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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September, 30, 2020
OR 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-37429
EXPEDIA GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware   20-2705720
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer Identification No.)
1111 Expedia Group Way W.
Seattle, WA 98119
(Address of principal executive office) (Zip Code)
(206) 481-7200
(Registrant’s telephone number, including area code)
__________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes         No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
    Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ☐    No  
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading symbol(s) Name of each exchange on which registered
Common stock, $0.0001 par value EXPE The Nasdaq Global Select Market
Expedia Group, Inc. 2.500% Senior Notes due 2022 EXPE22 New York Stock Exchange
The number of shares outstanding of each of the registrant’s classes of common stock as of October 23, 2020 was:
Common stock, $0.0001 par value per share   135,937,978  shares
Class B common stock, $0.0001 par value per share   5,523,452  shares


Expedia Group, Inc.
Form 10-Q
For the Quarter Ended September 30, 2020
Contents
 
Part I
Item 1
2
3
4
5
7
9
Item 2
Item 3
Item 4
Part II
Item 1
Item 1A
Item 2
Item 6



Part I. Item 1. Consolidated Financial Statements
EXPEDIA GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except share and per share data)
(Unaudited)
 
  Three months ended
September 30,
Nine months ended
September 30,
  2020 2019 2020 2019
Revenue $ 1,504  $ 3,558  $ 4,279  $ 9,320 
Costs and expenses:
       Cost of revenue (exclusive of depreciation and amortization shown separately below) (1)
375  548  1,393  1,538 
       Selling and marketing (1)
529  1,646  2,035  4,810 
       Technology and content (1)
224  304  787  905 
       General and administrative (1)
134  210  473  599 
Depreciation and amortization 220  228  681  684 
Impairment of goodwill 14  —  799  — 
Impairment of intangible assets 41  —  172  — 
Legal reserves, occupancy tax and other 11  (11) 25 
Restructuring and related reorganization changes 78  206  16 
Operating income (loss) (113) 609  (2,256) 743 
Other income (expense):
Interest income 17  16  45 
Interest expense (113) (40) (258) (120)
Other, net (1) (25) (158) (13)
Total other expense, net (111) (48) (400) (88)
Income (loss) before income taxes (224) 561  (2,656) 655 
Provision for income taxes 24  (154) 319  (161)
Net income (loss) (200) 407  (2,337) 494 
Net (income) loss attributable to non-controlling interests 108  (5)
Net income (loss) attributable to Expedia Group, Inc. (192) 409  (2,229) 489 
Preferred stock dividend (29) —  (46) — 
Net income (loss) attributable to Expedia Group, Inc. common stockholders $ (221) $ 409  $ (2,275) $ 489 
Earnings (loss) per share attributable to Expedia Group, Inc. available to common stockholders
Basic $ (1.56) $ 2.77  $ (16.13) $ 3.30 
Diluted (1.56) 2.71  (16.13) 3.24 
Shares used in computing earnings (loss) per share (000's):
Basic 141,306  147,232  141,068  148,052 
Diluted 141,306  150,635  141,068  150,912 
_______
(1) Includes stock-based compensation as follows:
Cost of revenue $ $ $ $
Selling and marketing 12  11  37  34 
Technology and content 15  18  53  56 
General and administrative 17  28  57  76 
See accompanying notes.
2

EXPEDIA GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited)
 
  Three months ended
September 30,
Nine months ended
September 30,
  2020 2019 2020 2019
Net income (loss) $ (200) $ 407  $ (2,337) $ 494 
Currency translation adjustments, net of tax(1)
48  (58) (8) (56)
Comprehensive income (loss) (152) 349  (2,345) 438 
Less: Comprehensive income (loss) attributable to non-controlling interests (18) (94) (13)
Less: Preferred stock dividend 29  —  46  — 
Comprehensive income (loss) attributable to Expedia Group, Inc. common stockholders $ (187) $ 367  $ (2,297) $ 451 
 
(1)Currency translation adjustments include tax benefit of $7 million and $8 million associated with net investment hedges for the three and nine months ended September 30, 2020 and tax expense of $7 million and $8 million for the three and nine months ended September 30, 2019.


See accompanying notes.
3

EXPEDIA GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except number of shares, which are reflected in thousands, and par value)
September 30,
2020
December 31,
2019
  (Unaudited)  
ASSETS
Current assets:
Cash and cash equivalents $ 4,353  $ 3,315 
Restricted cash and cash equivalents 725  779 
Short-term investments 23  526 
Accounts receivable, net of allowance of $118 and $41
839  2,524 
Income taxes receivable 110  70 
Prepaid expenses and other current assets 685  521 
Total current assets 6,735  7,735 
Property and equipment, net 2,303  2,198 
Operating lease right-of-use assets 598  611 
Long-term investments and other assets 606  796 
Deferred income taxes 557  145 
Intangible assets, net 1,537  1,804 
Goodwill 7,343  8,127 
TOTAL ASSETS $ 19,679  $ 21,416 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable, merchant $ 581  $ 1,921 
Accounts payable, other 521  906 
Deferred merchant bookings 3,247  5,679 
Deferred revenue 177  321 
Income taxes payable 34  88 
Accrued expenses and other current liabilities 1,076  1,050 
Current maturities of long-term debt —  749 
Total current liabilities 5,636  10,714 
Long-term debt, excluding current maturities 8,176  4,189 
Revolving credit facility 650  — 
Deferred income taxes 105  56 
Operating lease liabilities 522  532 
Other long-term liabilities 456  389 
Commitments and contingencies
Series A Preferred Stock: $.001 par value, Authorized shares: 100,000; Shares issued and outstanding: 1,200 and 0
1,022  — 
Stockholders’ equity:
Common stock: $.0001 par value; Authorized shares: 1,600,000
—  — 
Shares issued: 259,350 and 256,692; Shares outstanding: 135,906 and 137,076
Class B common stock: $.0001 par value; Authorized shares: 400,000
—  — 
Shares issued: 12,800 and 12,800; Shares outstanding: 5,523 and 5,523
Additional paid-in capital 13,361  12,978 
Treasury stock - Common stock and Class B, at cost; Shares 130,720 and 126,893
(10,092) (9,673)
Retained earnings (deficit) (1,398) 879 
Accumulated other comprehensive income (loss) (239) (217)
Total Expedia Group, Inc. stockholders’ equity 1,632  3,967 
Non-redeemable non-controlling interests 1,480  1,569 
Total stockholders’ equity 3,112  5,536 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 19,679  $ 21,416 
See accompanying notes.
4

EXPEDIA GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In millions, except share and per share data)
(Unaudited)
Three months ended September 30, 2019 Common stock Class B
common stock
Additional
paid-in
capital
Treasury stock - Common and Class B Retained
earnings
(deficit)
Accumulated
other
comprehensive
income (loss)
Non-redeemable
non-controlling
interest
Total
  Shares Amount Shares Amount Shares Amount
Balance as of June 30, 2019 234,102,186  $ —  12,799,999  $ —  $ 9,821  97,384,212  $ (5,771) $ 508  $ (216) $ 1,565  $ 5,907 
Net income (loss) (excludes $2 of net loss attributable to redeemable non-controlling interest)
409  —  409 
Other comprehensive income (loss), net of taxes (42) (16) (58)
Payment of dividends to common stockholders (declared at $0.34 per share)
(50) (50)
Proceeds from exercise of equity instruments and employee stock purchase plans 1,428,632  —  121  121 
Treasury stock activity related to vesting of equity instruments 23,791  (2) (2)
Liberty Expedia Holdings transaction 20,745,181  —  2,883  23,876,671  (3,217) (334)
Common stock repurchases 2,300,944  (300) (300)
Adjustment to the fair value of redeemable non-controlling interests (17) (17)
Other changes in ownership of non-controlling interests — 
Stock-based compensation expense 58  58 
Other (1) (1)
Balance as of September 30, 2019 256,275,999  $ —  12,799,999  $ —  $ 12,882  123,585,618  $ (9,290) $ 850  $ (258) $ 1,555  $ 5,739 


Nine months ended September 30, 2019 Common stock Class B
common stock
Additional
paid-in
capital
Treasury stock - Common and Class B Retained
earnings
(deficit)
Accumulated
other
comprehensive
income (loss)
Non-redeemable
non-controlling
interest
Total
  Shares Amount Shares Amount Shares Amount
Balance as of December 31, 2018 231,492,986  $ —  12,799,999  $ —  $ 9,549  97,158,586  $ (5,742) $ 517  $ (220) $ 1,547  $ 5,651 
Net income (loss) (excludes $2 of net loss attributable to redeemable non-controlling interest)
489  496 
Other comprehensive income (loss), net of taxes (38) (18) (56)
Payment of dividends to stockholders (declared at $0.98 per share)
(145) (145)
Proceeds from exercise of equity instruments and employee stock purchase plans 4,037,832  —  277  277 
Withholding taxes for stock options (2) (2)
Treasury stock activity related to vesting of equity instruments 249,417  (31) (31)
Liberty Expedia Holdings transaction 20,745,181  —  2,883  23,876,671  (3,217) (334)
Common stock repurchases 2,300,944  (300) (300)
Adjustment to the fair value of redeemable non-controlling interests (17) (17)
Other changes in ownership of non-controlling interests (3) 19  16 
Impact of adoption of new accounting guidance
Stock-based compensation expense 177  177 
Other
Balance as of September 30, 2019 256,275,999  $ —  12,799,999  $ —  $ 12,882  123,585,618  $ (9,290) $ 850  $ (258) $ 1,555  $ 5,739 
5


EXPEDIA GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In millions, except share and per share data)
(Unaudited)
Three months ended September 30, 2020 Common stock Class B
common stock
Additional
paid-in
capital
Treasury stock - Common and Class B Retained
earnings
(deficit)
Accumulated
other
comprehensive
income (loss)
Non-redeemable
non-controlling
interest
Total
  Shares Amount Shares Amount Shares Amount
Balance as of June 30, 2020 259,084,932  $ —  12,799,999  $ —  $ 13,300  130,670,373  $ (10,087) $ (1,206) $ (273) $ 1,469  $ 3,203 
Net income (loss) (192) (8) (200)
Other comprehensive income (loss), net of taxes 34  14  48 
Proceeds from exercise of equity instruments and employee stock purchase plans 264,728  — 
Treasury stock activity related to vesting of equity instruments 49,640  (5) (5)
Other changes in ownership of non-controlling interests (2)
Stock-based compensation expense 55  55 
Other (1) (1)
Balance as of September 30, 2020 259,349,660  $ —  12,799,999  $ —  $ 13,361  130,720,013  $ (10,092) $ (1,398) $ (239) $ 1,480  $ 3,112 

Nine months ended September 30, 2020 Common stock Class B
common stock
Additional
paid-in
capital
Treasury stock - Common and Class B Retained
earnings
(deficit)
Accumulated
other
comprehensive
income (loss)
Non-redeemable
non-controlling
interest
Total
  Shares Amount Shares Amount Shares Amount
Balance as of December 31, 2019 256,691,777  $ —  12,799,999  $ —  $ 12,978  126,892,525  $ (9,673) $ 879  $ (217) $ 1,569  $ 5,536 
Net income (loss) (2,229) (108) (2,337)
Other comprehensive income (loss), net of taxes (22) 14  (8)
Payment of dividends to common stockholders (declared at $0.34 per share)
(48) (48)
Payment of preferred dividends (declared at $14.58 per share)
(17) (17)
Proceeds from exercise of equity instruments and employee stock purchase plans 2,657,883  —  105  105 
Common stock warrants, net of issuance costs 110  110 
Treasury stock activity related to vesting of equity instruments 442,739  $ (49) (49)
Common stock repurchases 3,364,119  (370) (370)
Adjustment to the fair value of redeemable non-controlling interests
Other changes in ownership of non-controlling interests 13 
Stock-based compensation expense 173  173 
Other —  20,630  —  — 
Balance as of September 30, 2020 259,349,660  $ —  12,799,999  $ —  $ 13,361  130,720,013  $ (10,092) $ (1,398) $ (239) $ 1,480  $ 3,112 
See accompanying notes.
6

EXPEDIA GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
  Nine months ended
September 30,
  2020 2019
Operating activities:
Net income (loss) $ (2,337) $ 494 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation of property and equipment, including internal-use software and website development 559  530 
Amortization of intangible assets 122  154 
Impairment of goodwill and intangible assets 971  — 
Amortization of stock-based compensation 156  175 
Deferred income taxes (368) (58)
Foreign exchange loss on cash, restricted cash and short-term investments, net 27  40 
Realized gain on foreign currency forwards (89) (4)
Loss on minority equity investments, net 202  13 
Provision for credit losses and other, net 144  (16)
Changes in operating assets and liabilities:
Accounts receivable 1,636  (543)
Prepaid expenses and other assets (219) — 
Accounts payable, merchant (1,340) 119 
Accounts payable, other, accrued expenses and other liabilities (272) 207 
Tax payable/receivable, net (62) (6)
Deferred merchant bookings (2,437) 1,305 
Deferred revenue (142) 16 
Net cash provided by (used in) operating activities (3,449) 2,426 
Investing activities:
Capital expenditures, including internal-use software and website development (669) (864)
Purchases of investments (685) (1,283)
Sales and maturities of investments 1,161  635 
Acquisitions, net of cash and restricted cash acquired —  80 
Other, net 86 
Net cash used in investing activities (107) (1,429)
Financing activities:
Revolving credit facility borrowings 2,672  — 
Revolving credit facility repayments (2,022) — 
Proceeds from issuance of long-term debt, net of issuance costs 3,946  1,235 
Net proceeds from issuance of preferred stock and warrants 1,132  — 
Payment of Liberty Expedia Exchangeable Debentures   (400)
Payment of long-term debt (750) — 
Purchases of treasury stock (419) (352)
Payment of dividends to common stockholders (48) (145)
Payment of preferred stock dividends (17) — 
Proceeds from exercise of equity awards and employee stock purchase plan 105  277 
Other, net (28) (8)
Net cash provided by financing activities 4,571  607 
Effect of exchange rate changes on cash, cash equivalents and restricted cash and cash equivalents (31) (62)
Net increase in cash, cash equivalents and restricted cash and cash equivalents 984  1,542 
Cash, cash equivalents and restricted cash and cash equivalents at beginning of period 4,097  2,705 
Cash, cash equivalents and restricted cash and cash equivalents at end of period $ 5,081  $ 4,247 
Supplemental cash flow information
Cash paid for interest $ 217  $ 156 
Income tax payments, net 103  216 
See accompanying notes.
7

Notes to Consolidated Financial Statements
September 30, 2020
(Unaudited)
Note 1 – Basis of Presentation
Description of Business
Expedia Group, Inc. and its subsidiaries provide travel products and services to leisure and corporate travelers in the United States and abroad as well as various media and advertising offerings to travel and non-travel advertisers. These travel products and services are offered through a diversified portfolio of brands including: Brand Expedia®, Hotels.com®, Expedia® Partner Solutions, Vrbo®, Egencia®, trivago®, Orbitz®, Travelocity®, Hotwire®, Wotif®, ebookers®, CheapTickets®, Expedia Group™ Media Solutions, Expedia Local Expert®, CarRentals.comTM, Expedia® CruiseShipCenters®, Classic Vacations®, Traveldoo®, VacationRentals.com and SilverRailTM. In addition, many of these brands have related international points of sale. We refer to Expedia Group, Inc. and its subsidiaries collectively as “Expedia Group,” the “Company,” “us,” “we” and “our” in these consolidated financial statements.
COVID-19
During the second and third quarters of 2020, travel booking volumes remained significantly below prior year levels and cancellation levels remain elevated compared to pre-COVID levels. We have seen varying degrees of containment of the virus globally and some signs of travel recovery; however, the degree of containment and the recovery in travel, has varied country to country and there have been instances where cases of COVID-19 have started to increase again after a period of decline. Additionally, travel restrictions and quarantine orders remain in place. Overall, the full duration and total impact of COVID-19 remains uncertain and it is difficult to predict how the recovery will unfold for the travel industry and, in particular, our business, going forward.
Due to the high degree of cancellations and customer refunds and lower new bookings in the merchant business model, the Company experienced unfavorable working capital trends and material negative cash flow in the first half of 2020, although the level of negative cash flow moderated as booking trends improved and cancellations stabilized in recent months. We expect cash flow to remain negative until the decline in new merchant bookings improves further with cancellations either remaining stable or moderating further. For a discussion on incremental credit losses and allowance impacts related to our accounts receivable and prepaid merchant bookings, see Note 2 – Summary of Significant Accounting Policies. For a discussion of goodwill and intangible asset impairments recognized in conjunction with this pandemic, see Note 3 – Fair Value Measurements. For a discussion of recent actions to strengthen our liquidity position in the current environment, see Note 4 – Debt and Note 5 – Capital Stock - Preferred Stock and Warrants.
Basis of Presentation
These accompanying financial statements present our results of operations, financial position and cash flows on a consolidated basis. The unaudited consolidated financial statements include Expedia Group, Inc., our wholly-owned subsidiaries, and entities we control, or in which we have a variable interest and are the primary beneficiary of expected cash profits or losses. We have eliminated significant intercompany transactions and accounts.
We have prepared the accompanying unaudited consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting. We have included all adjustments necessary for a fair presentation of the results of the interim period. These adjustments consist of normal recurring items. Our interim unaudited consolidated financial statements are not necessarily indicative of results that may be expected for any other interim period or for the full year. These interim unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2019, previously filed with the Securities and Exchange Commission (“SEC”). trivago is a separately listed company on the Nasdaq Global Select Market and, therefore is subject to its own reporting and filing requirements, which could result in possible differences that are not expected to be material to Expedia Group.
Accounting Estimates
We use estimates and assumptions in the preparation of our interim unaudited consolidated financial statements in accordance with GAAP. Our estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of our interim unaudited consolidated financial statements. These estimates and assumptions also affect the reported amount of net income or loss during any period. Our actual financial results could differ significantly from these estimates. The significant estimates underlying our interim unaudited consolidated financial statements
8

Notes to Consolidated Financial Statements – (Continued)
 

include revenue recognition; recoverability of current and long-lived assets, intangible assets and goodwill; income and transactional taxes, such as potential settlements related to occupancy and excise taxes; loss contingencies; deferred loyalty rewards; acquisition purchase price allocations; stock-based compensation; accounting for derivative instruments and provisions for credit losses, customer refunds and chargebacks.
The COVID-19 pandemic has created and may continue to create significant uncertainty in macroeconomic conditions, which may cause further business disruptions and adversely impact our results of operations. As a result, many of our estimates and assumptions required increased judgment and carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, our estimates may change materially in future periods.
Reclassifications
We have reclassified prior period financial statements to conform to the current period presentation. During the first quarter of 2020, we reclassified depreciation expense from within our operating expense line items on our consolidated statements of operations to be included with intangible asset amortization expense. The following table presents a summary of the amounts as reported and as reclassified in our consolidated statements of operations for the three and nine months ended September 30, 2019:
Three months ended
September 30, 2019
Nine months ended
September 30, 2019
As reported As reclassified As reported As reclassified
  (In millions)
Cost of revenue $ 569  $ 548  $ 1,604  $ 1,538 
Selling and marketing 1,660  1,646  4,852  4,810 
Technology and content 440  304  1,304  905 
General and administrative 217  210  622  599 
Depreciation and amortization 50  228  154  684 
Seasonality
We generally experience seasonal fluctuations in the demand for our travel services. For example, traditional leisure travel bookings are generally the highest in the first three quarters as travelers plan and book their spring, summer and winter holiday travel. The number of bookings typically decreases in the fourth quarter. Because revenue for most of our travel services, including merchant and agency hotel, is recognized as the travel takes place rather than when it is booked, revenue typically lags bookings by several weeks for our hotel business and can be several months or more for our alternative accommodations business. Historically, Vrbo has seen seasonally stronger bookings in the first quarter of the year, with the relevant stays occurring during the peak summer travel months. The seasonal revenue impact is exacerbated with respect to income by the nature of our variable cost of revenue and direct sales and marketing costs, which we typically realize in closer alignment to booking volumes, and the more stable nature of our fixed costs. Furthermore, operating profits for our primary advertising business, trivago, have typically been experienced in the second half of the year, particularly the fourth quarter, as selling and marketing costs offset revenue in the first half of the year as we typically increase marketing during the busy booking period for spring, summer and winter holiday travel. As a result on a consolidated basis, revenue and income are typically the lowest in the first quarter and highest in the third quarter. The growth of our international operations, advertising business or a change in our product mix, including the growth of Vrbo, may influence the typical trend of the seasonality in the future.
Due to COVID-19, which led to significant cancellations for future travel during the first half of the year, and has impacted new travel bookings for the majority of 2020, we have not experienced our typical seasonal pattern for bookings, revenue and profit during 2020. In addition, with the lower new bookings and elevated cancellations in the merchant business model, our typical, seasonal working capital source of cash has been significantly disrupted resulting in the Company experiencing unfavorable working capital trends and material negative cash flow during the first half of 2020 when we typically generate significant positive cash flow. Seasonal trends were more normalized during the third quarter, but it is difficult to forecast the seasonality for the upcoming quarters, given the uncertainty related to the duration of the impact from COVID-19 and the shape and timing of any sustained recovery. In addition, we are experiencing much shorter booking windows in both our hotel and alternative accommodations business, which could also impact the seasonality of our working capital and cash flow.
9

Notes to Consolidated Financial Statements – (Continued)
 

Note 2 – Summary of Significant Accounting Policies
Recently Adopted Accounting Policies
Measurement of Credit Losses on Financial Instruments. As of January 1, 2020, we adopted the Accounting Standards Updates (“ASU”) guidance on the measurement of credit losses for financial assets measured at amortized cost, which includes accounts receivable, and available-for-sale debt securities, using the modified retrospective method. The new guidance replaced the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. Upon adoption, this new guidance did not have a material impact on our consolidated financial statements and no cumulative-effect adjustment to retained earnings was made.
Cloud Computing Arrangements. As of January 1, 2020, we adopted the new ASU guidance on the accounting for implementation costs incurred for a cloud computing arrangement that is a service contract using the prospective method. The update conformed the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the accounting guidance that provides for capitalization of costs incurred to develop or obtain internal-use-software. The adoption of this new guidance did not have a material impact on our consolidated financial statements.
Fair Value Measurements. As of January 1, 2020, we adopted the new ASU guidance related to the disclosure requirements on fair value measurements, which removed, modified or added certain disclosures using the prospective method. The adoption of this new guidance did not have a material impact on our consolidated financial statements.
Guarantor Financial Information. In March 2020, the SEC amended Rule 3-10 of Regulation S-X regarding financial disclosure requirements for registered debt offerings involving subsidiaries as either issuers or guarantors and affiliates whose securities are pledged as collateral. This new guidance narrows the circumstances that require separate financial statements of subsidiary issuers and guarantors and streamlines the alternative disclosures required in lieu of those statements. We adopted these amendments for the quarter ended March 31, 2020. Accordingly, combined summarized financial information has been presented only for the issuer and guarantors of our senior notes for the most recent fiscal year and the year-to-date interim period, and the location of the required disclosures has been removed from the Notes to the Consolidated Financial Statements and moved to Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Recent Accounting Policies Not Yet Adopted
Simplifying the Accounting for Income Taxes. In December 2019, the Financial Accounting Standards Board issued new guidance to simplify the accounting for income taxes. This new standard eliminates certain exceptions in current guidance related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. For public business entities, this guidance is effective for interim or annual periods beginning after December 15, 2020, with early adoption permitted in any interim period within that year. We are currently evaluating the impact of this guidance on our consolidated financial statements.
Investments - equity securities; Investments - Equity Method and Joint Ventures; Derivatives and Hedging. In January 2020, the FASB issued an accounting standards update which clarifies the interaction between the accounting for investments in equity securities, equity method investments and certain derivative instruments. The new standard is expected to reduce diversity in practice and increase comparability of the accounting for these interactions. The standards update is effective for interim or annual periods beginning after December 15, 2020, with early adoption permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements.
Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. In August 2020, the FASB issued an accounting standards update which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. Specifically, the standard simplifies accounting for convertible instruments by removing major separation models required under current GAAP, removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it, and simplifies the diluted earnings per share calculation in certain areas. The standards update is effective for interim or annual periods beginning after December 15, 2021. Early adoption is permitted for fiscal periods beginning after December 15, 2020 but the guidance must be adopted as of the beginning of the fiscal year. We are currently evaluating the impact of this guidance on our consolidated financial statements and the timing of adoption.
Significant Accounting Policies
Below are the significant accounting policies updated during 2020 as a result of the recently adopted accounting policies noted above as well as certain other accounting policies with interim disclosure requirements. For a comprehensive description of our accounting policies, refer to our Annual Report on Form 10-K for the year ended December 31, 2019.
10

Notes to Consolidated Financial Statements – (Continued)
 

Revenue
Prepaid Merchant Bookings. We classify payments made to suppliers in advance of Vrbo performance obligations as prepaid merchant bookings included within prepaid and other current assets. Prepaid merchant bookings was $420 million as of September 30, 2020 and $226 million as of December 31, 2019.
Deferred Merchant Bookings. We classify cash payments received in advance of our performance obligations as deferred merchant bookings. At December 31, 2019, $4.898 billion of cash advance cash payments was reported within deferred merchant bookings, $3.429 billion of which was recognized resulting in $569 million of revenue during the nine months ended September 30, 2020. At September 30, 2020, the related balance was $2.476 billion.
At December 31, 2019, $781 million of deferred loyalty rewards was reported within deferred merchant bookings, $333 million of which was recognized within revenue during the nine months ended September 30, 2020. At September 30, 2020, the related balance was $771 million.
Deferred Revenue. At December 31, 2019, $321 million was recorded as deferred revenue, $199 million of which was recognized as revenue during the nine months ended September 30, 2020. At September 30, 2020, the related balance was $177 million.
Practical Expedients and Exemptions. We have used the portfolio approach to account for our loyalty points as the rewards programs share similar characteristics within each program in relation to the value provided to the traveler and their breakage patterns. Using this portfolio approach is not expected to differ materially from applying the guidance to individual contracts. However, we will continue to assess and refine, if necessary, how a portfolio within each rewards program is defined.
We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
Cash, Restricted Cash and Cash Equivalents
Our cash and cash equivalents include cash and liquid financial instruments, including money market funds and term deposit investments, with maturities of three months or less when purchased. Restricted cash includes cash and cash equivalents that is restricted through legal contracts, regulations or our intention to use the cash for a specific purpose. Our restricted cash primarily relates to certain traveler deposits and to a lesser extent collateral for office leases. The following table reconciles cash, cash equivalents and restricted cash reported in our consolidated balance sheets to the total amount presented in our consolidated statements of cash flows:
September 30,
2020
December 31,
2019
(in millions)
Cash and cash equivalents $ 4,353  $ 3,315 
Restricted cash and cash equivalents 725  779 
Restricted cash included within long-term investments and other assets
Total cash, cash equivalents and restricted cash and cash equivalents in the consolidated statement of cash flow $ 5,081  $ 4,097 
Accounts Receivable and Allowances
Accounts receivable are generally due within thirty days and are recorded net of an allowance for expected uncollectible amounts. We consider accounts outstanding longer than the contractual payment terms as past due. The risk characteristics we generally review when analyzing our accounts receivable pools primarily include the type of receivable (for example, credit card vs hotel collect), collection terms and historical or expected credit loss patterns. For each pool, we make estimates of expected credit losses for our allowance by considering a number of factors, including the length of time trade accounts receivable are past due, previous loss history continually updated for new collections data, the credit quality of our customers, current economic conditions, reasonable and supportable forecasts of future economic conditions and other factors that may affect our ability to collect from customers. The provision for estimated credit losses is recorded as cost of revenue in our consolidated statements of operations. During the nine months ended September 30, 2020, we recorded approximately $97 million of incremental allowance for expected uncollectible amounts, including estimated future losses in consideration of the impact of COVID-19 pandemic on the economy and the Company, partially offset by $19 million of write-offs. Actual future bad debt could differ materially from this estimate resulting from changes in our assumptions of the duration and severity of the impact of the COVID-19 pandemic.
11

Notes to Consolidated Financial Statements – (Continued)
 

Note 3 – Fair Value Measurements
Financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2020 are classified using the fair value hierarchy in the table below:
Total Level 1 Level 2
  (In millions)
Assets
Cash equivalents:
Money market funds $ 59  $ 59  $ — 
Term deposits 112  —  112 
U.S. treasury securities 150  150  — 
Derivatives:
Foreign currency forward contracts — 
Investments:
Term deposits 23  —  23 
Marketable equity securities 61  61  — 
Total assets $ 407  $ 270  $ 137 
Financial assets measured at fair value on a recurring basis as of December 31, 2019 are classified using the fair value hierarchy in the table below:
Total Level 1 Level 2
  (In millions)
Assets
Cash equivalents:
Money market funds $ 36  $ 36  $ — 
Term deposits 865  —  865 
U.S. treasury securities 10  10  — 
Investments:
Term deposits 526  —  526 
Marketable equity securities 129  129  — 
Total assets $ 1,566  $ 175  $ 1,391 
Liabilities
Derivatives:
Foreign currency forward contracts $ $ —  $
We classify our cash equivalents and investments within Level 1 and Level 2 as we value our cash equivalents and investments using quoted market prices or alternative pricing sources and models utilizing market observable inputs. Valuation of the foreign currency forward contracts is based on foreign currency exchange rates in active markets, a Level 2 input.
As of September 30, 2020 and December 31, 2019, our cash and cash equivalents consisted primarily of U.S. treasury securities and term deposits with maturities of three months or less and bank account balances.
We hold term deposit investments with financial institutions. Term deposits with original maturities of less than three months are classified as cash equivalents and those with remaining maturities of less than one year are classified within short-term investments.
Our marketable equity securities consist of our investment in Despegar, a publicly traded company, which is included in long-term investments and other assets in our consolidated balance sheets. During the nine months ended September 30, 2020 and 2019, we recognized a loss of approximately $68 million and $10 million within other, net in our consolidated statements of operations related to the fair value changes of this equity investment.
Derivative instruments are carried at fair value on our consolidated balance sheets. We use foreign currency forward contracts to economically hedge certain merchant revenue exposures, foreign denominated liabilities related to certain of our loyalty programs and our other foreign currency-denominated operating liabilities. Our goal in managing our foreign exchange
12

Notes to Consolidated Financial Statements – (Continued)
 

risk is to reduce, to the extent practicable, our potential exposure to the changes that exchange rates might have on our earnings, cash flows and financial position. Our foreign currency forward contracts are typically short-term and, as they do not qualify for hedge accounting treatment, we classify the changes in their fair value in other, net. As of September 30, 2020, we were party to outstanding forward contracts hedging our liability and revenue exposures with a total net notional value of $1.3 billion. We had a net forward asset of $2 million ($13 million gross forward asset) as of September 30, 2020 recorded in prepaid expenses and other current assets and a net forward liability of $8 million ($30 million gross forward liability) as of December 31, 2019 recorded in accrued expenses and other current liabilities. We recorded $(1) million and $15 million in net gains (losses) from foreign currency forward contracts during the three months ended September 30, 2020 and 2019 as well as $99 million and $3 million in net gains from foreign currency forward contracts during the nine months ended September 30, 2020 and 2019.
Assets Measured at Fair Value on a Non-recurring Basis
Our non-financial assets, such as goodwill, intangible assets and property and equipment, as well as equity method investments, are adjusted to fair value when an impairment charge is recognized or the underlying investment is sold. Such fair value measurements are based predominately on Level 3 inputs. We measure our minority investments that do not have readily determinable fair values at cost less impairment, adjusted by observable price changes with changes recorded within other, net on our consolidated statements of operations.
Goodwill. During the three and nine months ended September 30, 2020, we recognized goodwill impairment charges of $14 million and $799 million. For the nine months ended September 30, 2020, $559 million related to our Retail segment, primarily our Vrbo reporting unit, and $240 million related to our trivago segment. Due to the severe and persistent negative effect COVID-19 has had on global economies, the travel industry and our business, as well as the uncertainty and high variability in anticipated versus actual rates of recovery, we deemed it necessary to perform interim assessments of goodwill. During the first quarter of 2020, we recognized goodwill impairment charges of $765 million. During the second quarter of 2020, we recognized goodwill impairment charges of $20 million related to a decision to streamline operations for a smaller brand within our Retail segment. During the third quarter of 2020, we recognized an additional goodwill impairment charge of $14 million related to our trivago segment.
During our interim assessments, we compared the fair value of the reporting units to their carrying value. The fair value estimates for all reporting units except trivago were based on a blended analysis of the present value of future discounted cash flows and market value approach, Level 3 inputs. The significant estimates used in the discounted cash flows model included our weighted average cost of capital, projected cash flows and the long-term rate of growth. Our assumptions were based on the actual historical performance of the reporting unit and took into account operating result trends, the anticipated duration of COVID-19 impacts and rates of recovery, and implied risk premiums based on market prices of our equity and debt as of the assessment dates. Our significant estimates in the market approach model included identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment and assessing comparable revenue and earnings multiples in estimating the fair value of the reporting unit. The fair value estimate for the trivago reporting unit was based on trivago’s stock price, a Level 1 input, adjusted for an estimated control premium. The excess of the reporting unit's carrying value over our estimate of the fair value was recorded as the goodwill impairment charge in each of the periods. As of September 30, 2020, the applicable reporting units within our Retail segment had $2.2 billion goodwill remaining after these impairments and our trivago segment had $322 million goodwill remaining.
Intangible Assets. During the first quarter of 2020, also as a result of the significant negative impact related to COVID-19, which has had a severe effect on the entire global travel industry, we recognized intangible asset impairment charges of $121 million. The impairment charges were primarily related to indefinite-lived trade names within our Retail segment and resulted from changes in estimated future revenues of the related brands. The assets, classified as Level 3 measurements, were valued using the relief-from-royalty method, which includes unobservable inputs, including royalty rates and projected revenues. During the second quarter of 2020, we recognized intangible impairment charges of $10 million primarily related to supplier relationship assets that were entirely written off in connection with our recent decision to streamline a smaller brand within our Retail segment. In addition, during the third quarter of 2020, with the persistence of the pandemic and in conjunction with another interim impairment test, we recognized $41 million of additional intangible impairment charges within our Retail segment primarily related to indefinite-lived trade names as well as intangible assets related to held-for-sale assets.
The full duration and total impact of COVID-19 remains uncertain and it is difficult to predict how the recovery will unfold (in general and versus our expectations) for global economies, the travel industry or our business. Additionally, as the stock of our trivago segment is publicly traded, it is difficult to predict market dynamics and the extent or duration of any stock price declines. As a result, we may continue to record impairment charges in the future due to the potential long-term economic impact and near-term financial impacts of the COVID-19 pandemic.
Minority Investments without Readily Determinable Fair Values. As of September 30, 2020 and December 31, 2019, the carrying values of our minority investments without readily determinable fair values totaled $331 million and $467 million.
13

Notes to Consolidated Financial Statements – (Continued)
 

During the nine months ended September 30, 2020, we recorded $134 million of impairment losses related to a minority investment, which had recent observable and orderly transactions for similar investments, using an option pricing model that utilizes judgmental inputs such as discounts for lack of marketability and estimated exit event timing. As of September 30, 2020, total cumulative adjustments made to the initial cost bases of these investments included $103 million in unrealized downward adjustments (including impairments). During the three and nine months ended September 30, 2019, we had no material gains or losses recognized related to these minority investments.
Note 4 – Debt
The following table sets forth our outstanding debt:
September 30,
2020
December 31,
2019
  (In millions)
5.95% senior notes due 2020 $ —  $ 749 
2.5% (€650 million) senior notes due 2022 761  725 
3.6% senior notes due 2023 495  — 
4.5% senior notes due 2024 497  497 
6.25% senior notes due 2025 1,971  — 
7.0% senior notes due 2025 739  — 
5.0% senior notes due 2026 744  743 
4.625% senior notes due 2027 743  — 
3.8% senior notes due 2028 993  992 
3.25% senior notes due 2030 1,233  1,232 
Long-term debt(1)
8,176  4,938 
Current maturities of long-term debt —  (749)
Long-term debt, excluding current maturities
$ 8,176  $ 4,189 
Revolving credit facility $ 650  $ — 
_______________
(1)Net of applicable discounts and debt issuance costs.
Current Maturities of Long-term Debt
In August 2020, our $750 million in registered senior unsecured notes that bore interest at 5.95% matured and the balance was repaid.
Long-term Debt
July 2020 Senior Note Private Placements. In July 2020, we privately placed the following senior notes:
$500 million of senior unsecured notes that are due in December 2023 that bear interest at 3.6% (the “3.6% Notes”). The 3.6% Notes were issued at a price of 99.922% of the aggregate principal amount. Interest is payable semi-annually in arrears in June and December of each year, beginning December 15, 2020. We may redeem some or all of the 3.6% Notes at any time prior to November 15, 2023 by paying a “make-whole” premium plus accrued and unpaid interest, if any. We may redeem some or all of the 3.6% Notes on or after November 15, 2023 at par plus accrued and unpaid interest, if any.
$750 million of senior unsecured notes that are due in August 2027 that bear interest at 4.625% (the “4.625% Notes”). The 4.625% Notes were issued at a price of 99.997% of the aggregate principal amount. Interest is payable semi-annually in arrears in February and August of each year, beginning February 1, 2021. We may redeem some or all of the 4.625% Notes at any time prior to May 1, 2027 by paying a “make-whole” premium plus accrued and unpaid interest, if any. We may redeem some or all of the 4.625% Notes on or after May 1, 2027 at par plus accrued and unpaid interest, if any.
We also entered into a registration rights agreement with respect to the 3.6% Notes and the 4.625% Notes (together, the “July 2020 Notes”), under which we agreed to use commercially reasonable best efforts to file a registration statement to permit the exchange of the July 2020 Notes for registered notes having the same financial terms and covenants, and cause such registration statement to become effective and complete the related exchange offer within 365 days of the issuance of the July 2020 Notes. If we fail to satisfy certain of its obligations under the registration rights agreement, we will be required to pay additional interest of 0.25% per annum to the holders of the July 2020 Notes until such failure is cured.
14

Notes to Consolidated Financial Statements – (Continued)
 

May 2020 Senior Note Private Placements. In May 2020, we privately placed the following senior notes:
$2 billion of senior unsecured notes that are due in May 2025 that bear interest at 6.25% (the “6.25% Notes”). The 6.25% Notes were issued at a price of 100% of the aggregate principal amount. Interest is payable semi-annually in arrears in May and November of each year, beginning November 1, 2020. We may redeem some or all of the 6.25% Notes at any time prior to February 1, 2025 by paying a “make-whole” premium plus accrued and unpaid interest, if any. We may redeem some or all of the 6.25% Notes on or after February 1, 2025 at par plus accrued and unpaid interest, if any.
$750 million of senior unsecured notes that are due in May 2025 that bear interest at 7.0% (the “7.0% Notes”). The 7.0% Notes were issued at a price of 100% of the aggregate principal amount. Interest is payable semi-annually in arrears in May and November of each year, beginning November 1, 2020. We may redeem some or all of the 7.0% Notes at any time prior to May 1, 2022 by paying a “make-whole” premium plus accrued and unpaid interest, if any. We may redeem some or all of the 7.0% Notes on or after May 1, 2022 at specified redemption prices set forth in the 7.0% Indenture, plus accrued and unpaid interest, if any. In addition, at any time or from time to time prior to May 1, 2022, we may redeem up to 40% of the aggregate principal amount of the 7.0% Notes with the net proceeds of certain equity offerings at the specified redemption price described in the 7.0% Indenture plus accrued and unpaid interest, if any.
For additional information about our senior notes, see Note 8 Debt of the Notes to Consolidated Financial Statements in our 2019 Form 10-K.
All of our outstanding senior notes (collectively the “Notes”) are senior unsecured obligations issued by Expedia Group and guaranteed by certain domestic Expedia Group subsidiaries. The Notes rank equally in right of payment with all of our existing and future unsecured and unsubordinated obligations of Expedia Group and the guarantor subsidiaries. In addition, the Notes include covenants that limit our ability to (i) create certain liens, (ii) enter into sale/leaseback transactions and (iii) merge or consolidate with or into another entity or transfer substantially all of our assets. Accrued interest related to the Notes was $107 million and $76 million as of September 30, 2020 and December 31, 2019. The Notes are redeemable in whole or in part, at the option of the holders thereof, upon the occurrence of certain change of control triggering events at a purchase price in cash equal to 101% of the principal plus accrued and unpaid interest.
The total estimated fair value of our Notes was approximately $8.6 billion and $5.1 billion as of September 30, 2020 and December 31, 2019. The fair value was determined based on quoted market prices in less active markets and is categorized according as Level 2 in the fair value hierarchy.
Credit Facilities
Revolving Credit Facility. As of December 31, 2019, Expedia Group maintained a $2 billion unsecured revolving credit facility with a group of lenders, which was unconditionally guaranteed by certain domestic Expedia Group subsidiaries that were the same as under the Notes and expired in May 2023. The facility contained covenants including maximum leverage and minimum interest coverage ratios. As of December 31, 2019, we had no revolving credit facility borrowings outstanding. On March 18, 2020, we borrowed $1.9 billion under the revolving credit facility.
Effective May 5, 2020, the revolving credit facility was amended and restated (the “Amended Credit Facility”) to, among other things:
suspend the maximum leverage ratio covenant until December 31, 2021;
increase the maximum permissible leverage ratio (once such covenant is reinstated) until March 31, 2023 (at which time the maximum permissible leverage ratio will return to the level in effect immediately prior to effectiveness of the Amended Credit Facility);
eliminate the covenant imposing a minimum interest coverage ratio and add a covenant regarding minimum liquidity; as well as
to make certain other amendments to the affirmative and negative covenants therein.
Obligations under the Amended Credit Facility are secured by substantially all of the assets of the Company and its subsidiaries that guarantee the Amended Credit Facility (subject to certain exceptions, including for our new headquarters located in Seattle, WA) up to the maximum amount permitted under the indentures governing the Notes without securing such Notes. Aggregate commitments under the Amended Credit Facility initially totaled $2 billion, and mature on May 31, 2023.
Loans under the Amended Credit Facility bear interest (A) in the case of eurocurrency loans, at rates ranging from (i) prior to December 31, 2021, 2.25% per annum and (ii) on and after December 31, 2021, or prior to such date for each quarter that the leverage ratio, as of the end of the most recently ended fiscal quarter for which financial statements have been delivered, calculated on an annualized basis using consolidated EBITDA for the two most recently ended fiscal quarters included in such financial statements multiplied by two, is not greater than 5.00:1.00, from 1.00% to 1.75% depending on the
15

Notes to Consolidated Financial Statements – (Continued)
 

Company’s credit ratings, and (B) in the case of base rate loans, at rates (i) prior to December 31, 2021, 1.25% per annum and (ii) on and after December 31, 2021, or prior to such date if the leverage ratio condition referred to above is satisfied, from 0.00% to 0.75% per annum depending on the Company’s credit ratings.
The amount of stand-by letters of credit (“LOC”) issued under the prior credit facility as well as the Amended Credit Facility reduced the credit amount available. As of September 30, 2020 and December 31, 2019, there was $17 million and $16 million of outstanding stand-by LOCs issued under the facilities.
On August 5, 2020, the Amended Credit Facility was further amended in order to, among other things, make changes to certain provisions of the Amended Credit Facility to conform to the corresponding provisions in the Foreign Credit Facility described below.
Foreign Credit Facility. Pursuant to the terms of the Amended Credit Facility, on August 5, 2020, the Company and Expedia Group International Holdings III, LLC, as borrower (the “Borrower”), entered into that certain Credit Agreement (as amended, supplemented or otherwise modified from time to time, the “Foreign Credit Facility”) with a group of lenders. Obligations under the Foreign Credit Facility are unsecured. Such obligations are guaranteed by the Company, its subsidiaries that guarantee obligations under the Amended Credit Agreement, as mentioned above, and the Second Amendment, dated as of August 5, 2020, as mentioned below, and certain of the Company’s additional subsidiaries (collectively, the “Guarantors”).
Aggregate commitments under the Foreign Credit Facility total $855 million, and mature on May 31, 2023. Substantially concurrently with the establishment of the Foreign Credit Facility, the Company reduced commitments under the Amended Credit Facility in an amount equal to $855 million and prepaid indebtedness under the Amended Credit Facility in an amount equal to $772 million, which was then outstanding under the Foreign Credit Facility.
Loans under the Foreign Credit Facility bear interest at a rate equal to an index rate plus a margin (A) in the case of eurocurrency loans, (i) prior to December 31, 2021, equal to 2.50% per annum and (ii) on and after December 31, 2021, or prior to such date for each quarter that the leverage ratio, as of the end of the most recently ended fiscal quarter for which financial statements have been delivered, calculated on an annualized basis using consolidated EBITDA for the two most recently ended fiscal quarters included in such financial statements multiplied by two, is not greater than 5.00:1.00, ranging from 1.25% to 2.00% per annum, depending on the Company’s credit ratings, and (B) in the case of base rate loans, (i) prior to December 31, 2021, equal to 1.50% per annum and (ii) on and after December 31, 2021, or prior to such date if the leverage ratio condition referred to above is satisfied, ranging from 0.25% to per 1.00% annum, depending on the Company’s credit ratings.
The covenants, events of default and other terms and conditions in the Foreign Credit Facility are substantially similar to those in the Amended Credit Facility, but include additional limitations on the Borrower and certain other entities that are not obligors under the Amended Credit Facility.
Subsidiary Credit Facility. In addition, one of our international subsidiaries maintains a Euro 50 million uncommitted credit facility, which is guaranteed by Expedia Group, which may be terminated at any time by the lender.
Outstanding Borrowings. On August 11, 2020, the Company repaid the outstanding amount of $772 million on the Foreign Credit Facility as well as $478 million under the Amended Credit Facility. As of September 30, 2020, there were no borrowings outstanding under the Foreign Credit Facility and $650 million was outstanding under the Amended Credit Facility with the interest rate on the outstanding balance of 2.41%. As of September 30, 2020 and December 31, 2019, there were no borrowings outstanding on the subsidiary credit facility.
Note 5 – Capital Stock
Preferred Stock and Warrants
On May 5, 2020, we completed the sale of Series A Preferred Stock (as defined below) and warrants (the “Warrants”) to purchase our common stock (“Common Stock”) to AP Fort Holdings, L.P., an affiliate of Apollo Global Management, Inc. (the “Apollo Purchaser”) and SLP Fort Aggregator II, L.P. and SLP V Fort Holdings II, L.P., affiliates of Silver Lake Group, L.L.C. (the “Silver Lake Purchasers”) pursuant to the Company’s previously announced Investment Agreements, dated as of April 23, 2020, with the Apollo Purchaser and the Silver Lake Purchasers (together, the “Investment Agreements”).
We issued and sold (1) to the Apollo Purchaser, pursuant to the Apollo Investment Agreement, 600,000 shares of the Company’s newly created Series A Preferred Stock, par value $0.001 per share (the “Series A Preferred Stock”) and warrants (the “Warrants”) to purchase 4.2 million shares of the Company’s common stock, par value $0.0001 per share (“Common Stock”), for an aggregate purchase price of $588 million and (2) to the Silver Lake Purchaser, pursuant to the Silver Lake Investment Agreement, 600,000 shares of Series A Preferred Stock and Warrants to purchase 4.2 million shares of Common Stock, for an aggregate purchase price of $588 million. At closing, we paid certain fees in an aggregate amount of $12 million to affiliates of the Apollo Purchaser and the Silver Lake Purchaser. On the terms and subject to the conditions set forth in the Investment Agreements, from and after the closing, (1) each of the Apollo Purchaser and the Silver Lake Purchaser designated
16

Notes to Consolidated Financial Statements – (Continued)
 

one representative who was appointed to the Board of Directors of the Company (the “Board”) and (2) the Apollo Purchaser appointed one non-voting observer to the Board, in each case until such time as the applicable Purchaser and its Permitted Transferees (as defined in the Investment Agreements) no longer beneficially own (a) at least 50% of the shares of Series A Preferred Stock purchased by the applicable Purchaser under the Investment Agreement (unless the applicable Purchaser holds less than 50% of the shares of Series A Preferred Stock as a result of redemptions by the Company, in which case the reference to 50% shall be replaced with a reference to 20%) and (b) Warrants and/or Common Stock for which the Warrants were exercised that represent in the aggregate and on an as exercised basis, at least 50% of the shares underlying the Warrants purchased by the applicable Purchaser under the Investment Agreement.
The Investment Agreements (including the forms of Certificate of Designations, Warrants and Registration Rights Agreement) contain other customary covenants and agreements, including certain standstill provisions and customary preemptive rights.
Certificate of Designations for Series A Preferred Stock. Dividends on each share of Series A Preferred Stock accrue daily on the Preference Amount (as defined below) at the then-applicable Dividend Rate (as defined below) and are payable semi-annually in arrears. As used herein, “Dividend Rate” with respect to the Series A Preferred Stock means (a) from the closing until the day immediately preceding the fifth anniversary of the closing, 9.5% per annum, (b) beginning on each of the fifth, sixth and seventh anniversaries of the closing, the then-applicable Dividend Rate shall be increased by 100 basis points on each such yearly anniversary, and (c) beginning on each of the eighth and ninth anniversaries of the closing date, the then-applicable Dividend Rate shall be increased by 150 basis points on each such yearly anniversary. The Dividend Rate is also subject to certain adjustments if the Company incurs indebtedness causing its leverage to exceed certain thresholds. Dividends are payable (a) until the third anniversary of the closing, either in cash or through an accrual of unpaid dividends (“Dividend Accrual”), at the Company’s option, (b) from the third anniversary of the closing until the sixth anniversary of the closing, either in cash or in a combination of cash and Dividend Accrual (with no more than 50% of the total amount of such Dividend being paid through a Dividend Accrual), at the Company’s option and (c) thereafter, in cash.
The Series A Preferred Stock rank senior to the Common Stock and the Class B common stock, par value $0.0001 per share, of the Company (the “Class B Common Stock”) with respect to dividend rights, redemption rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company.
At any time on or before the first anniversary of the closing, we may redeem all or any portion of the Series A Preferred Stock in cash at a price equal to 105% of the sum of the original liquidation preference of $1,000 per share of Series A Preferred Stock plus any Dividend Accruals (the “Preference Amount”), plus accrued and unpaid distributions as of the redemption date. Any time after the first anniversary of the closing but on or prior to the second anniversary of the closing, we may redeem all or any portion of the Series A Preferred Stock in cash at a price equal to 103% of the Preference Amount, plus accrued and unpaid distributions as of the redemption date. Any time after the second anniversary of the closing but on or prior to the third anniversary of the closing, we may redeem all or any portion of the Series A Preferred Stock in cash at a price equal to 102% of the Preference Amount, plus accrued and unpaid distributions as of the redemption date. Any time after the third anniversary of the closing but on or prior to the fourth anniversary of the closing, we may redeem all or any portion of the Series A Preferred Stock in cash at a price equal to 101% of the Preference Amount, plus accrued and unpaid distributions as of the redemption date. At any time after the fourth anniversary of the closing, we may redeem all or any portion of the Series A Preferred Stock in cash at a price equal to the Preference Amount plus accrued and unpaid distributions as of the redemption date.
In addition, upon the occurrence of a change of control, (i) we shall have the right, but not the obligation, to redeem any or all of the outstanding shares of Series A Preferred Stock at the then applicable redemption price, payable in cash and (ii) each holder will have the right, but not the obligation, to require the Company to redeem any or all of the outstanding shares of Series A Preferred Stock owned by such holder at the then applicable redemption price, payable in cash.
The Series A Preferred Stock is not convertible into Common Stock or Class B Common Stock.
Each holder of Series A Preferred Stock will have one vote per share on any matter on which holders of Series A Preferred are entitled to vote separately as a class (as described below), whether at a meeting or by written consent. The holders of shares of Series A Preferred Stock do not otherwise have any voting rights.
The vote or consent of the holders of at least two-thirds of the shares of Series A Preferred Stock outstanding at such time, voting together as a separate class, is required in order for the Company to (i) amend, alter or repeal any provision of its Amended and Restated Certificate of Incorporation (including the certificates of designations relating to the Series A Preferred Stock) in a manner that would have an adverse effect on the rights, preferences or privileges of the Series A Preferred Stock, as applicable, (ii) issue, any capital stock ranking senior or pari passu to the Series A Preferred Stock, other than certain issuances to a governmental entity in connection with a financing transaction or (iii) liquidate, dissolve or wind up the Company.
17

Notes to Consolidated Financial Statements – (Continued)
 

The Series A Preferred Stock is classified within temporary equity on our consolidated balance sheets due to provisions that could cause the equity to be redeemable at the option of the holder. However, such events that could cause the Series A Preferred Stock to become redeemable are not considered probable of occurring. As of September 30, 2020, the carrying value of the Series A Preferred Stock was $1,022 million, net of $68 million in initial discount and issuance costs as well as $110 million allocated on a relative fair value basis to the concurrently issued Warrants recorded to additional paid-in capital (as described below). The Series A Preferred Stock accumulated $29 million and $46 million in dividends during the three and nine months ended September 30, 2020, of which we paid $17 million (or $14.58 per share of Series A Preferred Stock) of total dividends during the nine months ended September 30, 2020.
Warrants to Purchase Company Common Stock. Pursuant to the Investment Agreements, we issued to each of (1) the Silver Lake Purchasers (in the aggregate) and (2) the Apollo Purchaser, Warrants to purchase 4.2 million shares of Common Stock at an exercise price of $72.00 per share, subject to certain customary anti-dilution adjustments provided under the Warrants, including for stock splits, reclassifications, combinations and dividends or distributions made by the Company on the Common Stock. The Warrants are exercisable on a net share settlement basis. The Warrants expire ten years after the closing date.
Registration Rights Agreement. In connection with and concurrently with the effective time of the transactions contemplated by the Investment Agreements, the Company, the Apollo Purchaser and the Silver Lake Purchasers entered into a Registration Rights Agreement (the “Registration Rights Agreement”), pursuant to which the Apollo Purchaser and the Silver Lake Purchasers are entitled to certain registration rights. Under the terms of the Registration Rights Agreement, the Apollo Purchaser and the Silver Lake Purchasers are entitled to customary registration rights with respect to the shares of Common Stock for which the Warrants may be exercised and, from and after the fifth anniversary of the closing, the Series A Preferred Stock.

Dividends on our Common Stock
The Executive Committee, acting on behalf of the Board of Directors, declared the following dividends during the periods presented:
Declaration Date Dividend
Per Share
Record Date Total Amount
(in millions)
Payment Date
Nine Months Ended September 30, 2020
February 13, 2020 $ 0.34  March 10, 2020 $ 48  March 26, 2020
Nine Months Ended September 30, 2019
February 6, 2019 0.32  March 7, 2019 47  March 27, 2019
May 1, 2019 0.32  May 23, 2019 48  June 13, 2019
July 24, 2019 0.34  August 22, 2019 50  September 12, 2019
During the second quarter of 2020, we suspended quarterly dividends on our common stock. We do not expect to declare future dividends on our common stock, at least until the current economic and operating environment improves.
Treasury Stock
As of September 30, 2020, the Company’s treasury stock was comprised of approximately 123.4 million common stock and 7.3 million Class B shares. As of December 31, 2019, the Company’s treasury stock was comprised of approximately 119.6 million shares of common stock and 7.3 million Class B shares.
Share Repurchases. In April 2018, the Executive Committee, acting on behalf of the Board of Directors, authorized a repurchase of up to 15 million outstanding shares of our common stock. In December 2019, the Board of Directors authorized a repurchase of up to 20 million outstanding shares of our common stock. During the nine months ended September 30, 2020, we repurchased, through open market transactions, 3.4 million shares under these authorizations for the total cost of $370 million, excluding transaction costs, representing an average repurchase price of $109.88 per share. As of September 30, 2020, there were approximately 23.3 million shares remaining under the 2018 and 2019 repurchase authorizations. There is no fixed termination date for the repurchases.
For information related to shares repurchased as part of the Liberty Expedia Holdings transaction during the third quarter of 2019, see Note 11 – Liberty Expedia Holdings Transaction.
18

Notes to Consolidated Financial Statements – (Continued)
 

Accumulated Other Comprehensive Loss
The balance of accumulated other comprehensive loss as of September 30, 2020 and December 31, 2019 was comprised of foreign currency translation adjustments. These translation adjustments include foreign currency transaction losses at September 30, 2020 of $42 million ($54 million before tax) and $15 million ($19 million before tax) at December 31, 2019 associated with our 2.5% Notes. The 2.5% Notes are Euro-denominated debt designated as hedges of certain of our Euro-denominated net assets.
Note 6 – Earnings (Loss) Per Share
The following table presents our basic and diluted earnings (loss) per share:
Three months ended
September 30,
Nine months ended
September 30,
2020 2019 2020 2019
(In millions, except share and per share data)
Net income (loss) attributable to Expedia Group, Inc. $ (192) $ 409  $ (2,229) $ 489 
Preferred stock dividend (29) —  (46) — 
Net income (loss) attributable to Expedia Group, Inc. common stockholders $ (221) $ 409  $ (2,275) $ 489 
Earnings (loss) per share attributable to Expedia Group, Inc. available to common stockholders:
Basic $ (1.56) $ 2.77  $ (16.13) $ 3.30 
Diluted (1.56) 2.71  (16.13) 3.24 
Weighted average number of shares outstanding (000's):
Basic 141,306  147,232  141,068  148,052 
Dilutive effect of:
Options to purchase common stock —  2,336  —  2,074 
Other dilutive securities —  1,067  —  786 
Diluted 141,306  150,635  141,068  150,912 
Basic earnings per share is calculated using our weighted-average outstanding common shares. The earnings per share amounts are the same for common stock and Class B common stock because the holders of each class are legally entitled to equal per share distributions whether through dividends or in liquidation.
Diluted earnings per share is calculated using our weighted-average outstanding common shares including the dilutive effect of stock awards and common stock warrants as determined under the treasury stock method. In periods when we recognize a net loss, we exclude the impact of outstanding stock awards and common stock warrants from the diluted loss per share calculation as their inclusion would have an antidilutive effect. For both of the three and nine months ended September 30, 2020, approximately 25 million of outstanding stock awards and common stock warrants have been excluded from the calculations of diluted earnings per share attributable to common stockholders because their effect would have been antidilutive. For both of the three and nine months ended September 30, 2019, approximately 2 million of outstanding stock awards have been excluded from the calculations of diluted earnings per share attributable to common stockholders because their effect would have been antidilutive.
Note 7 – Restructuring and Related Reorganization Charges
In February 2020, we committed to restructuring actions intended to simplify our businesses and improve operational efficiencies, which have resulted in headcount reductions, and, during the second and third quarter of 2020, the Company has accelerated further actions to adapt our business to the current environment. As a result, we recognized $78 million and $206 million in restructuring and related reorganization charges during the three and nine months ended September 30, 2020. Based on current plans, which are subject to change, we expect total reorganization charges in the remainder of 2020 and into 2021 of approximately $75 million. However, we continue to actively evaluate additional cost reduction efforts and should we make decisions in future periods to take further actions we will incur additional reorganization charges.
We also engaged in certain smaller scale restructure actions in 2019 to centralize and migrate certain operational functions and systems, for which we recognized $2 million and $16 million in restructuring and related reorganization charges during the three and nine months ended September 30, 2019, which were primarily related to severance and benefits.
19

Notes to Consolidated Financial Statements – (Continued)
 

The following table summarizes the restructuring and related reorganization activity for the nine months ended September 30, 2020:
Employee Severance and Benefits Other Total
  (In millions)
Accrued liability as of January 1, 2020 $ 11  $ $ 17 
Charges 195  11  206 
Payments (89) (14) (103)
Non-cash items (3) — 
Accrued liability as of September 30, 2020 $ 120  $ —  $ 120 
Note 8 – Income Taxes
We determine our provision for income taxes for interim periods using an estimate of our annual effective tax rate. We record any changes affecting the estimated annual effective tax rate in the interim period in which the change occurs, including discrete items.
For the three months ended September 30, 2020, the effective tax rate was a 10.8% benefit on a pre-tax loss, compared to a 27.4% expense on pre-tax income for the three months ended September 30, 2019. The change in the effective tax rate was primarily due to discrete items.
For the nine months ended September 30, 2020, the effective tax rate was a 12.0% benefit on a pre-tax loss, compared to a 24.5% expense on pre-tax income for the nine months ended September 30, 2019. The change in the effective tax rate was primarily driven by nondeductible impairment charges and a valuation allowance principally related to unrealized capital losses recorded in the first quarter of 2020.
We are subject to taxation in the United States and foreign jurisdictions. Our income tax filings are regularly examined by federal, state and foreign tax authorities. During the fourth quarter of 2019, the Internal Revenue Service (“IRS”) issued final adjustments related to transfer pricing with our foreign subsidiaries for our 2011 to 2013 tax years. The proposed adjustments would increase our U.S. taxable income by $696 million, which would result in federal tax of approximately $244 million, subject to interest. We do not agree with the position of the IRS. We filed a protest with the IRS for our 2011 to 2013 tax years and Appeals returned the case to Exam for further review. We are also under examination by the IRS for our 2014 to 2016 tax years. Subsequent years remain open to examination by the IRS. We do not anticipate a significant impact to our gross unrecognized tax benefits within the next 12 months related to these years.
Note 9 – Commitments and Contingencies
Legal Proceedings
In the ordinary course of business, we are a party to various lawsuits. Management does not expect these lawsuits to have a material impact on the liquidity, results of operations, or financial condition of Expedia Group. We also evaluate other potential contingent matters, including value-added tax, excise tax, sales tax, transient occupancy or accommodation tax and similar matters. We do not believe that the aggregate amount of liability that could be reasonably possible with respect to these matters would have a material adverse effect on our financial results; however, litigation is inherently uncertain and the actual losses incurred in the event that our legal proceedings were to result in unfavorable outcomes could have a material adverse effect on our business and financial performance.
Litigation Relating to Occupancy Taxes. One hundred one lawsuits have been filed by or against cities, counties and states involving hotel occupancy and other taxes. Nine lawsuits are currently active. These lawsuits are in various stages and we continue to defend against the claims made in them vigorously. With respect to the principal claims in these matters, we believe that the statutes or ordinances at issue do not apply to us or the services we provide and, therefore, that we do not owe the taxes that are claimed to be owed. We believe that the statutes or ordinances at issue generally impose occupancy and other taxes on entities that own, operate or control hotels (or similar businesses) or furnish or provide hotel rooms or similar accommodations. To date, forty-eight of these lawsuits have been dismissed. Some of these dismissals have been without prejudice and, generally, allow the governmental entity or entities to seek administrative remedies prior to pursuing further litigation. Thirty-four dismissals were based on a finding that we and the other defendants were not subject to the local tax ordinance or that the local government lacked standing to pursue its claims. As a result of this litigation and other attempts by certain jurisdictions to levy such taxes, we have established a reserve for the potential settlement of issues related to hotel occupancy and other taxes, consistent with applicable accounting principles and in light of all current facts and circumstances, in the amount of $58 million and $48 million as of September 30, 2020 and December 31, 2019, respectively. Our settlement reserve
20

Notes to Consolidated Financial Statements – (Continued)
 

is based on our best estimate of probable losses and the ultimate resolution of these contingencies may be greater or less than the liabilities recorded. An estimate for a reasonably possible loss or range of loss in excess of the amount reserved cannot be made. Changes to the settlement reserve are included within legal reserves, occupancy tax and other in the consolidated statements of operations.
Pay-to-Play. Certain jurisdictions may assert that we are required to pay any assessed taxes prior to being allowed to contest or litigate the applicability of the ordinances. This prepayment of contested taxes is referred to as “pay-to-play.” Payment of these amounts is not an admission that we believe we are subject to such taxes and, even when such payments are made, we continue to defend our position vigorously. If we prevail in the litigation, for which a pay-to-play payment was made, the jurisdiction collecting the payment will be required to repay such amounts and also may be required to pay interest.
We are in various stages of inquiry or audit with domestic and foreign tax authorities, some of which, including in the City of Los Angeles regarding hotel occupancy taxes and in the United Kingdom regarding the application of value added tax (“VAT”) to our European Union related transactions as discussed below, may impose a pay-to-play requirement to challenge an adverse inquiry or audit result in court.
Matters Relating to International VAT. We are in various stages of inquiry or audit in multiple European Union jurisdictions, including in the United Kingdom, regarding the application of VAT to our European Union related transactions. While we believe we comply with applicable VAT laws, rules and regulations in the relevant jurisdictions, the tax authorities may determine that we owe additional taxes. In certain jurisdictions, including the United Kingdom, we may be required to “pay-to-play” any VAT assessment prior to contesting its validity. While we believe that we will be successful based on the merits of our positions with regard to the United Kingdom and other VAT audits in pay-to-play jurisdictions, it is nevertheless reasonably possible that we could be required to pay any assessed amounts in order to contest or litigate the applicability of any assessments and an estimate for a reasonably possible amount of any such payments cannot be made.
Competition and Consumer Matters. On August 23, 2018, the Australian Competition and Consumer Commission, or "ACCC", instituted proceedings in the Australian Federal Court against trivago. The ACCC alleged breaches of Australian Consumer Law, or "ACL," relating to trivago’s advertisements in Australia concerning the hotel prices available on trivago’s Australian site, trivago’s strike-through pricing practice and other aspects of the way offers for accommodation were displayed on trivago's Australian website. The matter went to trial in September 2019 and, on January 20, 2020, the Australian Federal Court issued a judgment finding trivago had engaged in conduct in breach of the ACL. On March 4, 2020, trivago filed a notice of appeal of part of that judgment at the Australian Federal Court. On November 4, 2020, the Australian Federal Court dismissed trivago’s appeal. The court has yet to set a date for a separate trial regarding penalties and other orders. We recorded the estimated probable loss associated with the proceedings in a previous period. An estimate for the reasonable possible loss or range of loss in excess of the amount reserved cannot be made.
Note 10 – Divestitures
During the third quarter of 2020, in connection with our efforts to focus on our core businesses and streamline our activities, we committed to a plan that we think is probable of completion within the next year to divest certain smaller businesses within our Retail segment, one of which completed its sale in October 2020.
As a result, beginning in the third quarter of 2020, the related assets and liabilities of these disposal groups are considered held-for-sale and consist of the following as of September 30, 2020:
Held-for-sale assets of $60 million, which were primarily classified within cash of $17 million, accounts receivable of $18 million and prepaid expenses and other current assets of $15 million.
Held-for-sale liabilities of $68 million, which were primarily classified within accrued expenses and other current liabilities of $17 million and deferred merchant bookings of $36 million.
We expect to recognize a loss of approximately $20 million within other, net in the consolidated statements of operations during the fourth quarter of 2020 with respect to the sale of the disposal group which completed in October 2020.
In May 2020, we completed the sale of Bodybuilding.com, and the impacts of the divestiture are not considered material to the Company.
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Notes to Consolidated Financial Statements – (Continued)
 

Note 11 – Liberty Expedia Holdings Transaction
On July 26, 2019, Expedia Group acquired all of the outstanding shares of Liberty Expedia Holdings, Inc. (“Liberty Expedia Holdings”) in a transaction in which the outstanding shares of Liberty Expedia Holdings’ Series A common stock and Series B common stock were exchanged for newly issued shares of common stock of Expedia Group with a fair value of $2.9 billion, assumption of $400 million in debt and $15 million of cash. We accounted for the acquired Liberty Expedia Holdings assets and liabilities, except for the Expedia Group shares repurchased, as a business combination. We accounted for the exchanged Expedia Group shares held by Liberty Expedia Holdings as a share repurchase for consideration of $3.2 billion. As a result of this transaction, Expedia Group’s shares outstanding were reduced by approximately 3.1 million shares. The fair value of the assets and liabilities acquired in the business combination was $91 million, which was primarily comprised of $78 million of cash and $10 million of a trade name definite lived intangible asset related to Bodybuilding.com. Bodybuilding.com is primarily an Internet retailer of dietary supplements, sports nutrition products, and other health and wellness products. No goodwill was recorded for the portion of the transaction accounted for as a business combination.
In connection with the Liberty Expedia Holdings transaction, a wholly-owned subsidiary of Expedia Group, Inc. (“Merger LLC”) assumed the obligations of Liberty Expedia Holdings with respect to the $400 million aggregate outstanding principal amount of 1.0% Exchangeable Senior Debentures due 2047 issued by Liberty Expedia Holdings (the “Exchangeable Debentures”) and the indenture governing the Exchangeable Debentures. Also in connection with the Liberty Expedia Holdings transaction, Liberty Expedia Holdings delivered a notice of redemption with respect to the Exchangeable Debentures, pursuant to which Merger LLC would redeem all of the Exchangeable Debentures at a redemption price, in cash, equal to the sum of (i) the adjusted principal amount of such Exchangeable Debentures, (ii) any accrued and unpaid interest on such Exchangeable Debentures to the redemption date, and (iii) any final period distribution on such Exchangeable Debentures (subject to the right of holders of the Exchangeable Debentures to exchange such Exchangeable Debentures for equity of Expedia Group, Inc. or, at Merger LLC’s election, cash or a combination of such equity and cash). On August 26, 2019, Merger LLC redeemed all of the Exchangeable Debentures in exchange for a total payment of approximately $401 million (with no holders of the Exchangeable Debentures electing to exchange).
Bodybuilding.com was consolidated into our financial statements starting on the acquisition date and we recognized a related $24 million in revenue and $3 million in operating losses for the three and nine months ended September 30, 2019, which was included within Corporate and Eliminations in our segment footnote.
Note 12 – Segment Information
Beginning in the first quarter of 2020, we have the following reportable segments: Retail, B2B, and trivago. The change from our previous reportable segments, Core OTA, trivago, Vrbo and Egencia, reflect Expedia Group’s efforts to simplify our organization into a platform operating model by aligning our retail brand operations, combining our business focused brands and centralizing our platform and supply organizations to support all of our businesses. Our Retail segment, which consists of the aggregation of operating segments, provides a full range of travel and advertising services to our worldwide customers through a variety of consumer brands including: Expedia.com and Hotels.com in the United States and localized Expedia and Hotels.com websites throughout the world, Vrbo, Orbitz, Travelocity, Wotif Group, ebookers, CheapTickets, Hotwire.com, CarRentals.com, CruiseShipCenters, Classic Vacations and SilverRail Technologies, Inc. Our B2B segment is comprised of our Expedia Business Services organization including Expedia Partner Solutions, which operates private label and co-branded programs to make travel services available to leisure travelers through third-party company branded websites, and Egencia, a full-service travel management company that provides travel services to businesses and their corporate customers. Our trivago segment generates advertising revenue primarily from sending referrals to online travel companies and travel service providers from its hotel metasearch websites.
We determined our operating segments based on how our chief operating decision makers manage our business, make operating decisions and evaluate operating performance. Our primary operating metric is Adjusted EBITDA. Adjusted EBITDA for our Retail and B2B segments includes allocations of certain expenses, primarily related to our global travel supply organization and the majority of costs from our product and technology platform, as well as facility costs and the realized foreign currency gains or losses related to the forward contracts hedging a component of our net merchant lodging revenue. We base the allocations primarily on transaction volumes and other usage metrics. We do not allocate certain shared expenses such as accounting, human resources, certain information technology and legal to our reportable segments. We include these expenses in Corporate and Eliminations. Our allocation methodology is periodically evaluated and may change.
Our segment disclosure includes intersegment revenues, which primarily consist of advertising and media services provided by our trivago segment to our Retail segment. These intersegment transactions are recorded by each segment at amounts that approximate fair value as if the transactions were between third parties, and therefore, impact segment performance. However, the revenue and corresponding expense are eliminated in consolidation. The elimination of such intersegment transactions is included within Corporate and Eliminations in the table below.
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Notes to Consolidated Financial Statements – (Continued)
 

Corporate and Eliminations also includes unallocated corporate functions and expenses as well as Bodybuilding.com subsequent to our acquisition in July 2019 through its sale in May 2020. In addition, we record amortization of intangible assets and any related impairment, as well as stock-based compensation expense, restructuring and related reorganization charges, legal reserves, occupancy tax and other, and other items excluded from segment operating performance in Corporate and Eliminations. Such amounts are detailed in our segment reconciliation below.
The following tables present our segment information for the three and nine months ended September 30, 2020 and 2019. As a significant portion of our property and equipment is not allocated to our operating segments and depreciation is not included in our segment measure, we do not report the assets by segment as it would not be meaningful. We do not regularly provide such information to our chief operating decision makers.
 
  Three months ended September 30, 2020
  Retail B2B trivago Corporate &
Eliminations
Total
  (In millions)
Third-party revenue $ 1,246  $ 203  $ 55  $ —  $ 1,504 
Intersegment revenue —  —  15  (15) — 
Revenue $ 1,246  $ 203  $ 70  $ (15) $ 1,504 
Adjusted EBITDA $ 429  $ (52) $ $ (80) $ 304 
Depreciation (136) (30) (4) (13) (183)
Amortization of intangible assets —  —  —  (37) (37)
Impairment of goodwill —  —  —  (14) (14)
Impairment of intangible assets —  —  —  (41) (41)
Stock-based compensation —  —  —  (47) (47)
Legal reserves, occupancy tax and other —  —  —  (2) (2)
Restructuring and related reorganization charges —  —  —  (78) (78)
Realized (gain) loss on revenue hedges (15) —  —  —  (15)
Operating income (loss) $ 278  $ (82) $ $ (312) (113)
Other expense, net (111)
Loss before income taxes (224)
Provision for income taxes 24 
Net loss (200)
Net loss attributable to non-controlling interests
Net loss attributable to Expedia Group, Inc. (192)
Preferred stock dividend (29)
Net loss attributable to Expedia Group, Inc. common stockholders $ (221)
23

Notes to Consolidated Financial Statements – (Continued)
 

  Three months ended September 30, 2019
  Retail B2B trivago Corporate &
Eliminations
Total
  (In millions)
Third-party revenue $ 2,613  $ 731  $ 190  $ 24  $ 3,558 
Intersegment revenue —  —  89  (89) — 
Revenue $ 2,613  $ 731  $ 279  $ (65) $ 3,558 
Adjusted EBITDA $ 876  $ 149  $ 12  $ (125) $ 912 
Depreciation (128) (27) (3) (20) (178)
Amortization of intangible assets —  —  —  (50) (50)
Stock-based compensation —  —  —  (60) (60)
Legal reserves, occupancy tax and other —  —  —  (11) (11)
Restructuring and related reorganization charges —  —  —  (2) (2)
Realized (gain) loss on revenue hedges (6) —  —  (2)
Operating income (loss) $ 752  $ 116  $ $ (268) 609 
Other expense, net (48)
Income before income taxes 561 
Provision for income taxes (154)
Net income 407 
Net loss attributable to non-controlling interests
Net income attributable to Expedia Group, Inc. $ 409 
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Notes to Consolidated Financial Statements – (Continued)
 

  Nine months ended September 30, 2020
  Retail B2B trivago Corporate &
Eliminations
Total
  (In millions)
Third-party revenue $ 3,291  $ 756  $ 173  $ 59  $ 4,279 
Intersegment revenue —  —  69  (69) — 
Revenue $ 3,291  $ 756  $ 242  $ (10) $ 4,279 
Adjusted EBITDA $ 248  $ (154) $ (10) $ (292) $ (208)
Depreciation (400) (96) (10) (53) (559)
Amortization of intangible assets —  —  —  (122) (122)
Impairment of goodwill —  —  —  (799) (799)
Impairment of intangible assets —  —  —  (172) (172)
Stock-based compensation —  —  —  (156) (156)
Legal reserves, occupancy tax and other —  —  —  11  11 
Restructuring and related reorganization charges —  —  —  (206) (206)
Realized (gain) loss on revenue hedges (42) (3) —  —  (45)
Operating income (loss) $ (194) $ (253) $ (20) $ (1,789) (2,256)
Other expense, net (400)
Loss before income taxes (2,656)
Provision for income taxes 319 
Net loss (2,337)
Net loss attributable to non-controlling interests 108 
Net loss attributable to Expedia Group, Inc. (2,229)
Preferred stock dividend (46)
Net loss attributable to Expedia Group, Inc. common stockholders $ (2,275)
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Notes to Consolidated Financial Statements – (Continued)
 

  Nine months ended September 30, 2019
  Retail B2B trivago Corporate &
Eliminations
Total
  (In millions)
Third-party revenue $ 6,847  $ 1,944  $ 505  $ 24  $ 9,320 
Intersegment revenue —  —  262  (262) — 
Revenue $ 6,847  $ 1,944  $ 767  $ (238) $ 9,320 
Adjusted EBITDA $ 1,619  $ 351  $ 56  $ (370) $ 1,656 
Depreciation (383) (81) (9) (57) (530)
Amortization of intangible assets —  —  —  (154) (154)
Stock-based compensation —  —  —  (175) (175)
Legal reserves, occupancy tax and other —  —  —  (25) (25)
Restructuring and related reorganization charges —  —  —  (16) (16)
Realized (gain) loss on revenue hedges (2) (11) —  —  (13)
Operating income (loss) $ 1,234  $ 259  $ 47  $ (797) 743 
Other expense, net (88)
Income before income taxes 655 
Provision for income taxes (161)
Net income 494 
Net income attributable to non-controlling interests (5)
Net income attributable to Expedia Group, Inc. $ 489 

Revenue by Business Model and Service Type
The following table presents revenue by business model and service type:
Three months ended September 30, Nine months ended
September 30,
2020 2019 2020 2019
(in millions)
Business Model:
Merchant $ 1,032  $ 1,980  $ 2,740  $ 5,173 
Agency 329  1,177  996  3,066 
Advertising, media and other 143  401  543  1,081 
Total revenue
$ 1,504  $ 3,558  $ 4,279  $ 9,320 
Service Type:
Lodging $ 1,229  $ 2,575  $ 3,258  $ 6,468 
Air 27  202  67  678 
Advertising and media 94  312  322  861 
Other(1)
154  469  632  1,313 
Total revenue
$ 1,504  $ 3,558  $ 4,279  $ 9,320 

(1)Other includes car rental, insurance, destination services, cruise and fee revenue related to our corporate travel business, among other revenue streams, none of which are individually material. Other also includes product revenue of $59 million during the nine months ended September 30, 2020 and $24 million during the three and nine months ended September 30, 2019 related to Bodybuilding.com, which was sold in May 2020.

Our Retail and B2B segments generate revenue from the merchant, agency and advertising, media and other business models as well as all service types. trivago segment revenue is generated through advertising and media.
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Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. 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. Actual results could differ materially from those contained in these forward-looking statements for a variety of reasons, including, but not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 31, 2019, Part I, Item 1A, “Risk Factors,” in Exhibit 99.2 to our Current Report on Form 8-K filed with the SEC on April 23, 2020, and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, filed with the SEC on May 21, 2020, as well as those discussed in the Risk Factor section and elsewhere in this report. COVID-19, and the volatile regional and global economic conditions stemming from it, and additional or unforeseen effects from the COVID-19 pandemic, could also give rise to or aggravate these risk factors, which in turn could materially adversely affect our business, financial condition, liquidity, results of operations (including revenues and profitability) and/or stock price. Further, COVID-19 may also affect our operating and financial results in a manner that is not presently known to us or that we currently do not consider to present significant risks to our operations. Other unknown or unpredictable factors also could have a material adverse effect on our business, financial condition and results of operations. Accordingly, readers should not place undue reliance on these forward-looking statements. The use of words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “goal,” “intends,” “likely,” “may,” “plans,” “potential,” “predicts,” “projected,” “seeks,” “should” and “will,” or the negative of these terms or other similar expressions, among others, generally identify forward-looking statements; however, these words are not the exclusive means of identifying such statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. We are not under any obligation to, and do not intend to, publicly update or review any of these forward-looking statements, whether as a result of new information, future events or otherwise, even if experience or future events make it clear that any expected results expressed or implied by those forward-looking statements will not be realized. Please carefully review and consider the various disclosures made in this report and in our other reports filed with the SEC that attempt to advise interested parties of the risks and factors that may affect our business, prospects and results of operations.
The information included in this management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes included in this Quarterly Report, and the audited consolidated financial statements and notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2019.
Overview
Expedia Group is one of the world's largest travel companies. We help reduce the barriers to travel, making it easier, more attainable and more accessible, bringing the world within reach for customers and partners around the globe. We leverage our platform and technology capabilities across an extensive portfolio of businesses and brands to orchestrate the movement of people and the delivery of travel experiences on both a local and global basis. We make available, on a stand-alone and package basis, travel services provided by numerous lodging properties, airlines, car rental companies, activities and experiences providers, cruise lines, alternative accommodations property owners and managers, and other travel product and service companies. We also offer travel and non-travel advertisers access to a potential source of incremental traffic and transactions through our various media and advertising offerings on our websites. For additional information about our portfolio of brands, see “Portfolio of Brands” in Part I, Item 1, “Business”, in our Annual Report on Form 10-K for the year ended December 31, 2019.
All percentages within this section are calculated on actual, unrounded numbers.
Trends
The COVID-19 pandemic, and measures to contain the virus, including government travel restrictions and quarantine orders, have had a significant negative impact on the travel industry. COVID-19 has negatively impacted consumer sentiment and consumer’s ability to travel, and many of our supply partners, particularly airlines and hotels, continue to operate at reduced service levels.
As the spread of the virus has been contained to varying degrees in certain countries, some travel restrictions have been lifted and consumers have become more comfortable traveling, particularly to domestic locations. This has led to a moderation of the declines in travel bookings and in cancellation rates compared to the March and April 2020 time period. However, travel
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booking volume remains significantly below prior year levels and cancellation levels remain elevated compared to pre-COVID levels.
The degree of containment of the virus, and the recovery in travel, has varied country by country. During the recovery period, including in recent months, there have been instances where cases of COVID-19 have started to increase again after a period of decline, which in some cases impacted the recovery of travel in certain countries. COVID-19 also had broader economic impacts, including an increase in unemployment levels and reduction in economic activity, which could lead to recession and further reduction in consumer or business spending on travel activities, which may negatively impact the timing and level of a recovery in travel demand.
Our financial and operating results for the first nine months of 2020 were significantly impacted due to the decrease in travel demand related to COVID-19. We expect COVID-19 to continue to significantly impact our financial and operating results in the fourth quarter, and expect the impact to the overall travel market, and our business, to continue into 2021. However, the full duration and total impact of COVID-19 remains uncertain and it is difficult to predict how the recovery will play out for the travel industry and, in particular, our business.
Additionally, further health-related events, political instability, geopolitical conflicts, acts of terrorism, significant fluctuations in currency values, sovereign debt issues, and natural disasters, are examples of other events that could have a negative impact on the travel industry in the future.
Prior to the onset of COVID-19, we began to execute a cost savings initiative aimed at simplifying the organization and increasing efficiency. Following the onset of COVID-19, we accelerated execution on several of these cost savings initiatives and took additional actions to reduce costs to help mitigate the impact to demand from COVID-19 and reduce our monthly cash usage. While some cost actions during COVID-19 are temporary and intended to minimize cash usage during this disruption, we expect to continue to benefit from the majority of the savings when business conditions return to more normalized levels. Overall, we now expect annualized run-rate fixed cost savings of $700 to $750 million, and we continue to evaluate additional opportunities to increase efficiency and improve operational effectiveness across the Company. In addition to the actions to reduce fixed costs, we are executing initiatives to reduce certain variable costs and improve our marketing efficiency.
As a result of these cost savings initiatives, we expect Adjusted EBITDA margins to increase compared to historical levels when revenue returns to more normalized levels.
Lodging
Lodging includes hotel accommodations and alternative accommodations. As a percentage of our total worldwide revenue in the first nine months of 2020, lodging accounted for 76%. As a result of the impact on travel demand from the COVID-19 outbreak, room nights declined 58% in the third quarter of 2020, and 54% in the first nine months of 2020. The timing of recovery in consumer sentiment on travel and on staying at hotels will be a factor in our level of room night growth, and as noted above, we expect that to vary by country. Average Daily Rates (“ADRs”) for rooms booked on Expedia Group websites increased 8% in the third quarter and 2% in the first nine months of 2020. During the third quarter of 2020, the year-over-year increase in ADRs for our Vrbo business remained elevated compared to quarters prior to the COVID-19 outbreak and Vrbo, which carries a higher ADR than hotels, accounted for a higher percentage of room nights due to the faster recovery in alternative accommodations during this period. This was partially offset by declines in hotel ADRs.
The uncertain environment related to COVID-19, and the potential for a higher degree of discounting activity due to the lower travel demand, could result in continued hotel ADR declines for a period of time. Similarly, fluctuations in supply and demand for alternative accommodations, could impact ADRs for Vrbo. In addition, travel restrictions and shift in consumer behavior during COVID-19 that impact the mix of our lodging bookings across geographies and types of accommodations could impact total ADRs. Given these dynamics, it is difficult to predict ADR trends in the near-term.
Hotel. We generate the majority of our revenue through the facilitation of hotel reservations (stand-alone and package bookings). After rolling out Expedia Traveler Preference (“ETP”) globally over a period of several years, during which time we reduced negotiated economics in certain instances to compensate for hotel supply partners absorbing expenses such as credit card fees and customer service costs, our relationships and overall economics with hotel supply partners have been broadly stable in recent years. As we continue to expand the breadth and depth of our global hotel offering, in some cases we have reduced our economics in various geographies based on local market conditions. These impacts are due to specific initiatives intended to drive greater global size and scale through faster overall room night growth. Additionally, increased promotional activities such as growing loyalty programs contribute to declines in revenue per room night and profitability.
Since our hotel supplier agreements are generally negotiated on a percentage basis, any increase or decrease in ADRs has an impact on the revenue we earn per room night. Over the course of the last several years, occupancies and ADRs in the lodging industry generally increased on a currency-neutral basis in a gradually improving overall travel environment. However, with certain travel restrictions and quarantine orders implemented due to COVID-19, current occupancy rates for hotels in the United States are at significantly reduced levels and ADRs could decline for a period of time. In addition, other factors could
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pressure ADR trends, including the continued growth in hotel supply in recent years and the increase in alternative accommodation inventory. Further, while the global lodging industry remains very fragmented, there has been consolidation in the hotel space among chains as well as ownership groups. In the meantime, certain hotel chains have been focusing on driving direct bookings on their own websites and mobile applications by advertising lower rates than those available on third-party websites as well as incentives such as loyalty points, increased or exclusive product availability and complimentary Wi-Fi.
As of September 30, 2020, our global lodging marketplace included approximately 1.7 million properties offered through our global websites, including approximately 800,000 integrated Vrbo alternative accommodations listings.
Alternative Accommodations. With our acquisition of Vrbo (previously HomeAway) and all of its brands in December 2015, we expanded into the fast growing alternative accommodations market. Vrbo is a leader in this market and represents an attractive growth opportunity for Expedia Group. Vrbo has transitioned from a listings-based classified advertising model to an online transactional model that optimizes for both travelers and homeowner and property manager partners, with a goal of increasing monetization and driving growth through investments in marketing as well as in product and technology. Vrbo offers hosts subscription-based listing or pay-per-booking service models. It also generates revenue from a traveler service fee for bookings. As of September 30, 2020, there are 2.1 million online bookable listings available on Vrbo. In addition, we have actively moved to integrate Vrbo listings into our global Retail services, as well as directly add alternative accommodation listings to our offerings, to position our key global brands to offer a full range of lodging options for consumers.
Air
The airline industry has been dramatically impacted by COVID-19. As a result of the significantly reduced air travel demand due to government travel restrictions and the impact on consumer sentiment related to COVID-19, airlines have been operating with less capacity and passenger traffic has declined significantly. During the third quarter of 2020, air passenger traffic declines further moderated, but continue to lag the recover in lodging bookings. The recovery in air travel remains difficult to predict, and may not correlate with the recovery in lodging demand. According to the Transportation Security Administration (“TSA”), air traveler 7-day average throughput declined 95% in April 2020 compared to prior year levels. The declines moderated to down 73% in mid-July 2020 and have further moderated to down 63% as of mid-October. In addition, as of late July, the International Air Transport Association (“IATA”) expected airline passenger traffic to decline 55% in 2020 compared to 2019 levels. For 2021, IATA estimates passenger traffic to increase 62% compared to 2020, representing a decline of nearly 30% compared to 2019 levels. In September 2020, IATA lowered its forecast for air traffic (RPK), currently expecting a decline of 66% compared to 2019.
In addition, there is significant correlation between airline revenue and fuel prices, and fluctuations in fuel prices generally take time to be reflected in air revenue. Given current volatility, it is uncertain how fuel prices could impact airfares. We could encounter pressure on air remuneration as air carriers combine, certain supply agreements renew, and as we continue to add airlines to ensure local coverage in new markets.
Air ticket volumes increased 5% in 2018 and 7% in 2019. In the first nine months of 2020, air ticket volumes declined 61%. As a percentage of our total worldwide revenue in the first nine months of 2020, air accounted for 2%.
Advertising & Media
Our advertising and media business is principally driven by revenue generated by trivago, a leading hotel metasearch website, and Expedia Group Media Solutions, which is responsible for generating advertising revenue on our global online travel brands. In the first nine months of 2020, we generated $322 million of advertising and media revenue, a 63% decline from the same period in 2019, representing 8% of our total worldwide revenue. Given the decline in travel demand related to COVID-19, online travel agencies have dramatically reduced marketing spend, including on trivago, and given the uncertain duration and impact of COVID-19 it is difficult to predict when spend will recover to normalized levels. In response, trivago has significantly reduced its marketing spend and taken additional actions to lower operating expenses. We expect trivago to continue to experience significant pressure on revenue and profit until online travel agencies and other hotel suppliers begin to see consumer demand that warrants an increase in marketing spend.
Online Travel
Increased usage and familiarity with the internet are driving rapid growth in online penetration of travel expenditures. According to Phocuswright, an independent travel, tourism and hospitality research firm, in 2019, approximately 45% of U.S. and European leisure and unmanaged corporate travel expenditures occurred online. This figure was estimated to reach approximately 50% in 2020, prior to the outbreak of COVID-19. Online penetration rates in the emerging markets, such as Asia Pacific and Latin American regions, are lagging behind that of the United States and Europe. These penetration rates increased over the past few years, and are expected to continue growing, which presents an attractive growth opportunity for our business, while also attracting many competitors to online travel. This competition intensified in recent years, and the industry is expected to remain highly competitive for the foreseeable future. In addition to the growth of online travel agencies, we see
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increased interest in the online travel industry from search engine companies such as Google, evidenced by continued product enhancements, including new trip planning features for users and the integration of its various travel products into the Google Travel offering, as well as further prioritizing its own products in search results. Competitive entrants such as “metasearch” companies, including Kayak.com (owned by Booking Holdings), trivago (in which Expedia Group owns a majority interest) as well as TripAdvisor, introduced differentiated features, pricing and content compared with the legacy online travel agency companies, as well as various forms of direct or assisted booking tools. Further, airlines and lodging companies are aggressively pursuing direct online distribution of their products and services. In addition, the increasing popularity of the “sharing economy,” accelerated by online penetration, has had a direct impact on the travel and lodging industry. Businesses such as Airbnb, Vrbo (previously HomeAway, which Expedia Group acquired in December 2015) and Booking.com (owned by Booking Holdings) have emerged as the leaders, bringing incremental alternative accommodation and vacation rental inventory to the market. Many other competitors, including vacation rental metasearch players, continue to emerge in this space, which is expected to continue to grow as a percentage of the global accommodation market. Finally, traditional consumer ecommerce and group buying websites expanded their local offerings into the travel market by adding hotel offers to their websites.
The online travel industry also saw the development of alternative business models and variations in the timing of payment by travelers and to suppliers, which in some cases place pressure on historical business models. In particular, the agency hotel model saw rapid adoption in Europe. Expedia Group facilitates both merchant (Expedia Collect) and agency (Hotel Collect) hotel offerings with our hotel supply partners through both agency-only contracts as well as our hybrid ETP program, which offers travelers the choice of whether to pay Expedia Group at the time of booking or pay the hotel at the time of stay.
We have recently shifted to managing our marketing investments holistically across the brand portfolio in our Retail segment to optimize results for the Company, and making decisions on a market by market basis that we think are appropriate based on the relative growth opportunity, the expected returns and the competitive environment. Over time, intense competition historically led to aggressive marketing efforts by the travel suppliers and intermediaries, and a meaningful unfavorable impact on our overall marketing efficiencies and operating margins. During 2020, we have increased our focus on opportunities to increase marketing efficiency, drive a higher proportion of transactions through direct channels and improve the balance of transaction growth and profitability.
Growth Strategy
Global Expansion. Our Brand Expedia, Hotels.com, Vrbo portfolio, Expedia Partner Solutions and Egencia brands operate both domestically and through international points of sale, including in Europe, Asia Pacific, Canada and Latin America. In addition, ebookers offers multi-product online travel reservations in Europe and the Wotif portfolio of brands are focused principally on the Australia and New Zealand markets. We own a majority share of trivago, a leading metasearch company. In December 2016, trivago successfully completed its initial public offering and trades on the Nasdaq Global Select Market under the symbol “TRVG.” In addition, we have commercial agreements in place with Trip.com and eLong in China, Traveloka in Southeast Asia, as well as Despegar in Latin America, among many others. In conjunction with the commercial arrangements with Traveloka and Despegar, we have also made strategic investments in both companies. In the first nine months of 2020, approximately 34% of worldwide revenue was through international points of sale. Our strategy is focused on continuing to grow our international market share, and over the longer term we aim to increase our mix of international revenue as we execute to strengthen our brands and products in key international markets.
In expanding our global reach, we leverage significant investments in technology, operations, brand building, supplier relationships and other initiatives that we have made since the launch of Expedia.com in 1996. More recently, we have invested in migrating parts of our technology platform to the cloud, as well as focused on expanding our lodging supply, particularly in key international markets. Our scale of operations enhances the value of technology innovations we introduce on behalf of our travelers and suppliers. We believe that our size and scale afford the company the ability to negotiate competitive rates with our supply partners, provide breadth of choice and travel deals to our traveling customers through an expanding supply portfolio and create opportunities for new value added offers for our customers such as our loyalty programs. The size of Expedia Group’s worldwide traveler base makes our websites an increasingly appealing channel for travel suppliers to reach customers. In addition, the sheer size of our user base and search query volume allows us to test new technologies very quickly to determine which innovations are most likely to improve the travel research and booking process, and then roll those features out to our worldwide audience to drive improvements in conversion.
Product Innovation. Each of our leading brands was a pioneer in online travel and has been responsible for driving key innovations in the space for more than two decades. We have made key investments in technology, including significant development of our technical platforms, that make it possible for us to deliver innovations at a faster pace. Improvements in our global platforms for Hotels.com, Brand Expedia and Vrbo continue to enable us to significantly increase the innovation cycle, thereby improving conversion and driving faster growth rates for those brands. Since 2014, we have acquired Travelocity, Wotif Group and Orbitz Worldwide, including Orbitz, CheapTickets and ebookers, and migrated their brands to the Brand
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Expedia technology platform. In addition, Orbitz for Business customers were migrated to the Egencia technology platform in 2016. We intend to continue leveraging these technology investments when launching additional points of sale in new countries, introducing new website features, adding supplier products and services including new business model offerings, as well as proprietary and user-generated content for travelers.
Channel Expansion. Technological innovations and developments continue to create new opportunities for travel bookings. In the past few years, each of our brands made significant progress innovating on its mobile websites and mobile applications, contributing to solid download trends, and many of our brands now see more traffic via mobile devices than via traditional PCs and an increasing percentage of transactions are coming through mobile. Mobile bookings continue to present an opportunity for incremental growth as they are often completed with a much shorter booking window than we historically experienced via more traditional online booking methods. Additionally, our brands are implementing new technologies like voice-based search, chatbots and messaging apps as mobile-based options for travelers. In addition, we are seeing significant cross-device usage among our customers, who connect to our websites and apps across multiple devices and platforms throughout their travel planning process. We also believe mobile represents an efficient marketing channel given the opportunity for direct traffic acquisition, increase in share of wallet and in repeat customers, particularly through mobile applications. During 2019, more than 40% of transactions across Expedia Group’s Retail brands were booked on a mobile device.
Seasonality
We generally experience seasonal fluctuations in the demand for our travel services. For example, traditional leisure travel bookings are generally the highest in the first three quarters as travelers plan and book their spring, summer and winter holiday travel. The number of bookings typically decreases in the fourth quarter. Because revenue for most of our travel services, including merchant and agency hotel, is recognized as the travel takes place rather than when it is booked, revenue typically lags bookings by several weeks for our hotel business and can be several months or more for our alternative accommodations business. Historically, Vrbo has seen seasonally stronger bookings in the first quarter of the year, with the relevant stays occurring during the peak summer travel months. The seasonal revenue impact is exacerbated with respect to income by the nature of our variable cost of revenue and direct sales and marketing costs, which we typically realize in closer alignment to booking volumes, and the more stable nature of our fixed costs. Furthermore, operating profits for our primary advertising business, trivago, have typically been experienced in the second half of the year, particularly the fourth quarter, as selling and marketing costs offset revenue in the first half of the year as we typically increase marketing during the busy booking period for spring, summer and winter holiday travel. As a result on a consolidated basis, revenue and income are typically the lowest in the first quarter and highest in the third quarter. The growth of our international operations, advertising business or a change in our product mix, including the growth of Vrbo, may influence the typical trend of the seasonality in the future.
Due to COVID-19, which led to significant cancellations for future travel during the first half of the year, and has impacted new travel bookings for the majority of 2020, we have not experienced our typical seasonal pattern for bookings, revenue and profit during 2020. In addition, with the lower new bookings and elevated cancellations in the merchant business model, our typical, seasonal working capital source of cash has been significantly disrupted resulting in the Company experiencing unfavorable working capital trends and material negative cash flow during the first half of 2020 when we typically generate significant positive cash flow. Seasonal trends were more normalized during the third quarter, but it is difficult to forecast the seasonality for the upcoming quarters, given the uncertainty related to the duration of the impact from COVID-19 and the shape and timing of any sustained recovery. In addition, we are experiencing much shorter booking windows in both our hotel and alternative accommodations business, which could also impact the seasonality of our working capital and cash flow.
Critical Accounting Policies and Estimates
Critical accounting policies and estimates are those that we believe are important in the preparation of our consolidated financial statements because they require that we use judgment and estimates in applying those policies. We prepare our consolidated financial statements and accompanying notes in accordance with generally accepted accounting principles in the United States (“GAAP”). Preparation of the consolidated financial statements and accompanying notes requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements as well as revenue and expenses during the periods reported. We base our estimates on historical experience, where applicable, and other assumptions that we believe are reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions.
There are certain critical estimates that we believe require significant judgment in the preparation of our consolidated financial statements. We consider an accounting estimate to be critical if:
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It requires us to make an assumption because information was not available at the time or it included matters that were highly uncertain at the time we were making the estimate; and
Changes in the estimate or different estimates that we could have selected may have had a material impact on our financial condition or results of operations.
The COVID-19 pandemic has created and may continue to create significant uncertainty in macroeconomic conditions, which may cause further business disruptions and adversely impact our results of operations. As a result, many of our estimates and assumptions required increased judgment and carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, our estimates may change materially in future periods.
Recoverability of Goodwill and Indefinite and Definite-Lived Intangible Assets
Goodwill. We assess goodwill for impairment annually as of October 1, or more frequently, if events and circumstances indicate impairment may have occurred. During the first nine months of 2020, as a result of the significant turmoil related to COVID-19, we concluded that sufficient indicators existed to require us to perform multiple interim impairment assessments. In the evaluation of goodwill for impairment, we typically perform a quantitative assessment and compare the fair value of the reporting unit to the carrying value and, if applicable, record an impairment charge based on the excess of the reporting unit's carrying amount over its fair value. Periodically, we may choose to perform a qualitative assessment, prior to performing the quantitative analysis, to determine whether the fair value of the goodwill is more likely than not impaired.
We generally base our measurement of fair value of reporting units, except for trivago, which is a separately listed company on the Nasdaq Global Select Market, on a blended analysis of the present value of future discounted cash flows and market valuation approach. The discounted cash flows model indicates the fair value of the reporting units based on the present value of the cash flows that we expect the reporting units to generate in the future. Our significant estimates in the discounted cash flows model include: our weighted average cost of capital; long-term rate of growth and profitability of our business; and working capital effects. The market valuation approach indicates the fair value of the business based on a comparison of the Company to comparable publicly traded firms in similar lines of business. Our significant estimates in the market approach model include identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment and assessing comparable revenue and operating income multiples in estimating the fair value of the reporting units. The fair value estimate for the trivago reporting unit was based on trivago’s stock price, a Level 1 input, adjusted for an estimated control premium.
We believe the weighted use of discounted cash flows and market approach is generally the best method for determining the fair value of our reporting units because these are the most common valuation methodologies used within the travel and internet industries; and the blended use of both models compensates for the inherent risks associated with either model if used on a stand-alone basis.
In addition to measuring the fair value of our reporting units as described above, we consider the combined carrying and fair values of our reporting units in relation to the Company’s total fair value of equity plus debt as of the assessment date. Our equity value assumes our fully diluted market capitalization, using either the stock price on the valuation date or the average stock price over a range of dates around the valuation date, plus an estimated acquisition premium which is based on observable transactions of comparable companies. The debt value is based on the highest value expected to be paid to repurchase the debt, which can be fair value, principal or principal plus a premium depending on the terms of each debt instrument.
Indefinite-Lived Intangible Assets. We base our measurement of fair value of indefinite-lived intangible assets, which primarily consist of trade name and trademarks, using the relief-from-royalty method. This method assumes that the trade name and trademarks have value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires us to estimate the future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital.
Definite-Lived Intangible Assets. We review the carrying value of long-lived assets or asset groups to be used in operations whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset, or a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, we would assess the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates that the carrying value of the asset group is not recoverable, we will estimate the fair value of the asset group using appropriate valuation methodologies, which would typically include an estimate of discounted cash flows. Any impairment would be measured as the difference between the asset groups carrying amount and its estimated fair value.
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The use of different estimates or assumptions in determining the fair value of our goodwill, indefinite-lived and definite-lived intangible assets may result in different values for these assets, which could result in an impairment or, in the period in which an impairment is recognized, could result in a materially different impairment charge.
For additional information on our goodwill and intangible asset impairments recorded as a result of our interim impairment testing during the first nine months of 2020, see Note 3 – Fair Value Measurements in the notes to the consolidated financial statements.
For additional information about our other critical accounting policies and estimates, see the disclosure included in our Annual Report on Form 10-K for the year ended December 31, 2019 as well as updates in the current fiscal year provided in Note 2 – Summary of Significant Accounting Policies in the notes to the consolidated financial statements.
Occupancy and Other Taxes
Legal Proceedings. We are currently involved in nine lawsuits brought by or against states, cities and counties over issues involving the payment of hotel occupancy and other taxes. We continue to defend these lawsuits vigorously. With respect to the principal claims in these matters, we believe that the statutes and/or ordinances at issue do not apply to us or the services we provide, namely the facilitation of travel planning and reservations, and, therefore, that we do not owe the taxes that are claimed to be owed. We believe that the statutes and ordinances at issue generally impose occupancy and other taxes on entities that own, operate or control hotels (or similar businesses) or furnish or provide hotel rooms or similar accommodations.
Recent developments include:
City of San Antonio, Texas Litigation. On September 10, 2020, plaintiffs filed a petition for writ of certiorari to the United States Supreme Court, seeking to appeal the United States Fifth Circuit Court of Appeals affirmance of an award of over $2 million appeal bond costs against the city, which remains pending.
Jefferson Parrish, Louisiana Litigation. On September 17, 2020, the court granted the defendants’ motion, denied the plaintiff’s motion and dismissed all remaining claims filed by the plaintiff with prejudice. Plaintiff filed a notice of appeal on October 13, 2020.
Palm Beach, Florida Litigation. On October 19, 2020, the Florida Supreme Court denied Palm Beach County’s petition for discretionary review, thereby ending the matter.
For additional information on these and other legal proceedings, see Part II, Item 1, Legal Proceedings.
We have established a reserve for the potential settlement of issues related to hotel occupancy and other tax litigation, consistent with applicable accounting principles and in light of all current facts and circumstances, in the amount of $58 million as of September 30, 2020, and $48 million as of December 31, 2019.
Certain jurisdictions, including without limitation the states of New York, New Jersey, North Carolina, Minnesota, Oregon, Rhode Island, Maryland, Pennsylvania, Hawaii, Iowa, Massachusetts, Arizona, Wisconsin, Idaho, Arkansas, Indiana, Maine, Nebraska, Vermont, the city of New York, and the District of Columbia, have enacted legislation seeking to tax online travel company services as part of sales or other taxes for hotel and/or other accommodations and/or car rental. In addition, in certain jurisdictions, we have entered into voluntary collection agreements pursuant to which we have agreed to voluntarily collect and remit taxes to state and/or local taxing jurisdictions. We are currently remitting taxes to a number of jurisdictions, including without limitation the states of New York, New Jersey, South Carolina, North Carolina, Minnesota, Georgia, Wyoming, West Virginia, Oregon, Rhode Island, Montana, Maryland, Kentucky, Maine, Pennsylvania, Hawaii, Iowa, Massachusetts, Arizona, Wisconsin, Idaho, Arkansas, Indiana, Nebraska, Vermont, the city of New York and the District of Columbia, as well as certain other jurisdictions.
Pay-to-Play
Certain jurisdictions may assert that we are required to pay any assessed taxes prior to being allowed to contest or litigate the applicability of the ordinances. This prepayment of contested taxes is referred to as “pay-to-play.” Payment of these amounts is not an admission that we believe we are subject to such taxes and, even when such payments are made, we continue to defend our position vigorously. If we prevail in the litigation, for which a pay-to-play payment was made, the jurisdiction collecting the payment will be required to repay such amounts and also may be required to pay interest. However, any significant pay-to-play payment or litigation loss could negatively impact our liquidity.
Other Jurisdictions. We are also in various stages of inquiry or audit with domestic and foreign tax authorities, some of which, including the City of Los Angeles regarding hotel occupancy taxes and the United Kingdom regarding the application of value added tax (“VAT”) to our European Union related transactions, may impose a pay-to-play requirement to challenge an adverse inquiry or audit result in court.
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