricted stock units and stock options is recognized based on fair value on a straight-line basis over the respective requisite service periods and forfeitures are accounted for when they occur. The fair value on the grant date 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. 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.
The Company records stock-based compensation expense for performance-based awards using its estimate of the probable outcome at the end of the performance period (i.e., the estimated performance against the performance targets). The Company periodically adjusts the cumulative stock-based compensation expense recorded when the probable outcome for these performance-based awards is updated based upon changes in actual and forecasted operating results. For the performance share units outstanding at March 31, 2020, due to the impact of the COVID-19 pandemic (see Note 1), there is a significant decline in the estimated performance over the performance periods against the performance targets. At March 31, 2020, there was a significant reduction in the number of shares that were probable to be issued as compared to December 31, 2019. As a result, in the three months ended March 31, 2020, the Company recognized a reduction in stock-based compensation expense of $73 million, which is included in "Personnel" expense in the Unaudited Consolidated Statement of Operations.
Restricted stock units granted by the Company during the three months ended March 31, 2020 had aggregate grant-date fair values of $265 million. Restricted stock units and performance share units that vested during the three months ended March 31, 2020 had aggregate fair values at vesting of $319 million. At March 31, 2020, there was $541 million of estimated total future stock-based compensation expense related to unvested share-based awards to be recognized over a weighted-average period of 2.3 years.
Restricted Stock Units
The Company makes broad-based grants of restricted stock units that generally vest during a period of one- to three-years, subject to certain exceptions for terminations other than for "cause," for "good reason" or on account of death or disability.
The following table summarizes the activity of restricted stock units for employees and non-employee directors during the three months ended March 31, 2020:
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|
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Shares
|
|
Weighted-average Grant-date Fair Value Per Share
|
Unvested at December 31, 2019
|
|
256,745
|
|
|
|
$
|
1,801
|
|
|
|
|
|
|
|
|
|
Granted
|
|
152,832
|
|
|
|
$
|
1,732
|
|
|
Vested
|
|
(109,595
|
)
|
|
|
$
|
1,808
|
|
|
Forfeited
|
|
(5,971
|
)
|
|
|
$
|
1,805
|
|
|
Unvested at March 31, 2020
|
|
294,011
|
|
|
|
$
|
1,762
|
|
|
Performance Share Units
The Company grants performance share units to executives and certain other employees, which generally vest at the end of a three-year period, subject to certain exceptions for terminations other than for "cause," for "good reason" or on account of death or disability. Performance share units are payable in shares of the Company's common stock upon vesting. The number of shares which ultimately will vest depends on achieving certain performance metrics by the end of the performance period, assuming there is no accelerated vesting for, among other things, a termination of employment under certain circumstances.
The following table summarizes the activity of performance share units for employees during the three months ended March 31, 2020:
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|
|
|
|
|
|
|
|
|
Performance Share Units
|
|
Shares
|
Weighted-average Grant-date Fair Value Per Share
|
Unvested at December 31, 2019
|
|
216,083
|
|
|
$
|
1,835
|
|
|
|
|
|
|
|
|
Vested
|
|
(80,266
|
)
|
|
$
|
1,737
|
|
|
Performance Shares Adjustment *
|
|
(58,427
|
)
|
|
$
|
1,957
|
|
|
Forfeited
|
|
(2,989
|
)
|
|
$
|
1,834
|
|
|
Unvested at March 31, 2020
|
|
74,401
|
|
|
$
|
1,841
|
|
|
* Probable outcome for these performance-based awards is updated based upon changes in actual and forecasted operating results.
No performance share units were granted during the three months ended March 31, 2020. The following table summarizes the estimated vesting, as of March 31, 2020, of performance share units granted in 2019 and 2018, net of forfeiture and vesting since the respective grant dates:
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|
|
|
|
|
|
Performance Share Units, by grant year
|
|
2019
|
|
2018
|
Shares probable to be issued
|
|
45,361
|
|
|
29,040
|
|
Shares not subject to the achievement of minimum performance thresholds
|
|
45,361
|
|
|
28,647
|
|
Shares that could be issued if maximum performance thresholds are met
|
|
117,558
|
|
|
79,914
|
|
Stock Options
All outstanding employee stock options were assumed in acquisitions, and generally have a term of 10 years from the grant date. The following table summarizes the activity for stock options during the three months ended March 31, 2020:
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|
|
|
|
|
|
|
|
|
|
Employee Stock Options
|
|
Number of Shares
|
|
Weighted-average
Exercise Price
|
|
Aggregate
Intrinsic Value (in millions)
|
|
Weighted-average Remaining Contractual Term
(in years)
|
Balance, December 31, 2019
|
|
15,122
|
|
|
|
$
|
484
|
|
|
|
$
|
24
|
|
|
2.6
|
Exercised
|
|
(100
|
)
|
|
|
$
|
334
|
|
|
|
|
|
|
Balance, March 31, 2020
|
|
15,022
|
|
|
|
$
|
485
|
|
|
|
$
|
13
|
|
|
2.4
|
Vested and exercisable at March 31, 2020
|
|
15,022
|
|
|
|
$
|
485
|
|
|
|
$
|
13
|
|
|
2.4
|
4. NET (LOSS) INCOME PER SHARE
The Company computes basic net (loss) income per share by dividing net (loss) income applicable to common stockholders 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. Under the treasury stock method, if the conversion prices for the convertible notes exceed the Company's average stock price for the period, the convertible notes generally have no impact on diluted net income per share. The convertible notes are included in the calculation of diluted net income per share if their inclusion is dilutive under the treasury stock method.
A reconciliation of the weighted-average number of shares outstanding used in calculating diluted net (loss) income per share is as follows (in thousands):
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|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2020
|
|
2019
|
Weighted-average number of basic common shares outstanding
|
|
41,093
|
|
|
45,007
|
|
Weighted-average dilutive stock options, restricted stock units and performance share units
|
|
—
|
|
|
229
|
|
Assumed conversion of convertible senior notes
|
|
—
|
|
|
200
|
|
Weighted-average number of diluted common and common equivalent shares outstanding
|
|
41,093
|
|
|
45,436
|
|
For the three months ended March 31, 2020, 259,000 potential common shares principally related to restricted stock units, performance share units and convertible senior notes were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive for the period.
5. INVESTMENTS
The following table summarizes, by major security type, the Company's investments at March 31, 2020 (in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Gross
Unrealized Gains
|
|
Gross
Unrealized Losses
|
|
Carrying
Value
|
Short-term investments:
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$
|
164
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
164
|
|
Trip.com Group convertible debt securities
|
|
250
|
|
|
—
|
|
|
(2
|
)
|
|
248
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
Trip.com Group equity securities
|
|
531
|
|
|
—
|
|
|
(117
|
)
|
|
414
|
|
Total
|
|
$
|
945
|
|
|
$
|
—
|
|
|
$
|
(119
|
)
|
|
$
|
826
|
|
|
|
|
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
Investments in private companies:
|
|
|
|
|
|
|
|
|
Debt securities
|
|
$
|
250
|
|
|
$
|
—
|
|
|
$
|
(20
|
)
|
|
$
|
230
|
|
Equity securities
|
|
501
|
|
|
—
|
|
|
(100
|
)
|
|
401
|
|
Other long-term investments:
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
Trip.com Group convertible debt securities
|
|
525
|
|
|
—
|
|
|
(77
|
)
|
|
448
|
|
Equity securities
|
|
461
|
|
|
522
|
|
|
(6
|
)
|
|
977
|
|
Total
|
|
$
|
1,737
|
|
|
$
|
522
|
|
|
$
|
(203
|
)
|
|
$
|
2,056
|
|
The following table summarizes, by major security type, the Company's investments at December 31, 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Carrying
Value
|
Short-term investments:
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
International government securities
|
|
$
|
109
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
109
|
|
U.S. government securities
|
|
138
|
|
|
—
|
|
|
—
|
|
|
138
|
|
Corporate debt securities
|
|
751
|
|
|
1
|
|
|
(1
|
)
|
|
751
|
|
Total
|
|
$
|
998
|
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
|
$
|
998
|
|
|
|
|
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
Investments in private companies:
|
|
|
|
|
|
|
|
|
Debt securities
|
|
$
|
250
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
250
|
|
Equity securities
|
|
501
|
|
|
—
|
|
|
—
|
|
|
501
|
|
Other long-term investments:
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
International government securities
|
|
68
|
|
|
—
|
|
|
—
|
|
|
68
|
|
U.S. government securities
|
|
136
|
|
|
—
|
|
|
(1
|
)
|
|
135
|
|
Corporate debt securities
|
|
963
|
|
|
2
|
|
|
(2
|
)
|
|
963
|
|
Trip.com Group convertible debt securities
|
|
775
|
|
|
—
|
|
|
(8
|
)
|
|
767
|
|
Equity securities
|
|
1,117
|
|
|
684
|
|
|
(8
|
)
|
|
1,793
|
|
Total
|
|
$
|
3,810
|
|
|
$
|
686
|
|
|
$
|
(19
|
)
|
|
$
|
4,477
|
|
The Company assesses the classification of its investments in the Consolidated Balance Sheets as short-term or long-term at the individual security level. Classification as short-term or long-term is based upon the maturities of the securities, as applicable, and the Company's expectations regarding the timing of sales and redemptions. Investments of a strategic nature that have been made for the purpose of affiliation or potential business advantage or in connection with a commercial relationship are included in "Long-term investments" in the Consolidated Balance Sheets, except in situations where the Company expects the investment to be realized in cash, redeemed or sold within one year. At March 31, 2020, the Company reclassified $103 million of investments in debt securities with maturities greater than one year to short-term investments as the Company expects to sell the securities within one year. At December 31, 2019, these investments were classified as long-term investments. In addition, at March 31, 2020, $250 million of Trip.com Group convertible notes due May 2020 are classified as a short-term investment. At December 31, 2019, the investment was classified as a long-term investment based on the Company’s expectations at that time regarding the strategic investment. At March 31, 2020, investments in Trip.com Group American Depositary Shares ("ADSs") with a fair value of $414 million were reclassified to short-term investments as the Company expects to sell the securities within one year. At December 31, 2019, such investments were classified as long-term investments.
The Company has classified its investments in debt securities as available-for-sale securities. Preferred stock that is either mandatorily redeemable or redeemable at the option of the investor is also considered a debt security for accounting purposes. Available-for-sale debt securities are reported at estimated fair value (see Note 6) with the aggregate unrealized gains and losses, net of tax, reflected in "Accumulated other comprehensive loss" in the Consolidated Balance Sheets. If the amortized cost basis of an available-for-sale security exceeds its fair value and if the Company has the intention to sell the security or it is more likely than not that the Company will be required to sell the security before recovery of the amortized cost basis, an impairment is recognized in the Unaudited Consolidated Statements of Operations. If the Company does not have the intention to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of the amortized cost basis and the Company determines that the decline in fair value below the amortized cost basis of an available-for-sale security is entirely or partially due to credit-related factors, the credit loss is measured and recognized as an allowance for credit losses along with the related expense in the Unaudited Consolidated Statements of Operations. The allowance is measured as the amount by which the debt security’s amortized cost basis exceeds the Company’s best estimate of the present value of cash flows expected to be collected.
The fair values of these investments are based on the specific quoted market price of the securities or comparable securities at the balance sheet dates. Unobservable inputs are also used when little or no market data is available. See Note 6 for information related to fair value measurements.
Investments in equity securities include marketable equity securities and equity investments without readily determinable fair values. Marketable equity securities are reported at estimated fair value with changes in fair value recognized in "Net gains (losses) on marketable equity securities" in the Unaudited Consolidated Statements of Operations. The Company also holds investments in equity securities of private companies, over which the Company does not have the ability to exercise significant influence or control. The Company has elected to measure these investments at cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
Investments in Government and Corporate Debt Securities
The Company has classified its investments in international government securities, U.S. government securities and corporate debt securities as available-for-sale securities. The Company's investment policy seeks to preserve capital and maintain sufficient liquidity to meet operational and other needs of the business. At March 31, 2020, the weighted-average life of the Company’s investments in these debt securities, was approximately 0.8 years with an average credit quality of A+/A2/A.
At March 31, 2020, the Company recorded an impairment of $3 million for investments in certain corporate debt securities as their respective fair values were lower than their amortized cost basis and the Company had the intention to sell the securities. The difference between the fair value and the amortized cost basis of each of these securities was recorded in "Foreign currency transactions and other" in the Unaudited Consolidated Statement of Operations for the three months ended March 31, 2020. In addition, subsequent to March 31, 2020, the Company realized $164 million in cash from the sales and maturities of its remaining investments in corporate debt securities.
Investments in Trip.com Group
At March 31, 2020, the Company had $775 million invested in convertible senior notes issued at par value by Trip.com Group with maturity dates ranging from May 2020 to December 2025. The strategic investments in Trip.com Group convertible senior notes, excluding $250 million of convertible notes due May 2020, were classified as "Long-term investments" in the Consolidated Balance Sheet at March 31, 2020. At March 31, 2020, the fair values of the Company’s investments in the convertible notes were lower than their respective amortized cost basis. At March 31, 2020, the Company did not have the intent or a requirement to sell its investment in Trip.com Group convertible debt securities prior to their anticipated recovery. The Company believes that the decline in fair values of the investments are largely due to changes in market and economic conditions related to the COVID-19 pandemic (see Note 1), which had a negative impact on Trip.com's share price and other market conditions. The Company reviewed available information to evaluate Trip.com's financial solvency and at March 31, 2020 expects recovery of the amortized cost basis of the investments.
At December 31, 2019, the Company had $655 million invested in Trip.com Group ADSs with a fair value of $726 million, which is reported in "Long-term investments" in the Consolidated Balance Sheet. In the three months ended March 31, 2020, the Company sold a portion of its investment in the ADSs, with a cost basis of $124 million, for $94 million. "Net (losses) gains on marketable equity securities" in the Unaudited Consolidated Statement of Operations for the three months ended March 31, 2020 includes a loss of $40 million related to the ADSs sold during the period and an unrealized loss of $178 million related to the ADSs held by the Company at March 31, 2020. "Net (losses) gains on marketable equity securities" in the Unaudited Consolidated Statement of Operations for the three months ended March 31, 2019 includes a net unrealized gain of $360 million related to the ADSs.
Certain Trip.com Group convertible notes include a put option allowing the Company, at certain points of time, to require, at its option, redemption of the convertible notes and repayment in cash from Trip.com Group. The Company determined that the economic characteristics and risks of the put options are clearly and closely related to the notes, and therefore did not meet the requirement for separate accounting as embedded derivatives. The Company monitors the conversion features of these notes to determine whether they meet the definition of an embedded derivative during each reporting period. The conversion feature associated with the $25 million convertible notes issued in 2016 meets the definition of an embedded derivative that requires separate accounting. The embedded derivative is bifurcated for fair value measurement purposes only and is reported in the Consolidated Balance Sheets with its host contract in "Long-term investments." The mark-to-market adjustments of the embedded derivative are included in "Foreign currency transactions and other" in the Company's Unaudited Consolidated Statements of Operations.
Subsequent to March 31, 2020, the Company sold its remaining investment in the ADSs, with a cost basis of $531 million, for $431 million.
Investment in Meituan Dianping
In 2017, the Company invested $450 million in preferred shares of Meituan Dianping, the leading e-commerce platform for local services in China. The investment has been converted to ordinary shares and classified as a marketable equity security since Meituan Dianping's initial public offering in 2018. The investment had fair values of $972 million and $1.1 billion at March 31, 2020 and December 31, 2019, respectively, which is included in "Long-term investments" in the Consolidated Balance Sheets. For the three months ended March 31, 2020 and 2019, respectively, net unrealized loss of $81 million and a net unrealized gain of $91 million, related to this investment, are included in "Net (losses) gains on marketable equity securities" in the Unaudited Consolidated Statements of Operations.
Investments in Private Companies
Equity Securities without Readily Determinable Fair Values
The Company had $501 million invested in equity securities of private companies at March 31, 2020 and December 31, 2019, including $500 million invested in Didi Chuxing. These investments are measured at cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer and are included in "Long-term investments" in the Company's Consolidated Balance Sheets.
Considering the impact of the COVID-19 pandemic (see Note 1), the Company performed an impairment analysis on the investment in Didi Chuxing at March 31, 2020 and recognized an impairment charge of $100 million, resulting in an adjusted carrying value of $400 million at March 31, 2020 (see Note 6).
Debt Securities
The Company had $250 million invested in preferred shares of private companies, including Grab Holdings Inc. ("Grab"), with an aggregate fair value of $230 million and $250 million at March 31, 2020 and December 31, 2019, respectively. These investments are classified as debt securities for accounting purposes and categorized as available-for-sale. The preferred shares are convertible to ordinary shares at the Company’s option and are mandatorily convertible upon an initial public offering. The preferred shares also contain a redemption feature that can be exercised by the Company after certain points of time. These features have been evaluated as embedded derivatives, however, they do not meet the requirements to be accounted for separately.
The fair value of the Company's investment in Grab was $180 million and $200 million at March 31, 2020 and December 31, 2019, respectively (see Note 6). The Company recognized an unrealized loss of $20 million related to the investment in Grab in "Accumulated other comprehensive loss" in the Consolidated Balance Sheets at March 31, 2020. At March 31, 2020, the Company did not have the intent or a requirement to sell its investment in Grab. The Company believes that the decline in fair value of the investment is largely due to changes in market and economic conditions related to the COVID-19 pandemic (see Note 1). The Company also reviewed other available information and at March 31, 2020, expects recovery of the amortized cost basis of the investment.
6. FAIR VALUE MEASUREMENTS
Financial assets and liabilities carried at fair value at March 31, 2020 are classified in the categories described in the table below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Recurring fair value measurements
|
|
|
|
|
|
|
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents and restricted cash equivalents:
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
5,944
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,944
|
|
Time deposits and certificates of deposit
|
|
26
|
|
|
—
|
|
|
—
|
|
|
26
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
—
|
|
|
164
|
|
|
—
|
|
|
164
|
|
Trip.com Group convertible debt securities
|
|
—
|
|
|
248
|
|
|
—
|
|
|
248
|
|
Trip.com Group equity securities
|
|
414
|
|
|
—
|
|
|
—
|
|
|
414
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
Investments in private companies:
|
|
|
|
|
|
|
|
|
Debt securities
|
|
—
|
|
|
—
|
|
|
230
|
|
|
230
|
|
Other long-term investments:
|
|
|
|
|
|
|
|
|
Trip.com Group convertible debt securities
|
|
—
|
|
|
448
|
|
|
—
|
|
|
448
|
|
Equity securities
|
|
977
|
|
|
—
|
|
|
—
|
|
|
977
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
Foreign currency exchange derivatives
|
|
—
|
|
|
12
|
|
|
—
|
|
|
12
|
|
Total assets at fair value
|
|
$
|
7,361
|
|
|
$
|
872
|
|
|
$
|
230
|
|
|
$
|
8,463
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
Foreign currency exchange derivatives
|
|
$
|
—
|
|
|
$
|
21
|
|
|
$
|
—
|
|
|
$
|
21
|
|
|
|
|
|
|
|
|
|
|
Nonrecurring fair value measurements
|
|
|
|
|
|
|
|
|
Investment in Didi Chuxing
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
400
|
|
|
$
|
400
|
|
Goodwill of the OpenTable and KAYAK reporting unit
|
|
—
|
|
|
—
|
|
|
1,545
|
|
|
1,545
|
|
Total nonrecurring fair value measurements
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,945
|
|
|
$
|
1,945
|
|
Financial assets and liabilities carried at fair value at December 31, 2019 are classified in the categories described in the table below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Recurring fair value measurements
|
|
|
|
|
|
|
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
Cash and restricted cash equivalents:
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
5,734
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,734
|
|
Corporate debt securities
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Time deposits and certificates of deposit
|
|
29
|
|
|
—
|
|
|
—
|
|
|
29
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
International government securities
|
|
—
|
|
|
109
|
|
|
—
|
|
|
109
|
|
U.S. government securities
|
|
—
|
|
|
138
|
|
|
—
|
|
|
138
|
|
Corporate debt securities
|
|
—
|
|
|
751
|
|
|
—
|
|
|
751
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
Investments in private companies:
|
|
|
|
|
|
|
|
|
Debt securities
|
|
—
|
|
|
—
|
|
|
250
|
|
|
250
|
|
Other long-term investments:
|
|
|
|
|
|
|
|
|
International government securities
|
|
—
|
|
|
68
|
|
|
—
|
|
|
68
|
|
U.S. government securities
|
|
—
|
|
|
135
|
|
|
—
|
|
|
135
|
|
Corporate debt securities
|
|
—
|
|
|
963
|
|
|
—
|
|
|
963
|
|
Trip.com Group convertible debt securities
|
|
—
|
|
|
767
|
|
|
—
|
|
|
767
|
|
Equity securities
|
|
1,793
|
|
|
—
|
|
|
—
|
|
|
1,793
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
Foreign currency exchange derivatives
|
|
—
|
|
|
12
|
|
|
—
|
|
|
12
|
|
Total assets at fair value
|
|
$
|
7,556
|
|
|
$
|
2,945
|
|
|
$
|
250
|
|
|
$
|
10,751
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
Foreign currency exchange derivatives
|
|
$
|
—
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
5
|
|
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.
|
Rollforward of Level 3 Fair Value Measurements
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
|
|
Debt securities (in millions)
|
Balance, December 31, 2019
|
|
$
|
250
|
|
Total losses for the period:
|
|
|
Total unrealized losses included in accumulated other comprehensive loss (1)
|
|
(20
|
)
|
Balance, March 31, 2020
|
|
$
|
230
|
|
|
|
(1)
|
These losses are recorded in “Accumulated other comprehensive loss” in the Consolidated Balance Sheet.
|
Investments
See Note 5 for further information related to the Company's investments.
The valuation of investments in corporate debt securities, U.S. and international government securities and Trip.com Group convertible debt securities are considered "Level 2" valuations because the Company has access to quoted prices, but does not have visibility into the volume and frequency of trading for these 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.
Investments in private companies measured using Level 3 inputs
The Company’s investments measured using Level 3 inputs primarily consist of preferred stock investments in privately-held companies that are classified as either debt securities or equity securities without readily determinable fair values. Fair values of privately held securities are estimated using a variety of valuation methodologies, including both market and income approaches. The Company has used valuation techniques appropriate for the type of investment and the information available about the investee as of the valuation date to determine fair value. Recent financing transactions in the investee, such as new investments in preferred stock, are generally considered the best indication of the enterprise value and therefore used as a basis to estimate fair value. However, based on a number of factors, such as the proximity in timing to the valuation date or the volume or other terms of these financing transactions, the Company may also use other valuation techniques to supplement this data, including the income approach. In addition, an option-pricing model (“OPM”) is utilized to allocate value to the various classes of securities of the investee, including the class owned by the Company. The model includes assumptions around the investees’ expected time to liquidity and volatility.
At March 31, 2020, the fair values of the Company's investments in Didi and Grab, measured using Level 3 inputs, were $400 million and $180 million, respectively. As discussed below, the Company used unobservable inputs in order to determine fair value. The Company used an income approach in estimating the fair value of Didi and a relative weighting of 75% income approach and 25% recent financing transactions in estimating the fair value of Grab. The income approach estimates value based on the expectation of future cash flows that a company will generate. These future cash flows are discounted to their present values using a discount rate based on a company’s weighted-average cost of capital, and is adjusted to reflect the risks inherent in its cash flows. The key unobservable inputs and ranges used for these investments include the weighted average cost of capital (12%-14%), terminal Earnings before income taxes, depreciation and amortization (“EBITDA”) Multiple (13x-15x), volatility (60%-70%) and an estimated time to liquidity of 4 years. Significant changes in any of these inputs in isolation would result in significantly different fair value measurements. Generally, a change in the assumption used for terminal EBITDA multiples would result in a directionally similar change in the fair value and a change in the assumption used for weighted average cost of capital or volatility would result in a directionally opposite change in the fair value.
The determination of the fair values of investments, where the Company is a minority shareholder and has access to limited information from the investee, reflects numerous assumptions that are subject to various risks and uncertainties, including key assumptions regarding the investee’s expected growth rates and operating margin, expected length and severity of the impact from the COVID-19 pandemic and the shape and timing of the subsequent recovery, as well as other key assumptions with respect to matters outside of the Company's control, such as discount rates and market comparables. It requires significant judgments and estimates and actual results could be materially different than those judgments and estimates utilized in the fair value estimate. Future events and changing market conditions may lead the Company to re-evaluate the
assumptions reflected in the valuation, particularly the assumptions related to the length and severity of the COVID-19 pandemic and the shape and timing of the subsequent recovery and the overall impact on the investee’s business, which may result in a need to recognize an additional impairment charge that could have a material adverse effect on the Company's results of operations.
Derivatives
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 foreign currency exchange rates. The valuation of derivatives are considered "Level 2" fair value measurements. The Company's derivative instruments are typically short-term in nature.
In the normal course of business, the Company is exposed to the impact of foreign currency fluctuations. The Company mitigates these risks by following established risk management policies and procedures, including the use of derivatives. The Company enters into foreign currency derivative contracts to hedge translation risks from short-term foreign currency exchange rate fluctuations for the Euro, British Pound Sterling and certain other currencies versus the U.S. Dollar. The Company also enters into foreign currency forward contracts to hedge its exposure to the impact of movements in foreign currency exchange rates on its transactional balances denominated in currencies other than the functional currency. The Company does not use derivatives for trading or speculative purposes.
The Company reports the fair values of its derivative assets and liabilities on a gross basis in the Consolidated Balance Sheets in "Prepaid expenses and other current assets, net" and "Accrued expenses and other current liabilities," respectively. Unless designated as hedges for accounting purposes, gains and losses resulting from changes in the fair values of derivative instruments are recognized in "Foreign currency transactions and other" in the Unaudited Consolidated Statements of Operations in the period that the changes occur and cash flow impacts, if any, are classified within "Net cash (used in) provided by operating activities" in the Unaudited Consolidated Statements of Cash Flows. As of March 31, 2020 and December 31, 2019, the Company did not designate any derivatives as hedges for accounting purposes.
The table below provides fair values and notional amounts of foreign currency exchange derivatives outstanding at March 31, 2020 and December 31, 2019 (in millions). The notional amount of a foreign currency forward contract is the contracted amount of foreign currency to be exchanged and is not recorded in the balance sheets.
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
December 31, 2019
|
Fair value of derivative assets
|
$
|
12
|
|
|
$
|
12
|
|
Fair value of derivative liabilities
|
21
|
|
|
5
|
|
|
|
|
|
Notional amount:
|
|
|
|
Foreign currency purchases
|
1,441
|
|
|
1,770
|
|
Foreign currency sales
|
950
|
|
|
901
|
|
The effect of foreign currency exchange derivatives recorded in "Foreign currency transactions and other" in the Unaudited Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
March 31,
2020
|
|
March 31,
2019
|
Losses on foreign currency exchange derivatives
|
$
|
23
|
|
|
$
|
13
|
|
Other Financial Assets and Liabilities
At March 31, 2020 and December 31, 2019, the Company's cash consisted of bank deposits. Other financial assets and liabilities, including restricted cash, accounts payable, accrued expenses and deferred merchant bookings, are carried at cost which approximates their fair values because of the short-term nature of these items. Accounts receivable and other financial assets measured at amortized cost are carried at cost less an allowance for expected credit losses to present the net amount expected to be collected (see Note 7). See Note 9 for the estimated fair value of the Company's outstanding senior
notes and Note 5 for information related to an embedded derivative associated with the $25 million Trip.com Group convertible notes issued in 2016.
Goodwill
See Note 8 for nonrecurring fair value measurements related to the goodwill impairment test.
|
|
7.
|
ACCOUNTS RECEIVABLE AND OTHER FINANCIAL ASSETS
|
Accounts receivable in the Consolidated Balance Sheets at March 31, 2020 and December 31, 2019 includes receivables from customers of $740 million and $1.2 billion, respectively, and receivables from marketing affiliates of $61 million and $110 million, respectively. The remaining balance relates to receivables from third-party payment processors. The Company’s receivables are short-term in nature. In addition, the Company had prepayments to certain customers of $104 million and $232 million at March 31, 2020 and December 31, 2019, respectively, which are included in "Prepaid expenses and other current assets, net," and $126 million at March 31, 2020, which is included in "Other assets, net" in the Consolidated Balance Sheets. The amounts mentioned above are stated on a gross basis, before deducting the allowance for expected credit losses.
For periods prior to January 1, 2020, receivables from customers were recorded at the original invoiced amounts net of an allowance for doubtful accounts. On January 1, 2020, the Company adopted the accounting standards update on the measurement of credit losses, which requires the Company to estimate lifetime expected credit losses upon recognition of the financial assets. The Company adopted the accounting standards update using a modified retrospective approach and the adoption did not have a material impact to the Company's Unaudited Consolidated Financial Statements.
The Company has identified the following risk characteristics of its customers and the related receivables and prepayments: size, type (alternative accommodations vs. hotels) or geographic location of the customer, or a combination of these characteristics. Receivables with similar risk characteristics have been grouped into pools. For each pool, the Company considers the historical credit loss experience, current economic conditions, supportable forecasts of future economic conditions, and any recoveries in assessing the lifetime expected credit losses. Other key factors that influence the expected credit loss analysis include customer demographics, payment terms offered in the normal course of business to customers, the nature of competition, and industry-specific factors that could impact the Company's receivables. Additionally, external data and macroeconomic factors are considered. This is assessed at each quarter based on the Company’s specific facts and circumstances.
The following table summarizes the activity of the allowance for expected credit losses on receivables (in millions):
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
March 31,
|
|
2020
|
|
2019
|
Balance, beginning of year
|
$
|
49
|
|
|
$
|
51
|
|
Provision charged to earnings
|
199
|
|
|
17
|
|
Write-offs and adjustments
|
(1
|
)
|
|
(18
|
)
|
Currency translation adjustments
|
(2
|
)
|
|
(1
|
)
|
Balance, end of period
|
$
|
245
|
|
|
$
|
49
|
|
The allowance for expected credit losses on receivables as of March 31, 2020 includes a portion of the amounts related to refunds paid or payable to certain travelers without a corresponding estimated expected recovery from the travel service providers (see Note 2). For the three months ended March 31, 2020, the Company recorded a reduction in revenue of $48 million for such refunds, which is included in "Provision charged to earnings" in the table above.
In addition, the Company recorded an allowance for expected credit loss on prepayments to certain customers of $54 million and $6 million at March 31, 2020 and December 31, 2019, respectively, which are included in "Prepaid expenses and other current assets, net" and "Other assets, net" in the Consolidated Balance Sheets.
Due to the impact of the COVID-19 pandemic (see Note 1), given the volatility in global markets and the financial difficulties faced by many of the Company’s travel service provider and restaurant customers and marketing affiliates, the Company has increased its allowance for expected credit losses on receivables from and prepayments to its customers and
marketing affiliates. For the three months ended March 31, 2020, the Company recorded additional expected credit loss expenses of $183 million, which is included in "Sales and other expenses" in the Unaudited Consolidated Statement of Operations. Significant judgments and assumptions are required to estimate the allowance for expected credit losses on receivables from and prepayments to customers and such assumptions may change in future periods, particularly the assumptions related to the impact of the COVID-19 pandemic on the business prospects and financial condition of customers and the Company’s ability to collect the receivable or recover the prepayment.
8. GOODWILL, INTANGIBLE ASSETS AND OTHER LONG-LIVED ASSETS
A substantial portion of the Company’s intangible assets and goodwill relates to the acquisitions of OpenTable and KAYAK.
Goodwill
The changes in the balance of goodwill for the three months ended March 31, 2020 consist of the following (in millions):
|
|
|
|
|
|
Balance, December 31, 2019 (1)
|
|
$
|
2,913
|
|
Impairment
|
|
(489
|
)
|
Foreign currency translation adjustments
|
|
(33
|
)
|
Balance, March 31, 2020 (1)
|
|
$
|
2,391
|
|
(1) The balance of goodwill as of March 31, 2020 and December 31, 2019 is stated net of cumulative impairment charges of $1.4 billion and $941 million, respectively.
The Company tests goodwill for impairment annually and whenever an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company tests goodwill at a reporting unit level. The Company’s annual goodwill impairments tests are performed as of September 30. Due to the significant and negative financial impact of the COVID-19 pandemic (see Note 1), the Company performed an interim period goodwill impairment test at March 31, 2020. Under the current goodwill impairment standard adopted in the first quarter of 2020, a goodwill impairment loss is measured at the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill (see Note 1).
As of March 31, 2020, the fair value of each of the Company’s reporting units, except the OpenTable and KAYAK reporting unit, exceeded its respective carrying value. For the OpenTable and KAYAK reporting unit, the Company recognized a goodwill impairment charge of $489 million, which is not tax-deductible, resulting in an adjusted carrying value of goodwill for OpenTable and KAYAK of $1.5 billion at March 31, 2020. The goodwill impairment was primarily driven by a significant reduction in the forecasted near-term cash flows of OpenTable and KAYAK as well as the significant decline in comparable companies' market values as a result of the COVID-19 pandemic.
The estimated fair value of OpenTable and KAYAK was determined using a combination of standard valuation techniques, including an income approach (discounted cash flows) and a market approach (applying the recent decline in enterprise values of comparable publicly-traded companies to the recently calculated fair value for OpenTable and KAYAK, as well as applying comparable company multiples).
The income approach estimates fair value utilizing long-term growth rates and discount rates applied to the cash flow projection. In the cash flow projection, the Company assumes that OpenTable and KAYAK will experience a significant decline in near-term cash flows with a recovery to 2019 levels of financial performance occurring in 2023. The shape and timing of the recovery is a key assumption in the fair value calculation (both in the income and market approaches), however, it is highly uncertain whether the actual recovery will match the trajectory or magnitude of the Company's assumptions. If the timing of recovery to 2019 levels of financial performance were to occur in 2022 or 2024, the impact to the estimated fair value, at March 31, 2020, ranges from an increase of over $230 million to a decrease of over $410 million.
The estimation of fair value reflects numerous assumptions that are subject to various risks and uncertainties, including key assumptions regarding OpenTable and KAYAK’s expected growth rates and operating margin, expected length and severity of the impact from the COVID-19 pandemic and the shape and timing of the subsequent recovery, as well as other key assumptions with respect to matters outside of the Company's control, such as discount rates and market comparables. It requires significant judgments and estimates and actual results could be materially different than the judgments and estimates used to estimate fair value. Future events and changing market conditions may lead the Company to re-evaluate the assumptions reflected in the current forecast disclosed above, particularly the assumptions related to the length and severity of
the COVID-19 pandemic and the shape and timing of the subsequent recovery, which may result in a need to recognize an additional goodwill impairment charge, which could have a material adverse effect on the Company's results of operations.
Intangible Assets and Other Long-lived Assets
The Company's intangible assets at March 31, 2020 and December 31, 2019 consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Amortization
Period
|
Supply and distribution agreements
|
$
|
1,083
|
|
|
$
|
(478
|
)
|
|
$
|
605
|
|
|
$
|
1,100
|
|
|
$
|
(472
|
)
|
|
$
|
628
|
|
|
3 - 20 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
|
169
|
|
|
(131
|
)
|
|
38
|
|
|
170
|
|
|
(129
|
)
|
|
41
|
|
|
2 - 7 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internet domain names
|
39
|
|
|
(32
|
)
|
|
7
|
|
|
40
|
|
|
(32
|
)
|
|
8
|
|
|
5 - 20 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
1,802
|
|
|
(555
|
)
|
|
1,247
|
|
|
1,811
|
|
|
(534
|
)
|
|
1,277
|
|
|
4 - 20 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets
|
2
|
|
|
(2
|
)
|
|
—
|
|
|
2
|
|
|
(2
|
)
|
|
—
|
|
|
Up to 15 years
|
Total intangible assets
|
$
|
3,095
|
|
|
$
|
(1,198
|
)
|
|
$
|
1,897
|
|
|
$
|
3,123
|
|
|
$
|
(1,169
|
)
|
|
$
|
1,954
|
|
|
|
Intangible assets are amortized on a straight-line basis. Amortization expense was $43 million and $45 million for the three months ended March 31, 2020 and March 31, 2019, respectively.
The Company reviews long-lived assets, including intangible assets and operating lease assets, whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The assessment of possible impairment is based upon the ability to recover the carrying value of the assets from the estimated undiscounted future net cash flows, before interest and taxes, of the related asset group. Due to the significant and negative financial impact of the COVID-19 pandemic (see Note 1), the Company performed the recoverability test of its long-lived assets and concluded that there was no impairment at March 31, 2020.
9. DEBT
Revolving Credit Facility
In August 2019, 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 London Inter-bank Offer Rate, or if such London Inter-bank Offer Rate is no longer available, the agreed alternate rate of interest ("LIBOR") (but no less than 0%) for the interest period in effect for such borrowing plus an applicable margin ranging from 0.875% to 1.50%; or (ii) for U.S. Dollar-denominated loans only, the sum of (x) the greatest of (a) JPMorgan Chase Bank, N.A.'s prime lending rate, (b) the U.S. federal funds rate plus 0.50% and (c) LIBOR (but no less than 0%) for an interest period of one month plus 1.00%, plus (y) an applicable margin ranging from 0% to 0.50%. Undrawn balances available under the revolving credit facility are subject to commitment fees at the applicable rate ranging from 0.07% to 0.20%.
The revolving credit facility provides for the issuance of up to $80 million of letters of credit as well as borrowings of up to $100 million on same-day notice, referred to as swingline loans. Other than swingline loans, which are available only in U.S. Dollars, borrowings and letters of credit 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 can be used for working capital and general corporate purposes, including acquisitions, share repurchases and debt repayments. There were no borrowings outstanding and $5 million of letters of credit issued under this revolving credit facility at March 31, 2020 and December 31, 2019.
Upon entering into this revolving credit facility, the Company terminated its prior $2.0 billion five-year revolving credit facility entered into in June 2015. During the three months ended March 31, 2019, the Company made short-term borrowings under the prior revolving credit facility totaling $250 million with a weighted-average interest rate of 3.5%, which were repaid during the three months ended June 30, 2019.
The current revolving credit facility contains a maximum leverage ratio covenant, compliance with which is a condition to the Company's ability to borrow thereunder. In April 2020, the Company amended the revolving credit facility, pursuant to which the maximum leverage ratio covenant has been suspended through and including the quarter ending March 31, 2021, and has been replaced with a minimum liquidity covenant based on unrestricted cash, cash equivalents, short-term investments and unused capacity under this revolving credit facility. Beginning with the quarter ending June 30, 2021, the minimum liquidity covenant will cease to apply and the maximum leverage ratio covenant will again be in effect.
Outstanding Debt
Outstanding debt at March 31, 2020 consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
Outstanding
Principal
Amount
|
|
Unamortized Debt
Discount and Debt
Issuance Cost
|
|
Carrying
Value
|
Current liabilities:
|
|
|
|
|
|
|
0.35% Convertible Senior Notes due June 2020
|
|
$
|
1,000
|
|
|
$
|
(5
|
)
|
|
$
|
995
|
|
Long-term debt:
|
|
|
|
|
|
|
0.9% Convertible Senior Notes due September 2021
|
|
$
|
1,000
|
|
|
$
|
(33
|
)
|
|
$
|
967
|
|
0.8% (€1 Billion) Senior Notes due March 2022
|
|
1,097
|
|
|
(3
|
)
|
|
1,094
|
|
2.15% (€750 Million) Senior Notes due November 2022
|
|
824
|
|
|
(2
|
)
|
|
822
|
|
2.75% Senior Notes due March 2023
|
|
500
|
|
|
(2
|
)
|
|
498
|
|
2.375% (€1 Billion) Senior Notes due September 2024
|
|
1,097
|
|
|
(8
|
)
|
|
1,089
|
|
3.65% Senior Notes due March 2025
|
|
500
|
|
|
(2
|
)
|
|
498
|
|
3.6% Senior Notes due June 2026
|
|
1,000
|
|
|
(5
|
)
|
|
995
|
|
1.8% (€1 Billion) Senior Notes due March 2027
|
|
1,097
|
|
|
(4
|
)
|
|
1,093
|
|
3.55% Senior Notes due March 2028
|
|
500
|
|
|
(3
|
)
|
|
497
|
|
Total long-term debt
|
|
$
|
7,615
|
|
|
$
|
(62
|
)
|
|
$
|
7,553
|
|
Outstanding debt at December 31, 2019 consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Outstanding
Principal
Amount
|
|
Unamortized Debt
Discount and Debt
Issuance Cost
|
|
Carrying
Value
|
Current Liabilities:
|
|
|
|
|
|
|
0.35% Convertible Senior Notes due June 2020
|
|
$
|
1,000
|
|
|
$
|
(12
|
)
|
|
$
|
988
|
|
Long-term debt:
|
|
|
|
|
|
|
0.9% Convertible Senior Notes due September 2021
|
|
1,000
|
|
|
(39
|
)
|
|
961
|
|
0.8% (€1 Billion) Senior Notes due March 2022
|
|
1,123
|
|
|
(3
|
)
|
|
1,120
|
|
2.15% (€750 Million) Senior Notes due November 2022
|
|
842
|
|
|
(3
|
)
|
|
839
|
|
2.75% Senior Notes due March 2023
|
|
500
|
|
|
(2
|
)
|
|
498
|
|
2.375% (€1 Billion) Senior Notes due September 2024
|
|
1,123
|
|
|
(9
|
)
|
|
1,114
|
|
3.65% Senior Notes due March 2025
|
|
500
|
|
|
(2
|
)
|
|
498
|
|
3.6% Senior Notes due June 2026
|
|
1,000
|
|
|
(5
|
)
|
|
995
|
|
1.8% (€1 Billion) Senior Notes due March 2027
|
|
1,123
|
|
|
(5
|
)
|
|
1,118
|
|
3.55% Senior Notes due March 2028
|
|
500
|
|
|
(3
|
)
|
|
497
|
|
Total long-term debt
|
|
$
|
7,711
|
|
|
$
|
(71
|
)
|
|
$
|
7,640
|
|
Based on the closing price of the Company's common stock for the prescribed measurement periods for the three months ended March 31, 2020 and December 31, 2019, the contingent conversion thresholds on the 2020 Notes (as defined below) and 2021 Notes (as defined below) were not exceeded. The 2021 Notes were not convertible at the option of the holder at March 31, 2020 and December 31, 2019. However, starting on March 15, 2020, the 2020 Notes became convertible at the option of the holder, regardless of the Company's stock price. At March 31, 2020, the 2020 Notes are convertible at the option of the holders and the principal amount is required to be paid in cash. The Company reclassified the equity component in the amount of $4 million at March 31, 2020, from additional paid-in-capital to convertible debt in the mezzanine section in the Company's Consolidated Balance Sheet.
Fair Value of Debt
At March 31, 2020 and December 31, 2019, the estimated fair value of the outstanding Senior Notes was approximately $8.7 billion and $9.8 billion, respectively, and was considered a "Level 2" fair value measurement (see Note 6). 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. The fair value of the Company's debt in excess of the outstanding principal amount primarily relates to the conversion premium on the Convertible Senior Notes.
Convertible Senior Notes
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. If the Company's convertible debt is redeemed or converted prior to maturity, a gain or loss on extinguishment is recognized. The gain or loss is the difference between the fair value of the debt component immediately prior to extinguishment and its carrying value. To estimate the fair value of the debt at the conversion date, the Company estimates the borrowing rate, considering the credit rating and similar debt of comparable corporate issuers without the conversion feature.
Description of Convertible Senior 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 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 $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 $375 million depending upon the date of the transaction and the then current stock price of the Company. Starting on June 15, 2021, holders will have the right to convert all or any portion of the 2021 Notes, regardless of the Company's stock price. 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. At March 31, 2020, the if-converted value of the 2021 Notes did not exceed the aggregate principle amount.
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 million. The Company paid $1 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 $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 $397 million depending upon the date of the transaction and the then current stock price of the Company. Since March 15, 2020, holders have had the right to convert all or any portion of the 2020 Notes, regardless of the Company's stock price. 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. At March 31, 2020, the if-converted value of the 2020 Notes exceeded the aggregate principle amount by $92 million.
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, at 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 borrowing rates at debt origination to be 3.18% for the 2021 Notes and 3.13% for the 2020 Notes, considering its credit rating and similar debt of comparable corporate issuers without the conversion feature. The yield to maturity was estimated at an at-market coupon priced at par.
Debt discount after tax of $83 million ($143 million before tax) related to the 2021 Notes and $92 million ($154 million before tax) related to the 2020 Notes less financing costs associated with the equity component of the respective convertible notes was recorded in "Additional paid-in capital" in the balance sheet at debt origination.
For both the three months ended March 31, 2020 and 2019, the Company recognized interest expense of $15 million related to convertible notes, which is almost entirely comprised of the amortization of debt discount of $12 million and the contractual coupon interest of $3 million for each period. For the three months ended March 31, 2020 and 2019, included in the amortization of debt discount mentioned above is $1 million of original issuance discount related to the 2020 Notes for each period. The remaining interest expense relates 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 date for the respective debt. The weighted-average effective interest rates for both the three months ended March 31, 2020 and 2019 were 3.2%.
In April 2020, the Company issued a private placement of $863 million aggregate principal amount of Convertible Senior Notes due May 1, 2025 with an interest rate of 0.75% (the "May 2025 Notes"). The May 2025 Notes are convertible, subject to certain conditions, into the Company's common stock at a conversion price of $1,886.44 per share. The May 2025 Notes are convertible, at the option of the holder, prior to November 1, 2024, 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 130% of the conversion price in effect for the notes on the last trading day of the immediate 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 May 2025 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 May 2025 Notes in an aggregate value ranging from $0 to $273 million depending upon the date of the transaction and the then current stock price of the Company. Starting on November 1, 2024, holders will have the right to convert all or any portion of the May 2025 Notes, regardless of the Company's stock price. The May 2025 Notes may not be redeemed by the Company prior to maturity. The holders may require the Company to repurchase the May 2025 Notes for cash in certain circumstances. Interest on the May 2025 Notes is payable on May 1 and November 1 of each year, beginning on November 1, 2020.
The proceeds from the issuance of the May 2025 Notes can be used for general corporate purposes, which may include repayment of debt, including the repayment, at maturity or upon conversion prior thereto, of the Company’s 2020 Notes and 2021 Notes.
Other Long-term Debt
Other long-term debt had a total carrying value of $6.6 billion and $6.7 billion at March 31, 2020 and December 31, 2019, respectively. Debt discount is amortized using the effective interest rate method over the period from the origination date through the stated maturity date. The following table summarizes the information related to other long-term debt at March 31, 2020:
|
|
|
|
|
|
|
|
|
Other Long-term Debt
|
|
Period of Issuance
|
|
Effective Interest Rate at Debt Origination
|
|
Timing of Interest Payments
|
0.8% Senior Notes due March 2022
|
|
March 2017
|
|
0.84
|
%
|
|
Annually in March
|
2.15% Senior Notes due November 2022
|
|
November 2015
|
|
2.20
|
%
|
|
Annually in November
|
2.75% Senior Notes due March 2023
|
|
August 2017
|
|
2.78
|
%
|
|
Semi-annually in March and September
|
2.375% Senior Notes due September 2024
|
|
September 2014
|
|
2.48
|
%
|
|
Annually in September
|
3.65% Senior Notes due March 2025
|
|
March 2015
|
|
3.68
|
%
|
|
Semi-annually in March and September
|
3.6% Senior Notes due June 2026
|
|
May 2016
|
|
3.62
|
%
|
|
Semi-annually in June and December
|
1.8% Senior Notes due March 2027
|
|
March 2015
|
|
1.80
|
%
|
|
Annually in March
|
3.55% Senior Notes due March 2028
|
|
August 2017
|
|
3.56
|
%
|
|
Semi-annually in March and September
|
For both the three months ended March 31, 2020 and 2019, the Company recognized interest expense of $42 million related to other long-term debt, which is almost entirely comprised of $40 million related to the contractual coupon interest for each period. The remaining interest expense relates to the amortization of debt discount and 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.
Historically, the aggregate principal value of the Euro-denominated Senior Notes maturing in March 2022, November 2022, September 2024 and March 2027 (collectively the "Euro-denominated debt") and accrued interest thereon had been designated as a hedge of the Company's net investment in a Euro functional currency subsidiary. Beginning in the second quarter of 2019, the Company has only designated certain portions of the aggregated principal value of the Euro-denominated debt as a hedge. For the three months ended March 31, 2020, the carrying value of the portion of Euro-denominated debt designated as a net investment hedge ranged from $2.1 billion to $3.2 billion. The foreign currency transaction gains or losses on these Euro-denominated liabilities are measured based upon changes in spot rates. The foreign currency transaction gains or losses on the Euro-denominated debt that is designated as a hedging instrument for accounting purposes are recorded in "Accumulated other comprehensive loss" in the Consolidated Balance Sheets. The net assets of this Euro functional currency subsidiary are translated into U.S. Dollars at each balance sheet date, with the effects of foreign currency changes also reported in "Accumulated other comprehensive loss" in the Consolidated Balance Sheets. The foreign currency transaction gains or losses on the Euro-denominated debt that is not designated as a hedging instrument are recognized in "Foreign currency transactions and other" in the Unaudited Consolidated Statements of Operations.
In April 2020, the Company issued Senior Notes due April 13, 2025 with an interest rate of 4.10% for an aggregate principal amount of $1 billion, Senior Notes due April 13, 2027 with an interest rate of 4.50% for an aggregate principal amount of $750 million and Senior Notes due April 13, 2030 with an interest rate of 4.625% for an aggregate principal amount of $1.5 billion. Interest on these Senior Notes is payable on April 13 and October 13 of each year, beginning on October 13, 2020. The proceeds from the issuance of the Senior Notes can be used for general corporate purposes, which may include repayment of debt, including the repayment, at maturity or upon conversion prior thereto, of the Company’s 2020 Notes and 2021 Notes.
10. TREASURY STOCK
At December 31, 2019, the Company had a total remaining authorization of $11.5 billion to repurchase its common stock related to a program authorized by the Company's Board of Directors in 2019 for $15.0 billion. At March 31, 2020, the Company had a total remaining authorization of $10.4 billion to repurchase its common stock. The Company has not repurchased any shares in the second quarter of 2020 and does not intend to initiate any repurchases until it has better visibility into the shape and timing of a recovery from the COVID-19 pandemic. Additionally, the Board of Directors has given the Company the general authorization to repurchase shares of its common stock withheld to satisfy employee withholding tax obligations related to stock-based compensation.
The following table summarizes the Company's stock repurchase activities during the three months ended March 31, 2020 and 2019 (in millions, except for shares, which are reflected in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2020
|
|
Three Months Ended
March 31, 2019
|
|
|
Shares
|
|
Amount
|
|
Shares
|
Amount
|
Authorized stock repurchase programs
|
|
601
|
|
$
|
1,122
|
|
|
1,548
|
|
$
|
2,735
|
|
General authorization for shares withheld on stock award vesting
|
|
77
|
|
129
|
|
|
71
|
|
121
|
|
Total
|
|
678
|
|
$
|
1,251
|
|
|
1,619
|
|
$
|
2,856
|
|
Stock repurchases of $40 million in December 2019 were settled in January 2020.
For the three months ended March 31, 2020 and 2019, the Company remitted employee withholding taxes of $119 million and $111 million, respectively, to the tax authorities, which is different from the aggregate cost of the shares withheld for taxes for each period due to the timing in remitting the taxes. The cash remitted to the tax authorities is included in financing activities in the Unaudited Consolidated Statements of Cash Flows.
At March 31, 2020, there were 22,439,549 shares of the Company's common stock held in treasury.
11. 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 months ended March 31, 2020 was 3.1%, compared to 21.0% for the three months ended March 31, 2019. The Company's 2020 effective tax rate differs from the U.S. federal statutory tax rate of 21%, and was lower for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, primarily due to the non-deductible goodwill impairment charge related to OpenTable and KAYAK and valuation allowances recorded against the deferred tax assets generated from the impairment of a long-term investment.
During the three months ended March 31, 2019, a majority of the Company's income was reported in the Netherlands, where Booking.com is based. According to Dutch corporate income tax law, income generated from qualifying innovative activities is taxed at a rate of 7% ("Innovation Box Tax") rather than the Dutch statutory rate of 25%. A portion of Booking.com's earnings during the three months ended March 31, 2019 qualified for Innovation Box Tax treatment, which had a beneficial impact on the Company's effective tax rate for that period. During the three months ended March 31, 2020, the Company did not benefit from the Innovation Box Tax.
12. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT
The tables below present the changes in the balances of accumulated other comprehensive loss ("AOCl") by component for the three months ended March 31, 2020 and 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments, net of tax
|
|
Net unrealized (losses) gains on available-for-sale securities, net of tax
|
|
Total AOCI, net of tax
|
|
Foreign currency translation
|
|
Net Investment
Hedges (1)
|
|
Total, net of tax
|
|
Before tax
|
|
Tax (expense) benefit
|
|
Total, net of tax
|
|
|
Before tax
|
|
Tax benefit(2)
|
|
Before tax
|
|
Tax expense
|
|
|
|
Balance, December 31, 2019
|
|
$
|
(186
|
)
|
|
$
|
54
|
|
|
$
|
(2
|
)
|
|
$
|
(5
|
)
|
|
(139
|
)
|
|
$
|
(7
|
)
|
|
$
|
(45
|
)
|
|
(52
|
)
|
|
(191
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive (Loss) Income
("OCI") before
reclassifications
|
|
(128
|
)
|
|
4
|
|
|
62
|
|
|
(15
|
)
|
|
(77
|
)
|
|
(94
|
)
|
|
17
|
|
|
(77
|
)
|
|
(154
|
)
|
Amounts reclassified to
net income (3)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
(1
|
)
|
|
3
|
|
|
3
|
|
OCI for the period
|
|
(128
|
)
|
|
4
|
|
|
62
|
|
|
(15
|
)
|
|
(77
|
)
|
|
(90
|
)
|
|
16
|
|
|
(74
|
)
|
|
(151
|
)
|
Balance, March 31, 2020
|
|
$
|
(314
|
)
|
|
$
|
58
|
|
|
$
|
60
|
|
|
$
|
(20
|
)
|
|
$
|
(216
|
)
|
|
$
|
(97
|
)
|
|
$
|
(29
|
)
|
|
$
|
(126
|
)
|
|
$
|
(342
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments, net of tax
|
|
Net unrealized (losses) gains on available-for-sale securities, net of tax
|
|
Total AOCI, net of tax
|
|
Foreign currency translation
|
|
Net Investment
Hedges (1)
|
|
Total, net of tax
|
|
Before tax
|
|
Tax expense
|
|
Total, net of tax
|
|
|
Before tax
|
|
Tax benefit(2)
|
|
Before tax
|
|
Tax benefit (expense)
|
|
|
|
Balance, December 31, 2018
|
|
$
|
(109
|
)
|
|
$
|
41
|
|
|
$
|
(73
|
)
|
|
$
|
12
|
|
|
(129
|
)
|
|
$
|
(157
|
)
|
|
$
|
(30
|
)
|
|
(187
|
)
|
|
(316
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OCI before reclassifications
|
|
(80
|
)
|
|
11
|
|
|
76
|
|
|
(19
|
)
|
|
(12
|
)
|
|
211
|
|
|
(51
|
)
|
|
160
|
|
|
148
|
|
Amounts reclassified to
net income (3)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
OCI for the period
|
|
(80
|
)
|
|
11
|
|
|
76
|
|
|
(19
|
)
|
|
(12
|
)
|
|
210
|
|
|
(51
|
)
|
|
159
|
|
|
147
|
|
Balance, March 31, 2019
|
|
$
|
(189
|
)
|
|
$
|
52
|
|
|
$
|
3
|
|
|
$
|
(7
|
)
|
|
$
|
(141
|
)
|
|
$
|
53
|
|
|
$
|
(81
|
)
|
|
$
|
(28
|
)
|
|
$
|
(169
|
)
|
(1) Net investment hedges balance, net of tax, at March 31, 2020 and earlier dates presented above, include accumulated net losses from fair value adjustments of $35 million after tax ($53 million before tax) associated with previously settled derivatives that were designated as net investment hedges. The remaining balances relate to foreign currency transaction gains (losses) and related tax benefits (expenses) associated with the Company's Euro-denominated debt that is designated as a hedge against the impact of currency fluctuations on the net assets of a Euro functional currency subsidiary (see Note 9).
(2) The tax benefits relate to foreign currency translation adjustments to the Company's one-time deemed repatriation tax liability recorded at December 31, 2017 and foreign earnings for periods after December 31, 2017 that are subject to U.S. federal and state income tax, resulting from the enactment of the U.S. Tax Cuts and Jobs Act (the "Tax Act").
(3) The reclassified net realized losses before tax from sales of investments in debt securities and impairment losses before tax related to debt securities held by the Company are included in "Foreign currency transactions and other" and the related reclassified tax benefits are included in "Income tax (benefit) expense" in the Unaudited Consolidated Statements of Operations. The cost of marketable debt securities sold is determined using a first-in and first-out method.
13. COMMITMENTS AND CONTINGENCIES
Competition and Consumer Protection Reviews
At times, online platforms, including online travel platforms, have been the subject of investigations or inquiries by various national competition authorities ("NCAs") or other governmental authorities regarding competition law matters,
consumer protection issues or other areas of concern. The Company is or has been involved in many such investigations. For example, the Company has been and continues to be involved in investigations 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 with room rates, conditions or availability that are at least as favorable as those offered to other online travel companies ("OTCs") or through the accommodation provider's website. To resolve and close certain of the investigations, the Company has from time to time made commitments to the investigating authorities regarding future business practices or activities. For example, Booking.com has made commitments to several NCAs, including agreeing to narrow the scope of its parity clauses, in order to resolve parity-related investigations. In addition, in September 2017, the Swiss Price Surveillance Office opened an investigation into the level of commissions of Booking.com in Switzerland and the investigation is ongoing. Some authorities are reviewing the online hotel booking sector more generally through market inquiries and the Company cannot predict the outcome of such inquiries or any resulting impact on its business, results of operations, cash flows or financial condition.
NCAs or other governmental authorities are continuing to review the activities of online platforms, including through the use of consumer protection powers. For example, the United Kingdom's NCA (the Competition and Markets Authority, or CMA) conducted a consumer protection law investigation into the clarity, accuracy and presentation of information on hotel booking sites with a specific focus on the display of search results (e.g., ranking), claims regarding discounts, methods of "pressure selling" (such as allegedly creating false impressions regarding room availability) and failure to disclose hidden charges. In connection with this investigation, Booking.com, agoda and KAYAK, along with a number of other OTCs, voluntarily agreed to certain commitments with the CMA addressing its concerns in resolution of this investigation, which took effect on September 1, 2019. Among other things, the commitments provided to the CMA included showing prices inclusive of all mandatory taxes and charges, providing information about the effect of money earned on search result rankings on or before the search results page and making certain adjustments to how discounts and statements concerning popularity or availability are shown to consumers. The CMA has stated that it expects all participants in the online travel market to adhere to the same standards, regardless of whether they formally signed the commitments. The commitments concluded the CMA's investigation without finding an infringement or an admission of wrongdoing of the OTCs involved. As a result of additional inquiries from other NCAs in the European Union, Booking.com has made similar commitments with the Consumer Protection Cooperation Network to be applicable in the European Union beginning in June 2020. In the future, it is possible other jurisdictions could engage Booking.com in discussions to implement similar changes to its business in those countries. The Company is unable to predict what, if any, effect these commitments and any future similar commitments will have on its business, industry practices or online commerce more generally. To the extent that any other investigations or inquiries result in additional commitments, fines, damages or other remedies, the Company's business, financial condition and results of operations could be harmed.
The Company is involved in litigation in Israel claiming that it has violated Israeli consumer protection laws. One such lawsuit alleges that the Company violated Israeli consumer protection laws by failing to properly display Israeli local taxes in the total prices shown to Israeli residents on its platform. Another lawsuit claims that the Company's parity contractual terms with partners violate Israeli consumer protection laws because they are anti-competitive. A third lawsuit claims Israeli consumer protection laws prohibit the Company from facilitating non-refundable bookings to Israeli residents. Each of the plaintiffs in these matters is requesting certification of a class and the Company is defending against class certification. If the court were to grant class certification for any of these matters and if the plaintiffs were successful on the merits of the claims, the Company could be required to pay damages. However, it is not reasonably possible to estimate the amount of such damages because the likelihood of class certification and the success of the merits of these cases are both too speculative at this stage in the litigation and also because a reasonable assessment of the size of any potential class is not possible at this time.
The Company is unable to predict how any current or future investigations or litigation may be resolved or the long-term impact of any such resolution on its business. For example, competition and consumer-law-related investigations, legislation or issues have and could in the future result in private litigation. More immediate results could include, among other things, the imposition of fines, commitments to change certain business practices or reputational damage, any of which could harm the Company's business, results of operations, brands or competitive position.
Tax Matters
French tax authorities conducted an audit of Booking.com for the years 2003 through 2012 and are conducting audits for the years 2013 through 2018. They are asserting that Booking.com has a permanent establishment in France and are seeking to recover what they claim are unpaid income and value-added taxes. In December 2015, the French tax authorities issued Booking.com assessments related to tax years 2003 through 2012 for approximately 356 million Euros, the majority of which represents penalties and interest. As a result of a formal demand from the French tax authorities for payment of the amounts assessed for the years 2003 through 2012, in January 2019, the Company paid the assessments of approximately 356 million Euros ($403 million) in order to preserve its right to contest those assessments in court. The payment, which is
included in "Other assets, net" in the Consolidated Balance Sheets at March 31, 2020 and December 31, 2019, does not constitute an admission that the Company owes the taxes and will be refunded (with interest) to the Company to the extent the Company prevails. If the Company is unable to resolve the matter with the French tax authorities, the Company plans to challenge the assessments in the French courts. In December 2019, the French tax authorities issued an additional assessment of 70 million Euros ($77 million), including interest and penalties, for the 2013 year asserting that Booking.com has taxable income in France attributable to a permanent establishment in France. Furthermore, the French tax authorities issued assessments totaling 39 million Euros ($43 million), including interest and penalties, for certain tax years between 2011 and 2015 on Booking.com's French subsidiary asserting that the subsidiary did not receive sufficient compensation for the services it rendered to Booking.com in the Netherlands. The Company has not recorded a liability in connection with any of the French tax assessments as the Company believes that Booking.com has been, and continues to be, in compliance with French tax law, and the Company is contesting the assessments. Additional assessments could result when the French tax authorities complete the outstanding audits.
Italian authorities are reviewing Booking.com's activities for the years 2011 through 2018. They are reviewing whether Booking.com has a permanent establishment in Italy and Booking.com's transfer pricing policies in Italy. The Company is cooperating with the investigation but intends to contest any allegation that Booking.com has a permanent establishment in Italy or that its transfer pricing policies are inappropriate. In December 2018 and 2019, respectively, the Italian tax authorities issued assessments on Booking.com's Italian subsidiary for approximately 48 million Euros ($52 million) for the 2013 tax year and 58 million Euros ($64 million) for the 2014 tax year asserting that its transfer pricing policies were inadequate. The Company has not recorded a liability in connection with these assessments. The Company believes that Booking.com has been, and continues to be, in compliance with Italian tax law. The Company paid 10 million Euros ($11 million) in December 2019 as a partial payment of the 2013 assessment. The payment, which is included in "Other assets, net" in the Consolidated Balance Sheets at March 31, 2020 and December 31, 2019, does not constitute an admission that the Company owes the taxes and will be refunded (with interest) to the Company to the extent the Company prevails. It is unclear what further actions, if any, the Italian authorities will take. Such actions could include closing the investigation, assessing Booking.com additional taxes, imposing interest, fines and penalties and/or bringing criminal charges.
In addition, Turkish tax authorities have asserted that Booking.com has a permanent establishment in Turkey and have issued tax assessments for the years 2012 through 2017 for approximately 544 million Turkish Lira ($83 million), including interest and penalties. The Company believes that Booking.com has been, and continues to be, in compliance with Turkish tax law, and the Company is contesting these assessments. The Company has not recorded a liability in connection with these assessments.
As a result of an internal review of tax policies and positions at one of the Company's smaller subsidiaries, the Company identified two issues related to the application of certain non-income-based tax laws to that subsidiary's business in 2018. At March 31, 2020 and December 31, 2019, respectively, the Company had $75 million and $67 million accrued related to these travel transaction taxes based on the Company's estimate of the probable travel transaction tax owed for the prior periods, including interest and penalties, as applicable. The related expenses are included in "General and administrative" expense in the Unaudited Consolidated Statements of Operations. The Company currently estimates that the reasonably possible loss related to these matters in excess of the amount accrued is approximately $25 million. The Company's internal review is ongoing, and, to the extent the Company determines that the probable taxes owed related to these matters exceed what has already been accrued or new issues are identified during this review, the Company may need to accrue additional amounts, which could adversely affect the Company’s business, results of operations, financial condition and cash flows.
From time to time, the Company is involved in other tax-related audits, investigations or proceedings, which could relate to income taxes, value-added taxes, sales taxes, employment taxes, etc. For example, the Company is subject to legal proceedings in the United States related to travel transaction taxes (e.g., hotel occupancy taxes, sales taxes, etc.).
Any taxes or other assessments in excess of the Company's current tax provisions, whether in connection with the foregoing or otherwise (including the resolution of any tax proceedings), could have a materially adverse impact on the Company's results of operations, cash flows and financial condition.
Other Matters
Beginning in 2014, Booking.com received several letters from the Netherlands Pension Fund for the Travel Industry (Reiswerk) (“BPF”) claiming that Booking.com is required to participate in the mandatory pension scheme of the BPF with retroactive effect to 1999, which has a higher contribution rate than the pension scheme in which Booking.com is currently participating. BPF instituted legal proceedings against Booking.com and in 2016 the District Court of Amsterdam rejected all of BPF’s claims. BPF appealed the decision to the Court of Appeal, and, in May 2019, the Court of Appeal also rejected all of
BPF’s claims. BPF has appealed to the Netherlands Supreme Court. The Company expects the Supreme Court to rule in early 2021. The Company believes that Booking.com is in compliance with its pension obligations. The Company has not recorded a liability in connection with a potential adverse outcome to this litigation. However, if Booking.com were to lose and all of BPF’s claims were to be accepted (including retroactivity to 1999), the Company estimates that as of March 31, 2020 the maximum loss, not including any potential interest or penalties, would be approximately $200 million. Such estimated potential loss increases as Booking.com continues not to contribute to the BPF and depends on Booking.com’s applicable employee compensation after March 31, 2020.
The Company accrues for certain legal contingencies where it is probable that a loss has been incurred and the amount can be reasonably estimated. Such accrued amounts are not material to the Company's balance sheets and provisions recorded have not been material to the Company's results of operations or cash flows.
From time to time, the Company has been, and expects to continue to be, subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of third-party intellectual property rights. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources, divert management's attention from the Company's business objectives and adversely affect the Company's business, results of operations, financial condition and cash flows.
Building Construction
In September 2016, the Company signed a turnkey agreement to construct an office building for Booking.com’s future headquarters in the Netherlands. Upon signing this agreement, the Company paid 43 million Euros ($48 million) for the acquired land-use rights, which was included in "Operating lease assets" in the Consolidated Balance Sheets. In addition, since signing the turnkey agreement the Company has made several progress payments principally related to the construction of the building, which are included in "Property and equipment, net" in the Consolidated Balance Sheets. As of March 31, 2020, the Company has paid 168 million Euros ($193 million) and had a remaining obligation of 102 million Euros ($112 million) related to the turnkey agreement. The remaining obligation will be paid through mid-2022, when the Company anticipates construction will be complete. Subsequent to March 31, 2020 the remaining obligation was reduced to 93 million Euros ($102 million).
In addition to the turnkey agreement, the Company has a remaining obligation at March 31, 2020 to pay 71 million Euros ($78 million) over the remaining term of the acquired land lease. The Company will also make additional capital expenditures to fit out and furnish the office space.
Other Contractual Obligations
In 2018, the Company entered into an agreement to sign a future lease related to approximately 222,000 square feet of office space in the city of Manchester in the United Kingdom for the future headquarters of Rentalcars.com. The Company's obligation to execute the lease is conditional upon the lessor completing certain activities, which are expected to be completed in 2021. If these activities are completed, the lease will commence for a term of approximately 13 years and the Company will have a lease obligation of approximately 65 million British Pounds Sterling ($80 million), excluding lease incentives. The Company will also make capital expenditures to fit out and furnish the office space.
14. OTHER
Restricted Cash and Cash Equivalents
Restricted cash and cash equivalents at March 31, 2020 and December 31, 2019 principally relates to the minimum cash requirement for the Company's travel-related insurance business. The following table reconciles cash and cash equivalents and restricted cash and cash equivalents reported in the Consolidated Balance Sheets to the total amounts shown in the Unaudited Consolidated Statements of Cash Flows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
December 31,
2019
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(Unaudited)
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As included in the Consolidated Balance Sheets:
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Cash and cash equivalents
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$
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6,363
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$
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6,312
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Restricted cash and cash equivalents included in "Prepaid expenses and other current assets, net"
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20
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|
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20
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Total cash and cash equivalents and restricted cash and cash equivalents as shown in the Unaudited Consolidated Statements of Cash Flows
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$
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6,383
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|
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$
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6,332
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Income Taxes Prepayment and Refund
In the first quarter of 2020, the Company made a prepayment of the Netherlands income taxes of $717 million to earn prepayment discounts, which were included in the “Prepaid expense and other current assets, net” in the Consolidated Balance Sheet at March 31, 2020. The Company requested a refund of this amount from the Dutch tax authorities and it was received in April 2020.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our Unaudited Consolidated Financial Statements, including the notes to those statements, included elsewhere in this Quarterly Report on Form 10-Q, and the Section entitled "Special Note Regarding Forward-Looking Statements" at the end of this Item 2. As discussed in more detail in the Section entitled "Special Note Regarding Forward-Looking Statements," this discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause those differences include those discussed in "Risk Factors" and elsewhere in this Quarterly Report. The information on our websites is not a part of this Quarterly Report and is not incorporated herein by reference.
We evaluate certain operating and financial measures on both an as-reported and constant-currency basis. We calculate constant currency by converting our current-year period financial results for transactions recorded in currencies other than U.S. Dollars using the corresponding prior-year period monthly average exchange rates rather than the current-year period monthly average exchange rates.
Overview
Our mission is to make it easier for everyone to experience the world. We seek to empower people to cut through travel barriers, such as money, time, language and overwhelming options, so they can use our services to easily and confidently get where they want to go, stay where they want to stay, dine where they want to dine, pay how they want to pay and experience what they want to experience. We connect consumers wishing to make travel reservations with providers of travel services around the world through our online platforms. Through one or more of our brands, consumers can: book a broad array of accommodations (including hotels, motels, resorts, homes, apartments, bed and breakfasts, hostels and other properties); make a car rental reservation or arrange for an airport taxi; make a dinner reservation; or book a flight, cruise, vacation package, tour or activity. Consumers can also use our meta-search services to easily compare travel reservation information, such as airline ticket, hotel reservation and rental car reservation information, from hundreds of online travel platforms at once. In addition, we offer various other services to consumers and partners, such as certain travel-related insurance products and restaurant management services to restaurants.
We offer these services through six primary consumer-facing brands: Booking.com, KAYAK, priceline, agoda, Rentalcars.com and OpenTable. While historically our brands operated on a largely independent basis and many of them focused on a particular service (e.g., accommodation reservations) or geography, we are increasing the collaboration, cooperation and interdependency among our brands in our efforts to provide consumers with the best and most comprehensive services. We also seek to maximize the benefits of our scale by sharing resources and technological innovations, co-developing new services and coordinating activities in key markets among our brands. For example, Booking.com, the world’s leading brand for booking online accommodation reservations (based on room nights booked), offers rental car and other ground transportation services, flights, restaurant reservations, tours and activities reservations and other services, many of which are supported by our other brands. Similarly, hotel reservations available through Booking.com are also generally available through agoda and priceline.
We refer to our company and all of our subsidiaries and brands collectively as "Booking Holdings," the "Company," "we," "our" or "us."
Our business is driven primarily by international results, which consist of the results of Booking.com, agoda and Rentalcars.com in their entirety and the international businesses of KAYAK and OpenTable. This classification is independent of where the consumer resides, where the consumer is physically located while using our services or the location of the travel service provider or restaurant. For example, a reservation made through Booking.com (which is domiciled in the Netherlands) at a hotel in New York by a consumer in the United States is part of our international results. In 2019, our international business (the substantial majority of which is generated by Booking.com) represented approximately 90% of our consolidated revenues. A significant majority of our revenues, including a significant majority of our international revenues, is earned in connection with facilitating accommodation reservations. See Note 2 to the Unaudited Consolidated Financial Statements for more geographic information.
We derive substantially all of our revenues from enabling consumers to make travel service reservations. We also earn revenues from credit card processing rebates and customer processing fees, advertising services, restaurant reservations and restaurant management services, and various other services, such as travel-related insurance revenues.
Trends
In December 2019, a novel strain of coronavirus, COVID-19, was first detected in Wuhan, China, and has since spread to other regions, including Europe and the United States. On March 11, 2020, the World Health Organization declared that the rapidly spreading COVID-19 outbreak was a global pandemic (“COVID-19 pandemic”). In response to the pandemic, many governments around the world have implemented, and continue to implement, a variety of measures to reduce the spread of COVID-19, including travel restrictions and bans, instructions to residents to practice social distancing, quarantine advisories, shelter-in-place orders and required closures of non-essential businesses. These government mandates have forced many of the partners on whom our business relies, including hotels and other accommodation providers, airlines and restaurants, to seek government support in order to continue operating, to curtail drastically their service offerings or to cease operations entirely. Further, these measures have materially adversely affected, and may further adversely affect, consumer sentiment and discretionary spending patterns, economies and financial markets, and our workforce, operations and customers. The COVID-19 pandemic and the resulting economic conditions and government orders have resulted in a material decrease in consumer spending and an unprecedented decline in travel and restaurant activities and consumer demand for related services. Our financial results and prospects are almost entirely dependent on the sale of such travel and restaurant-related services. Our results for the quarter ended March 31, 2020 have been significantly and negatively impacted, with a material decline in gross travel bookings, room nights booked, total revenues, net income and cash flow from operations as compared to the corresponding period in 2019. Newly-booked room night reservations, excluding the impact of cancellations, have been declining as the COVID-19 pandemic has spread, and decreased by over 85% in April 2020 as compared to April 2019. In addition, we expect our revenue will be impacted to a greater extent considering the impact of cancellations in March for April stays and also since many hotels, especially in Europe, were not open in April. We expect to continue to see severely reduced new travel and restaurant reservation bookings as compared to 2019 levels for the foreseeable future, which will have a materially adverse impact on our business, financial condition, results of operations and cash flows. Further, given the volatility in global markets and the financial difficulties faced by many of our travel service provider and restaurant partners, we have increased our provision for expected credit losses on receivables from and cash advances made to our travel service provider and restaurant partners.
Due to the uncertain and rapidly evolving nature of current conditions around the world, we are unable to predict accurately the impact that the COVID-19 pandemic will have on our business going forward. We currently expect, however, that the COVID-19 pandemic will impact our financial performance for the quarter ended June 30, 2020, much more significantly than it impacted the quarter ended March 31, 2020, primarily because an increasing number of markets and locations will have been subject to the governmental measures and economic disruptions noted above during the entirety of the second quarter (as compared to the first quarter, when the effects of the outbreak were largely limited to China and certain other Asian markets during January 2020 and much of February 2020). With the spread of COVID-19 to other regions, such as Europe and the United States, we expect the pandemic and its effects to continue to have a significant adverse impact on our business for the duration of the pandemic and during the subsequent economic recovery, which could be an extended period of time. For more information, see Part II, Item 1A, Risk Factors - "The COVID-19 pandemic has materially adversely affected, and may further adversely impact, our business and financial performance."
In response to the COVID-19 pandemic, we have taken and are taking various actions to address the impact of the pandemic on our business. Among other things, we have:
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Eliminated non-essential business travel
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Canceled internal company events and offsites
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•
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Significantly reduced marketing spend worldwide
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Implemented a general company-wide hiring freeze and initiated certain personnel actions such as furloughs and workforce reductions
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Evaluated available government aid programs and, as we deem appropriate, applied for or begun to participate in certain of these programs (in particular those that provide employee wage support)
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Suspended share repurchases
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Raised $4.1 billion in debt and negotiated an amendment to our revolving credit facility to provide additional financial flexibility
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Further, our Chief Executive Officer and the Chief Executive Officers of our brands have voluntarily declined their salaries during the crisis, certain other senior managers have voluntarily reduced their salaries during the crisis and our non-employee Directors have voluntarily waived their cash fees for the rest of 2020. We have also been working with travelers and our travel service provider partners to deal with reservation cancellations and other disruptions arising from the impact of the pandemic. For example, Booking.com has committed to allow cancellations of certain non-refundable bookings that were impacted by
government travel restrictions and OpenTable has suspended restaurant subscription fees for the remainder of the year. The impacts of the COVID-19 pandemic are wide-ranging and affect all aspects of our business. As a result, the pandemic has negatively affected our financial results and condition as described throughout this Quarterly Report on Form 10-Q. Among other effects, we have recorded a reduction in revenue for certain refunds paid or estimated to be payable to travelers, a significant impairment of goodwill, a write-down of our investment in Didi Chuxing, a downward adjustment to our stock-based compensation expense due to our expectation that we will not achieve our previously anticipated financial performance and additional provision for expected credit losses. We anticipate that we will continue to make decisions and take actions to address the impacts of the pandemic on our business, including additional efforts to reduce costs while preserving our ability to offer valuable services to consumers and partners when the industry recovers. Further, the full impact of the pandemic on our business is impossible to predict, and therefore we may recognize additional impairments, provisions and other impacts to our operating results and financial condition in future periods as a result of the pandemic.
Prior to the COVID-19 pandemic, we experienced many years of significant growth in our accommodation reservation services. We believe this growth was the result of, among other things, the broader shift of travel purchases from offline to online, the widespread adoption of mobile devices and the growth of travel overall. We also believe this growth was the result of the continued innovation and execution by our teams around the world to increase the number and the variety of accommodations we offer consumers, increase and improve content, build distribution and improve the consumer experience on our online platforms, as well as consistently and effectively marketing our brands through performance and brand marketing efforts. Prior to the COVID-19 pandemic, these year-over-year growth rates generally decelerated due to the size of our accommodation reservation business and the generally slowing growth rate of the online travel market. When the travel market begins its recovery from the impact of the COVID-19 pandemic, we expect to see accelerating growth rates until we return to the level of travel market demand that we observed prior to the COVID-19 pandemic, after which we expect prior trends to generally resume.
We are a global business, and online travel growth rates vary across the world depending on numerous factors, including local and regional economic conditions, individual disposable income, access to the internet and adoption of e-commerce. Over the last several years, and prior to the COVID-19 pandemic, online travel growth rates had generally slowed in markets such as North America and Europe where online activity was high and consumers had been engaging in e-commerce transactions for many years, while online travel growth rates remained relatively high in markets such as Asia-Pacific where incomes were rising more quickly and the increased availability and use of mobile devices had accelerated the growth of internet usage and travel e-commerce transactions. Over the long term, we expect the broader global economy and online travel market to recover from the COVID-19 pandemic, and following the recovery of the travel industry to the level of pre-COVID-19 pandemic demand, we would expect online travel growth rates will slow as markets continue to mature. However, we believe that the opportunity to grow our business beyond pre-COVID-19 pandemic levels exists for the markets in which we operate, including in both mature and less mature markets. Further, we believe that this opportunity for growth exists because we believe we provide significant value to travel service providers, regardless of size or geography, due to our global reach and online marketing expertise. For example, we believe that accommodation providers of all sizes, from large hotel chains to small, independent hotels and alternative accommodations such as homes and apartments, benefit from using our services, which enable them to reach a broader audience of potential customers.
Our growth has primarily been generated by the worldwide accommodation reservation business of Booking.com, which is our most significant brand, and has been due, in part, to the availability of a large number of properties through Booking.com. Booking.com included approximately 2,607,000 properties on its website at March 31, 2020, consisting of approximately 472,000 hotels, motels and resorts and approximately 2,135,000 homes, apartments and other unique places to stay, compared to approximately 2,290,000 properties (including approximately 438,000 hotels, motels and resorts and approximately 1,852,000 homes, apartments, and other unique places to stay) at March 31, 2019. Booking.com categorizes properties listed on its website as either (a) hotels, motels and resorts, which groups together more traditional accommodation types (including hostels and inns), or (b) homes, apartments and other unique places to stay, also referred to as alternative accommodations, which encompasses all other types of accommodations, including bed and breakfasts, villas, apart-hotels and beyond.
We intend to continue to improve the accommodation choices available for reservation on our platforms, however the growth rate of the number of accommodations on our platforms may vary in part as a result of removing accommodations from time to time. The COVID-19 pandemic may cause more accommodations to be removed from our platform than in prior periods due to increases in property closures or changes in ownership. Many of the newer accommodations we add to our travel reservation services, especially in highly-penetrated markets, may have fewer rooms or higher credit risk and may appeal to a smaller subset of consumers (e.g., hostels and bed and breakfasts). Because alternative accommodations are often either a single unit or a small collection of independent units, these properties generally represent more limited booking opportunities than hotels, motels and resorts, which generally have more units to rent per property. Further, alternative accommodations in
general may be subject to increased seasonality due to local tourism seasons or other factors or may not be available at peak times due to use by the property owners. We may also experience lower profit margins with respect to these properties due to certain additional costs, such as increased customer service costs, related to offering these accommodations on our platforms. As our alternative accommodation business has grown, these different characteristics have negatively impacted our profit margins and we expect this trend to continue. Further, to the extent these properties represent an increasing percentage of the properties added to our platforms, we expect that our room nights growth rate and property growth rate will continue to diverge over time (since each such property has fewer booking opportunities). As a result of the foregoing, as the percentage of alternative accommodation properties increases, the number of reservations per property will likely continue to decrease. We believe that continuing to expand the number and variety of accommodations available through our services, in particular Booking.com, will help us to continue to grow our accommodation reservation business.
We are constantly innovating to grow our business by, among other things, providing a best-in-class user experience with intuitive, easy-to-use online platforms (i.e., websites and mobile apps) to ensure that we are meeting the needs of online consumers while aiming to exceed their expectations. As part of these ongoing efforts, we have a long-term strategy to build a more integrated offering of multiple elements of travel, which we refer to as the "Connected Trip." Although we expect our efforts to build the Connected Trip may increase revenue growth over time, we may see a negative impact on our operating margins in the near term as we incur the expenses associated with these investments. Further, to the extent our non-accommodation services grow faster than our accommodation services, whether as part of the Connected Trip or otherwise, our operating margins may be negatively affected if we experience an increasing mix of revenues from lower-margin services.
As part of our strategy to provide more payment options to consumers and travel service providers, increase the number and variety of accommodations available on Booking.com and enable the growth of our in-destination activities businesses, Booking.com is increasingly processing transactions on a merchant basis, where it facilitates payments from travelers for the services provided. This allows Booking.com to process transactions for travel service providers and to increase its ability to offer secure and flexible transaction terms to consumers, such as the form and timing of payment. We believe that adding these types of service offerings will benefit consumers and travel service providers, as well as our gross bookings, room night and earnings growth rates. However, this results in additional expenses for personnel, payment processing, customer chargebacks (including those related to fraud) and other expenses related to these transactions, which are recorded in "Personnel" and "Sales and other expenses" in our Unaudited Consolidated Statements of Operations, as well as associated incremental revenues in the form of credit card rebates, for example, which are recorded in "Merchant revenues." To the extent more of our business is generated on a merchant basis, we will incur a greater level of these merchant-related expenses, which would negatively impact our operating margins despite increases in associated incremental revenues. Components of revenues and expenses related to our merchant business may be recognized in different periods. These timing factors could impact our operating margins as well as the relationship between our gross bookings and revenues in a particular period, especially as our merchant business increases as a percentage of our overall business.
We compete globally with both online and traditional providers of travel and restaurant reservation and related services. The markets for the services we offer are intensely competitive, constantly evolving and subject to rapid change, and current and new competitors can launch new services at relatively low cost. Some of our current and potential competitors, such as Google, Apple, Alibaba, Tencent, Amazon and Facebook, have significantly more customers or users, consumer data and financial and other resources than we do, and they may be able to leverage other aspects of their businesses (e.g., search or mobile device businesses) to enable them to compete more effectively with us. For example, Google has entered various aspects of the online travel market and has grown rapidly in this area, including by offering a flight meta-search product (Google Flights), a hotel meta-search product (Google Hotel Ads), a vacation rental meta-search product, its "Book on Google" reservation functionality and integrating its hotel and restaurant meta-search products into its Google Maps app, as well as Google Travel, a planning tool which aggregates its flight, hotel and packages products in one website. Moreover, as the economy and the travel industry recover from the impact of the COVID-19 pandemic, the structure of the travel industry could change in unexpected ways, which could advantage or disadvantage us and benefit certain of our existing competitors or new entrants. As a result, our historical strengths may not provide the competitive advantages that they did prior to the pandemic. If we are unable to successfully adapt to any changes in how the travel industry operates or to changes in the ways in which consumers purchase travel services, our ability to compete, and therefore our business and results of operations, would be adversely affected.
Our markets are also subject to rapidly changing conditions, including technological developments, consumer behavior changes, regulatory changes and travel service provider consolidation. We expect these trends to continue. For example, we have experienced a significant shift of both direct and indirect business to mobile platforms and our advertising partners are also seeing a rapid shift of traffic to mobile platforms. Advertising and distribution opportunities may be more limited on mobile devices given their smaller screen sizes. In addition, the revenue earned on a mobile transaction may be less than a typical desktop transaction due to different consumer purchasing patterns. For example, accommodation reservations made on
a mobile device typically are for shorter lengths of stay, have lower accommodation average daily rates ("ADRs") and are not made as far in advance. For more detail regarding the competitive trends and risks we face, see Part II, Item 1A, Risk Factors - "Intense competition could reduce our market share and harm our financial performance." and "Consumer adoption and use of mobile devices creates challenges and may enable device companies such as Google and Apple to compete directly with us." and "We may not be able to keep up with rapid technological or other market changes."
Although we believe that providing an extensive collection of properties, excellent customer service and an intuitive, easy-to-use consumer experience are important factors influencing a consumer's decision to make a reservation, for many consumers, particularly in certain markets, the price of the travel service is the primary factor determining whether a consumer will book a reservation. As a result, it is increasingly important to offer travel services, such as accommodation reservations, at competitive prices, whether through discounts, coupons, closed-user group rates or loyalty programs, or otherwise. These initiatives have resulted and in the future may result in lower ADRs and lower revenue as a percentage of gross bookings. Discounting and couponing coupled with a high degree of consumer shopping behavior is particularly common in Asian markets. In some cases, our competitors are willing to make little or no profit on a transaction, or offer travel services at a loss, in order to gain market share.
We have experienced a meaningful decline in constant-currency accommodation ADRs since the COVID-19 outbreak and it is uncertain how long the COVID-19 pandemic will impact our ADRs. Prior to the outbreak, we observed a trend of declining constant-currency accommodation ADRs, which we expected to continue, though the rate of decline may fluctuate and there may be periods of stable or increasing ADRs. We believe the trend of declining ADRs, observed prior to the outbreak, was partially driven by the negative impact of the changing geographical mix of our business (e.g., lower ADR regions like Asia-Pacific are generally growing faster than higher ADR regions like Western Europe) as well as pricing pressures within local markets from time to time which resulted from competitive conditions, weakening economic conditions or changes in travel patterns. These declining ADR trends have resulted in and may continue to result in our gross bookings growing at a lower rate of growth than our accommodation room nights.
We have established widely used and recognized e-commerce brands through marketing and promotional campaigns. Historically our marketing expenses have increased significantly, however, we experienced more moderate growth rates in recent years, and since the COVID-19 pandemic, our marketing expenses have declined significantly. Our marketing expense is comprised of performance marketing and brand marketing expenses. Our performance marketing expense, which represents a substantial majority of our marketing expense, is primarily related to the use of online search engines (primarily Google), meta-search and travel research services and affiliate marketing to generate traffic to our websites. Our brand marketing expense is primarily related to costs associated with producing and airing television advertising, online video advertising (for example, on YouTube and Facebook), online display advertising and other brand marketing. Total marketing expenses were $0.9 billion and $1.2 billion for the three months ended March 31, 2020 and March 31, 2019, respectively. We expect that in the second quarter and for the remainder of 2020 our total marketing expenses will be substantially lower than the comparable period in 2019. We expect that our marketing expenses will remain significantly below 2019 levels for the remainder of 2020.
Marketing efficiency, expressed as marketing expense as a percentage of total revenues, is impacted by a number of factors that are subject to variability and that are, in some cases, outside of our control, including ADRs, costs per click, cancellation rates, foreign currency exchange rates, our ability to convert paid traffic to booking customers, the timing and effectiveness of our brand marketing campaigns and the extent to which consumers come directly to our platforms for bookings. For example, competition for desired rankings in search results and/or a decline in ad clicks by consumers could increase our costs per click and reduce our marketing efficiency. Changes by Google or any of our other search or meta-search partners in how it presents travel search results, including, if applicable, by placing its own offerings at or near the top of search results, or the manner in which it conducts the auction for placement among search results may be competitively disadvantageous to us and may impact our ability to efficiently generate traffic to our websites.
We have observed a long-term trend of decreasing performance marketing returns on investment ("ROIs"). In recent years, we have observed periods of stable or increasing ROIs, however, since the COVID-19 pandemic we have experienced decreasing ROIs driven by an increase in cancellation rates. When evaluating our performance marketing spend, we typically consider several factors for each channel, such as the customer experience on the advertising platform, the incrementality of the traffic we receive and the anticipated repeat rate from a particular platform, as well as other factors. However, with the significant decrease in demand due to the COVID-19 pandemic, our performance marketing spend is highly influenced by expected cancellation rates in addition to the other factors listed above. The amount of business we obtain through each performance marketing channel is impacted by numerous factors, including the level of consumer demand for travel, bidding decisions by us and our competitors (including decisions to optimize performance marketing ROIs) and the marketing efforts and success of those channels to attract consumers and generate demand. See Part II, Item 1A, Risk Factors - "We rely on marketing channels to generate a significant amount of traffic to our platforms and grow our business." and "Our business
could be negatively affected by changes in online search and meta-search algorithms and dynamics or traffic-generating arrangements."
In recent years, we experienced significant increases in our cancellation rates, which negatively affected our marketing efficiency and results of operations. From the third quarter of 2018 until the fourth quarter of 2019, our cancellation rates generally decreased, which benefited our marketing efficiency and results of operations. Since the COVID-19 pandemic we have experienced unprecedented increases in cancellation rates which negatively impacted our marketing efficiency and results of operations. For example, increased cancellations have resulted in increased customer service costs, as well as higher than normal cash outlays to refund consumers for prepaid reservations. While it is uncertain how long the COVID-19 pandemic (including any relapse of the pandemic) will impact our cancellation rates, we expect that this impact will eventually diminish over time as we return to more normal levels of travel demand.
Perceived or actual adverse economic conditions, including slow, slowing or negative economic growth, high or rising unemployment rates, inflation and weakening currencies, and concerns over government responses such as higher taxes or tariffs and reduced government spending have impaired and could in the future impair consumer spending and adversely affect travel demand. We expect the lingering concerns of consumers around the safety of traveling as well as reduced discretionary incomes could negatively impact leisure travel demand. Further, political uncertainty, conditions or events, such as the variety of measures implemented by many governments around the world to reduce the spread of COVID-19, including travel restrictions and bans, instructions to residents to practice social distancing, quarantine advisories, shelter-in-place orders and required closures of non-essential businesses can also negatively affect consumer spending and adversely affect travel demand. At times, we have experienced volatility in transaction growth rates, increased cancellation rates and weaker trends in ADRs across many regions of the world, particularly in those countries that appear to be most affected by economic and political uncertainties, which we believe are due at least in part to these macro-economic conditions and concerns. For more detail, see Part II, Item 1A, Risk Factors - "The COVID-19 pandemic has materially adversely affected, and may further adversely impact, our business and financial performance" and "Declines or disruptions in the travel industry could adversely affect our business and financial performance."
These and other macro-economic uncertainties, such as geopolitical tensions and differing central bank monetary policies, have led to significant volatility in the exchange rates between the U.S. Dollar and the Euro, the British Pound Sterling and other currencies. Significant fluctuations in foreign currency exchange rates, stock markets and oil prices can also impact consumer travel behavior.
As noted earlier, our international business represents a substantial majority of our financial results. Therefore, because we report our results in U.S. Dollars, we face exposure to movements in foreign currency exchange rates as the financial results and the financial condition of our international businesses are translated from local currency (principally Euros and British Pounds Sterling) into U.S. Dollars. As a result, both the absolute amounts of and percentage changes in our foreign-currency-denominated net assets, gross bookings, revenues, operating expenses and net income as expressed in U.S. Dollars are affected by foreign currency exchange rate changes. Our foreign-currency-denominated gross bookings, revenues, operating expenses and net income as expressed in U.S. Dollars are lower for the three months ended March 31, 2020 than they would have been had foreign currency exchange rates remained where they were for the three months ended March 31, 2019. For example, total revenues from our international operations decreased by 18.9% for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019, but, without the impact of changes in foreign currency exchange rates, decreased year-over-year on a constant-currency basis by approximately 17%. Since our expenses are generally denominated in foreign currencies on a basis similar to our revenues, our operating margins have not been significantly impacted by currency fluctuations. Historically, the aggregate principal value of our Euro-denominated long-term debt and accrued interest thereon provided a hedge against the impact of foreign currency exchange rate fluctuations on the net assets of one of our Euro functional currency subsidiaries. Beginning in the second quarter of 2019, we have only designated certain portions of the aggregate principal value of our Euro-denominated debt as a hedge, and as a result we have recognized foreign currency transaction gains or losses. The foreign currency transaction gains or losses on the Euro-denominated debt that is not designated as a hedging instrument for accounting purposes are recognized in "Foreign currency transactions and other" in the Unaudited Consolidated Statement of Operations (see Note 6 to our Unaudited Consolidated Financial Statements). For more information, see Part II, Item 1A, Risk Factors - "We are exposed to fluctuations in foreign currency exchange rates."
We generally enter into derivative instruments to minimize the impact of short-term foreign currency exchange rate fluctuations on the translation of our consolidated operating results into U.S. Dollars. However, such derivative instruments are short-term in nature and not designed to hedge against currency fluctuations that could impact growth rates for our gross bookings or revenues (see Note 6 to our Unaudited Consolidated Financial Statements for additional information related to our derivative contracts).
Many taxing authorities are increasingly focused on ways to increase tax revenues and have targeted large multinational technology companies in these efforts. As a result, many countries have implemented or are considering the adoption of a digital services tax that imposes a tax on revenue earned from digital advertisements and the use of online platforms, even when there is no physical presence in the jurisdiction. Currently, rates for this tax range from 2% to 7.5% of revenue deemed generated in the jurisdiction. The digital services taxes currently in effect have negatively impacted our results of operations and if many other countries pass similar legislation, the collective impact of all of these measures could have a materially adverse impact on our results of operations and cash flows. For more information, see Part II, Item 1A, Risk Factors - "We may have exposure to additional tax liabilities."
Many national governments have conducted or are conducting investigations into competitive practices within the online travel industry, and we may be involved or affected by such investigations and their results. Some countries have adopted or proposed legislation that could also affect business practices within the online travel industry. For example, France, Italy, Belgium and Austria have passed legislation prohibiting parity contract clauses in their entirety. Also, a number of governments are investigating or conducting information-gathering exercises with respect to compliance by OTCs with consumer protection laws, including practices related to the display of search results and search ranking algorithms, claims regarding discounts, disclosure of charges and availability, and similar messaging. For more information on these investigations and their potential effects on our business, see Note 13 to our Unaudited Consolidated Financial Statements and Part II, Item 1A, Risk Factors - "Our business is subject to various competition, anti-trust, consumer protection and online commerce laws, rules and regulations around the world, and as the size of our business grows, scrutiny of our business by legislators and regulators in these areas may intensify." In addition to the price parity and consumer protection investigations, from time to time national competition authorities, other governmental agencies, trade associations and private parties take legal actions, including commencing legal proceedings, that may affect our operations. In general, increased regulatory focus on online businesses, including online travel businesses like ours, could result in increased compliance costs or otherwise adversely affect our business.
Seasonality
In recent years, the majority of our gross bookings have been generated in the first half of the year, as consumers planned and reserved their spring and summer vacations in Europe and North America. However, we would generally recognize revenue from these bookings when the travel begins (at "check-in"), which can be in a quarter other than when the associated reservations are booked. In contrast, we expensed the substantial majority of our marketing activities as the expense is incurred, which, in the case of marketing in particular, is typically in the quarter in which associated reservations were booked. As a result of this timing difference between when we recorded marketing expense and when we recognized associated revenue, we have experienced our highest levels of profitability in the third quarter of the year, which is when we experienced the highest levels of accommodation check-ins for the year for our European and North American businesses. The first quarter of the year was typically our lowest level of profitability and highest level of volatility in earnings growth rates due to these seasonal timing factors. For our Asia-Pacific business, we experienced the highest level of accommodation check-ins in the fourth quarter. As the relative growth rates for our businesses fluctuate, the quarterly distribution of our operating results may vary. We cannot currently predict travel patterns given the COVID-19 pandemic and we may not experience typical seasonality impacts in 2020.
For several years, we experienced an expansion of the booking window (the average time between the making of a travel reservation and the travel), which impacts the relationship between our gross bookings (recognized at the time of booking) and our revenues (recognized at the time of check-in). However, we saw a contraction of the booking window throughout 2018 and 2019. Due to the impact of the COVID-19 pandemic on our booking trends, we have seen a recent expansion in the booking window as an increased percentage of newly-booked room nights have been made for travel that will occur further in the future. We have also seen a recent increase in the percentage of newly booked room nights for travel that will occur within a couple of days of booking, however, the increased mix of the longer window bookings is more than offsetting the increase in these close-in bookings, which results in the expansion of the booking window we are currently seeing. Future changes in the length of the booking window will affect the degree to which our gross bookings and revenues occur in the same period and, as a result, whether our gross bookings growth rates and revenue growth rates converge or diverge.
In addition, the date on which certain holidays fall can have an impact on our quarterly results. For example, in 2019, Easter fell on April 21 and Easter-related travel began in the second quarter, when the associated revenue was recognized. By comparison, in 2018, Easter was on April 1 and a meaningful amount of Easter-related travel began in the week leading up to the holiday with the associated revenue being recognized in the first quarter of 2018. As a result of the shift in Easter timing relative to 2018, our first quarter 2019 year-over-year growth rates in revenue, operating income and operating margins were negatively impacted and our second quarter 2019 year-over-year growth rates were positively impacted. In 2020, Easter fell on
April 12, in the second quarter as it did in 2019, and as a result we do not expect a meaningful impact to our year-over-year growth rates in 2020 from the Easter holiday. Further, due to the significant reduction in travel demand related to the COVID-19 pandemic, we do not expect the timing of the Easter holiday to have a meaningful impact on our growth rates in 2021. The timing of other holidays such as Ramadan can also impact our quarterly year-over-year growth rates.
The impact of seasonality can be exaggerated in the short term by the gross bookings growth rate of the business. For example, in periods where our gross bookings growth rate substantially decelerates, our operating margins typically benefit from relatively less variable marketing expense. In addition, revenue growth is typically less impacted by decelerating gross bookings growth in the near term due to the benefit of revenue related to reservations booked in previous quarters, but any such deceleration would negatively impact revenue growth in subsequent periods. Conversely, in periods where our gross bookings growth rate accelerates, our operating margins are typically negatively impacted by relatively more variable marketing expense. In addition, revenue growth is typically less impacted by accelerating gross bookings growth in the near term, but any such acceleration would positively impact revenue growth in subsequent periods as a portion of the revenue recognized from such gross bookings will occur in future quarters.
Other Factors
We believe that our future success depends in large part on our ability to continue to profitably grow our brands worldwide, and, over time, to offer other travel and travel-related services. Factors beyond our control, such as oil prices, stock market volatility, terrorist attacks, unusual or extreme weather or natural disasters such as earthquakes, hurricanes, tsunamis, floods, fires, droughts and volcanic eruptions, travel-related health concerns including pandemics and epidemics such as COVID-19 and other coronaviruses, Ebola and Zika, political instability, changes in economic conditions, wars and regional hostilities, imposition of taxes, tariffs or surcharges by regulatory authorities, changes in trade policies or trade disputes, changes in immigration policies or travel-related accidents or increased focus on the environmental impact of travel, can disrupt travel, limit the ability or willingness of travelers to visit certain locations or otherwise result in declines in travel demand. These kinds of events have negatively affected our business and results of operations in the past and may do so again in the future. Because these events or concerns, and the full impact of their effects, are largely unpredictable, they can dramatically and suddenly affect travel behavior by consumers, and therefore demand for our services and our relationships with travel service providers and other partners, any of which can adversely affect our business and results of operations. See Part II, Item 1A, Risk Factors - "The COVID-19 pandemic has materially adversely affected, and may further adversely impact, our business and financial performance" and "Declines or disruptions in the travel industry could adversely affect our business and financial performance."
The extent of the effects of the COVID-19 pandemic on our business, results of operations, cash flows and growth prospects is highly uncertain and will ultimately depend on future developments. We expect the pandemic and its effects to continue to have a significant adverse impact on our business for the duration of the pandemic and during the subsequent economic recovery, which could be an extended period of time. Over the long-term, we intend to continue to invest in marketing and promotion, technology and personnel within parameters consistent with attempts to improve long-term operating results, even if those expenditures create pressure on operating margins. In recent years, we have experienced pressure on operating margins as we invested in initiatives to drive future growth. We also intend to broaden the scope of our business, and to that end, we explore strategic alternatives from time to time in the form of, among other things, acquisitions. We believe competitive pressure to innovate will encompass a wider range of services and technologies, including services and technologies that may be outside of our historical core business, and our ability to keep pace may slow. Potential competitors, such as emerging start-ups, may be able to innovate and focus on developing a particularly new product or service faster than we can or may foresee consumer need for new services or technologies before us. Some of our larger competitors or potential competitors have more resources or more established or diversified relationships with consumers than we do, and they could use these advantages in ways that could affect our competitive position, including by making acquisitions, entering or investing in travel reservation businesses, investing in research and development, and competing aggressively for highly-skilled employees. For example, because consumers often utilize other online services more frequently than online travel services, a competitor or potential competitor that has established other, more frequent online interactions with consumers may be able to more easily or cost-effectively acquire customers for its online travel services than we can. Our goal is to grow revenue and achieve healthy operating margins in an effort to maintain profitability. The uncertain and highly competitive environment in which we operate makes the prediction of future results of operations difficult, and accordingly, we may not be able to return to the levels of revenue growth and profitability we experienced before the COVID-19 pandemic.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our Unaudited Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). Certain of our accounting estimates are particularly important to our financial position and results of operations and require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Our management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. We evaluate our estimates on an ongoing basis. Estimates are based on, among other things, historical experience, terms of existing contracts, our observance of trends in the travel industry and on various other assumptions that we believe to be reasonable under the circumstances. Our actual results may differ from these estimates under different assumptions or conditions.
Valuation of Goodwill and Other Long-lived Assets
A substantial portion of our intangible assets and goodwill relates to the acquisitions of OpenTable and KAYAK.
We review long-lived assets whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The assessment of possible impairment is based upon the ability to recover the carrying value of the assets from the estimated undiscounted future net cash flows, before interest and taxes, of the related asset group. Due to the significant and negative financial impact of the COVID-19 pandemic, we performed the recoverability test of our long-lived assets and concluded there was no impairment at March 31, 2020.
We test goodwill for impairment annually and whenever an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We test goodwill at a reporting unit level. Our annual goodwill impairments tests are performed as of September 30. Due to the significant and negative financial impact of the COVID-19 pandemic, we performed an interim period goodwill impairment test at March 31, 2020. Under the current goodwill impairment standard adopted in the first quarter of 2020, a goodwill impairment loss is measured at the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill (see Note 1 to our Unaudited Consolidated Financial Statements).
As of March 31, 2020, the fair value of each of our reporting units, except the OpenTable and KAYAK reporting unit, substantially exceeded its respective carrying value. For OpenTable and KAYAK, we recognized a goodwill impairment charge of $489 million, which is not tax-deductible, resulting in an adjusted carrying value of goodwill for OpenTable and KAYAK of $1.5 billion at March 31, 2020. The goodwill impairment was primarily driven by a significant reduction in the forecasted near-term cash flows of OpenTable and KAYAK as well as the significant decline in comparable companies' market values as a result of the COVID-19 pandemic.
The estimated fair value of OpenTable and KAYAK was determined using a combination of standard valuation techniques, including an income approach (discounted cash flows) and a market approach (applying the recent decline in enterprise values of comparable publicly-traded companies to the recently calculated fair value for OpenTable and KAYAK as well as applying comparable company multiples).
The income approach estimates fair value utilizing long-term growth rates and discount rates applied to the cash flow projection. In the cash flow projection, we assume that OpenTable and KAYAK will experience a significant decline in near-term cash flows with a recovery to 2019 levels of financial performance occurring in 2023. The shape and timing of the recovery is a key assumption in our fair value calculation (both in the income and market approaches), however, it is highly uncertain whether the actual recovery will match the trajectory or magnitude of our assumptions. If the timing of recovery to 2019 levels of financial performance were to occur in 2022 or 2024, the impact to the estimated fair value, at March 31, 2020, ranges from an increase of over $230 million to a decrease of over $410 million.
The estimation of fair value reflects numerous assumptions that are subject to various risks and uncertainties, including key assumptions regarding OpenTable and KAYAK’s expected growth rates and operating margin, expected length and severity of the impact from the COVID-19 pandemic and the shape and timing of the subsequent recovery, as well as other key assumptions with respect to matters outside of our control, such as discount rates and market comparables. It requires significant judgments and estimates and actual results could be materially different than the judgments and estimates used to estimate fair value. Future events and changing market conditions may lead us to re-evaluate the assumptions reflected in the current forecast disclosed above, particularly the assumptions related to the length and severity of the COVID-19 pandemic and the shape and timing of the subsequent recovery, which may result in a need to recognize an additional goodwill impairment charge that could have a material adverse effect on our results of operations.
Valuation of Investments in Private Companies
See Note 5 to our Unaudited Consolidated Financial Statements for further information related to the investments in private companies. The fair value of these investments are measured using unobservable inputs when little or no market data is available ("Level 3 inputs"). See Note 6 to our Unaudited Consolidated Financial Statements for further information.
Our investments measured using Level 3 inputs primarily consist of preferred stock investments in privately-held companies that are classified as either debt securities or equity securities without readily determinable fair values. Fair values of privately held securities are estimated using a variety of valuation methodologies, including both market and income approaches. We have used valuation techniques appropriate for the type of investment and the information available about the investee as of the valuation date to determine fair value. Recent financing transactions in the investee, such as new investments in preferred stock, are generally considered the best indication of enterprise value and therefore used as a basis to estimate fair value. However, based on a number of factors, such as the proximity in timing to the valuation date or the volume or other terms of these financing transactions, we may also use other valuation techniques to supplement this data, including the income approach. In addition, an option-pricing model (“OPM”) is utilized to allocate value to the various classes of securities of the investee, including the class owned by us. The model includes assumptions around the investees’ expected time to liquidity and volatility.
At March 31, 2020, the fair values of our investments in Didi and Grab, measured using Level 3 inputs, were $400 million and $180 million, respectively. As discussed below, we used unobservable inputs in order to determine fair value. We used an income approach in estimating the fair value of Didi and a relative weighting of 75% income approach and 25% recent financing transactions in estimating the fair value of Grab. The income approach estimates value based on the expectation of future cash flows that a company will generate. These future cash flows are discounted to their present values using a discount rate based on a company’s weighted- average cost of capital, and is adjusted to reflect the risks inherent in its cash flows. The key unobservable inputs and ranges used for these investments include the weighted average cost of capital (12%-14%), terminal Earnings before income taxes, depreciation and amortization (“EBITDA”) Multiple (13x-15x), volatility (60%-70%) and an estimated time to liquidity of 4 years. Significant changes in any of these inputs in isolation would have resulted in significantly different fair value measurements. Generally, a change in the assumption used for terminal EBITDA multiples would result in a directionally similar change in the fair value and a change in the assumption used for weighted average cost of capital or volatility would result in a directionally opposite change in the fair value.
The determination of the fair values of investments, where we are a minority shareholder and have access to limited information from the investee, reflects numerous assumptions that are subject to various risks and uncertainties, including key assumptions regarding the investee’s expected growth rates and operating margin, expected length and severity of the impact from the COVID-19 pandemic and the shape and timing of the subsequent recovery, as well as other key assumptions with respect to matters outside of our control, such as discount rates and market comparables. It requires significant judgments and estimates and actual results could be materially different than those judgments and estimates utilized in the fair value estimate. Future events and changing market conditions may lead us to re-evaluate the assumptions reflected in our valuation, particularly the assumptions related to the length and severity of the COVID-19 pandemic and the shape and timing of the subsequent recovery and the overall impact on the investee’s business, which may result in a need to recognize an additional impairment charge that could have a material adverse effect on our results of operations.
Results of Operations
Three Months Ended March 31, 2020 compared to the Three Months Ended March 31, 2019
We evaluate certain operating and financial measures on both an as-reported and constant-currency basis. We calculate constant currency by converting our current-year period financial results for transactions recorded in currencies other than U.S. Dollars using the corresponding prior-year period monthly average exchange rates rather than the current-year period monthly average exchange rates.
Operating and Statistical Metrics
Our financial results are driven by certain operating metrics that encompass the booking and other business activity generated by our travel and travel-related services. Specifically, reservations of accommodation room nights, rental car days and airline tickets capture the volume of units booked through our OTC brands by our travel reservation services customers. Gross bookings is an operating and statistical metric that captures the total dollar value, generally inclusive of taxes and fees, of all travel services booked through our OTC brands by our customers, net of cancellations, and is widely used in the travel business. Our non-OTC brands (KAYAK and OpenTable) have different business metrics from those of our OTC brands and therefore search queries through KAYAK and restaurant reservations through OpenTable do not contribute to our gross bookings.
Accommodation room nights, rental car days and airline tickets reserved through our services for the three months ended March 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in millions)
|
|
Decrease
|
|
|
2020
|
|
2019
|
|
Room nights
|
|
124
|
|
217
|
|
(42.8
|
)%
|
Rental car days
|
|
12
|
|
18
|
|
(36.4
|
)%
|
Airline tickets
|
|
2
|
|
2
|
|
(8.0
|
)%
|
Accommodation room nights, rental car days and airline tickets reserved through our services each declined for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, due to the COVID-19 pandemic which drove a substantial decline in new travel bookings and significantly increased cancellation rates.
Gross bookings resulting from reservations of accommodation room nights, rental car days and airline tickets made through our agency and merchant models for the three months ended March 31, 2020 and 2019 were as follows (numbers may not total due to rounding):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in millions)
|
|
Decrease
|
|
|
2020
|
|
2019
|
|
Agency
|
|
$
|
8,320
|
|
|
$
|
19,678
|
|
|
(57.7
|
)%
|
Merchant
|
|
4,073
|
|
|
5,732
|
|
|
(28.9
|
)%
|
Total
|
|
$
|
12,393
|
|
|
$
|
25,410
|
|
|
(51.2
|
)%
|
Gross bookings decreased by 51.2% for the three months ended March 31, 2020, compared to the three months ended March 31, 2019 (decreased on a constant-currency basis by approximately 50%), almost entirely due to the 42.8% decline in accommodation room night reservations for the three months ended March 31, 2020, as well as a 15% decline in accommodation ADRs on a constant-currency basis for the three months ended March 31, 2020, compared to the three months ended March 31, 2019. We believe that unit growth rates and growth in total gross bookings on a constant-currency basis, which excludes the impact of foreign currency exchange rate fluctuations, are important measures to understand the fundamental performance of the business.
Agency gross bookings are derived from travel-related transactions where we do not facilitate payments from travelers for the travel services provided. Agency gross bookings decreased by 57.7% for the three months ended March 31, 2020,
compared to the three months ended March 31, 2019, almost entirely due to a decrease in gross bookings from agency accommodation room night reservations at Booking.com.
Merchant gross bookings are derived from services where we facilitate payments from travelers for the travel services provided. Merchant gross bookings decreased by 28.9% for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, almost entirely due to a decrease in gross bookings from our merchant accommodation reservation services at agoda, Booking.com and priceline. Merchant gross bookings declined less than agency gross bookings due to stronger growth of merchant gross bookings earlier in the quarter as Booking.com had been expanding its merchant accommodation reservation services prior to the COVID-19 pandemic.
Revenues
Online travel reservation services
Substantially all of our revenues are generated by providing online travel reservation services, which facilitate online travel purchases between travel service providers and travelers.
Revenues from online travel reservation services are classified into two categories:
|
|
•
|
Agency. Agency revenues are derived from travel-related transactions where we do not facilitate payments from travelers for the services provided. Agency revenues consist almost entirely of travel reservation commissions. Substantially all of our agency revenue is from Booking.com agency accommodation reservations.
|
|
|
•
|
Merchant. Merchant revenues are derived from travel-related transactions where we facilitate payments from travelers for the services provided, generally at the time of booking. Merchant revenues include (1) travel reservation commissions and transaction net revenues (i.e., the amount charged to travelers less the amount owed to travel service providers) in connection with our merchant reservation services; (2) credit card processing rebates and customer processing fees; and (3) ancillary fees, including travel-related insurance revenues and certain global distribution system ("GDS") reservation booking fees. Substantially all merchant revenues are derived from transactions where travelers book accommodation reservations or rental car reservations.
|
Advertising and other revenues
Advertising and other revenues are derived primarily from (1) revenues earned by KAYAK for (a) sending referrals to OTCs and travel service providers and (b) advertising placements on its platforms; and (2) revenues earned by OpenTable for (a) restaurant reservation services (fees paid by restaurants for diners seated through OpenTable's online reservation service) and (b) subscription fees for restaurant management services.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in millions)
|
|
Increase (decrease)
|
|
|
2020
|
|
2019
|
|
Agency revenues
|
|
$
|
1,424
|
|
|
$
|
1,949
|
|
|
(26.9
|
)%
|
Merchant revenues
|
|
659
|
|
|
603
|
|
|
9.3
|
%
|
Advertising and other revenues
|
|
205
|
|
|
285
|
|
|
(28.1
|
)%
|
Total revenues
|
|
$
|
2,288
|
|
|
$
|
2,837
|
|
|
(19.3
|
)%
|
Total revenues for the three months ended March 31, 2020 compared to the three months ended March 31, 2019, decreased by 19.3% (decreased on a constant-currency basis by approximately 17%). A significant majority of the year-over-year decrease was related to revenues from our accommodation reservation services. For the three months ended March 31, 2020, we recorded a reduction in revenue of $63 million for refunds paid or estimated to be payable to travelers as a result of the COVID-19 pandemic where we have agreed to provide free cancellation for certain non-refundable reservations without a corresponding estimated expected recovery from the travel service providers (see Notes 1 and 3 to the Unaudited Consolidated Financial Statements).
Agency revenues decreased by 26.9% for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, almost entirely due to decreased gross bookings from agency accommodation room night reservations at Booking.com.
Merchant revenues increased by 9.3% for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, despite decreases in gross bookings from merchant accommodation reservation services, as revenue benefited from travel earlier in the quarter before the COVID-19 pandemic.
Advertising and other revenues decreased by 28.1% for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, primarily due to the COVID-19 pandemic, which resulted in a decline in consumer demand for the travel and restaurant-related services offered by KAYAK and OpenTable.
Total revenues as a percentage of gross bookings was 18.5% for the three months ended March 31, 2020, as compared to 11.2% for the three months ended March 31, 2019, due to timing of booking versus travel as revenue benefited from travel earlier in the quarter before the COVID-19 pandemic. After the COVID-19 pandemic, we experienced a decline in new gross bookings and an increase in cancellations, which will negatively impact revenues in subsequent periods.
Our international businesses accounted for approximately $2.0 billion of our total revenues for the three months ended March 31, 2020, compared to $2.5 billion for the three months ended March 31, 2019. Total revenues attributable to our international businesses for the three months ended March 31, 2020 decreased by 18.9%, compared to the three months ended March 31, 2019 (decreased on a constant-currency basis by approximately 17%). Total revenues attributable to our U.S. businesses decreased 22.2% for the three months ended March 31, 2020, compared to the three months ended March 31, 2019.
Operating Expenses
Marketing expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in millions)
|
|
Decrease
|
|
|
2020
|
|
2019
|
|
Marketing expenses
|
|
$
|
851
|
|
|
$
|
1,193
|
|
|
(28.6
|
)%
|
% of Total revenues
|
|
37.2
|
%
|
|
42.0
|
%
|
|
|
We rely on marketing channels to generate a significant amount of traffic to our websites. Marketing expenses consist primarily of the costs of: (1) search engine keyword purchases; (2) referrals from meta-search and travel research websites; (3) affiliate programs; (4) offline and online brand marketing; and (5) other performance-based marketing and incentives. For the three months ended March 31, 2020, our marketing expense declined significantly due to reduced travel demand as a result of the COVID-19 pandemic. We adjust our marketing spend based on our growth and profitability objectives, as well as the travel demand and expected ROIs in our marketing channels. Marketing expense as a percentage of total revenues decreased for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, due to the timing of booking versus travel as revenue benefited from travel earlier in the quarter before the COVID-19 pandemic, with some of the associated marketing spend expensed in the prior quarter. After the COVID-19 outbreak, we experienced an immediate decline in travel demand and a resulting reduction in performance marketing spend. In addition, we took actions to reduce our brand marketing spend in response to the reduced travel demand.
Sales and Other Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in millions)
|
|
Increase
|
|
|
2020
|
|
2019
|
|
Sales and other expenses
|
|
$
|
377
|
|
|
$
|
215
|
|
|
75.4
|
%
|
% of Total revenues
|
|
16.5
|
%
|
|
7.6
|
%
|
|
|
Sales and other expenses consist primarily of: (1) credit card and other payment processing fees associated with merchant transactions; (2) fees paid to third parties that provide call center, website content translations and other services; (3) customer chargeback provisions and fraud prevention expenses associated with merchant transactions; (4) customer relations
costs; and (5) provisions for expected credit losses, primarily related to agency accommodation commission receivables and prepayments to certain customers. For the three months ended March 31, 2020, sales and other expenses, which are substantially variable in nature, increased compared to the three months ended March 31, 2019, due primarily to a $183 million increase in provision for expected credit losses resulting from the COVID-19 pandemic (see Notes 1 and 7 to the Unaudited Consolidated Financial Statements), partially offset by lower expenses related to a decrease in transactions processed on a merchant basis.
Personnel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in millions)
|
|
Decrease
|
|
|
2020
|
|
2019
|
|
Personnel
|
|
$
|
484
|
|
|
$
|
501
|
|
|
(3.4
|
)%
|
% of Total revenues
|
|
21.2
|
%
|
|
17.7
|
%
|
|
|
Personnel expenses consist of compensation to our personnel, including salaries, stock-based compensation, bonuses, payroll taxes, and employee health and other benefits. Personnel expenses decreased during the three months ended March 31, 2020, compared to the three months ended March 31, 2019, primarily due to a decrease in stock-based compensation of $68 million, which is impacted by reduced financial performance as a result of the COVID-19 pandemic. Stock-based compensation expense was $6 million for the three months ended March 31, 2020, compared to $74 million for the three months ended March 31, 2019. This decrease was partially offset by higher aggregate salaries related to headcount growth, and higher bonus expense due to a larger reversal of bonus expense in the first quarter of 2019. Headcount as of March 31, 2020 increased compared to March 31, 2019, primarily due to the year-over-year growth at agoda and Booking.com, in the areas of customer service and information technology to support transaction growth (including significant cancellations caused by the COVID-19 pandemic) and various business initiatives, such as alternative accommodations, marketing, payments and in-destination experiences.
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in millions)
|
|
Increase
|
|
|
2020
|
|
2019
|
|
General and administrative
|
|
$
|
201
|
|
|
$
|
191
|
|
|
5.6
|
%
|
% of Total revenues
|
|
8.8
|
%
|
|
6.7
|
%
|
|
|
|
General and administrative expenses consist primarily of: (1) occupancy and office expenses; (2) personnel-related expenses such as travel, relocation, recruiting and training expenses; (3) fees for outside professionals, including litigation expenses; and (4) indirect taxes such as travel transaction taxes and digital services taxes. General and administrative expenses increased during the three months ended March 31, 2020, compared to the three months ended March 31, 2019, due to increased indirect taxes including $16 million related to an accrual for travel transaction taxes and $9 million related to digital service taxes, as well as increased professional fees. These increased costs were partially offset by lower personnel-related expenses associated with a company-wide freeze on non-essential travel and entertainment and employee hiring due to the COVID-19 pandemic.
Information Technology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in millions)
|
|
Increase
|
|
|
2020
|
|
2019
|
|
Information technology
|
|
$
|
78
|
|
|
$
|
65
|
|
|
20.1
|
%
|
% of Total revenues
|
|
3.4
|
%
|
|
2.3
|
%
|
|
|
|
Information technology expenses consist primarily of: (1) software license and system maintenance fees; (2) outsourced data center and cloud computing costs; (3) payments to contractors; and (4) data communications and other expenses associated with operating our services. Information technology expenses increased during the three months ended
March 31, 2020, compared to the three months ended March 31, 2019, due to increased software license fees and outsourced data center and cloud computing costs.
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in millions)
|
|
Increase
|
|
|
2020
|
|
2019
|
|
Depreciation and amortization
|
|
$
|
117
|
|
|
$
|
116
|
|
|
0.4
|
%
|
% of Total revenues
|
|
5.1
|
%
|
|
4.1
|
%
|
|
|
|
Depreciation and amortization expenses consist of: (1) amortization of intangible assets with determinable lives; (2) depreciation of computer equipment; (3) amortization of internally-developed and purchased software; and (4) depreciation of leasehold improvements, furniture and fixtures and office equipment. Depreciation and amortization expenses increased during the three months ended March 31, 2020, compared to the three months ended March 31, 2019, as a result of increased internally-developed software amortization expenses, partially offset by decreased amortization of intangible assets and depreciation of leasehold improvements.
Impairment of Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in millions)
|
|
Increase
|
|
|
2020
|
|
2019
|
|
Impairment of goodwill
|
|
$
|
489
|
|
|
$
|
—
|
|
|
N/A
|
% of Total revenues
|
|
21.4
|
%
|
|
N/A
|
|
|
|
During the three months ended March 31, 2020, we recognized an impairment charge for goodwill related to OpenTable and KAYAK, which is not tax-deductible, of $489 million (see Note 8 to our Unaudited Consolidated Financial Statements and Critical Accounting Policies and Estimates included in this Management's Discussion and Analysis of Financial Condition and Results of Operations).
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in millions)
|
|
Increase (decrease)
|
|
|
2020
|
|
2019
|
|
Interest income
|
|
$
|
32
|
|
|
$
|
35
|
|
|
(8.3
|
)%
|
Interest expense
|
|
(64
|
)
|
|
(66
|
)
|
|
(3.1
|
)%
|
Net (losses) gains on marketable equity securities
|
|
(307
|
)
|
|
451
|
|
|
(168.1
|
)%
|
Impairment of investment
|
|
(100
|
)
|
|
—
|
|
|
N/A
|
|
Foreign currency transactions and other
|
|
26
|
|
|
(8
|
)
|
|
452.2
|
%
|
Total
|
|
$
|
(413
|
)
|
|
$
|
412
|
|
|
(200.3
|
)%
|
Interest income decreased for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, primarily due to lower average invested balances of marketable securities and lower yields as well as increased usage of investments classified as cash equivalents.
Net (losses) gains on marketable equity securities for the three months ended March 31, 2020 and 2019 principally related to our equity investments in Trip.com Group and Meituan Dianping (see Note 5 to our Unaudited Consolidated Financial Statements for further information).
Impairment of investment for the three months ended March 31, 2020 is related to our investment in Didi Chuxing (see Notes 4 and 5 to our Unaudited Consolidated Financial Statements and Critical Accounting Policies and Estimates included in this Management's Discussion and Analysis of Financial Condition and Results of Operations for further information).
Foreign currency transactions and other includes foreign currency gains or losses on derivative contracts, foreign currency transaction gains or losses, including costs related to foreign currency transactions, and net realized gains or losses on investments and other income or expense. Foreign currency transactions and other includes foreign currency losses on derivative contracts of $23 million and $13 million and foreign currency transaction gains of $54 million and $4 million for the three months ended March 31, 2020 and 2019, respectively. Foreign currency transaction gains for the three months ended March 31, 2020 includes gains of $33 million related to the portion of our Euro-denominated debt that was not designated as a net investment hedge in the first quarter of 2020.
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in millions)
|
|
Increase
|
|
|
2020
|
|
2019
|
|
Income tax (benefit) expense
|
|
$
|
(23
|
)
|
|
$
|
203
|
|
|
(111.1
|
)%
|
% of (Loss) income before income taxes
|
|
3.1
|
%
|
|
21.0
|
%
|
|
|
Our 2020 effective tax rate differs from the U.S. federal statutory tax rate of 21%, and our effective tax rate was lower for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, primarily due to the non-deductible goodwill impairment charge relating to OpenTable and KAYAK and valuation allowances recorded against the deferred tax assets generated from the impairment of a long-term investment.
A portion of Booking.com's earnings during the three months ended March 31, 2019 qualified for Innovation Box Tax treatment under Dutch tax law, which had a significant beneficial impact on our effective tax rate for that period. During the three months ended March 31, 2020, we did not benefit from the Innovation Box Tax. In 2019, the Dutch government approved a reduction in its corporate income tax rate from 25% to 21.7%, effective in 2021. Furthermore, the Dutch government has proposed an increase in the Innovation Box Tax rate from 7% to 9%, which, if enacted, could be effective beginning in 2021. While we expect Booking.com to continue to qualify for Innovation Box Tax treatment with respect to a portion of its earnings for the foreseeable future, the loss of the Innovation Box Tax benefit, whether due to a change in tax law or a determination by the Dutch government that Booking.com's activities are not innovative or for any other reason, could substantially increase our effective tax rate and adversely impact our results of operations and cash flows in future periods. See Part II, Item 1A, Risk Factors - "We may not be able to maintain our 'Innovation Box Tax' benefit."
Liquidity and Capital Resources
The COVID-19 pandemic and the resulting economic conditions and government orders have resulted in a material decrease in consumer spending and an unprecedented decline in travel and restaurant activities and consumer demand for related services. Our financial results and prospects are almost entirely dependent on the sale of such travel and restaurant-related services.
The extent of the effects of the COVID-19 pandemic on our business, results of operations, cash flows and growth prospects is highly uncertain and will ultimately depend on future developments. These include, but are not limited to, the severity, extent and duration of the pandemic and its impact on the travel and restaurant industries and consumer spending more broadly. Even if economic and operating conditions for our business improve, we cannot predict the long-term effects of the pandemic on our business or the travel and restaurant industries as a whole. If the travel and restaurant industries are fundamentally changed by the COVID-19 pandemic in ways that are detrimental to our operating model, our business may continue to be adversely affected even as the broader global economy recovers.
Our continued access to sources of liquidity depends on multiple factors, including global economic conditions, the condition of global financial markets, the availability of sufficient amounts of financing, our operating performance and our credit ratings. If our credit ratings were to be downgraded, or financing sources were to ascribe higher risk to our rating levels or our industry, our access to capital and the cost of any financing would be negatively impacted. There is no guarantee that additional debt financing will be available in the future to fund our obligations, or that it will be available on commercially reasonable terms, in which case we may need to seek other sources of funding. In addition, the terms of future debt agreements could include more restrictive covenants than those we are currently subject to, which could restrict our business operations. For more information, see Part II, Item 1A, Risk Factors - "Our liquidity, credit ratings and ongoing access to capital could be materially and negatively affected by the impacts of the COVID-19 pandemic."
At March 31, 2020, we had $9.2 billion in cash, cash equivalents and short-term and long-term investments, of which approximately $3.0 billion is held by our international subsidiaries and is denominated primarily in U.S. Dollars, Euros and, to a lesser extent, British Pounds Sterling and other currencies. Cash equivalents and short-term and long-term investments are principally comprised of U.S. and international corporate bonds, money market funds, time deposits and certificates of deposit, convertible debt securities and American Depositary Shares ("ADSs") of Trip.com Group, Meituan Dianping equity securities and our investments in private companies (see Notes 5 and 6 to the Unaudited Consolidated Financial Statements).
In April 2020, we realized $164 million in cash from the sales and maturity of our remaining investments in corporate debt securities and sold our remaining investment in the ADSs of Trip.com Group, with a cost basis of $531 million, for $431 million.
At March 31, 2020, we had a remaining transition tax liability of $1.1 billion as a result of the Tax Cuts and Jobs Act (the "Tax Act"), which included $1.0 billion reported as "Long-term U.S. transition tax liability" and $53 million included in "Accrued expenses and other current liabilities" in the Consolidated Balance Sheet. This liability will be paid over the next six years. In accordance with the Tax Act, generally, future repatriation of our international cash will not be subject to a U.S. federal income tax liability as a dividend, but will be subject to U.S. state income taxes and international withholding taxes, which have been accrued by us.
In the first quarter of 2020, we made a prepayment of the Netherlands income taxes of $717 million, based on forecasted income prior to the COVID-19 pandemic, to earn prepayment discounts. We requested a refund of this amount from the Dutch tax authorities and it was received in April 2020.
In August 2019, we entered into a $2.0 billion five-year unsecured revolving credit facility with a group of lenders. The revolving credit facility provides for the issuance of up to $80 million of letters of credit as well as borrowings of up to $100 million on same-day notice, referred to as swingline loans. The proceeds of loans made under the facility can be used for working capital and general corporate purposes, including acquisitions, share repurchases and debt repayments. At March 31, 2020, there were no borrowings outstanding and $5 million of letters of credit issued under the facility. The revolving credit facility contains a maximum leverage ratio covenant, compliance with which is a condition to our ability to borrow thereunder. At March 31, 2020, we were in compliance with the maximum leverage ratio covenant. In April 2020, we amended the revolving credit facility, pursuant to which the maximum leverage ratio covenant has been suspended through and including the quarter ending March 31, 2021, and has been replaced with a minimum liquidity covenant based on unrestricted cash, cash equivalents, short-term investments and unused capacity under the revolving credit facility. Beginning with the quarter ending June 30, 2021, the minimum liquidity covenant will cease to apply and the maximum leverage ratio covenant will again be in
effect. There can be no assurance that we will be able to meet either the minimum liquidity covenant or the maximum leverage ratio covenant, as applicable, at any particular time, and our ability to borrow under the revolving credit facility depends on compliance with the applicable covenant. Further, the lenders have the right to require repayment of any amounts borrowed under the facility if we are not in compliance with the applicable covenant (see Note 9 to the Unaudited Consolidated Financial Statements). As a result, we have not taken into account the availability of the revolving credit facility in evaluating our ability to meet our minimum liquidity requirements.
Our Convertible Senior Notes due June 2020 (the "2020 Notes") are reported as current liabilities in the Consolidated Balance Sheet at March 31, 2020. Starting on March 15, 2020, the holders have the right to convert all or any portion of the 2020 Notes, which will be settled upon maturity of the 2020 Notes on June 15, 2020, regardless of our stock price (see Note 9 to the Unaudited Consolidated Financial Statements).
In April 2020, we issued Senior Notes due April 13, 2025 with an interest rate of 4.10% for an aggregated principal amount of $1.0 billion, Senior Notes due April 13, 2027 with an interest rate of 4.50% for an aggregated principal amount of $750 million and Senior Notes due April 13, 2030 with an interest rate of 4.625% for an aggregated principal amount of $1.5 billion. In addition, in April 2020, in a private placement, we issued $863 million aggregated principal amount of Convertible Senior Notes due May 1, 2025 with an interest rate of 0.75%. The proceeds from the issuance of these Senior Notes and Convertible Senior Notes can be used for general corporate purposes, which may include repayment of debt, including the repayment, at maturity or upon conversion prior thereto, of the 2020 Notes and our Convertible Senior Notes due September 2021 (see Note 9 to the Unaudited Consolidated Financial Statements).
During the three months ended March 31, 2020, we repurchased 677,479 shares of our common stock for an aggregate cost of $1.3 billion. At March 31, 2020, we had a remaining aggregate amount of $10.4 billion authorized by our Board of Directors to repurchase our common stock. We have not repurchased any shares during the second quarter of 2020 and do not intend to initiate any repurchases until we have better visibility into the shape and timing of a recovery from the COVID-19 pandemic.
In September 2016, we signed a turnkey agreement to construct an office building for Booking.com’s future headquarters in the Netherlands. Upon signing this agreement, we paid 43 million Euros ($48 million) for the acquired land-use rights. In addition, since signing the turnkey agreement we have made several progress payments principally related to the construction of the building. As of March 31, 2020, we have paid 168 million Euros ($193 million) and have a remaining obligation of 102 million Euros ($112 million) related to the turnkey agreement. The remaining obligation will be paid through mid-2022, when we anticipate construction will be complete. Subsequent to March 31, 2020 the remaining obligation was reduced to 93 million Euros ($102 million). In addition to the turnkey agreement, we have a remaining obligation at March 31, 2020 to pay 71 million Euros ($78 million) over the remaining term of the acquired land lease. We will also make additional capital expenditures to fit out and furnish the office space. See Note 13 to the Unaudited Consolidated Financial Statements for further information related to our commitments and contingencies.
At March 31, 2020 and December 31, 2019, we had operating lease obligations of $662 million and $690 million, respectively, and in the aggregate, $121 million and $79 million of non-cancellable purchase obligations individually greater than $10 million.
At March 31, 2020 and December 31, 2019, respectively, there were $132 million and $160 million, standby letters of credit and bank guarantees issued on behalf of us, primarily related to payment guarantees to third-party payment processors.
We are taking actions to improve our liquidity including, but not limited to, raising additional capital through the issuance of Senior Notes and Convertible Senior Notes as disclosed above, reducing capital expenditures and operating expenses by significantly reducing marketing spend worldwide and eliminating non-essential operating costs and monitoring the financial health of our partners, suppliers and other third-party relationships. However, whether as a result of the COVID-19 pandemic or otherwise, if we are not successful in generating sufficient cash flow from operations or in raising additional capital when required in sufficient amounts and on terms acceptable to us, we may be required to reduce our planned capital expenditures and scale back the scope of our business plans, either of which could have a material adverse effect on our business, our ability to compete or our future growth prospects, financial condition and results of operations. If additional funds were raised through the issuance of equity securities, the percentage ownership of our then current stockholders would be diluted. We may not generate sufficient cash flow from operations in the future, revenue growth or sustained profitability may not be realized, and future borrowings or equity sales may not be available in amounts sufficient to make anticipated capital expenditures, finance our strategies or repay our indebtedness.
Cash Flow Analysis
For the three months ended March 31, 2020, net cash used in operating activities was $380 million, as compared to net cash provided by operating activities of $150 million for the three months ended March 31, 2019. The change is primarily due to the negative impact of the COVID-19 pandemic to our businesses and financial results, partially offset by the impact of the payment of $403 million in 2019 to French tax authorities to preserve our right in order to contest certain tax assessments in court (see Note 13 to our Unaudited Consolidated Financial Statements).
Net cash used in operating activities for the three months ended March 31, 2020 was $380 million, resulting from net loss of $699 million and an unfavorable net change in working capital and other long-term assets and liabilities of $899 million, partially offset by a favorable impact from adjustments for non-cash items of $1.2 billion. Non-cash items were principally associated with impairment of goodwill, net losses on marketable equity securities, provision for expected credit losses and chargebacks, depreciation and amortization and impairment of investment. For the three months ended March 31, 2020, prepaid expenses and other current assets increased by $445 million, primarily related to the prepayment of the Netherlands income taxes of $717 million to earn prepayment discounts, partially offset by the refund for overpayment from a vendor and lower prepayment to third-party payment processors due to decreases in business volume as a result of the COVID-19 pandemic. For the three months ended March 31, 2020, accounts receivable decreased by $760 million and deferred merchant bookings and other current liabilities decreased by $1.1 billion primarily due to decreases in business volumes as a result of the COVID-19 pandemic. The decrease in deferred merchant bookings and other current liabilities is also due to a reduction in accrued compensation liabilities as a result of 2019 bonuses being paid in the first quarter of 2020.
Net cash provided by operating activities for the three months ended March 31, 2019 was $150 million, resulting from net income of $765 million, partially offset by an unfavorable impact from adjustments for non-cash items of $65 million and net unfavorable changes in working capital and other long-term assets and liabilities of $550 million. Non-cash items were principally associated with net gains on marketable equity securities, depreciation and amortization, deferred income tax expense and stock-based compensation expense. For the three months ended March 31, 2019, prepaid expenses and other current assets increased by $669 million, primarily related to the prepayments of the Netherlands income taxes of $774 million to earn prepayment discounts. For the three months ended March 31, 2019, deferred merchant bookings and other current liabilities increased by $561 million, primarily related to growth in Booking.com's merchant transactions and increases in business volumes, partially offset by a reduction in accrued compensation liabilities as a result of 2018 bonuses being paid in the first quarter of 2019. Net change in other long-term assets and liabilities of $418 million was due to the increase in other long-term assets related to the payment of $403 million to French tax authorities in order to preserve our right to contest the assessments in court (see Note 13 to our Unaudited Consolidated Financial Statements).
Net cash provided by investing activities for the three months ended March 31, 2020 was $1.7 billion, principally resulting from the proceeds from sales and maturities of investments of $1.9 billion, net of purchases of $0.1 billion. Net cash provided by investing activities for the three months ended March 31, 2019 was $2.1 billion, principally resulting from the proceeds from sales and maturities of investments of $2.7 billion, net of purchases of $0.4 billion. Cash invested in the purchase of property and equipment was $80 million and $111 million in the three months ended March 31, 2020 and 2019, respectively.
Net cash used in financing activities was $1.3 billion for the three months ended March 31, 2020 resulting from payments for the repurchase of common stock. Net cash used in financing activities was $2.5 billion for the three months ended March 31, 2019, which primarily consisted of payments for the repurchase of common stock of $2.8 billion, partially offset by the proceeds from short-term borrowings of $250 million.
Contingencies
French tax authorities conducted an audit of Booking.com for the years 2003 through 2012 and are conducting audits for the years 2013 through 2018. They are asserting that Booking.com has a permanent establishment in France and are seeking to recover what they claim are unpaid income and value-added taxes. In December 2015, the French tax authorities issued Booking.com assessments related to tax years 2003 through 2012 for approximately 356 million Euros, the majority of which represents penalties and interest. As a result of a formal demand from the French tax authorities for payment of the amounts assessed for the years 2003 through 2012, in January 2019, we paid the assessments of approximately 356 million Euros ($403 million) in order to preserve our right to contest those assessments in court. The payment, which is included in "Other assets, net" in the Consolidated Balance Sheets at March 31, 2020 and December 31, 2019, does not constitute an admission that we owe the taxes and will be refunded (with interest) to us to the extent we prevail. If we are unable to resolve the matter with the French tax authorities, we plan to challenge the assessments in the French courts. The French tax authorities have issued other tax assessments for other years for which demand for payment has not been made. We have not recorded a
liability in connection with any of the French tax assessments as we believe that Booking.com has been, and continues to be, in compliance with French tax law, and we are contesting the assessments. Additional assessments could result when the French tax authorities complete the outstanding audits. For further information related to the French tax assessments and our other contingent liabilities, see Note 13 to our Unaudited Consolidated Financial Statements and Part II, Item 1A, Risk Factors - "We may have exposure to additional tax liabilities."
Off-Balance Sheet Arrangements
At March 31, 2020, we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Sections of this Form 10-Q including, in particular, our Management's Discussion and Analysis of Financial Condition and Results of Operations above and the Risk Factors contained in Part II Item 1A hereof, contain forward-looking statements. These forward-looking statements reflect the views of our management regarding current expectations and projections about future events and are based on currently available information. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict; therefore, actual results could differ materially from those described in the forward-looking statements.
Expressions of future goals and expectations and similar expressions, including "may," "will," "should," "could," "aims," "seeks," "expects," "plans," "anticipates," "intends," "believes," "estimates," "predicts," "potential," "targets," or "continue," reflecting something other than historical fact are intended to identify forward-looking statements. Our actual results could differ materially from those described in the forward-looking statements for various reasons including the risks we face which are more fully described in Part II, Item 1A, Risk Factors. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. However, readers should carefully review the reports and documents we file or furnish from time to time with the Securities and Exchange Commission, particularly our Annual Report on Form 10-K for the year ended December 31, 2019, and our subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.