10-Q 1 sabr-10q_20140930.htm 10-Q

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

or

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-36422

 

Sabre Corporation

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

20-8647233

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

3150 Sabre Drive

Southlake, TX 76092

(Address, including zip code, of principal executive offices)

(682) 605-1000

(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 (the “Exchange Act”) 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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  x    No  ¨

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

 

Large accelerated filer

 

¨

  

Accelerated filer

 

¨

 

Non-accelerated filer

 

x  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

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

As of November 10, 2014, 265,364,515 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.

 

 

 

 

 

 


 

SABRE CORPORATION

TABLE OF CONTENTS

 

 

 

Page No.

PART I. FINANCIAL INFORMATION

 

 

    Item 1.

Financial Statements:

 

 

 

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2014 and 2013

1

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2014 and 2013

2

 

 

Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013

3

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013

4

 

 

Notes to Consolidated Financial Statements

5

 

    Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

 

    Item 3.

Quantitative and Qualitative Disclosures About Market Risk

54

 

    Item 4.

Controls and Procedures

54

 

PART II. OTHER INFORMATION

 

 

    Item 1.

Legal Proceedings

55

 

    Item 6.

Exhibits

55

 

 

 

 


 

PART I – FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

SABRE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Revenue

$

756,303

 

 

$

775,823

 

 

$

2,229,286

 

 

$

2,303,399

 

Cost of revenue (1) (2)

 

465,689

 

 

 

474,090

 

 

 

1,399,919

 

 

 

1,423,242

 

Selling, general and administrative (2)

 

169,183

 

 

 

208,033

 

 

 

575,413

 

 

 

620,226

 

Impairment

 

 

 

 

2,837

 

 

 

 

 

 

138,435

 

Restructuring charges

 

4,735

 

 

 

15,889

 

 

 

2,325

 

 

 

15,889

 

Operating income

 

116,696

 

 

 

74,974

 

 

 

251,629

 

 

 

105,607

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(50,153

)

 

 

(63,454

)

 

 

(167,332

)

 

 

(209,653

)

Loss on extinguishment of debt

 

 

 

 

 

 

 

(33,538

)

 

 

(12,181

)

Joint venture equity income

 

2,867

 

 

 

1,841

 

 

 

9,367

 

 

 

7,873

 

Other, net

 

565

 

 

 

(2,429

)

 

 

760

 

 

 

(1,099

)

Total other expense, net

 

(46,721

)

 

 

(64,042

)

 

 

(190,743

)

 

 

(215,060

)

Income (loss) from continuing operations before income taxes

 

69,975

 

 

 

10,932

 

 

 

60,886

 

 

 

(109,453

)

Provision (benefit) for income taxes

 

30,956

 

 

 

7,861

 

 

 

27,878

 

 

 

(5,229

)

Income (loss) from continuing operations

 

39,019

 

 

 

3,071

 

 

 

33,008

 

 

 

(104,224

)

(Loss) income from discontinued operations, net of tax

 

(1,736

)

 

 

3,015

 

 

 

(8,017

)

 

 

(20,895

)

Net income (loss)

 

37,283

 

 

 

6,086

 

 

 

24,991

 

 

 

(125,119

)

Net income attributable to noncontrolling interests

 

720

 

 

 

714

 

 

 

2,168

 

 

 

2,135

 

Net income (loss) attributable to Sabre Corporation

 

36,563

 

 

 

5,372

 

 

 

22,823

 

 

 

(127,254

)

Preferred stock dividends

 

 

 

 

9,242

 

 

 

11,381

 

 

 

27,219

 

Net income (loss) attributable to common shareholders

$

36,563

 

 

$

(3,870

)

 

$

11,442

 

 

$

(154,473

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income (loss) per share attributable to common shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

0.14

 

 

$

(0.04

)

 

$

0.08

 

 

$

(0.75

)

(Loss) income from discontinued operations

 

(0.01

)

 

 

0.02

 

 

 

(0.03

)

 

 

(0.12

)

Net income (loss) per common share

$

0.14

 

 

$

(0.02

)

 

$

0.05

 

 

$

(0.87

)

Diluted net income (loss) per share attributable to common shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

0.14

 

 

$

(0.04

)

 

$

0.08

 

 

$

(0.75

)

(Loss) income from discontinued operations

 

(0.01

)

 

 

0.02

 

 

 

(0.03

)

 

 

(0.12

)

Net income (loss) per common share

$

0.13

 

 

$

(0.02

)

 

$

0.05

 

 

$

(0.87

)

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

264,768

 

 

 

178,140

 

 

 

229,405

 

 

 

178,051

 

Diluted

 

273,330

 

 

 

178,140

 

 

 

237,994

 

 

 

178,051

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends per common share

$

0.09

 

 

$

 

 

$

0.09

 

 

$

 

 

 

(1) Includes amortization of upfront incentive consideration

$

10,388

 

 

$

9,385

 

 

$

33,177

 

 

$

28,736

 

(2) Includes stock-based compensation as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

$

2,172

 

 

$

544

 

 

$

5,618

 

 

$

816

 

Selling, general and administrative

 

3,300

 

 

 

2,142

 

 

 

16,816

 

 

 

4,630

 

See Notes to Consolidated Financial Statements.

 

1


 

SABRE CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net income (loss)

$

37,283

 

 

$

6,086

 

 

$

24,991

 

 

$

(125,119

)

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments (“CTA”):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign CTA gains (losses), net of tax

 

1,522

 

 

 

(612

)

 

 

3,711

 

 

 

(276

)

Reclassification adjustment for realized losses

   on foreign CTA, net of tax

 

 

 

 

 

 

 

 

 

 

8,162

 

Net change in foreign CTA gains (losses), net of tax

 

1,522

 

 

 

(612

)

 

 

3,711

 

 

 

7,886

 

Retirement-related benefit plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service credits, net of taxes of $129 and

   $1,041 for the three months ended September 30, 2014 and

   2013, respectively, and $386 and $3,740 for the nine months

   ended September 30, 2014 and 2013, respectively

 

(229

)

 

 

(2,405

)

 

 

(686

)

 

 

(6,596

)

Amortization of actuarial losses, net of taxes of $(454) and

   $(414) for the three months ended September 30, 2014 and

   2013, respectively, and $(1,299) and $(1,482) for the nine

   months ended September 30, 2014 and 2013, respectively

 

803

 

 

 

955

 

 

 

2,292

 

 

 

2,615

 

Total retirement-related benefit plans

 

574

 

 

 

(1,450

)

 

 

1,606

 

 

 

(3,981

)

Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses), net of taxes of $1,096 and $(1,311)

   for the three months ended September 30, 2014 and 2013,

   respectively, and $666 and $(484) for the nine months ended

   September 30, 2014 and 2013, respectively

 

(3,799

)

 

 

2,752

 

 

 

(3,181

)

 

 

564

 

Reclassification adjustment for realized losses, net of taxes of

   $(1,057) and $(1,615) for the three months ended

   September 30, 2014 and 2013, respectively, and $(2,607)

   and $(4,079) for the nine months ended September 30, 2014

   and 2013, respectively

 

1,684

 

 

 

2,703

 

 

 

2,747

 

 

 

6,312

 

Net change in unrealized (losses) gains on derivatives, net of tax

 

(2,115

)

 

 

5,455

 

 

 

(434

)

 

 

6,876

 

Share of other comprehensive income of joint venture

 

 

 

 

 

 

 

3,420

 

 

 

 

Other comprehensive (loss) income

 

(19

)

 

 

3,393

 

 

 

8,303

 

 

 

10,781

 

Comprehensive income (loss)

 

37,264

 

 

 

9,479

 

 

 

33,294

 

 

 

(114,338

)

Less: Comprehensive income attributable to

   noncontrolling interests

 

(720

)

 

 

(714

)

 

 

(2,168

)

 

 

(2,135

)

Comprehensive income (loss) attributable to Sabre Corporation

$

36,544

 

 

$

8,765

 

 

$

31,126

 

 

$

(116,473

)

 

See Notes to Consolidated Financial Statements.

 

 

2


 

SABRE CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

 

 

September 30, 2014

 

 

December 31, 2013

 

Assets

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

157,747

 

 

$

308,236

 

Restricted cash

 

755

 

 

 

2,359

 

Accounts receivable, net

 

466,753

 

 

 

434,288

 

Prepaid expenses and other current assets

 

56,315

 

 

 

53,378

 

Current deferred income taxes

 

39,184

 

 

 

41,431

 

Other receivables, net

 

28,902

 

 

 

29,511

 

Assets of discontinued operations

 

9,364

 

 

 

13,624

 

Total current assets

 

759,020

 

 

 

882,827

 

Property and equipment, net of accumulated depreciation of  $824,146 and $722,916

 

526,722

 

 

 

498,523

 

Investments in joint ventures

 

142,639

 

 

 

132,082

 

Goodwill

 

2,152,590

 

 

 

2,138,175

 

Trademarks and brandnames, net of accumulated amortization of $554,286 and $545,597

 

307,445

 

 

 

323,035

 

Other intangible assets, net of accumulated amortization of $956,606 and $889,904

 

261,581

 

 

 

311,523

 

Other assets, net

 

522,397

 

 

 

469,543

 

Total assets

$

4,672,394

 

 

$

4,755,708

 

 

 

 

 

 

 

 

 

Liabilities, temporary equity and stockholders’ equity (deficit)

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

$

129,555

 

 

$

111,386

 

Travel supplier liabilities and related deferred revenue

 

107,409

 

 

 

213,504

 

Accrued compensation and related benefits

 

91,700

 

 

 

117,689

 

Accrued subscriber incentives

 

168,019

 

 

 

142,767

 

Deferred revenues

 

176,990

 

 

 

136,380

 

Litigation settlement liability and related deferred revenue

 

75,409

 

 

 

38,920

 

Other accrued liabilities

 

210,196

 

 

 

267,867

 

Current portion of debt

 

22,418

 

 

 

86,117

 

Liabilities of discontinued operations

 

23,881

 

 

 

41,788

 

Total current liabilities

 

1,005,577

 

 

 

1,156,418

 

Deferred income taxes

 

8,601

 

 

 

10,253

 

Other noncurrent liabilities

 

523,728

 

 

 

263,182

 

Long-term debt

 

3,065,440

 

 

 

3,643,548

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

 

Temporary equity

 

 

 

 

 

 

 

Series A Redeemable Preferred Stock: $0.01 par value; 225,000,000 authorized

    shares; no shares issued and outstanding at September 30, 2014; 87,229,703 shares

    issued and 87,184,179 outstanding at December 31, 2013

 

 

 

 

634,843

 

Stockholders’ equity (deficit)

 

 

 

 

 

 

 

Common Stock: $0.01 par value; 450,000,000 authorized shares; 265,224,958

    and 178,633,409 shares issued, 264,787,572 and 178,491,568 outstanding

    at September 30, 2014 and December 31, 2013, respectively

 

2,652

 

 

 

1,786

 

Additional paid-in capital

 

1,911,172

 

 

 

880,619

 

Treasury Stock, at cost, 437,386 shares at September 30, 2014

 

(5,297

)

 

 

 

Retained deficit

 

(1,797,944

)

 

 

(1,785,554

)

Accumulated other comprehensive loss

 

(41,592

)

 

 

(49,895

)

Noncontrolling interest

 

57

 

 

 

508

 

Total stockholders’ equity (deficit)

 

69,048

 

 

 

(952,536

)

Total liabilities, temporary equity and stockholders’ equity (deficit)

$

4,672,394

 

 

$

4,755,708

 

 

See Notes to Consolidated Financial Statements.

 

 

3


 

SABRE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

Operating Activities

 

 

 

 

 

 

 

Net income (loss)

$

24,991

 

 

$

(125,119

)

Adjustments to reconcile net income (loss) to cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

230,461

 

 

 

230,277

 

Impairment

 

 

 

 

138,435

 

Restructuring charges

 

3,247

 

 

 

4,089

 

Amortization of upfront incentive consideration

 

33,177

 

 

 

28,736

 

Litigation related (gains) charges

 

(6,132

)

 

 

6,117

 

Stock-based compensation expense

 

22,434

 

 

 

5,446

 

Allowance for doubtful accounts

 

6,371

 

 

 

7,583

 

Deferred income taxes

 

6,232

 

 

 

(19,357

)

Joint venture equity income

 

(9,367

)

 

 

(7,873

)

Dividends received from joint venture investments

 

2,205

 

 

 

 

Amortization of debt issuance costs

 

4,779

 

 

 

5,323

 

Debt modification costs

 

3,290

 

 

 

14,003

 

Loss on extinguishment of debt

 

33,538

 

 

 

12,181

 

Other

 

3,658

 

 

 

(10,210

)

Loss from discontinued operations

 

8,017

 

 

 

20,895

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts and other receivables

 

(58,435

)

 

 

(46,394

)

Prepaid expenses and other current assets

 

(10,612

)

 

 

7,314

 

Capitalized implementation costs

 

(27,602

)

 

 

(48,686

)

Upfront incentive consideration

 

(31,633

)

 

 

(26,634

)

Other assets

 

(58,120

)

 

 

(63,389

)

Accrued compensation and related benefits

 

(23,104

)

 

 

7,361

 

Accounts payable and other accrued liabilities

 

(31,516

)

 

 

109,778

 

Pension and other postretirement benefits

 

(4,200

)

 

 

2,186

 

Cash provided by operating activities

 

121,679

 

 

 

252,062

 

Investing Activities

 

 

 

 

 

 

 

Additions to property and equipment

 

(160,385

)

 

 

(168,744

)

Acquisition, net of cash acquired

 

(31,799

)

 

 

(30,476

)

Proceeds from sale of business

 

 

 

 

10,000

 

Other investing activities

 

235

 

 

 

 

Cash used in investing activities

 

(191,949

)

 

 

(189,220

)

Financing Activities

 

 

 

 

 

 

 

Proceeds of borrowings from lenders

 

148,307

 

 

 

2,540,063

 

Payments on borrowings from lenders

 

(797,028

)

 

 

(2,239,538

)

Proceeds from issuance of common stock in initial public offering, net

 

672,137

 

 

 

 

Prepayment fee and debt modification and issuance costs

 

(30,490

)

 

 

(19,116

)

Acquisition-related contingent consideration paid

 

(27,000

)

 

 

 

Dividends paid to common shareholders

 

(23,831

)

 

 

 

Other financing activities

 

(1,384

)

 

 

(6,692

)

Cash (used in) provided by financing activities

 

(59,289

)

 

 

274,717

 

Cash Flows from Discontinued Operations

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

 

(25,424

)

 

 

6,352

 

Net cash provided by investing activities

 

3,760

 

 

 

20,502

 

Net cash (used in) provided by discontinued operations

 

(21,664

)

 

 

26,854

 

Effect of exchange rate changes on cash and cash equivalents

 

734

 

 

 

480

 

(Decrease) increase in cash and cash equivalents

 

(150,489

)

 

 

364,893

 

Cash and cash equivalents at beginning of period

 

308,236

 

 

 

126,695

 

Cash and cash equivalents at end of period

$

157,747

 

 

$

491,588

 

See Notes to Consolidated Financial Statements.

 

4


 

SABRE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. General Information

Sabre Corporation is a Delaware corporation formed in December 2006. On March 30, 2007, Sabre Corporation acquired Sabre Holdings Corporation (“Sabre Holdings”). Sabre Holdings is the sole subsidiary of Sabre Corporation. Sabre GLBL Inc. is the principal operating subsidiary and sole direct subsidiary of Sabre Holdings. Sabre GLBL Inc. or its direct or indirect subsidiaries conduct all of our businesses. In these consolidated financial statements, references to “Sabre”, the “Company”, “we”, “our”, “ours” and “us” refer to Sabre Corporation and its consolidated subsidiaries unless otherwise stated or the context otherwise requires.

We are a leading technology solutions provider to the global travel and tourism industry. We operate through three business segments: (i) Travel Network, our global travel marketplace for travel suppliers and travel buyers, (ii) Airline and Hospitality Solutions, an extensive suite of travel industry leading software solutions primarily for airlines and hotel properties, and (iii) Travelocity, our portfolio of online consumer travel e-commerce businesses through which we provide travel content and booking functionality primarily for leisure travelers.

Initial Public Offering and Share-based Compensation—On April 23, 2014, we closed our initial public offering of our common stock in which we sold 39,200,000 shares, and on April 25, 2014, the underwriters exercised in full their overallotment option which resulted in the sale of an additional 5,880,000 shares of our common stock. Our shares of common stock were sold at an initial public offering price of $16.00 per share, which generated $672 million of net proceeds from the offering after deducting underwriting discounts and commissions and offering expenses. Upon closing of our initial public offering, we redeemed all of our outstanding shares of Series A Cumulative Preferred Stock in exchange for 40,343,529 shares of our common stock.

We used the net proceeds from this offering to repay (i) $296 million aggregate principal amount of our term loans and (ii) $320 million aggregate principal amount of our senior secured notes due in 2019 at a redemption price of 108.5% of the principal amount, which represents the maximum amount of the contingent call option exercisable in the event of an equity offering (see Note 8, Debt). The term loan prepayment occurred in two installments: the first prepayment of $207 million occurred on April 24, 2014 and the second prepayment of $90 million occurred on April 29, 2014. The redemption of $320 million of our senior secured notes due in 2019 occurred on May 7, 2014. We also used the net proceeds from our offering to pay the $27 million redemption premium and $13 million in accrued but unpaid interest on the senior secured notes due in 2019. We used the remaining portion of the net proceeds from our offering to pay a $21 million fee, in the aggregate, to TPG Global, LLC (“TPG”) and Silver Lake Management Company (“Silver Lake”) pursuant to a management services agreement (the “MSA”), which was thereafter terminated.

On March 20, 2014, our board of directors adopted the Sabre Corporation 2014 Omnibus Incentive Compensation Plan (the “2014 Omnibus Plan”), which permits the grant of cash and equity and equity-based incentive awards. Our employees and the non-employee members of our board of directors and those of our subsidiaries are eligible to receive awards under the 2014 Omnibus Plan. On the effective date of our initial public offering, under the 2014 Omnibus Plan, we granted time-based options to purchase 1,541,627 shares of common stock at an exercise price of $16.68 per share and a total of 2,298,478 shares of performance-based and time-based restricted stock units.

In April 2014, we cancelled all outstanding stock-based awards issued under the Travelocity.com LLC Stock Option Grant Agreements, the Travelocity Equity 2012 Plan and the Sovereign Holdings, Inc. Amended and Restated Stock Incentive Plan for Travelocity’s CEO—Stock Settled SARs with Respect to Travelocity Equity, terminated all related plans and award agreements, and recorded stock compensation expense of $7 million, representing the remaining unrecognized compensation expense of the awards at the cancellation date.

Basis of Presentation—The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position, results of operations and cash flows for the periods indicated. Operating results for the three and nine months ended September 30, 2014 are not necessarily indicative of results that may be expected for any other interim period or for the year ended December 31, 2014. The accompanying interim financial statements should be read in conjunction with our annual audited financial statements and related notes thereto for the year ended December 31, 2013 included in our prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act on April 17, 2014.

We consolidate all of our majority-owned subsidiaries and companies over which we exercise control through majority voting rights. No entities are currently consolidated due to control through operating agreements, financing agreements, or as the primary beneficiary of a variable interest entity.

5


 

The consolidated financial statements include our accounts after elimination of all significant intercompany balances and transactions.

Use of Estimates—The preparation of these interim financial statements in conformity with GAAP requires that certain amounts be recorded based on estimates and assumptions made by management. Actual results could differ from these estimates and assumptions. Our accounting policies, which include significant estimates and assumptions, include, among other things, estimation of the collectability of accounts receivable, amounts for future cancellations of bookings processed through the Sabre global distribution system (“GDS”), revenue recognition for software development, determination of the fair value of assets and liabilities acquired in a business combination, determination of the fair value of derivatives, the evaluation of the recoverability of the carrying value of intangible assets and goodwill, assumptions utilized in the determination of pension and other postretirement benefit liabilities, assumptions made in the calculation of restructuring liabilities and the evaluation of uncertainties surrounding the calculation of our tax assets and liabilities. These policies are discussed in our annual audited consolidated financial statements and related notes thereto for the year ended December 31, 2013 included in our prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act on April 17, 2014.

2. Acquisitions

On September 11, 2014, we acquired certain assets and liabilities of Genares Worldwide Reservation Services, Ltd. (“Genares”), a provider of central reservation systems, revenue management and marketing solutions to more than 2,300 independent and chain hotel properties worldwide. Under the transaction, we acquired the assets of Genares for cash consideration of $32 million. The operating results of Genares have been included in our consolidated statement of operations and results of operations of our Airline and Hospitality Solutions segment from the date of the acquisition. The assets acquired and liabilities assumed have been recorded in our consolidated balance sheet based on preliminary fair value estimates. The final allocation of the purchase price will be based on a complete evaluation of the assets acquired and liabilities assumed. Accordingly, the information presented in our consolidated balance sheet and elsewhere in this report may differ from the final purchase price allocation. The preliminary allocation of the purchase price includes $14 million to goodwill, which is deductible for tax purposes, $17 million to other intangible assets and $1 million to net assets acquired. The other intangible assets consist primarily of $14 million of acquired customer relationships with a useful life of ten years and $2 million of non-compete agreements with a useful life of five years.

3. Discontinued Operations and Dispositions

We have disposed of or discontinued certain businesses or operations in order to further align Travelocity with its core strategies of focusing on product and customer experiences in profitable locations, and displaying and promoting highly relevant content. We believe these decisions will allow us to reduce our technological complexity by reducing the number of supported business platforms and operations.

Discontinued Operations

The results for the following Travelocity operations are presented in (loss) income from discontinued operations in our consolidated statements of operations:

Holiday Autos—On June 25, 2013, we sold certain assets of our Holiday Autos operations to a third party and, in November 2013, completed the closing of the remainder of the Holiday Autos operations such that it represented a discontinued operation. Holiday Autos was a leisure car hire broker that offered pre-paid, low-cost car rentals in various markets, largely in Europe. In the second quarter of 2013, we recognized an $11 million loss, net of tax, on the sale of Holiday Autos. The loss includes the write-off of $39 million of goodwill and intangible assets attributed to Holiday Autos, with the goodwill portion determined based on Holiday Autos’ relative fair value to the Travelocity Europe reporting unit. The sale provides for us to receive two earn-out payments measured during the 12 month periods ending September 30, 2014 and 2015, totaling up to $12 million, based upon the purchaser exceeding certain booking thresholds as defined in the sale agreement. We recognized $6 million relative to these earn-out provisions and the resulting receivable is reviewed for recovery on a periodic basis. Any earn-out payments received in excess of the $6 million recognized will be recorded as a gain in the period received.

Zuji—In December 2012, we entered into an agreement to sell our shares of Zuji Properties A.V.V. and Zuji Pte Ltd along with its operating subsidiaries (collectively “Zuji”), a Travelocity Asia Pacific-based Online Travel Agency (“OTA”). At that time, the assets were recorded at the lower of the carrying amount or fair value less cost to sell. We recorded an estimated loss on the sale of approximately $14 million, net of tax during 2012. We sold Zuji on March 21, 2013 and recorded an additional $11 million loss on sale, net of tax during the three months ended March 31, 2013. We have continuing cash flows from Zuji due to reciprocal agreements between us and Zuji to provide hotel reservations services over a three year period. The agreements include commissions to be paid to the respective party based on qualifying bookings. The continuing cash flows associated with Zuji were not material to our results of operations for the nine months ended September 30, 2014.

6


 

Results of Discontinued Operations—We have reported the results of operations of Holiday Autos and Zuji as discontinued operations. As part of the Zuji sale agreement, we had retained the rights to receive refunds of certain disputed income taxes outstanding as of the sale date. During the third quarter of 2014, we received a $2 million tax refund associated with the operations of Zuji prior to its disposal which is included in (benefit) provision for income taxes of discontinued operations. The following table summarizes the results of our discontinued operations (in thousands):

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Revenue

$

 

 

$

12,806

 

 

$

 

 

$

48,549

 

Cost of revenue

 

146

 

 

 

2,882

 

 

 

1,257

 

 

 

14,668

 

Selling, general and administrative

 

680

 

 

 

469

 

 

 

3,023

 

 

 

31,030

 

Operating (loss) income

 

(826

)

 

 

9,455

 

 

 

(4,280

)

 

 

2,851

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(2,559

)

 

 

3,613

 

 

 

(5,917

)

 

 

1,493

 

Loss on sale of businesses, net

 

 

 

 

 

 

 

 

 

 

(27,708

)

Other, net

 

(392

)

 

 

(4,283

)

 

 

(2,044

)

 

 

(880

)

Total other expense, net

 

(2,951

)

 

 

(670

)

 

 

(7,961

)

 

 

(27,095

)

(Loss) income from discontinuing operations before

   income taxes

 

(3,777

)

 

 

8,785

 

 

 

(12,241

)

 

 

(24,244

)

(Benefit) provision for income taxes

 

(2,041

)

 

 

5,770

 

 

 

(4,224

)

 

 

(3,349

)

Net (loss) income from discontinued operations

$

(1,736

)

 

$

3,015

 

 

$

(8,017

)

 

$

(20,895

)

Dispositions

Disposition of Certain Assets of Travelocity—In February 2014, as a further step in our restructuring plans for Travelocity, we completed a sale of assets associated with Travelocity Partner Network (“TPN”), a business-to-business private white label website offering, for $10 million in upfront proceeds. Pursuant to the sale agreement, we will receive two annual earn-out payments, totaling up to $10 million, if the purchaser exceeds certain revenue thresholds during the calendar years ending December 31, 2014 and 2015. In connection with the sale, Travelocity entered into a Transition Services Agreement (“TSA”) with the acquirer to provide services to maintain the websites and certain technical and administrative functions for the acquirer until a complete transition occurs or the TSA terminates. Consideration received under both agreements has been allocated to the disposition and the services provided under the TSA; therefore, a significant portion of the upfront proceeds have been deferred, based on fair value of the TSA services. At the time of sale, we recognized no net gain or loss which was comprised of a $3 million loss on disposition, offset by a $3 million receivable for earn-out proceeds. During the third quarter of 2014, we determined that receipt of the earn-out proceeds was no longer probable and therefore fully impaired the receivable. The $3 million loss is included in restructuring charges for the three and nine months ended September 30, 2014 in our consolidated statements of operations.

On June 18, 2013, we completed the sale of certain assets of Travelocity (“TBiz”) operations to a third party for proceeds of $10 million. TBiz provided managed travel services for corporate customers. In the second quarter of 2013, we recognized a pre-tax gain on the sale of TBiz of $1 million which included the write-off of $9 million of goodwill attributed to TBiz based on the relative fair value to the Travelocity North America reporting unit. On an after tax basis, we recognized a loss of $3 million on the sale of TBiz.

 

4. Restructuring Charges

Travelocity Restructuring—In the third quarter of 2013, we initiated plans to restructure Travelocity, shifting Travelocity in the United States and Canada away from a fixed-cost model to a lower-cost, performance-based shared revenue structure. On August 22, 2013 we entered into an exclusive, long-term strategic marketing agreement with Expedia (“Expedia SMA”), in which Expedia powers the technology platforms for Travelocity’s existing U.S. and Canadian websites, as well as provides Travelocity with access to Expedia’s supply and customer service platforms. In connection with the Expedia SMA, we also entered into a put/call agreement with Expedia (the “Put/Call Agreement”). The Expedia SMA represents a strategic decision to reduce direct costs associated with Travelocity and provide our customers with the benefit of Expedia’s long term investment in its technology platform as well as its supply and customer service platforms. Both parties began development and implementation after signing the Expedia SMA. Substantially all supplier offerings have been migrated to the Expedia platform which has resulted in increased conversion and operational efficiency and has allowed us to shift our focus to Travelocity’s marketing strengths. Based on the terms of the Expedia SMA, Expedia earned an incentive payment of $8 million in January 2014 and an additional $3 million in March 2014. We are amortizing these payments over the non-cancellable term of the Expedia SMA as a reduction to revenue.

Expedia pays us a performance-based marketing fee that varies based on the amount of travel booked through Travelocity-branded websites powered by Expedia under this collaborative arrangement. The marketing fee we receive is recorded as marketing

7


 

fee revenue and the cost we incur to promote the Travelocity brand and for marketing is recorded as selling, general and administrative expense in our results of operations. Correspondingly, we are winding down certain internal processes, including back office functions, as substantially all transactions have moved from our technology platforms to those of Expedia.

Pursuant to the Put/Call Agreement, Expedia may acquire, or we may sell to Expedia, assets relating to the Travelocity-branded portions of our Travelocity business, which primarily include the assets subject to the Expedia SMA. Our put right may be exercised during the first 24 months of the Expedia SMA only upon the occurrence of certain triggering events primarily relating to implementation, which are outside of our control. The occurrence of these events is not considered probable. During this period, the exercise price of the put right is fixed. After the initial 24 month period, the put right is only exercisable for a limited period of time in 2016 and 2017 at a discount to fair market value as defined in the Put/Call Agreement. The call right held by Expedia is exercisable at any time during the term of the Put/Call Agreement. If the call right is exercised, although we expect the amount paid will be fair value, the call right provides for a floor for a limited time that may be higher than fair value and a ceiling for the duration of the Put/Call Agreement that may be lower than fair value.

In the fourth quarter of 2013, we also initiated a plan to restructure lastminute.com, the European portion of the Travelocity business. This plan involved establishing lastminute.com as a stand-alone operation, separating processes from the North America operations, while adding efficiencies to streamline the European operations. Travelocity continues to be managed as one reportable segment.

During the three months ended September 30, 2014, we recorded restructuring charges of $5 million which includes a $3 million loss on the sale of TPN, $1 million in additional severance costs and $1 million in other costs. During the nine months ended September 30, 2014, we recorded restructuring charges of $2 million which includes a $3 million loss on the sale of TPN, $2 million in additional severance costs and $2 million in other costs, net of adjustments to our original estimates of employee termination benefits of $4 million. The adjustments to our original estimates are primarily the result of certain employees transferring to the acquirer of the TPN business without a required severance payment. We estimate that we will incur additional charges for the remainder of 2014 of approximately $3 million consisting of contract termination and other related costs.

Technology Restructuring—Our corporate expenses include a technology organization that provides development and support activities to our business segments. Costs associated with our technology organization are charged to the business segments primarily based on its usage of development resources. For the year ended December 31, 2013, the majority of costs associated with the technology organization were incurred by Travel Network and Airline and Hospitality Solutions. In the fourth quarter of 2013, we initiated a restructuring plan to simplify our technology organization, better align costs with our current business, reduce our spending on third-party resources, increase focus on product development and reduce our employee base by approximately 350 employees. The majority of this plan was completed in the first half of 2014 and we do not expect to record material charges in 2014 related to this action.

The change in our restructuring accruals, included in other current liabilities, is as follows (in thousands):

 

 

Employee Termination Benefits

 

 

Travelocity

 

 

Technology

Organization

 

 

Total

 

Balance as of December 31, 2013

$

17,731

 

 

$

8,163

 

 

$

25,894

 

Charges

 

2,102

 

 

 

 

 

 

2,102

 

Adjustments

 

(3,938

)

 

 

(914

)

 

 

(4,852

)

Payments

 

(9,261

)

 

 

(6,877

)

 

 

(16,138

)

Balance as of September 30, 2014

$

6,634

 

 

$

372

 

 

$

7,006

 

 

The charges included in our restructuring accruals do not include items charged directly to expense (e.g., asset impairments) and other periodic costs recognized as incurred, as those items are not reflected in the restructuring reserve in our consolidated balance sheet. Restructuring charges are not allocated to the segments for segment reporting purposes (see Note 15, Segment Information).

 

5. Equity Method Investments

We have an investment in Abacus International Pte Ltd (“Abacus”) and have entered into a service agreement with Abacus related to data processing services, development labor and other services as requested. The primary revenue generated from Abacus is data processing fees associated with bookings on the Sabre GDS. Development labor and ancillary services are provided upon request. Additionally, in accordance with an agreement with Abacus, we collect booking fees on behalf of Abacus and record a payable, or economic benefit transfer, to Abacus for amounts collected but unremitted at any period end, net of any associated costs we incur.

8


 

A summary of Abacus’ income statement information is as follows (in thousands):

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Revenue

$

87,039

 

 

$

83,237

 

 

$

263,536

 

 

$

248,814

 

Operating income

 

12,876

 

 

 

15,946

 

 

 

42,961

 

 

 

41,683

 

Net income

 

10,793

 

 

 

8,887

 

 

 

34,863

 

 

 

30,575

 

 

6. Pension and Other Postretirement Benefit Plans

We sponsor the Sabre Inc. Legacy Pension Plan (“LPP”), which is a tax-qualified defined benefit pension plan for employees meeting certain eligibility requirements. The LPP was amended to freeze pension benefit accruals as of December 31, 2005, so that no additional pension benefits are accrued after that date. We also sponsor a defined benefit pension plan for certain employees in Canada.

We previously provided retiree life insurance benefits to certain employees who retired prior to January 1, 2001, and we subsidized a portion of the cost of retiree medical benefits for certain retirees and eligible employees hired prior to October 1, 2000. In February 2009, we amended our retiree medical plan to reduce the subsidies received by participants by 20% per year over five years, with no further subsidies beginning January 1, 2014. This amendment resulted in $57 million of prior service credit recorded in other comprehensive income that was amortized to operating expense over the remaining term which concluded in December 2013. The following table provides the components of net periodic benefit costs associated with our pension and other postretirement benefit plans for the three and nine months ended September 30, 2014 and 2013 (in thousands):

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Pension Benefits:

 

 

 

 

 

Interest cost

$

4,886

 

 

$

4,483

 

 

$

14,686

 

 

$

13,448

 

Expected return on plan assets

 

(5,909

)

 

 

(5,908

)

 

 

(17,959

)

 

 

(17,726

)

Amortization of prior service credit

 

(358

)

 

 

(359

)

 

 

(1,074

)

 

 

(1,075

)

Amortization of actuarial loss

 

1,290

 

 

 

1,846

 

 

 

3,690

 

 

 

5,537

 

Net periodic (credit) cost

$

(91

)

 

$

62

 

 

$

(657

)

 

$

184

 

Other Benefits:

 

 

 

 

 

Interest cost

 

 

 

 

10

 

 

 

2

 

 

 

30

 

Amortization of prior service credit

 

 

 

 

(3,087

)

 

 

 

 

 

(9,261

)

Amortization of actuarial gain

 

(33

)

 

 

(477

)

 

 

(99

)

 

 

(1,439

)

Net periodic credit

$

(33

)

 

$

(3,554

)

 

$

(97

)

 

$

(10,670

)

 

 

We made contributions of $4 million to fund our defined benefit pension plans during the nine months ended September 30, 2014. No contributions were made during the nine months ended September 30, 2013. Annual contributions to our defined benefit pension plans in the United States and Canada are based on several factors that may vary from year to year. Thus, past contributions are not always indicative of future contributions. Based on current assumptions, we do not expect to make additional contributions to our defined benefit pension plans for the remainder of 2014.

 

7. Income Taxes

Our effective tax rates for the nine months ended September 30, 2014 and 2013 were 46% and 5%, respectively. The increase in the effective tax rate for the nine months ended September 30, 2014 as compared to the same period in 2013 was primarily due to the impairment of nondeductible goodwill in the prior year, the amount of current year losses for which no tax benefit can be recognized relative to the amount of pre-tax income and the impact of other discrete items, partially offset by the increase in forecasted earnings in lower tax jurisdictions.

The differences between our effective tax rates and the U.S. federal statutory income tax rate primarily result from our geographic mix of taxable income in various tax jurisdictions as well as the discrete tax items referenced above.

We recognize liabilities when we believe that an uncertain tax position may not be fully sustained upon examination by the tax authorities. This requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. When facts and circumstances change, we reassess these probabilities and record any changes in the consolidated financial statements as

9


 

appropriate. Our net unrecognized tax benefits, excluding interest and penalties, included in our consolidated balance sheets, were $69 million and $61 million as of September 30, 2014 and December 31, 2013, respectively.

Tax Receivable Agreement

Immediately prior to the closing of our initial public offering, we entered into an income tax receivable agreement (“TRA”) that provides those stockholders and equity award holders that were our stockholders and equity award holders, respectively, immediately prior to the closing of our initial public offering (collectively, the “Existing Stockholders”) the right to receive future payments from us of 85% of the amount of cash savings, if any, in U.S. federal income tax that we and our subsidiaries realize as a result of the utilization of certain tax assets attributable to periods prior to our initial public offering, including federal net operating losses, capital losses and the ability to realize tax amortization of certain intangible assets (collectively, the “Pre-IPO Tax Assets”). We recognized an initial liability of $321 million after considering the valuation allowance of $66 million recorded against the Pre-IPO Tax Assets. The TRA liability was recorded as a reduction to additional paid-in capital and an increase to other noncurrent liabilities. No payments have been made under the TRA during the nine months ended September 30, 2014 and we do not expect material payments to occur prior to 2016. Any payments made under the TRA will be classified as a financing activity in our statement of cash flows.

 

8. Debt

In April 2014, we completed an initial public offering of our common stock and utilized the net proceeds to repay (i) $296 million aggregate principal amount of our Term Loan C (as defined below) and (ii) $320 million aggregate principal amount of our 2019 Notes (as defined below) at a redemption price of 108.5% of the principal amount, which represents the maximum amount of the contingent call option exercisable in the event of an equity offering. As a result of the prepayments on Term Loan C and the 2019 Notes, we recorded an extinguishment loss of $31 million which includes a $27 million redemption premium on the 2019 Notes.

As of September 30, 2014 and December 31, 2013, our outstanding debt included in our consolidated balance sheets totaled $3,088 million and $3,730 million, respectively, net of unamortized discounts of $15 million and $20 million, respectively. The following table sets forth the face values of our outstanding debt as of September 30, 2014 and December 31, 2013 (in thousands):

 

 

Rate

 

 

Maturity

 

September 30, 2014

 

 

December 31, 2013

 

Senior secured credit facilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Term Loan B

L + 3.00%

 

 

February 2019

 

$

1,743,938

 

 

$

1,757,250

 

Incremental term loan facility

L + 3.00%

 

 

February 2019

 

 

346,500

 

 

 

349,125

 

Term Loan C

L + 2.50%

 

 

December 2017

 

 

49,313

 

 

 

361,250

 

Revolver, $370 million

L + 2.75%

 

 

February 2019

 

 

 

 

 

 

Revolver, $35 million

L + 3.25%

 

 

February 2018

 

 

 

 

 

 

Senior unsecured notes due 2016

 

8.35%

 

 

March 2016

 

 

400,000

 

 

 

400,000

 

Senior secured notes due 2019

 

8.50%

 

 

May 2019

 

 

480,000

 

 

 

800,000

 

Mortgage facility

 

5.80%

 

 

March 2017

 

 

82,457

 

 

 

83,286

 

Face value of total debt outstanding

 

 

 

 

 

 

 

3,102,208

 

 

 

3,750,911

 

Less current portion of debt outstanding

 

 

 

 

 

 

 

(22,418

)

 

 

(86,117

)

Face value of long-term debt outstanding

 

 

 

 

 

 

$

3,079,790

 

 

$

3,664,794

 

 

Senior Secured Credit Facilities

On February 19, 2013, Sabre GLBL Inc. entered into an agreement that amended and restated its existing senior secured credit facilities (the “Amended and Restated Credit Agreement”). The new agreement replaced (i) the existing initial term loans with new classes of term loans of $1,775 million (the “Term Loan B”) and $425 million (the “Term Loan C”) and (ii) the existing revolver with a new revolver of $352 million (the “Revolver”).

On September 30, 2013, we entered into an agreement for an incremental term loan facility to Term Loan B (the “Incremental Term Loan Facility”), having a face value of $350 million and providing total net proceeds of $350 million. We have used a portion, and intend to use the remainder of the proceeds of the Incremental Term Loan Facility, for working capital, general corporate purposes and ongoing and future strategic actions related to Travelocity. The Incremental Term Loan Facility matures on February 19, 2019 and initially bore interest at a rate equal to the LIBOR rate, subject to a 1.00% floor, plus 3.50% per annum. It includes a provision for increases in interest rates to maintain a difference of not more than 50 basis points relative to future term loan extensions or refinancing of amounts under the Amended and Restated Credit Agreement.

On February 20, 2014, we entered into a series of amendments to our Amended and Restated Credit Agreement (the “Repricing Amendments”) the first of which reduced the Term Loan B’s applicable margin for Eurocurrency and Base rate borrowings to 3.25%

10


 

and 2.25%, respectively, with a step down to 3.00% and 2.00%, respectively, if the Senior Secured Leverage Ratio (as defined in the Amended and Restated Credit Agreement) is less than or equal to 3.25 to 1.00. It also reduced the Eurocurrency rate floor to 1.00% and the Base rate floor to 2.00%.

The Repricing Amendments extended the maturity date of $317 million of the $352 million Revolver to February 19, 2019. The Repricing Amendments also provided for an incremental revolving commitment due February 19, 2019 of $53 million, increasing the Revolver from $352 million to $405 million. The extended and incremental revolving commitments, totaling $370 million (the “Extended Revolver”), reduced the applicable margins to 3.00% for Eurocurrency and 2.00% for Base rate borrowings, with a step down to 2.75% and 1.75%, respectively, if the Senior Secured Leverage Ratio is less than or equal to 3.25 to 1.00. There were no changes in the maturity date and applicable margins of the unextended revolving commitments of $35 million (“Unextended Revolver”). The Extended Revolver also includes an accelerated maturity date of November 19, 2018 if, as of that date, borrowings under the Term Loan B (or permitted refinancing thereof) remain outstanding and mature before February 18, 2020.

Sabre GLBL Inc.’s obligations under the Amended and Restated Credit Agreement are guaranteed by Sabre Holdings and each of Sabre GLBL Inc.’s wholly-owned material domestic subsidiaries, except unrestricted subsidiaries. We refer to these guarantors together with Sabre GLBL Inc., as the Loan Parties. The Amended and Restated Credit Agreement is secured by (i) a first priority security interest on the equity interests in Sabre GLBL Inc. and each other Loan Party that is a direct subsidiary of Sabre GLBL Inc. or another Loan Party, (ii) 65% of the issued and outstanding voting (and 100% of the non-voting) equity interests of each wholly-owned material foreign subsidiary of Sabre GLBL Inc. that is a direct subsidiary of Sabre GLBL Inc. or another Loan Party, and (iii) a blanket lien on substantially all of the tangible and intangible assets of the Loan Parties.

Under the Amended and Restated Credit Agreement, the Loan Parties are subject to certain customary non-financial covenants, as well as a maximum Senior Secured Leverage Ratio, which applies if our Revolver utilization exceeds certain thresholds and is calculated as Senior Secured Debt (net of cash) to EBITDA, as defined by the agreement. This ratio was 5.5 to 1.0 for 2013 and is 5.0 to 1.0 for 2014. The definition of EBITDA is based on a trailing twelve months EBITDA adjusted for certain items including non-recurring expenses and the pro forma impact of cost saving initiatives. As of September 30, 2014, we are in compliance with all covenants under the Amended and Restated Credit Agreement.

As of September 30, 2014 and December 31, 2013, we had no outstanding balance under the Extended and Unextended Revolver. As of September 30, 2014, we had outstanding letters of credit totaling $60 million, which reduces our overall credit capacity under the Revolver. As of December 31, 2013, we had outstanding letters of credit totaling $67 million, of which $66 million reduced our overall credit capacity under the Revolver and $1 million was collateralized with restricted cash.

Principal Payments

Term Loan B and the Incremental Term Loan Facility mature on February 19, 2019, and require principal payments in equal quarterly installments of 0.25%. Term Loan C matures on December 31, 2017. As a result of the April 2014 prepayment, quarterly principal payments on Term Loan C are no longer required. We are obligated to pay $17 million on September 30, 2017 and the remaining balance on December 31, 2017. The Extended Revolver matures on February 19, 2019 and the Unextended Revolver matures on February 19, 2018. For the nine months ended September 30, 2014, we made $328 million of principal payments of which $296 million was the prepayment on Term Loan C. We are scheduled to make $22 million in principal payments over the next twelve months.

We are also required to pay down the term loans by an amount equal to 50% of annual excess cash flow, as defined in our Amended and Restated Credit Agreement. This percentage requirement may decrease or be eliminated if certain leverage ratios are achieved. As a result of the Amended and Restated Credit Agreement, no excess cash flow payment was required in 2013 with respect to our results for the year ended December 31, 2012. Additionally, based on our results for the year ended December 31, 2013, we are not required to make an excess cash flow payment in 2014. In the event of certain asset sales or borrowings, the Amended and Restated Credit Agreement requires that we pay down the term loans with the resulting proceeds. Subject to the repricing premium discussed above, we may repay the indebtedness at any time prior to the maturity dates without penalty.

Interest

Borrowings under the Amended and Restated Credit Agreement bear interest at a rate equal to either, at our option: (i) the Eurocurrency rate plus an applicable margin for Eurocurrency borrowings as set forth below, or (ii) a base rate determined by the highest of (1) the prime rate of Bank of America, (2) the federal funds effective rate plus 1/2% or (3) LIBOR plus 1.00%, plus an applicable margin for base rate borrowings as set forth below. The Eurocurrency rate is based on LIBOR for all U.S. dollar borrowings and has a floor.

 

11


 

 

Eurocurrency borrowings

 

 

Base rate borrowings

 

 

Applicable Margin (1)

 

 

Floor

 

 

Applicable Margin (1)

 

 

Floor

 

Term Loan B, prior to Repricing Amendments

 

4.00

%

 

 

1.25

%

 

 

3.00

%

 

 

2.25

%

Term Loan B, subsequent to Repricing Amendments

 

3.25

%

 

 

1.00

%

 

 

2.25

%

 

 

2.00

%

Incremental term loan facility

 

3.50

%

 

 

1.00

%

 

 

2.50

%

 

 

2.00

%

Term Loan C

 

3.00

%

 

 

1.00

%

 

 

2.00

%

 

 

2.00

%

Revolver, $370 million

 

3.00

%

 

N/A

 

 

2.00

%

 

N/A

 

Revolver, $35 million

 

3.75

%

 

N/A

  

 

2.75

%

 

N/A

 

____________________________________________________________  

(1)

Applicable margins do not reflect potential step downs which are determined by the Senior Secured Leverage Ratio. See below for additional information.

Applicable margins for Term Loan B and the Extended Revolver step down 25 basis points for any quarter if the Senior Secured Leverage Ratio is less than or equal to 3.25 to 1.00. Applicable margins for all other borrowings under the Amended and Restated Credit Agreement step down by 50 basis points for any quarter if the Senior Secured Leverage Ratio is less than or equal to 3.0 to 1.0. Applicable margins increase to maintain a difference of not more than 50 basis points relative to future term loan extensions or refinancings. In addition, we are required to pay a quarterly commitment fee of 0.375% per annum for unused revolving commitments. The commitment fee may increase to 0.5% per annum if the Senior Secured Leverage Ratio is greater than 4.0 to 1.0.

We have elected the three-month LIBOR as the floating interest rate on all $2,140 million of our outstanding term loans. As of September 30, 2014, the interest rate, including applicable margin, is 4.0% for the Term Loan B of $1,744 million; 4.0% for the Incremental Term Loan Facility of $347 million; and 3.5% for the Term Loan C of $49 million. Interest payments are due on the last day of each quarter. Interest on a portion of the outstanding loan is hedged with interest rate swaps (see Note 9, Derivatives).

In connection with the prepayment on Term Loan C and the Repricing Amendments, we recognized losses on extinguishment of debt of $1 million and $3 million, respectively. In addition, we incurred costs totaling $3 million as a result of the Repricing Amendments which were recorded as interest expense. In 2013, we incurred costs totaling $19 million associated with the Amended and Restated Credit Agreement and the Incremental Term Loan Facility. We charged $14 million to interest expense during the first quarter of 2013, and capitalized $3 million and $2 million as debt issuance costs during the first and third quarter of 2013, respectively. We also recognized a loss on extinguishment of debt of $12 million for the nine months ended September 30, 2013 as a result of the Amended and Restated Credit Agreement. As of September 30, 2014, we had $24 million of unamortized debt issuance costs included in other assets in our consolidated balance sheets associated with all debt transactions under the Amended and Restated Credit Agreement and the previous senior secured credit agreement. These costs are being amortized to interest expense over the maturity period of the Amended and Restated Credit Agreement. Our effective interest rates for the three and nine months ended September 30, 2014 and 2013, inclusive of amounts charged to interest expense as described above, are as follows:

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Including the impact of interest rate swaps

 

5.25

%

 

 

6.26

%

 

 

5.64

%

 

 

7.15

%

Excluding the impact of interest rate swaps

 

4.50

%

 

 

5.51

%

 

 

4.94

%

 

 

6.43

%

  

Senior Unsecured Notes

As of September 30, 2014, we have, at face value, $400 million in senior unsecured notes currently bearing interest at a rate of 8.35% and maturing on March 15, 2016 (“2016 Notes”). The 2016 Notes include certain non-financial covenants, including restrictions on incurring certain types of debt, entering into certain sale and leaseback transactions and entering into mergers, consolidations or a transfer of substantially all our assets. As of September 30, 2014, we are in compliance with all covenants under the 2016 Notes.

Senior Secured Notes

We have, at face value, $480 million in senior secured notes bearing interest at a rate of 8.50% and maturing on May 15, 2019 (“2019 Notes”). The 2019 Notes include certain non-financial covenants, including certain restrictions on incurring certain types of indebtedness, creation of liens on certain assets, making of certain investments, and payment of dividends. These covenants are similar in nature to those existing in the Amended and Restated Credit Agreement. As of September 30, 2014, we are in compliance with all covenants under the 2019 Notes.

The indenture to the 2019 Notes allowed us, at our option, to redeem up to 40% of the principal amount of the notes outstanding in the event of an equity offering, such as an initial public offering, until May 15, 2015. The contingent call option was at a price of 108.50%, plus accrued and unpaid interest, if any, to the date of redemption. In May 2014, we exercised our contingent call option and

12


 

prepaid $320 million, or 40%, of the outstanding principal on the 2019 Notes at the redemption price of 108.5% of the principal amount. As a result of the prepayment, we recognized a loss on extinguishment of $31 million, which included the $27 million redemption premium.

Mortgage Facility

We have $82 million outstanding under a mortgage facility for the buildings, land and furniture and fixtures located at our headquarters facilities in Southlake, Texas. The mortgage facility bears interest at a rate of 5.7985% per annum and matures on April 1, 2017. The mortgage facility includes certain customary non-financial covenants, including restrictions on incurring liens other than permitted liens, dissolving the borrower or changing our business, forgiving debt, changing our principal place of business and transferring the property. As of September 30, 2014, we are in compliance with all covenants under the mortgage facility.

Aggregate Maturities

As of September 30, 2014, aggregate maturities of our long-term debt were as follows (in thousands):

 

 

Amount

 

Three months ending December 31, 2014

$

5,601

 

2015

 

22,435

 

2016

 

422,493

 

2017

 

150,303

 

2018

 

21,250

 

Thereafter

 

2,480,125

 

Total

$

3,102,208

 

 

 

9. Derivatives

Hedging Objectives—We are exposed to certain risks relating to ongoing business operations. The primary risks managed by using derivative instruments are foreign currency exchange rate risk and interest rate risk. Forward contracts on various foreign currencies are entered into to manage the foreign currency exchange rate risk on operational exposure denominated in foreign currencies. Interest rate swaps are entered into to manage interest rate risk associated with our floating-rate borrowings. In accordance with authoritative guidance on accounting for derivatives and hedging, we designate foreign currency forward contracts as cash flow hedges on operational exposure and interest rate swaps as cash flow hedges of floating-rate borrowings.

Cash Flow Hedging Strategy—To protect against the reduction in value of forecasted foreign currency cash flows, we have instituted a foreign currency cash flow hedging program. We hedge portions of our expenses denominated in foreign currencies with forward contracts. When the dollar strengthens significantly against the foreign currencies, the decline in present value of future foreign currency revenue is offset by gains in the fair value of the forward contracts designated as hedges. Conversely, when the dollar weakens, the increase in the present value of future foreign currency cash flows is offset by losses in the fair value of the forward contracts.

We enter into interest rate swap agreements to manage interest rate risk exposure. The interest rate swap agreements modify our exposure to interest rate risk by converting floating-rate debt to a fixed rate basis, thus reducing the impact of interest rate changes on future interest expense and net earnings. These agreements involve the receipt of floating rate amounts in exchange for fixed rate interest payments over the life of the agreements without an exchange of the underlying principal amount.

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any (ineffective portion), and hedge components excluded from the assessment of effectiveness, are recognized in the consolidated statements of operations during the current period.

Our interest rate swaps were not designated in a cash flow hedging relationship because we no longer qualified for hedge accounting treatment following the amendment and restatement of our senior secured credit facility in February of 2013 (see Note 8, Debt). Derivatives not designated as hedging instruments are carried at fair value with changes in fair value reflected in the consolidated statement of operations.

13


 

Forward Contracts—In order to hedge our operational exposure to foreign currency movements, we are a party to certain foreign currency forward contracts that extend until September 2015. We have designated these instruments as cash flow hedges. No hedging ineffectiveness was recorded in earnings relating to the forward contracts during the three and nine months ended September 30, 2014 and 2013. As the outstanding contracts settle, it is estimated that $4 million in losses will be reclassified from other comprehensive income (loss) to earnings. We have also entered into short-term forward contracts to hedge a portion of our foreign currency exposure related to travel supplier liability payments. As part of our risk management strategy, these derivatives were not designated for hedge accounting at inception; therefore, the change in fair value of these contracts is recorded in our consolidated statements of operations. The adjustments to fair value of our foreign currency forward contracts for the three and nine months ended September 30, 2014 were not material to our results of operations.

As of September 30, 2014 and December 31, 2013, we had the following unsettled purchased foreign currency forward contracts that were entered into to hedge our operational exposure to foreign currency movements (in thousands, except for average contract rates):

 

September 30, 2014 Outstanding Notional Amount

 

Buy Currency

 

Sell Currency

 

Foreign Amount

 

 

USD Amount

 

 

Average Contract Rate

 

US Dollar

 

Australian Dollar

 

 

6,950

 

 

$

6,195

 

 

 

0.8914

 

Euro

 

US Dollar

 

 

22,750

 

 

 

30,323

 

 

 

1.3329

 

British Pound Sterling

 

US Dollar

 

 

21,950

 

 

 

36,239

 

 

 

1.6510

 

Indian Rupee

 

US Dollar

 

 

1,074,000

 

 

 

16,680

 

 

 

0.0155

 

Polish Zloty

 

US Dollar

 

 

193,800

 

 

 

61,376

 

 

 

0.3167

 

 

December 31, 2013 Outstanding Notional Amount

 

Buy Currency

 

Sell Currency

 

Foreign Amount

 

 

USD Amount

 

 

Average Contract Rate

 

US Dollar

 

Australian Dollar

 

 

5,625

 

 

$

5,041

 

 

 

0.8962

 

Australian Dollar

 

US Dollar

 

 

975

 

 

 

996

 

 

 

1.0215

 

Euro

 

US Dollar

 

 

12,800

 

 

 

16,624

 

 

 

1.2988

 

British Pound Sterling

 

US Dollar

 

 

18,450

 

 

 

28,908

 

 

 

1.5668

 

Indian Rupee

 

US Dollar

 

 

1,174,000

 

 

 

18,593

 

 

 

0.0158

 

Polish Zloty

 

US Dollar

 

 

170,400

 

 

 

52,748

 

 

 

0.3096

 

  

Interest Rate Swap Contracts—In April 2007, in connection with our then existing senior secured credit facilities, we entered into six interest rate swaps, four of which matured prior to 2013. The table below sets forth the remaining two interest rate swaps which matured on September 30, 2014.

Notional Amount

 

Interest Rate Received

 

Interest Rate Paid

 

 

Effective Date

 

Maturity Date

$400 million

 

1 month LIBOR

 

 

2.03

%

 

July 29, 2011

 

September 30, 2014

$350 million

 

1 month LIBOR

 

 

2.51

%

 

April 30, 2012

 

September 30, 2014

$750 million

 

 

 

 

 

 

 

 

 

 

 

The objective of the swaps was to hedge the interest payments associated with floating-rate liabilities on the notional amounts of a portion of our senior secured debt as summarized in the table above. Our interest rate swaps were not designated in a cash flow hedging relationship because we no longer qualified for hedge accounting treatment following the amendment and restatement of our senior secured credit facility in February 2013 (see Note 8, Debt). Derivatives not designated as hedging instruments are carried at fair value with changes in fair value recognized in the consolidated statements of operations. The adjustments to fair value of our interest rate swap agreements for the three and nine months ended September 30, 2014 were not material to our results of operations.

 

The estimated fair values of our derivatives designated as hedging instruments as of September 30, 2014 and December 31, 2013 are as follows (in thousands):

 

 

 

Derivative Assets (Liabilities)

 

 

 

 

 

Fair Value as of

 

Derivatives designated as hedging instruments

 

Balance Sheet Location

 

September 30, 2014

 

 

December 31, 2013

 

Foreign exchange contracts

 

Prepaid expenses

 

$

 

 

$

5,374

 

 

 

Other accrued liabilities

 

$

(4,079

)

 

$

 

 

14


 

The effects of derivative instruments, net of taxes, on other comprehensive income (loss) (“OCI”) for the three and nine months ended September 30, 2014 and 2013 are as follows (in thousands):

 

 

 

Amount of Gain (Loss) Recognized in OCI on Derivative

(Effective Portion)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

Derivatives in Cash Flow Hedging Relationships

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Foreign exchange contracts

$

(3,799

)

 

$

2,752

 

 

$

(3,181

)

 

$

564

 

 

 

 

 

 

 

Amount of Gain (Loss) Reclassified from Accumulated OCI into

Income (Effective Portion)

 

 

 

Income Statement

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

Derivatives in Cash Flow Hedging Relationships

 

Location

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Foreign exchange contracts

Cost of revenue

 

$

646

 

 

$

(370

)

 

$

4,242

 

 

$

685

 

 

As described in Note 8, Debt, on February 19, 2013 we entered into an agreement that amended and restated our existing senior secured credit facilities. As a result, a critical term of the interest rate swap agreements no longer matched the senior secured debt, and we no longer qualified for hedge accounting as of January 1, 2013. For the three and nine months ended September 30, 2014, we reclassified $4 million ($2 million, net of tax) and $11 million ($7 million, net of tax), respectively, from OCI to interest expense related to the derivatives that no longer qualify for hedge accounting. The interest rate swaps matured on September 30, 2014.

Embedded Derivative Related to Senior Secured Notes—The 2019 Notes included a contingent call option to redeem up to 40% of the notes in the event of an equity offering at a rate of 108.50%, until May 15, 2015. This contingent call option was not clearly and closely related to the hybrid indenture and therefore required separate accounting. In May 2014, we exercised our contingent call option and prepaid 40%, or $320 million, of our 2019 Notes. In conjunction with the prepayment, the fair value of the contingent call option of $2 million was charged to loss on debt extinguishment for the nine months ended September 30, 2014.

 

10. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market for that asset or liability. Guidance on fair value measurements and disclosures establishes a valuation hierarchy for disclosure of inputs used in measuring fair value defined as follows:

Level 1—Inputs are unadjusted quoted prices that are available in active markets for identical assets or liabilities.

Level 2—Inputs include quoted prices for similar assets and liabilities in active markets and quoted prices in non-active markets, inputs other than quoted prices that are observable, and inputs that are not directly observable, but are corroborated by observable market data.

Level 3—Inputs that are unobservable and are supported by little or no market activity and reflect the use of significant management judgment.

A financial asset’s or liability’s classification within the hierarchy is determined based on the least reliable level of input that is significant to the fair value measurement. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. We also consider the counterparty and our own non-performance risk in our assessment of fair value.

Assets and Liabilities that are Measured at Fair Value on a Recurring Basis

Foreign Currency Forward Contracts—The fair value of the foreign currency forward contracts was estimated based upon pricing models that utilize Level 2 inputs derived from or corroborated by observable market data such as currency spot and forward rates.

Interest Rate Swaps—The fair value of our interest rate swaps was estimated using a combined income and market-based valuation methodology based upon Level 2 inputs including credit ratings and forward interest rate yield curves obtained from independent pricing services reflecting broker market quotes. Our outstanding interest rate swaps matured during the third quarter of 2014 and we had no interest rate swaps outstanding as of September 30, 2014.

15


 

Contingent Consideration—On August 1, 2012, we acquired all of the outstanding stock and ownership interest of PRISM. Included in the purchase price is contingent consideration, based on management’s best estimate of fair value and future performance results on the acquisition date and is to be paid in 24 months following the acquisition date. Fair value of this payment was estimated considering the timing of the payments and discounted at 4.75%, representing our short-term borrowing rate based on our revolving credit facility at the time of the acquisition, a Level 3 input. For the three and nine months ended September 30, 2014 and 2013, the expense recognized related to the change in fair value was not material. In August 2014, we paid the remaining contingent consideration and contingent employment payments associated with our acquisition of PRISM which totaled $30 million.

Embedded Derivative—As part of the 2019 Notes, we acquired a contingent call option to redeem a portion of the 2019 Notes in the event of an equity offering (see Note 8, Debt). We determined the fair value of this call option by evaluating the difference in fair value of the hybrid instrument with and without the call option requiring separate accounting. We calculated the fair value using Level 3 unobservable inputs such as management’s estimate of the probability of an equity offering, credit spreads and the expected future volatility of interest rates based on historical trends. In May 2014, we exercised our contingent call option and prepaid 40%, or $320 million, of our 2019 Notes.

As of September 30, 2014, we had $4 million of liabilities associated with foreign currency forward contracts classified as Level 2. We had no other assets or liabilities required to be measured at fair value on a recurring basis as of September 30, 2014.

The following table presents the fair value of our assets (liabilities) that are required to be measured at fair value on a recurring basis as of December 31, 2013 (in thousands):

  

 

 

 

 

 

Fair Value at Reporting Date Using

 

 

December 31, 2013

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Contingent consideration

$

(26,303

)

 

$

 

 

$

 

 

$

(26,303

)

Derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts (see Note 9)

 

5,374

 

 

 

 

 

 

5,374

 

 

 

 

Interest rate swap contracts (see Note 9)

 

(11,533

)

 

 

 

 

 

(11,533

)

 

 

 

Contingent call option, 2019 Notes (see Note 8)

 

1,657

 

 

 

 

 

 

 

 

 

1,657

 

Total derivatives

 

(4,502

)

 

 

 

 

 

(6,159

)

 

 

1,657

 

Total

$

(30,805

)

 

$

 

 

$

(6,159

)

 

$

(24,646

)

Other Financial Instruments

Notes Payable—The fair values of our 2016 Notes, 2019 Notes and term loans under our Amended and Restated Credit Agreement are determined based on quoted market prices for the identical liability when traded as an asset in an active market, a Level 1 input. The outstanding principal balance of our mortgage facility approximated its fair value as of September 30, 2014 and December 31, 2013. The fair values of the mortgage facility were determined based on estimates of current interest rates for similar debt, a Level 2 input.

The following table presents the fair value and carrying value of our 2016 Notes, 2019 Notes and term loans under our Amended and Restated Credit Agreement as of September 30, 2014 and December 31, 2013 (in thousands):

  

 

 

Fair Value at

 

 

Carrying Value at

 

Financial Instrument

 

September 30, 2014

 

 

December 31,

2013

 

 

September 30, 2014

 

 

December 31,

2013

 

Term Loan B

 

$

1,722,138

 

 

$

1,777,107

 

 

$

1,736,119

 

 

$

1,747,378

 

Incremental term loan facility

 

 

342,602

 

 

 

349,334

 

 

 

346,500

 

 

 

349,125

 

Term Loan C

 

 

49,189

 

 

 

363,056

 

 

 

49,061

 

 

 

360,477

 

Senior unsecured notes due 2016

 

 

433,000

 

 

 

448,320

 

 

 

392,767

 

 

 

389,321

 

Senior secured notes due 2019

 

 

520,500

 

 

 

886,000

 

 

 

480,779

 

 

 

799,823

 

 

  

16


 

11. Comprehensive Income (Loss)

At September 30, 2014 and December 31, 2013, the components of accumulated other comprehensive income (loss), net of related deferred income taxes were as follows (in thousands):

 

 

September 30, 2014

 

 

December 31, 2013

 

Retirement-related benefit plans

$

(62,156

)

 

$

(63,762

)

Unrealized loss on foreign currency forward contracts

   and interest rate swaps

 

(3,118

)

 

 

(2,684

)

Unrealized foreign currency translation gain

 

18,761

 

 

 

15,050

 

Other (1)

 

4,921

 

 

 

1,501

 

Total accumulated other comprehensive loss, net of tax

$

(41,592

)

 

$

(49,895

)

____________________________________________________________  

(1)

Primarily relates to our share of Abacus’ accumulated other comprehensive income. See Note 5, Equity Method Investments.

In the nine months ended September 30, 2013, we reclassified $8 million, net of tax, of foreign currency translation losses from accumulated other comprehensive income into loss from discontinued operations as a result of the disposition of Zuji (see Note 3, Discontinued Operations and Dispositions). The amortization of actuarial losses and periodic service credits associated with our retirement-related benefit plans are included in selling, general and administrative expenses. See Note 9, Derivatives, for information on the income statement line items affected as the result of reclassification adjustments associated with derivatives.

 

12. Redeemable Preferred Stock

Prior to the closing of our initial public offering, we amended our Certificate of Incorporation and exercised our right to redeem all of our Series A Cumulative Preferred Stock. The amendment to our Certificate of Incorporation modified the redemption feature of the Series A Cumulative Preferred Stock to allow for settlement using cash, shares of our common stock or a mix of cash and shares of our common stock. On April 23, 2014, we redeemed all of our outstanding shares of Series A Cumulative Preferred Stock in exchange for 40,343,529 shares of our common stock, which were delivered pro rata to the holders thereof concurrently with the closing of our initial public offering.

 

13. Earnings Per Share

The following table reconciles the numerators and denominators used in the computations of basic and diluted earnings per share (in thousands, expect per share data):

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

39,019

 

 

$

3,071

 

 

$

33,008

 

 

$

(104,224

)

Net income attributable to noncontrolling  interests

 

720

 

 

 

714

 

 

 

2,168

 

 

 

2,135

 

Preferred stock dividends

 

 

 

 

9,242

 

 

 

11,381

 

 

 

27,219

 

Net income (loss) from continuing operations available

   to common shareholders, basic and diluted

$

38,299

 

 

$

(6,885

)

 

$

19,459

 

 

$

(133,578

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted-average common shares outstanding

 

264,768

 

 

 

178,140

 

 

 

229,405

 

 

 

178,051

 

Dilutive effect of stock awards

 

8,562

 

 

 

 

 

 

8,589

 

 

 

 

Diluted weighted-average common shares outstanding

 

273,330

 

 

 

178,140

 

 

 

237,994

 

 

 

178,051

 

Basic earnings per share

$

0.14

 

 

$

(0.04

)

 

$

0.08

 

 

$

(0.75

)

Diluted earnings per share

$

0.14

 

 

$

(0.04

)

 

$

0.08

 

 

$

(0.75

)

 

Basic earnings per share are based on the weighted-average number of common shares outstanding during each period. Diluted earnings per share are based on the weighted-average number of common shares outstanding plus the effect of all dilutive common stock equivalents during each period. The calculation of diluted weighted-average shares excludes the impact of 2 million and 21 million common stock equivalents for the three months ended September 30, 2014 and 2013, respectively, and 1 million and 21 million common stock equivalents for the nine months ended September 30, 2014 and 2013, respectively. As we recorded net losses from continuing operations available to common shareholders in the three and nine months ended September 30, 2013, all common stock equivalents were excluded from the calculation of diluted earnings per share as its inclusion would have been antidilutive.

17


 

14. Contingencies

Value Added Tax Receivables

We generate Value Added Tax (“VAT”) refund claims, recorded as receivables, in multiple jurisdictions through the normal course of our business. Audits related to these claims are in various stages of investigation. If the results of the audit or litigation were to become unfavorable, the uncollectible amounts could be material to our results of operations. In previous years, the right to recover certain VAT receivables associated with European businesses has been questioned by tax authorities. We believe that our claims are valid under applicable law and as such we will continue to pursue collection, possibly through litigation. We assess VAT receivables for collectability and may be required to record reserves in the future. Our VAT receivables totaled $24 million and $23 million as of September 30, 2014 and December 31, 2013, respectively, and are included in other receivables in our consolidated balance sheets.

Litigation and Risks Relating to Value Added Taxes

Holiday Autos, a discontinued operation (see Note 3, Discontinued Operations and Dispositions), conducted a cross border car rental brokering business that involved substantial sums of VAT receivables and payable from the period 2007 to 2009. Certain of the VAT receivables were challenged by tax authorities and successfully defended. In France, however, the Court of Appeal ruled against us on June 18, 2013 in respect of outstanding VAT refund claims of $4 million made for the periods 2007 through 2009. We believe our claims are valid and have appealed the decision to the Supreme Court in France. Due to litigation, significant delays and other factors impacting our settlement of these claims, we have recorded an allowance for losses relating to such events in assets of discontinued operations in our consolidated balance sheets. The allowances recorded as of September 30, 2014 and December 31, 2013, in respect of the French claims subject to litigation, were $4 million. Our VAT receivables, net of reserves, associated with Holiday Autos totaled $5 million and $6 million as of September 30, 2014 and December 31, 2013, respectively, and are included in assets of discontinued operations in our consolidated balance sheets.

As we dissolve subsidiaries associated with discontinued operations, tax authorities may or have initiated audits that could result in challenges to our refund claims and assessments of additional taxes. We believe the merits of our claims are valid and will aggressively defend any denial of our claims.

In the United Kingdom, the Commissioners for Her Majesty’s Revenue & Customs (“HMRC”) had asserted that our subsidiary, Secret Hotels2 Limited (formerly Med Hotels Limited), failed to account for United Kingdom VAT on margins relating to hotels located within the European Union (“EU”). This business was sold in February 2009 to a third-party and we account for it as a discontinued operation. Because the sale was structured as an asset sale, we retained the potential tax liabilities of Secret Hotels2 Limited. HMRC issued assessments of tax totaling approximately $11 million. We appealed the assessments and as a result of an unfavorable ruling against us in the penultimate appeal court, we accrued $17 million of expense included in discontinued operations in the fourth quarter of 2012. On March 5, 2014 judgment was given in favor of Secret Hotels2 Limited. This judgment cannot be further appealed. We therefore reversed our reserve in 2013 in discontinued operations.

HMRC had started a review of other parts of our lastminute.com business in the United Kingdom. Following the favorable judgment in March 2014 associated with Secret Hotels2 Limited, HMRC ceased its review activity and withdrew its VAT claims against lastminute.com.

Legal Proceedings

While certain legal proceedings and related indemnification obligations to which we are a party specify the amounts claimed, these claims may not represent reasonably possible losses. Given the inherent uncertainties of litigation, the ultimate outcome of these matters cannot be predicted at this time, nor can the amount of possible loss or range of loss, if any, be reasonably estimated, except in circumstances where an aggregate litigation accrual has been recorded for probable and reasonably estimable loss contingencies. A determination of the amount of accrual required, if any, for these contingencies is made after careful analysis of each matter. The required accrual may change in the future due to new information or developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters.

Litigation and Administrative Audit Proceedings Relating to Hotel Occupancy Taxes

Over the past ten years, various state and local governments in the United States have filed approximately 70 lawsuits against us and other OTAs pertaining primarily to whether Travelocity and other OTAs owe sales or occupancy taxes on some or all of the revenues they earn from facilitating hotel reservations using the merchant revenue model. In the merchant revenue model, the customer pays us an amount at the time of booking that includes (i) service fees, which we collect, and (ii) the price of the hotel room and amounts for occupancy or other local taxes, which we pass along to the hotel supplier. The complaints generally allege, among other things, that the defendants failed to pay to the relevant taxing authority hotel accommodations taxes on the service fees. Courts have dismissed approximately 30 of these lawsuits, some for failure to exhaust administrative remedies and some on the basis that we are not subject to the sales or occupancy tax at issue based on the construction of the language in the ordinance. The Fourth, Sixth and

18


 

Eleventh Circuits of the United States Courts of Appeals each have ruled in our favor on the merits, as have state appellate courts in Missouri, Alabama, Texas, California, Kentucky, Florida, Colorado and Pennsylvania, and a number of state and federal trial courts. The remaining lawsuits are in various stages of litigation. We have also settled some cases individually, most for nuisance value, and with respect to these settlements, have generally reserved our rights to challenge any effort by the applicable tax authority to impose occupancy taxes in the future.

We have received recent favorable decisions pertaining to cases in North Carolina, California, Montana, Arizona and Colorado. On August 19, 2014, the North Carolina Court of Appeals affirmed a judgment in favor of Travelocity and other OTAs after concluding they are not operators of hotels, motel or similar-type businesses and therefore are not subject to hotel occupancy tax. The plaintiffs have filed a petition for discretionary review with the North Carolina Supreme Court. On May 28, 2014, an administrative hearing officer in Arizona ruled that Travelocity is not responsible for collecting or remitting local hotel taxes and set aside assessments made by twelve municipalities in Arizona, including Phoenix, Scottsdale, Tempe, and Tucson. On March 27, 2014, a California court of appeals upheld a trial court ruling that OTAs, including Travelocity, are not subject to the City of San Diego’s transient occupancy tax because they are not hotel operators or managing agents. The City of San Diego has filed a petition asking the Supreme Court of California to review the case. This marked the third time that a California appellate court has ruled in favor of Travelocity on the question of whether OTAs are subject to transient occupancy taxes in California, the prior two cases being brought by the City of Anaheim and City of Santa Monica. Travelocity also has prevailed at the trial court level in cases brought by San Francisco and Los Angeles, both of which are being appealed by the cities. On March 6, 2014, a Montana trial court ruled by summary judgment that Travelocity and other OTAs are not subject to the State of Montana’s lodging facility use tax or its sales tax on accommodations and vehicles. The lawsuit had been brought by the Montana Department of Revenue, which has appealed the decision. On July 3, 2014, the Colorado Court of Appeals affirmed a final judgment that Travelocity and OTAs are not liable for lodging taxes as claimed by the City of Denver. The City of Denver has petitioned the Supreme Court of Colorado to review the decision.

Although we have prevailed in the majority of these lawsuits and proceedings, there have been several adverse judgments or decisions on the merits, some of which are subject to appeal. On April 3, 2014, the Supreme Court of Wyoming affirmed a decision by the Wyoming State Board of Equalization that Travelocity and other OTAs are subject to sales tax on lodging. Similarly, on March 4, 2014, a trial court in Washington D.C. entered final judgment in favor of the District of Columbia on its claim that Travelocity and other OTAs are subject to the District’s hotel occupancy tax. Travelocity has appealed the trial court’s decision. We did not record material charges associated with these cases during the three and nine months ended September 30, 2014 and 2013. As of September 30, 2014, our reserve for these cases totaled $6 million and is included in other accrued liabilities in our consolidated balance sheets.

On November 21, 2013, the New York State Court of Appeals ruled against Travelocity and other OTAs, holding that New York City’s hotel occupancy tax, which was amended in 2009 to capture revenue from fees charged to customers by third-party travel companies, is constitutional because such fees constitute rent as they are a condition of occupancy. Travelocity had been collecting and remitting taxes under the statute, so the ruling did not impact its financial results in that regard.

On June 21, 2013, a state trial court in Cook County, Illinois granted summary judgment in favor of the City of Chicago and against Travelocity and other OTAs, ruling that Chicago’s hotel tax applies to the fees retained by the OTAs because, according to the trial court, OTAs act as hotel “managers” when facilitating hotel reservations. Travelocity subsequently settled the lawsuit prior to the entry of final judgment or any ruling on damages for an amount not material to our results of operations.

On April 4, 2013, the United States District Court for the Western District of Texas (“W.D.T.”) entered a final judgment against Travelocity and other OTAs in a class action lawsuit filed by the City of San Antonio. The final judgment was based on a jury verdict from October 30, 2009 that the OTAs “control” hotels for purposes of city hotel occupancy taxes. Following that jury verdict, on July 1, 2011, the W.D.T. concluded that fees charged by the OTAs are subject to city hotel occupancy taxes and that the OTAs have a duty to assess, collect and remit these taxes. We disagree with the jury’s finding that we “control” hotels, and with the W.D.T.’s conclusions based on the jury finding, and intend to appeal the final judgment to the United States Court of Appeals for the Fifth Circuit. The verdict against us, including penalties and interest, is $4 million which we do not believe we will ultimately pay and therefore have not accrued any loss related to this case.

We believe the Fifth Circuit’s resolution of the San Antonio appeal may be affected by a separate Texas state appellate court decision in our favor. On October 26, 2011, the Fourteenth Court of Appeals of Texas affirmed a trial court’s summary judgment ruling in favor of the OTAs in a case brought by the City of Houston and the Harris County-Houston Sports Authority on a similarly worded tax ordinance as the one at issue in the San Antonio case. The Texas Supreme Court denied the City of Houston’s petition to review the case. We believe this decision should provide persuasive authority to the Fifth Circuit in its review of the San Antonio case.

In late 2012, the Tax Appeal Court of the State of Hawaii granted summary judgment in favor of Travelocity and other OTAs on the issue of whether Hawaii’s transient accommodation tax applies to the merchant revenue model. However, in January 2013, the same court granted summary judgment in favor of the State of Hawaii and against Travelocity and other OTAs on the issue of whether

19


 

the state’s general excise tax, which is assessed on all business activity in the state, applies to the merchant revenue model for the period from 2002 to 2011.

We recorded charges of $1 million and $17 million in cost of revenue for the nine months ended September 30, 2014 and 2013, respectively, which represents the amount we would owe to the State of Hawaii, prior to appealing the Tax Appeal Court’s ruling, in back excise taxes, penalties and interest based on the court’s interpretation of the statute. As of September 30, 2014, we maintained an accrued liability of $9 million for this case and have not made material payments in the nine months ended September 30, 2014. Payment of such amount is not an admission that we believe we are subject to the taxes in question.

The State of Hawaii has appealed the Tax Appeal Court’s decision that Travelocity is not subject to transient accommodation tax, and Travelocity has likewise appealed the Tax Appeal Court’s determination that we are subject to general excise tax, as we believe the decision is incorrect and inconsistent with the same court’s prior rulings. If any excise tax is in fact owed (which we dispute), we believe the correct amount should be under $10 million. The ultimate resolution of these contingencies may differ from the liabilities recorded. To the extent our appeal is successful in reducing or eliminating the assessed excise tax amounts, the State of Hawaii would be required to refund such amounts, plus interest. On May 20, 2013, the State of Hawaii issued additional assessments of general excise tax and hotel occupancy tax for the calendar year 2012. Travelocity has appealed these assessments to the Tax Appeal Court, and these assessments have been stayed pending a final appellate decision on the original assessments.

On December 9, 2013, the State of Hawaii also issued assessments of general excise tax for merchant rental car bookings facilitated by Travelocity and other OTAs for the period 2001 to 2012 for which we recorded a $2 million reserve in the fourth quarter of 2013. Travelocity has appealed the assessment to the Tax Appeal Court, which ordered a stay of the assessment pending a final appellate decision on the original assessments.

On July 18, 2014, the State of Hawaii also issued additional assessments of general excise tax and hotel occupancy tax for the calendar year 2013.  Travelocity has appealed those assessments to the Tax Appeal Court and intends to request a stay of the assessments pending a final appellate decision on the original assessments.

As of September 30, 2014, we have a reserve of $20 million, included in other accrued liabilities in the consolidated balance sheet, for the potential resolution of issues identified related to litigation involving hotel sales, occupancy or excise taxes, which includes the $11 million liability for the remaining payments to the State of Hawaii. As of December 31, 2013, the reserve for litigation involving hotel sales, occupancy or excise taxes was $18 million. Our estimated liability is based on our current best estimate but the ultimate resolution of these issues may be greater or less than the amount recorded and, if greater, could adversely affect our results of operations.

In addition to the actions by the tax authorities, four consumer class action lawsuits have been filed against us in which the plaintiffs allege that we made misrepresentations concerning the description of the fees received in relation to facilitating hotel reservations. Generally, the consumer claims relate to whether Travelocity provided adequate notice to consumers regarding the nature of our fees and the amount of taxes charged or collected. One of these lawsuits was dismissed by the trial court and this dismissal was subsequently affirmed by the Texas Supreme Court; one was voluntarily dismissed by the plaintiffs; one is pending in Texas state court, where the court is currently considering the plaintiffs’ motion to certify a class action; and the last is pending in federal court, but has been stayed pending the outcome of the Texas state court action. We believe the notice we provided was appropriate.

In addition to the lawsuits, a number of state and local governments have initiated inquiries, audits and other administrative proceedings that could result in an assessment of sales or occupancy taxes on fees. If we do not prevail at the administrative level, those cases could lead to formal litigation proceedings.

Pursuant to our Expedia SMA, we continue to be liable for fees, charges, costs and settlements relating to litigation arising from hotels booked on the Travelocity platform operated by Travelocity prior to the full implementation of the Expedia SMA. However, fees, charges, costs and settlements relating to litigation from hotels booked subsequent to the Expedia SMA will be shared with Expedia according to the terms of the Expedia SMA. Under the Expedia SMA, we are also required to guarantee Travelocity’s indemnification obligations to Expedia for any liabilities arising out of historical claims with respect to this type of litigation.

US Airways Antitrust Litigation and DOJ Investigation

US Airways Antitrust Litigation

In April 2011, US Airways sued us in federal court in the Southern District of New York, alleging violations of the Sherman Act Section 1 (anticompetitive agreements) and Section 2 (monopolization). The complaint was filed two months after we entered into a new distribution agreement with US Airways. In September 2011, the court dismissed all claims relating to Section 2. The claims that were not dismissed are claims brought under Section 1 of the Sherman Act that relate to our contracts with airlines, especially US Airways itself, which US Airways says contain anticompetitive content-related provisions, and an alleged conspiracy with the other

20


 

GDSs, allegedly to maintain the industry structure and not to implement US Airways’ preferred system of distributing its Choice Seats product. We strongly deny all of the allegations made by US Airways. US Airways quantifies its damages at either $317 million or $482 million (before trebling), depending on certain assumptions. We believe both estimates are based on faulty assumptions and analysis and therefore are highly overstated. In the event US Airways were to prevail on the merits of its claim, we believe any monetary damages awarded (before trebling) would be significantly less than either of US Airways’ proposed damage amounts.

Document, fact and expert witness discovery are complete. Summary judgment motions were filed in April 2014 and we are awaiting a ruling. No trial date has been set and we anticipate the most likely trial date would be in the first half of 2015, assuming no delays with the court’s schedule and that we do not prevail completely with our summary judgment motions.

We have and will incur significant fees, costs and expenses for as long as the litigation is ongoing. In addition, litigation by its nature is highly uncertain and fraught with risk, and it is therefore difficult to predict the outcome of any particular matter. If favorable resolution of the matter is not reached, any monetary damages are subject to trebling under the antitrust laws and US Airways would be eligible to be reimbursed by us for its costs and attorneys’ fees. Depending on the amount of any such judgment, if we do not have sufficient cash on hand, we may be required to seek financing through the issuance of additional equity or from private or public financing. Additionally, US Airways can and has sought injunctive relief, though we believe injunctive relief for US Airways is precluded by the settlement agreement we reached with American Airlines in 2012, which covers affiliates, including through merger, of American Airlines. If injunctive relief were granted, depending on its scope, it could affect the manner in which our airline distribution business is operated and potentially force changes to the existing airline distribution business model. Any of these consequences could have a material adverse effect on our business, financial condition and results of operations.

Department of Justice Investigation

On May 19, 2011, we received a civil investigative demand (“CID”) from the U.S. Department of Justice (“DOJ”) investigating alleged anticompetitive acts related to the airline distribution component of our business. We are fully cooperating with the DOJ investigation and are unable to make any prediction regarding its outcome. The DOJ is also investigating other companies that own GDSs, and has sent CIDs to other companies in the travel industry. Based on its findings in the investigation, the DOJ may (i) close the file, (ii) seek a consent decree to remedy issues it believes violate the antitrust laws, or (iii) file suit against us for violating the antitrust laws, seeking injunctive relief. If injunctive relief were granted, depending on its scope, it could affect the manner in which our airline distribution business is operated and potentially force changes to the existing airline distribution business model. Any of these consequences would have a material adverse effect on our business, financial condition and results of operations.

Insurance Carriers

We have disputes against two of our insurance carriers for failing to reimburse defense costs incurred in the American Airlines antitrust litigation, which we settled in October 2012. Both carriers admitted there is coverage, but reserved their rights not to pay should we be found liable for certain of American Airlines’ allegations. Despite their admission of coverage, the insurers have only reimbursed us for a small portion of our significant defense costs. We filed suit against the entities in New York state court alleging breach of contract and a statutory cause of action for failure to promptly pay claims. If we prevail, we may recover some or all amounts already tendered to the insurance companies for payment within the limits of the policies and may be entitled to 18% interest on such amounts. To date, settlement discussions have been unsuccessful. We are currently in the discovery process. The court has not yet scheduled a trial date though we anticipate trial to begin in the second half of 2015.

Hotel Related Antitrust Proceedings

On August 20, 2012, two individuals alleging to represent a putative class of bookers of online hotel reservations filed a complaint against Sabre Holdings, Travelocity.com LP, and several other online travel companies and hotel chains in the U.S. District Court for the Northern District of California, alleging federal and state antitrust and related claims. The complaint alleges generally that the defendants conspired to enter into illegal agreements relating to the price of hotel rooms. Over 30 copycat suits were filed in various courts in the United States. In December 2012, the Judicial Panel on Multi-District Litigation centralized these cases in the U.S. District Court in the Northern District of Texas, which subsequently consolidated them. The proposed class period is January 1, 2003 through May 1, 2013. On June 15, 2013, the court granted Travelocity’s motion to compel arbitration of claims involving Travelocity bookings made on or after February 4, 2010. While all claims from February 4, 2010 through May 1, 2013 are now excluded from the lawsuit and must be arbitrated if pursued at all, the lawsuit still covers claims from January 1, 2003 through February 3, 2010. Together with the other defendants, Travelocity and Sabre filed a motion to dismiss. On February 18, 2014, the court granted the motion and dismissed the plaintiff’s claims without prejudice. The plaintiffs had moved for leave to file an amended complaint but the judge denied the motion on October 27, 2014. The plaintiffs will have an opportunity to appeal. We deny any conspiracy or any anti-competitive actions and we intend to aggressively defend against the claims.

Even if we are ultimately successful in defending ourselves in this matter, we are likely to incur significant fees, costs and expenses for as long as it is ongoing. In addition, litigation by its nature is highly uncertain and fraught with risk, and it is difficult to

21


 

predict the outcome of any particular matter. If favorable resolution of the matter is not reached, we could be subject to monetary damages, including treble damages under the antitrust laws, as well as injunctive relief. If injunctive relief were granted, depending on its scope, it could affect the manner in which our Travelocity business is operated and potentially force changes to the existing business model. Any of these consequences could have a material adverse effect on our business, financial condition and results of operations.

Litigation Relating to Patent Infringement

In April 2010, CEATS, Inc. (“CEATS”) filed a patent infringement lawsuit against several ticketing companies and airlines, including JetBlue, in the Eastern District of Texas. CEATS alleged that the mouse-over seat map that appears on the defendants’ websites infringes certain of its patents. JetBlue’s website is provided by our Airline Solutions business under the SabreSonic Web service. On June 11, 2010, JetBlue requested that we indemnify and defend it for and against the CEATS lawsuit based on the indemnification provision in our agreement with JetBlue, and we agreed to a conditional indemnification. CEATS claimed damages of $0.30 per segment sold on JetBlue’s website during the relevant time period which totaled $10 million. A jury trial began on March 12, 2012, which resulted in a jury verdict invalidating the CEATS’ patents. Final judgment was entered and the plaintiff appealed. The Federal Circuit affirmed the jury’s decision in our favor on April 26, 2013. CEATS did not appeal the Federal Circuit’s decision, and its deadline to do so has passed. On June 28, 2013, the Eastern District denied CEATS’ previously filed motion to vacate the judgment based on an alleged conflict of interest with a mediator. CEATS appealed that decision and the Federal Circuit heard the appeal on May 5, 2014, and subsequently denied the appeal. On July 22, 2014, CEATs filed a motion for rehearing en banc before the Federal Circuit which was denied on September 5, 2014. CEATS has ninety days from the denial to file a petition for a review with the Supreme Court.

Indian Income Tax Litigation

We are currently a defendant in income tax litigation brought by the Indian Director of Income Tax (“DIT”) in the Supreme Court of India. The dispute arose in 1999 when the DIT asserted that we have a permanent establishment within the meaning of the Income Tax Treaty between the United States and the Republic of India and accordingly issued tax assessments for assessment years ending March 1998 and March 1999, and later issued further tax assessments for assessment years ending March 2000 through March 2006. We appealed the tax assessments and the Indian Commissioner of Income Tax Appeals returned a mixed verdict. We filed further appeals with the Income Tax Appellate Tribunal, or the ITAT. The ITAT ruled in our favor on June 19, 2009 and July 10, 2009, stating that no income would be chargeable to tax for assessment years ending March 1998 and March 1999, and from March 2000 through March 2006. The DIT appealed those decisions to the Delhi High Court, which found in our favor on July 19, 2010. The DIT has appealed the decision to the Supreme Court of India and no trial date has been set.

We intend to continue to aggressively defend against these claims. Although we do not believe that the outcome of the proceedings will result in a material impact on our business or financial condition, litigation is by its nature uncertain. If the DIT were to fully prevail on every claim, we could be subject to taxes, interest and penalties of approximately $26 million as of September 30, 2014, which could have a material adverse effect on our business, financial condition and results of operations. We do not believe this outcome is probable and therefore have not made any provisions or recorded any liability for the potential resolution of this matter.

Litigation Relating to Routine Proceedings

We are also engaged from time to time in other routine legal and tax proceedings incidental to our business. We do not believe that any of these routine proceedings will have a material impact on the business or our financial condition.

 

15. Segment Information

Our reportable segments are based upon: our internal organizational structure; the manner in which our operations are managed; the criteria used by our Chief Executive Officer, who is our Chief Operating Decision Maker (“CODM”), to evaluate segment performance; the availability of separate financial information; and overall materiality considerations.

Our business has three reportable segments: Travel Network, Airline and Hospitality Solutions, and Travelocity. Airline and Hospitality Solutions aggregates the Airline Solutions and Hospitality Solutions operating segments as these operating segments have similar economic characteristics, generate revenues on transaction-based fees, incur the same types of expenses and use our SaaS based and hosted applications and platforms to market to the travel industry.

Our CODM utilizes Adjusted Gross Margin and Adjusted EBITDA as the measures of profitability to evaluate performance of our segments and allocate resources. Segment results do not include unallocated expenses or interest expenses which are centrally managed costs. Benefits expense, including pension expense, postretirement benefits, medical insurance and workers’ compensation are allocated to the segments based on headcount. Depreciation expense on the corporate headquarters building and related facilities

22


 

costs are allocated to the segments through a facility fee based on headcount. Corporate includes certain shared expenses such as accounting, human resources, legal, corporate systems, and other shared technology costs. Corporate also includes all amortization of intangible assets and any related impairments that originate from purchase accounting, as well as stock based compensation expense, restructuring charges, legal reserves, occupancy taxes and other items not identifiable with one of our segments.

We account for significant intersegment transactions as if the transactions were with third parties, that is, at estimated current market prices. The majority of the intersegment revenues and cost of revenues are between Travelocity and Travel Network, consisting mainly of incentive consideration provided, net of data processing fees incurred, by Travel Network to Travelocity for transactions processed through the Sabre GDS, transaction fees paid by Travelocity to Travel Network for transactions facilitated through the Sabre GDS in which the travel supplier pays Travelocity directly, and fees paid by Travel Network to Travelocity for corporate trips booked through the Travelocity online booking technology. During the second quarter of 2014, Travel Network charged Travelocity a fee of approximately $7 million for not meeting certain minimum booking level requirements. This fee was recorded as revenue on Travel Network and expensed on Travelocity in our segment results and is eliminated in consolidation. In addition, Airline and Hospitality Solutions pay fees to Travel Network for airline trips booked through our GDS.

Our CODM does not review total assets by segment as operating evaluations and resource allocation decisions are not made on the basis of total assets by segment. Our CODM uses Adjusted Capital Expenditures in making product investment decisions and determining development resource requirements.

The performance of our segments is evaluated primarily on Adjusted Revenue, Adjusted Gross Margin and Adjusted EBITDA which are not recognized terms under GAAP. Our uses of Adjusted Revenue, Adjusted Gross Margin and Adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. We define Adjusted Revenue as revenue adjusted for the amortization of Expedia SMA incentive payments, which are recorded as a reduction to revenue and are being amortized over the non-cancellable term of the Expedia SMA (see Note 4, Restructuring Charges). We define Adjusted Gross Margin as operating income (loss) adjusted for selling, general and administrative expenses, impairment, depreciation and amortization, amortization of upfront incentive consideration, restructuring and other costs, litigation and taxes, including penalties, stock-based compensation and amortization of Expedia SMA incentive payments. The definition of Adjusted Gross Margin was revised in the first quarter of 2014 to adjust for restructuring and other costs, litigation and taxes, including penalties and stock-based compensation included in cost of revenue which differs from Adjusted Gross Margin presented in our prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act on April 17, 2014. Adjusted Gross Margin for the prior year period has been recast to conform to our revised definition. We define Adjusted EBITDA as income (loss) from continuing operations adjusted for impairment, depreciation and amortization of property and equipment, amortization of capitalized implementation costs, acquisition related amortization, amortization of upfront incentive consideration, interest expense, net, loss on extinguishment of debt, other, net, restructuring and other costs, litigation and taxes including penalties, stock-based compensation, management fees, amortization of Expedia SMA incentive payments and income taxes. We define Adjusted Capital Expenditures as additions to property and equipment and capitalized implementation costs during the periods presented.

23


 

Segment information for the three and nine months ended September 30, 2014 and 2013 is as follows (in thousands):

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Adjusted Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Travel Network

$

466,278

 

 

$

449,562

 

 

$

1,420,341

 

 

$

1,381,105

 

Airline and Hospitality Solutions

 

208,685

 

 

 

182,505

 

 

 

571,975

 

 

 

522,794

 

Travelocity

 

88,853

 

 

 

160,811

 

 

 

268,848

 

 

 

457,518

 

Eliminations

 

(4,638

)

 

 

(17,055

)

 

 

(24,253

)

 

 

(58,018

)

Total Adjusted Revenue

 

759,178

 

 

 

775,823

 

 

 

2,236,911

 

 

 

2,303,399

 

Amortization of Expedia SMA incentive payments

 

(2,875

)

 

 

 

 

 

(7,625

)

 

 

 

Total revenue

$

756,303

 

 

$

775,823

 

 

$

2,229,286

 

 

$

2,303,399

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Gross Margin (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Travel Network

$

216,214

 

 

$

207,506

 

 

$

670,023

 

 

$

652,568

 

Airline and Hospitality Solutions

 

94,747

 

 

 

64,539

 

 

 

235,546

 

 

 

183,237

 

Travelocity

 

66,013

 

 

 

102,710

 

 

 

184,124

 

 

 

277,895

 

Eliminations

 

(41

)

 

 

(123

)

 

 

(7,498

)

 

 

(514

)

Corporate

 

(18,579

)

 

 

(5,578

)

 

 

(38,119

)

 

 

(28,651

)

Total

$

358,354

 

 

$

369,054

 

 

$

1,044,076

 

 

$

1,084,535

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA (b)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Travel Network

$

193,823

 

 

$

183,728

 

 

$

606,637

 

 

$

582,268

 

Airline and Hospitality Solutions

 

81,671

 

 

 

56,940

 

 

 

197,686

 

 

 

145,485

 

Travelocity

 

15,954

 

 

 

7,403

 

 

 

(18,116

)

 

 

7,528

 

Total segments

 

291,448

 

 

 

248,071

 

 

 

786,207

 

 

 

735,281

 

Corporate

 

(61,522

)

 

 

(46,722

)

 

 

(168,857

)

 

 

(151,318

)

Total

$

229,926

 

 

$

201,349

 

 

$

617,350

 

 

$

583,963

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Travel Network

$

14,788

 

 

$

13,225

 

 

$

46,597

 

 

$

37,810

 

Airline and Hospitality Solutions

 

26,031

 

 

 

19,853

 

 

 

79,729

 

 

 

57,225

 

Travelocity

 

1,122

 

 

 

1,237

 

 

 

3,585

 

 

 

8,826

 

Total segments

 

41,941

 

 

 

34,315

 

 

 

129,911

 

 

 

103,861

 

Corporate

 

29,771

 

 

 

42,051

 

 

 

100,550

 

 

 

126,416

 

Total

$

71,712

 

 

$

76,366

 

 

$

230,461

 

 

$

230,277

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Capital Expenditures (c)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Travel Network

$

13,238

 

 

$

19,542

 

 

$

43,858

 

 

$

51,593

 

Airline and Hospitality Solutions

 

39,994

 

 

 

38,993

 

 

 

117,784

 

 

 

132,563

 

Travelocity

 

2,685

 

 

 

3,571

 

 

 

6,810

 

 

 

14,367

 

Total segments

 

55,917

 

 

 

62,106

 

 

 

168,452

 

 

 

198,523

 

Corporate

 

3,890

 

 

 

5,174

 

 

 

19,535

 

 

 

18,907

 

Total

$

59,807

 

 

$

67,280

 

 

$

187,987

 

 

$

217,430

 

 

24


 

  

 

(a)

The following tables set forth the reconciliation of Adjusted Gross Margin to operating income in our statement of operations (in thousands):

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Adjusted Gross Margin

$

358,354

 

 

$

369,054

 

 

$

1,044,076

 

 

$

1,084,535

 

Less adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

169,183

 

 

 

208,033

 

 

 

575,413

 

 

 

620,226

 

Impairment

 

 

 

 

2,837

 

 

 

 

 

 

138,435

 

Restructuring charges

 

4,735

 

 

 

15,889

 

 

 

2,325

 

 

 

15,889

 

Cost of revenue adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization(1)

 

47,252

 

 

 

49,421

 

 

 

157,146

 

 

 

150,441

 

Amortization of upfront incentive consideration(2)

 

10,388

 

 

 

9,385

 

 

 

33,177

 

 

 

28,736

 

Restructuring and other costs (4)

 

4,865

 

 

 

2,582

 

 

 

10,016

 

 

 

4,521

 

Litigation and taxes, including penalties(5)

 

188

 

 

 

5,389

 

 

 

1,127

 

 

 

19,864

 

Stock-based compensation

 

2,172

 

 

 

544

 

 

 

5,618

 

 

 

816

 

Amortization of Expedia SMA incentive payments

 

2,875

 

 

 

 

 

 

7,625

 

 

 

 

Operating income

$

116,696

 

 

$

74,974

 

 

$

251,629

 

 

$

105,607

 

(b)

The following tables set forth the reconciliation of Adjusted EBITDA to loss from continuing operations in our statement of operations (in thousands):

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Adjusted EBITDA

$

229,926

 

 

$

201,349

 

 

$

617,350

 

 

$

583,963

 

Less adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment

 

 

 

 

2,837

 

 

 

 

 

 

138,435

 

Depreciation and amortization of property and equipment(1a)

 

39,524

 

 

 

32,936

 

 

 

122,409

 

 

 

97,687

 

Amortization of capitalized implementation costs(1b)

 

9,084

 

 

 

8,437

 

 

 

27,111

 

 

 

27,038

 

Acquisition related amortization(1c)

 

23,905

 

 

 

35,794

 

 

 

83,344

 

 

 

107,955

 

Amortization of upfront incentive consideration(2)

 

10,388

 

 

 

9,385

 

 

 

33,177

 

 

 

28,736

 

Interest expense, net

 

50,153

 

 

 

63,454

 

 

 

167,332

 

 

 

209,653

 

Loss on extinguishment of debt

 

 

 

 

 

 

 

33,538

 

 

 

12,181

 

Other, net (3)

 

(565

)

 

 

2,429

 

 

 

(760

)

 

 

1,099

 

Restructuring and other costs (4)

 

14,482

 

 

 

21,754

 

 

 

24,056

 

 

 

26,296

 

Litigation and taxes, including penalties(5)

 

4,440

 

 

 

8,579

 

 

 

12,497

 

 

 

31,543

 

Stock-based compensation

 

5,472

 

 

 

2,686

 

 

 

22,434

 

 

 

5,446

 

Management fees(6)

 

193

 

 

 

2,126

 

 

 

23,701

 

 

 

7,347

 

Amortization of Expedia SMA incentive payments

 

2,875

 

 

 

 

 

 

7,625

 

 

 

 

Provision (benefit) for income taxes

 

30,956

 

 

 

7,861

 

 

 

27,878

 

 

 

(5,229

)

Income (loss) from continuing operations

$

39,019

 

 

$

3,071

 

 

$

33,008

 

 

$

(104,224

)

(1)

Depreciation and amortization expenses:

a.

Depreciation and amortization of property and equipment includes software developed for internal use.

b.

Amortization of capitalized implementation costs represents amortization of upfront costs to implement new customer contracts under our SaaS and hosted revenue model.

c.

Acquisition related amortization represents amortization of intangible assets from the take-private transaction in 2007 as well as intangibles associated with acquisitions since that date and amortization of the excess basis in our underlying equity in joint ventures.

(2)

Our Travel Network business at times makes upfront cash payments or other consideration to travel agency subscribers at the inception or modification of a service contract, which are capitalized and amortized over an average expected life of the service contract, generally over three to five years. Such consideration is made with the objective of increasing the number of clients or to ensure or improve customer loyalty. Such service contract terms are established such that the supplier and other fees generated over the life of the contract will exceed the cost of the incentive consideration provided up front. Such service contracts with travel agency subscribers require that the customer commit to achieving certain economic objectives and generally have terms requiring repayment of the upfront incentive consideration if those objectives are not met.

25


 

(3)

Other, net primarily represents foreign exchange gains and losses related to the remeasurement of foreign currency denominated balances included in our consolidated balance sheets into the relevant functional currency.

(4)

Restructuring and other costs represents charges associated with business restructuring and associated changes implemented which resulted in severance benefits related to employee terminations, integration and facility opening or closing costs and other business reorganization costs.

(5)

Litigation and taxes, including penalties represents charges or settlements associated with airline antitrust litigation as well as payments or reserves taken in relation to certain retroactive hotel occupancy and excise tax disputes (see Note 14, Contingencies).

(6)

We paid an annual management fee to TPG and Silver Lake in an amount between (i) $5 million and (ii) $7 million, the actual amount of which is calculated based upon 1% of Adjusted EBITDA, earned by the company in such fiscal year up to a maximum of $7 million. In addition, the MSA provided for reimbursement of certain costs incurred by TPG and Silver Lake, which are included in this line item. The MSA was terminated in connection with our initial public offering.

(c)

Includes capital expenditures and capitalized implementation costs as summarized below (in thousands):

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Additions to property and equipment

$

49,802

 

 

$

57,257

 

 

$

160,385

 

 

$

168,744

 

Capitalized implementation costs

 

10,005

 

 

 

10,023

 

 

 

27,602

 

 

 

48,686

 

Adjusted Capital Expenditures

$

59,807

 

 

$

67,280

 

 

$

187,987

 

 

$

217,430

 

 

 

 

 

26


 

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 about future trends, events, uncertainties and our plans and expectations of what may happen in the future. Any statements that are not historical or current facts are forward-looking statements. In many cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “potential” or the negative of these terms or other comparable terminology. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause Sabre Corporation’s actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Certain of these risks and uncertainties are described in the “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” sections included in our prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended (“Securities Act”), on April 17, 2014. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance or achievements. Readers are cautioned not to place undue reliance on these forward-looking statements. Unless required by law, Sabre Corporation undertakes no obligation to publicly update or revise any forward-looking statements to reflect circumstances or events after the date they are made.

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes contained elsewhere in this Quarterly Report on Form 10-Q and our prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act on April 17, 2014.

Overview

We are a leading technology solutions provider to the global travel and tourism industry. We span the breadth of a highly complex global travel ecosystem through three business segments: (i) Travel Network, our global B2B travel marketplace for travel suppliers and travel buyers, (ii) Airline and Hospitality Solutions, an extensive suite of leading software solutions primarily for airlines and hotel properties, and (iii) Travelocity, our portfolio of online consumer travel e-commerce businesses through which we provide travel content and booking functionality primarily for leisure travelers. Collectively, these offerings enable travel suppliers to better serve their customers across the entire travel lifecycle, from route planning to post-trip business intelligence and analysis.

A significant portion of our revenue is generated through transaction based fees that we charge to our customers. For Travel Network, this fee is in the form of a transaction fee for bookings on our global distribution system (“GDS”); for Airline and Hospitality Solutions, this fee is a recurring usage-based fee for the use of our software-as-a-service (“SaaS”) and hosted systems, as well as implementation fees and consulting fees. Items that are not allocated to our business segments are identified as corporate and include primarily certain shared technology costs as well as stock-based compensation expense, litigation costs related to occupancy or other taxes and other items that are not identifiable with one of our segments.

Factors Affecting our Results and Comparability

A discussion of trends that we believe are the most significant opportunities and challenges currently impacting our business and industry is included the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting our Results” in our prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act on April 17, 2014. The discussion also includes management’s assessment of the effects these trends have had and are expected to have on our results of continuing operations. The information is not an exhaustive list of all of the factors that could affect our results and should be read in conjunction with the factors referred to in the section entitled “Risk Factors” included in our prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act on April 17, 2014. There have been no material changes to the Factors Affecting our Results previously disclosed in our prospectus.

Travelocity Restructuring—We initiated plans in the third quarter of 2013 to shift our Travelocity business in the United States and Canada away from a high fixed-cost model to a lower-cost, performance-based revenue structure. On August 22, 2013, Travelocity entered into an exclusive, long-term strategic marketing agreement with Expedia (“Expedia SMA”). Under the Expedia SMA, Expedia powers the technology platforms for Travelocity’s existing U.S. and Canadian websites as well as provide Travelocity with access to Expedia’s supply and customer service platforms. In connection with the Expedia SMA, we also entered into a separate put/call agreement (the “Put/Call Agreement”). The Expedia SMA represents a strategic decision to reduce direct costs associated with Travelocity and to provide our customers with the benefit of Expedia’s long-term investment in its technology platform as well as its supply and customer service platforms. Both parties began development and implementation of this arrangement after signing the Expedia SMA. Substantially all supplier offerings have been migrated to the Expedia platform which has resulted in increased conversion and operational efficiency and has allowed us to shift our focus to Travelocity’s marketing strengths.

27


 

Under the terms of the Expedia SMA, Expedia pays us a performance-based marketing fee that varies based on the amount of travel booked through Travelocity-branded websites powered by Expedia. The marketing fee we receive is recorded as marketing fee revenue and the cost we incur to promote the Travelocity brand and for marketing is recorded as selling, general and administrative expense in our results of operations. As a result of transactions being processed through Expedia’s platform instead of the Travelocity platform, the revenue we derive from the merchant, agency and media revenue models has declined. In connection with this migration, we are no longer considered the merchant of record for merchant transactions, and therefore we no longer collect cash from consumers, receive transaction fees and commissions directly from travel suppliers, receive service fees or insurance related revenue directly from customers or directly market or receive media revenue from advertisers on our websites. We instead collect the marketing fee revenue from Expedia, which is net of costs incurred by Expedia in connection with these activities. Additionally, Travelocity no longer receives incentive consideration from Travel Network as intersegment revenue, and Expedia is not required to use Travel Network for shopping and booking of non-air travel for Travelocity.com and Travelocity.ca. In addition, Expedia may choose to use another intermediary for shopping and booking of a portion or all of the air travel booked through Travelocity.com and Travelocity.ca beginning in 2019, subject to earlier termination under certain circumstances.

In the fourth quarter of 2013, we also initiated a plan to restructure lastminute.com, the European portion of the Travelocity business. This plan involved establishing lastminute.com as a stand-alone operation, separating processes from the North America operations, while adding efficiencies to streamline the European operations. Travelocity continues to be managed as one reportable segment. On August 27, 2014, we announced that we are reviewing strategic options for lastminute.com as part of our strategy to focus on our core business as the world’s leading technology provider to the global travel and tourism industry.  For these purposes, we have retained an international investment bank as advisors. For the nine months ended September 30, 2014, lastminute.com contributed $119 million to our total revenue and a $7 million loss to Adjusted EBITDA, both excluding intersegment eliminations. There can be no assurance that a transaction will occur as announced or at all.

In February 2014, as a further step in our restructuring plans for Travelocity, we completed a sale of assets associated with Travelocity Partner Network (“TPN”), a business-to-business private white label website offering. In connection with the sale, Travelocity entered into a Transition Services Agreement (“TSA”) with the acquirer to provide services to maintain the websites and certain technical and administrative functions for the acquirer until a complete transition occurs or the TSA terminates. The proceeds to be received under the sale agreement and the TSA were allocated across these multiple agreements based on a relative fair value allocation. During the nine months ended September 30, 2014, we recorded a loss on disposition of $3 million which is included in restructuring charges in our consolidated statements of operations.

As a result of the change in Travelocity’s business model and the sale of our TPN business, we expect the revenue contribution from the Travelocity segment to be in the range of 55% to 65% of 2013 levels after the Expedia SMA is fully implemented, which we expect to occur by the end of 2014. Due to the elimination of the intersegment revenue between Travelocity and Travel Network, we expect intersegment eliminations to substantially decrease in connection with the Expedia SMA. See “—Components of Revenues and Expenses—Intersegment Transactions.” Correspondingly, we are winding down certain internal processes, including back office functions, associated with our Travelocity-branded technology platforms and TPN business, which we expect to complete by the end of 2014. Once completed, we expect our costs from the Travelocity segment to significantly decrease and to be in the range of 45% to 55% of 2013 levels. Ongoing costs in our Travelocity business in the United States and Canada will primarily consist of marketing the Travelocity website, marketing staff and support staff. Under the Expedia SMA, we have committed to continue investing in the marketing of the Travelocity-branded websites in a manner that is consistent with past practice.

As a result, we expect our plan to result in improved margins and profitability for our Travelocity segment.

Our success is dependent on many factors, including:

improved conversion through better site performance and user experience using the Expedia platform and technology;

improved cost structure by reducing operational complexity; and

profitable results from our marketing efforts.

We cannot be certain that this plan will be successful.

28


 

During the three months ended September 30, 2014, we recorded restructuring charges of $5 million which includes a $3 million loss on the sale of TPN, $1 million in additional severance costs and $1 million in other costs. During the nine months ended September 30, 2014, we recorded restructuring charges of $2 million which includes a $3 million loss on the sale of TPN, $2 million in additional severance costs and $2 million in other costs, net of adjustments to our original estimates of employee termination benefits of $4 million. The adjustments to our original estimates are primarily the result of certain employees transferring to the acquirer of the TPN business without a required severance payment. We estimate that we will incur additional charges in the fourth quarter of 2014 of approximately $3 million consisting of contract termination and other related costs. Contract termination costs represent an estimate of costs we may incur as we negotiate with our vendors to terminate contracts and costs for contracts we are unable to renegotiate and receive no future benefit. The actual amount incurred may differ significantly from this estimate.

Pursuant to the Put/Call Agreement, Expedia may acquire, or we may sell to Expedia, assets relating to the Travelocity-branded portions of our Travelocity business, which primarily include the assets subject to the Expedia SMA. Our put right may be exercised during the first 24 months of the Put/Call Agreement only upon the occurrence of certain triggering events primarily relating to implementation, which are outside of our control. The occurrence of these events is not considered probable. During this period, the amount of the put right is fixed. After the initial 24 month period, the put right is only exercisable for a limited period of time in 2016 and 2017 at a discount to fair market value as defined in the Put/Call Agreement. The call right held by Expedia is exercisable at any time during the term of the Put/Call Agreement. If the call right is exercised, although we expect the amount paid will be fair value, the call right provides for a floor for a limited time that may be higher than fair value and a ceiling for the duration of the Put/Call Agreement that may be lower than fair value.

The term of the amended and restated Expedia SMA is nine years and automatically renews under certain conditions.

Disposition of Assets—On June 18, 2013, we completed the sale of certain assets of Travelocity (“TBiz”) operations to a third-party, which reduced revenue and expenses for Travelocity for the three and nine months ended September 30, 2014 compared to 2013. TBiz provided managed corporate travel services for corporate customers.

Revenue Models

We employ several revenue models across our businesses with some revenue models employed in multiple businesses. Travel Network primarily employs the transaction revenue model. Airline and Hospitality Solutions primarily employs the SaaS and hosted and consulting revenue models, as well as the software licensing fee model to a lesser extent. Travelocity primarily employed two revenue models: (i) the merchant revenue model or our “Net Rate Program” (applicable to a majority of our hotel net rate revenues) and (ii) the agency revenue model (applicable to most of our airline, car and cruise commission revenues and a small portion of hotel commission revenues). In connection with the Expedia SMA, Travelocity has begun to employ the marketing fee revenue model (applicable to revenue generated through Travelocity-branded websites operated by Expedia). Travel Network and, historically, Travelocity employ the media revenue model (applicable to advertising revenues). We report revenue net of any revenue-based taxes assessed by governmental authorities that are imposed on and concurrent with specific revenue-producing transactions.

Transaction Revenue Model—This model accounts for substantially all of Travel Network’s revenue. We define a “Direct Billable Booking” as any booking that generates a fee directly to Travel Network. These include bookings made through our GDS (e.g., air, car and hotel bookings) and through our joint venture partners in cases where we are paid directly by the travel supplier. Under this model, a transaction occurs when a travel agency or corporate travel department books, or reserves, a travel supplier’s product on our GDS, for which we receive a fee. Transaction fees include, but are not limited to, transaction fees paid by travel suppliers for selling their inventory through our GDS and transaction fees paid by travel agency subscribers related to their use of our GDS. We receive revenue from the travel supplier and the travel agency according to the commercial arrangement with each.

Transaction revenue for airline travel reservations is recognized at the time of the booking of the reservation, net of transaction fee reserves for estimated future cancellations. Transaction revenue for car rental, hotel bookings and other travel services is recognized at the time the reservation is used by the customer.

SaaS and Hosted Revenue Model—The SaaS and hosted revenue model is the primary revenue model employed by Airline and Hospitality Solutions. This revenue model applies to situations where we host software solutions on our own secure platforms or deploy it through our SaaS solutions, and we maintain the software as well as the infrastructure it employs. Our customers pay us an implementation fee and a recurring usage-based fee for the use of such software pursuant to contracts with terms that typically range between three and ten years and generally include minimum annual volume requirements. This usage-based fee arrangement allows our customers to pay for software normally on a monthly basis to the extent that it is used. Similar contracts with the same customer which are entered into at or around the same period are analyzed for revenue recognition purposes on a combined basis. Revenue from implementation fees is generally recognized over the term of the agreement. The amount of periodic usage fees is typically based on a metric relevant to the software purchased. We recognize revenue from recurring usage-based fees in the period earned. Over the last several years, our customers have shifted toward the SaaS and hosted revenue model as license fee contracts expire, and we expect to continue to facilitate the shift from license fee contracts to the SaaS and hosted revenue model going forward.

29


 

Consulting Revenue Model—Airline and Hospitality Solutions offerings that utilize the SaaS and hosted revenue model are sometimes sold as part of multiple-element agreements for which we also provide professional services. Our professional services consist primarily of consulting services focused on helping customers achieve better utilization of and return on their software investment. Often, we provide consulting services during the implementation phase of our SaaS solutions. We account for consulting service revenue separately from implementation and recurring usage-based fees, with value assigned to each element based on its relative selling price to the total selling price. We perform a market analysis on a periodic basis to determine the range of selling prices for each product and service. The revenue for consulting services is generally recognized over the period the consulting services are performed.

Software Licensing Fee Revenue Model—The software licensing fee revenue model is also utilized by Airline and Hospitality Solutions. Under this model, we generate revenue by charging customers for the installation and use of our software products. Some contracts under this model generate additional revenue for the maintenance of the software product. When software is sold without associated customization or implementation services, revenue from software licensing fees is recognized when all of the following are met: (i) the software is delivered, (ii) fees are fixed or determinable, (iii) no undelivered elements are essential to the functionality of delivered software, and (iv) collection is probable. When software is sold with customization or implementation services, revenue from software licensing fees is recognized based on the percentage of completion of the customization and implementation services. Fees for software maintenance are recognized ratably over the life of the contract. We are unable to determine vendor-specific objective evidence of fair value for software maintenance fees. Therefore, when fees for software maintenance are included in software license agreements, revenue from the software license, customization, implementation and the maintenance are recognized ratably over the related contract term.

Marketing Fee Revenue Model—With the implementation of Expedia’s technology for our U.S. and Canadian websites beginning late in 2013, Expedia pays us a performance-based marketing fee that varies based on the amount of travel booked through Travelocity-branded websites powered by Expedia. The marketing fee we receive is recorded as revenue and the costs we incur for marketing and to promote the Travelocity brand is recorded as selling, general and administrative expense in our results of operations. See “Factors Affecting our Results and Comparability—Travelocity Restructuring.”

Merchant Revenue Model—The merchant revenue model or the “Net Rate Program” is utilized by Travelocity, except to the extent the marketing fee revenue model applies. We primarily use this model for revenue from hotel reservations and dynamically packaged combinations of travel components. Pursuant to this model, we are the merchant of record for credit card processing for travel accommodations. Even though we are the merchant of record for these transactions, we do not purchase and resell travel accommodations, and we do not have any obligations with respect to the travel accommodations we offer online that we do not sell. Instead, we act as an intermediary by entering into agreements with travel suppliers for the right to market their products, services and other offerings at pre-determined net rates. We market net rate offerings to travelers at prices that include an amount sufficient to pay the travel supplier for providing the travel accommodations and any occupancy and other local taxes, as well as additional amounts representing our service fees, which is how we generate revenue under this model. Under this revenue model, we require prepayment by the traveler at the time of booking.

Travelocity recognizes net rate revenue for stand-alone air travel at the time the travel is booked with a reserve for estimated future canceled bookings. Revenues from vacation packages and car rentals as well as hotel net rate revenues are recognized at the time the reservation is used by the consumer.

For net rate and dynamically packaged combinations sold through Travelocity, we record net rate revenues based on the total amount paid by the customer for products and services, net of our payment to the travel supplier. At the time a customer makes and prepays a reservation, we accrue a supplier liability based on the amount we expect to be billed by our travel suppliers. In some cases, a portion of Travelocity’s prepaid net rate and travel package transactions goes unused by the traveler. In these circumstances, Travelocity may not be billed the full amount of the accrued supplier liability. Therefore, we reduce the accrued supplier liability for amounts aged more than six months after the reservation goes unused and record the aged amount as revenue if certain conditions are met. Our process for determining when aged amounts may be recognized as revenue includes consideration of key factors such as the age of the supplier liability, historical billing and payment information, among others. See “Factors Affecting our Results and Comparability—Travelocity Restructuring.”

Agency Revenue Model—This model is employed by Travelocity, except to the extent the marketing fee revenue model applies, and applies to revenues generated via commissions from travel suppliers for reservations made by travelers through our websites. Under this model, we act as an agent in the transaction by passing reservations booked by travelers to the relevant airline, hotel, car rental company, cruise line or other travel supplier, while the travel supplier serves as merchant of record and processes the payment from the traveler.

Under the agency revenue model, Travelocity recognizes commission revenue for stand-alone air travel at the time the travel is booked with a reserve for estimated future canceled bookings. Commissions from car and hotel travel suppliers are recognized upon

30


 

the scheduled date of travel consumption. We record car and hotel commission revenue net of an estimated reserve for cancellations, no-shows and uncollectable commissions.

See “Factors Affecting our Results and Comparability—Travelocity Restructuring.”

Media Revenue Model—The media revenue model is used to record advertising revenue from entities that advertise products on Travelocity’s websites, except to the extent the marketing fee revenue model applies, and, to a lesser extent, on our GDS. Advertisers use two types of advertising metrics: (i) display advertising and (ii) action advertising. In display advertising, advertisers usually pay based on the number of customers who view the advertisement, and are charged based on cost per thousand impressions. In action advertising, advertisers usually pay based on the number of customers who perform a specific action, such as click on the advertisement, and are charged based on the cost per action. Advertising revenues are recognized in the period that the advertising impressions are delivered or the click-through or other specific action occurs.

See “Factors Affecting our Results and Comparability—Travelocity Restructuring.”

Components of Revenues and Expenses

Revenues

Travel Network

Travel Network primarily generates revenues from the transaction revenue model, as well as revenue from certain services we provide our joint ventures and the sale of aggregated bookings data to carriers. See “—Revenue Models.”

Airline and Hospitality Solutions

Airline and Hospitality Solutions primarily generates revenue from the SaaS and hosted revenue model, the consulting revenue model, as well as the software licensing fee model to a lesser extent. Over the last several years, our customers have shifted toward the SaaS and hosted revenue model as license fee contracts expire, and we expect to continue to facilitate the shift from license fee contracts to the SaaS and hosted revenue model going forward. See “—Revenue Models.”

Travelocity

Travelocity generates transaction revenue through the merchant revenue model and the agency revenue model, and non-transaction revenue, in each case, except to the extent the marketing fee model applies. See “Factors Affecting our Results and Comparability—Travelocity Restructuring.” Transaction revenue is comprised of (i) stand-alone air transaction revenue (i.e., revenue from the sale of air travel without any other products) and (ii) other transaction revenue (i.e., revenue from hotel suppliers, packages which include multiple travel products, lifestyle products such as theatre tickets and services).

Except to the extent the marketing fee model applies, Travelocity also generates revenues from fees from offline (e.g., call center agent transacted) bookings for air and packages and insurance revenues from third-party insurance providers whose air, total trip and cruise insurance we offer on our websites.

Additionally, Travelocity generates intersegment transaction revenue from Travel Network, consisting of incentive consideration earned for Travelocity transactions processed through our GDS and fees paid by Travel Network and Airline and Hospitality Solutions for corporate trips booked through the Travelocity online booking technology. For the nine months ended September 30, 2014, intersegment revenue has substantially decreased in connection with the Expedia SMA. Intersegment transaction revenue is eliminated in consolidation.

Non-transaction revenue consists of advertising revenue from the media revenue model, paper ticket fees and services, and change and reissue fees.

Cost of Revenue

Travel Network

Travel Network cost of revenues consists primarily of:

Incentive Consideration—payments or other consideration to travel agencies for reservations made on our GDS which have accrued on a monthly basis. Incentive consideration, when provided on a periodic basis over the term of the contract, is recorded to cost of revenue. Travel Network provides incentive consideration to Travelocity for Travelocity transactions processed through our GDS, although we expect intersegment revenue to substantially decrease in connection with the

31


 

Expedia SMA. Intersegment expense is eliminated in consolidation. See “—Components of Revenues and Expenses—Intersegment Transactions.”

Technology Expenses—data processing, data center management, application hosting, applications development and maintenance and related charges.

Labor Expenses—salaries and benefits paid to employees supporting the operations of the business.

Other Expenses—includes services purchased, facilities and corporate overhead.

Airline and Hospitality Solutions

Airline and Hospitality Solutions cost of revenues consists primarily of:

Labor Expenses—salaries and benefits paid to employees for the development, delivery and implementation of software.

Technology Expenses—data processing, data center management, application hosting, applications development and maintenance and related charges resulting from the hosting of our solutions.

Other Expenses—includes services purchased, facilities and other costs.

Travelocity

Except as described below, Travelocity cost of revenue consists primarily of:

Volume Related Expenses—customer service costs; credit card fees and technology fees; charges related to fraudulent bookings and compensation to customers, i.e., for service related issues.

Technology Expenses—data processing, data center management, applications development, maintenance and related charges.

Labor Expenses—salaries and benefits paid to employees supporting the operations of the business.

Other Expenses—includes services purchased, facilities and other costs.

In connection with the Expedia SMA, Travelocity will no longer incur significant cost of revenues with respect to Travelocity’s existing websites in the United States and Canada.

Corporate

Corporate cost of revenue includes certain shared technology costs as well as stock-based compensation expense, litigation expenses associated with occupancy or other taxes and other items that are not identifiable with one of our segments.

Depreciation and amortization

Cost of revenue includes depreciation and amortization associated with property and equipment; software developed for internal use that supports our revenue, businesses and systems; amortization of contract implementation costs which relates to Airlines and Hospitality Solutions; and intangible assets for technology purchased through acquisitions or established with our take-private transaction.

Amortization of upfront incentive consideration

We provide upfront payments or other consideration to travel agencies for reservations made on our GDS which are capitalized and amortized over the expected life of the contract.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of personnel-related expenses for employees that sell our services to new customers and administratively support the business, commission payments made to travel agency and distribution partners of Travelocity, advertising and promotional costs primarily for Travelocity, certain settlement costs and costs to defend legal disputes, bad debt expense, depreciation and amortization and other costs. In connection with the Expedia SMA, Travelocity will no longer incur significant non-marketing related expenses; instead, the marketing fee we receive under the Expedia SMA is net of costs incurred by Expedia in connection with these activities. The marketing costs we incur to promote the Travelocity brand are recorded as selling, general and administrative expenses.

32


 

Intersegment Transactions

We account for significant intersegment transactions as if the transactions were with third parties, that is, at estimated current market prices. The majority of the intersegment revenues and cost of revenues are between Travelocity and Travel Network, consisting mainly of accruals for incentive consideration, net of data processing fees incurred, by Travel Network to Travelocity for transactions processed through our GDS, transaction fees paid by Travelocity to Travel Network for transactions facilitated through our GDS in which the travel supplier pays Travelocity directly, and fees paid by Travel Network to Travelocity for corporate trips booked through the Travelocity online booking technology. During the second quarter of 2014, Travel Network charged Travelocity a fee of approximately $7 million for not meeting certain minimum booking level requirements. This fee was recorded as revenue on Travel Network and expensed on Travelocity in our segment results and is eliminated in consolidation. In addition, Airline and Hospitality Solutions pays fees to Travel Network for airline trips booked through our GDS. Due to the elimination of the intersegment revenue between Travelocity and Travel Network with the Expedia SMA, intersegment eliminations have substantially decreased for the three and nine months ended September 30, 2014 compared to the prior year. See Note 15, Segment Information, to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Key Metrics

“Direct Billable Bookings” and “Passengers boarded” are the primary metrics utilized by Travel Network and Airline Solutions, respectively, to measure operating performance. Travel Network generates fees for each Direct Billable Booking which include bookings made through our GDS (e.g., air, car and hotel bookings) and through our joint venture partners in cases where we are paid directly by the travel supplier. Passengers boarded (“PBs”) is the primary metric used by Airline Solutions to recognize SaaS and Hosted revenue from recurring usage-based fees. The following table sets forth our key metrics (in thousands):

 

 

Three Months Ended

September 30,

 

 

 

 

 

 

Nine Months Ended

September 30,

 

 

 

 

 

 

2014

 

 

2013

 

 

% Change

 

 

2014

 

 

2013

 

 

% Change

 

Travel Network

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct Billable Bookings - Air

 

81,047

 

 

 

78,314

 

 

 

3.5%

 

 

 

251,145

 

 

 

244,267

 

 

 

2.8%

 

Direct Billable Bookings - Non-Air

 

13,806

 

 

 

13,701

 

 

 

0.8%

 

 

 

41,274

 

 

 

40,734

 

 

 

1.3%

 

Total Direct Billable Bookings

 

94,853

 

 

 

92,015

 

 

 

3.1%

 

 

 

292,419

 

 

 

285,001

 

 

 

2.6%

 

Airline Solutions Passengers Boarded

 

136,545

 

 

 

126,545

 

 

 

7.9%

 

 

 

385,611

 

 

 

358,428

 

 

 

7.6%

 

 

Non-GAAP Financial Measures

We have included both financial measures compiled in accordance with GAAP and certain non-GAAP financial measures in this Quarterly Report on Form 10-Q, including Adjusted Revenue, Adjusted Gross Margin, Adjusted Net Income, Adjusted EBITDA, Adjusted Capital Expenditures, Free Cash Flow, Adjusted Free Cash Flow and ratios based on these financial measures.

We define Adjusted Revenue as revenue adjusted for the amortization of Expedia SMA incentive payments, which are recorded as a reduction to revenue and are being amortized over the non-cancellable term of the Expedia SMA (see Note 4, Restructuring Charges, to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q).

We define Adjusted Gross Margin as operating income (loss) adjusted for selling, general and administrative expenses, impairment, depreciation and amortization, amortization of upfront incentive consideration, restructuring and other costs, litigation and taxes, including penalties, stock-based compensation and amortization of Expedia SMA incentive payments. The definition of Adjusted Gross Margin was revised in the first quarter of 2014 to adjust for restructuring and other costs, litigation and taxes, including penalties and stock-based compensation included in cost of revenue which differs from Adjusted Gross Margin presented in our prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act on April 17, 2014. Adjusted Gross Margin for the prior year period has been recast to conform to our revised definition.

We define Adjusted Net Income as income (loss) from continuing operations adjusted for impairment, acquisition related amortization, loss on extinguishment of debt, other, net, restructuring and other costs, litigation and taxes, including penalties, stock-based compensation, management fees, amortization of Expedia SMA incentive payments and tax impact of net income adjustments.

We define Adjusted EBITDA as Adjusted Net Income adjusted for depreciation and amortization of property and equipment, amortization of capitalized implementation costs, amortization of upfront incentive consideration, interest expense, net, and remaining  provision (benefit) for income taxes. This Adjusted EBITDA metric differs from (i) the EBITDA metric referenced in the section entitled “—Liquidity and Capital Resources—Senior Secured Credit Facilities,” which is calculated for the purposes of compliance with our debt covenants, and (ii) the Pre-VCP EBITDA and EBITDA metrics referenced in the section entitled “Compensation Discussion and Analysis” in our prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act on April 17, 2014, which are calculated for the purposes of our annual incentive compensation program and performance-based awards, respectively.

33


 

We define Adjusted Capital Expenditures as additions to property and equipment and capitalized implementation costs during the periods presented.

We define Free Cash Flow as cash provided by operating activities less cash used in additions to property and equipment. We define Adjusted Free Cash Flow as Free Cash Flow plus the cash flow effect of restructuring and other costs, litigation settlement and tax payments for certain items, other litigation costs, management fees and the working capital impact from the Expedia SMA and the sale of TPN (see “Factors Affecting our Results and Comparability —Travelocity Restructuring”).

These non-GAAP financial measures are key metrics used by management and our board of directors to monitor our ongoing core operations because historical results have been significantly impacted by events that are unrelated to our core operations as a result of changes to our business and the regulatory environment. We believe that these non-GAAP financial measures are used by investors, analysts and other interested parties as measures of financial performance and to evaluate our ability to service debt obligations, fund capital expenditures and meet working capital requirements. Adjusted Capital Expenditures includes cash flows used in investing activities, for property and equipment, and cash flows used in operating activities, for capitalized implementation costs. Our management uses this combined metric in making product investment decisions and determining development resource requirements. We also believe that Adjusted Gross Margin, Adjusted Net Income, Adjusted EBITDA and Adjusted Capital Expenditures assist investors in company-to-company and period-to-period comparisons by excluding differences caused by variations in capital structures (affecting interest expense), tax positions and the impact of depreciation and amortization expense. In addition, amounts derived from Adjusted EBITDA are a primary component of certain covenants under our senior secured credit facilities.

Adjusted Revenue, Adjusted Gross Margin, Adjusted Net Income, Adjusted EBITDA, Adjusted Capital Expenditures, Free Cash Flow, Adjusted Free Cash Flow and ratios based on these financial measures are not recognized terms under GAAP. These non-GAAP financial measures and ratios based on them have important limitations as analytical tools, and should not be viewed in isolation and do not purport to be alternatives to net income as indicators of operating performance or cash flows from operating activities as measures of liquidity. These non-GAAP financial measures and ratios based on them exclude some, but not all, items that affect net income or cash flows from operating activities and these measures may vary among companies. Our use of these measures has limitations as an analytical tool, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are:

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted Gross Margin and Adjusted EBITDA do not reflect cash requirements for such replacements;

Adjusted Net Income and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;

Adjusted EBITDA does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our indebtedness;

Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us;

Free Cash Flow and Adjusted Free Cash Flow do not reflect the cash requirements necessary to service the principal payments on our indebtedness;

Free Cash Flow and Adjusted Free Cash Flow do not reflect payments related to restructuring, litigation, management fees and Travelocity working capital which reduced the cash available to us;

Free Cash Flow and Adjusted Free Cash Flow remove the impact of accrual-basis accounting on asset accounts and non-debt liability accounts; and

other companies, including companies in our industry, may calculate Adjusted Revenue, Adjusted Gross Margin, Adjusted Net Income, Adjusted EBITDA, Adjusted Capital Expenditures, Free Cash Flow or Adjusted Free Cash Flow differently, which reduces their usefulness as comparative measures.

The following table sets forth the reconciliation of Adjusted Revenue to revenue (in thousands):

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Revenue

$

756,303

 

 

$

775,823

 

 

$

2,229,286

 

 

$

2,303,399

 

Amortization of Expedia SMA incentive payments

 

2,875

 

 

 

 

 

 

7,625

 

 

 

 

Adjusted Revenue

$

759,178

 

 

$

775,823

 

 

$

2,236,911

 

 

$

2,303,399

 

34


 

 

The following table sets forth the reconciliation of net income (loss) attributable to common shareholders to Adjusted Net Income and Adjusted EBITDA (in thousands):

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net income (loss) attributable to common shareholders

$

36,563

 

 

$

(3,870

)

 

$

11,442

 

 

$

(154,473

)

Loss (income) from discontinued operations, net of tax

 

1,736

 

 

 

(3,015

)

 

 

8,017

 

 

 

20,895

 

Net income attributable to noncontrolling interests(1)

 

720

 

 

 

714

 

 

 

2,168

 

 

 

2,135

 

Preferred stock dividends

 

 

 

 

9,242

 

 

 

11,381

 

 

 

27,219

 

Income (loss) from continuing operations

 

39,019

 

 

 

3,071

 

 

 

33,008

 

 

 

(104,224

)

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment

 

 

 

 

2,837

 

 

 

 

 

 

138,435

 

Acquisition related amortization(2a)

 

23,905

 

 

 

35,794

 

 

 

83,344

 

 

 

107,955

 

Loss on extinguishment of debt

 

 

 

 

 

 

 

33,538

 

 

 

12,181

 

Other, net (4)

 

(565

)

 

 

2,429

 

 

 

(760

)

 

 

1,099

 

Restructuring and other costs (5)

 

14,482

 

 

 

21,754

 

 

 

24,056

 

 

 

26,296

 

Litigation and taxes, including penalties(6)

 

4,440

 

 

 

8,579

 

 

 

12,497

 

 

 

31,543

 

Stock-based compensation

 

5,472

 

 

 

2,686

 

 

 

22,434

 

 

 

5,446

 

Management fees(7)

 

193

 

 

 

2,126

 

 

 

23,701

 

 

 

7,347

 

Amortization of Expedia SMA incentive payments

 

2,875

 

 

 

 

 

 

7,625

 

 

 

 

Tax impact of net income adjustments

 

(19,894

)

 

 

(27,539

)

 

 

(80,614

)

 

 

(78,381

)

Adjusted Net Income from continuing operations

$

69,927

 

 

$

51,737

 

 

$

158,829

 

 

$

147,697

 

Adjusted Net Income from continuing operations

   per share

$

0.26

 

 

$

0.28

 

 

$

0.67

 

 

$

0.80

 

Weighted-average shares outstanding adjusted for

   assumed inclusion of common stock equivalents

 

273,330

 

 

 

185,322

 

 

 

237,994

 

 

 

184,893

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Net Income from continuing operations

$

69,927

 

 

$

51,737

 

 

$

158,829

 

 

$

147,697

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization of property and equipment(2b)

 

39,524

 

 

 

32,936

 

 

 

122,409

 

 

 

97,687

 

Amortization of capitalized implementation costs(2c)

 

9,084

 

 

 

8,437

 

 

 

27,111

 

 

 

27,038

 

Amortization of upfront incentive consideration(3)

 

10,388

 

 

 

9,385

 

 

 

33,177

 

 

 

28,736

 

Interest expense, net

 

50,153

 

 

 

63,454

 

 

 

167,332

 

 

 

209,653

 

Remaining provision (benefit) for income taxes

 

50,850

 

 

 

35,400

 

 

 

108,492

 

 

 

73,152

 

Adjusted EBITDA

$

229,926

 

 

$

201,349

 

 

$

617,350

 

 

$

583,963

 

 

The following table sets forth the reconciliation of GAAP basic weighted-average common shares outstanding to the adjusted weighted-average shares outstanding for the assumed inclusion of common stock equivalents (in thousands):

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

GAAP basic weighted-average common shares outstanding

 

264,768

 

 

 

178,140

 

 

 

229,405

 

 

 

178,051

 

   Dilutive effect of stock options and restricted stock awards

 

8,562

 

 

 

7,182

 

 

 

8,589

 

 

 

6,842

 

Weighted-average common shares outstanding adjusted

   for assumed inclusion of common stock equivalents

 

273,330

 

 

 

185,322

 

 

 

237,994

 

 

 

184,893

 

35


 

The following tables set forth the reconciliation of Adjusted Gross Margin and Adjusted EBITDA by business segment to operating income (loss) in our statement of operations (in thousands):

 

 

Three Months Ended September 30, 2014

 

 

Travel

Network

 

 

Airline and

Hospitality

Solutions

 

 

Travelocity

 

 

Eliminations

 

 

Corporate

 

 

Total

 

Operating income (loss)

$

164,979

 

 

$

55,640

 

 

$

11,957

 

 

$

 

 

$

(115,880

)

 

$

116,696

 

Add back:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

26,583

 

 

 

13,236

 

 

 

50,059

 

 

 

(41

)

 

 

79,346

 

 

 

169,183

 

Restructuring charges

 

 

 

 

 

 

 

 

 

 

 

 

 

4,735

 

 

 

4,735

 

Cost of revenue adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization(2)

 

14,264

 

 

 

25,871

 

 

 

1,122

 

 

 

 

 

 

5,995

 

 

 

47,252

 

Amortization of upfront incentive

   consideration(3)

 

10,388

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,388

 

Restructuring and other costs (5)

 

 

 

 

 

 

 

 

 

 

 

 

 

4,865

 

 

 

4,865

 

Litigation and taxes, including penalties(6)

 

 

 

 

 

 

 

 

 

 

 

 

 

188

 

 

 

188

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

2,172

 

 

 

2,172

 

Amortization of Expedia SMA incentive payments

 

 

 

 

 

 

 

2,875

 

 

 

 

 

 

 

 

 

2,875

 

Adjusted Gross Margin

 

216,214

 

 

 

94,747

 

 

 

66,013

 

 

 

(41

)

 

 

(18,579

)

 

 

358,354

 

Selling, general and administrative

 

(26,583

)

 

 

(13,236

)

 

 

(50,059

)

 

 

41

 

 

 

(79,346

)

 

 

(169,183

)

Joint venture equity income

 

2,867

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,867

 

Joint venture intangible amortization(2a)

 

801

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

801

 

Selling, general and administrative adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization(2)

 

524

 

 

 

160

 

 

 

 

 

 

 

 

 

23,776

 

 

 

24,460

 

Restructuring and other costs (5)

 

 

 

 

 

 

 

 

 

 

 

 

 

4,882

 

 

 

4,882

 

Litigation and taxes, including penalties(6)

 

 

 

 

 

 

 

 

 

 

 

 

 

4,252

 

 

 

4,252

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

3,300

 

 

 

3,300

 

Management fees(7)

 

 

 

 

 

 

 

 

 

 

 

 

 

193

 

 

 

193

 

Adjusted EBITDA

$

193,823

 

 

$

81,671

 

 

$

15,954

 

 

$

 

 

$

(61,522

)

 

$

229,926

 

 

  

 

Three Months Ended September 30, 2013

 

 

Travel

Network

 

 

Airline and

Hospitality

Solutions

 

 

Travelocity

 

 

Eliminations

 

 

Corporate

 

 

Total

 

Operating income (loss)

$

158,476

 

 

$

37,087

 

 

 

6,166

 

 

$

 

 

$

(126,755

)

 

$

74,974

 

Add back:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

27,024

 

 

 

9,153

 

 

 

95,412

 

 

 

(123

)

 

 

76,567

 

 

 

208,033

 

Impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

2,837

 

 

 

2,837

 

Restructuring charges

 

 

 

 

 

 

 

 

 

 

 

 

 

15,889

 

 

 

15,889

 

Cost of revenue adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization(2)

 

12,621

 

 

 

18,299

 

 

 

1,132

 

 

 

 

 

 

17,369

 

 

 

49,421

 

Amortization of upfront incentive

   consideration(3)

 

9,385

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,385

 

Restructuring and other costs (5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,582

 

 

 

2,582

 

Litigation and taxes, including penalties(6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,389

 

 

 

5,389

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

544

 

 

 

544

 

Adjusted Gross Margin

 

207,506

 

 

 

64,539

 

 

 

102,710

 

 

 

(123

)

 

 

(5,578

)

 

 

369,054

 

Selling, general and administrative

 

(27,024

)

 

 

(9,153

)

 

 

(95,412

)

 

 

123

 

 

 

(76,567

)

 

 

(208,033

)

Joint venture equity income

 

1,841

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,841

 

Joint venture intangible amortization(2a)

 

801

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

801

 

Selling, general and administrative adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization(2)

 

604

 

 

 

1,554

 

 

 

105

 

 

 

 

 

 

24,682

 

 

 

26,945

 

Restructuring and other costs (5)

 

 

 

 

 

 

 

 

 

 

 

 

 

3,283

 

 

 

3,283

 

Litigation and taxes, including penalties(6)

 

 

 

 

 

 

 

 

 

 

 

 

 

3,190

 

 

 

3,190

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

2,142

 

 

 

2,142

 

Management fees(7)

 

 

 

 

 

 

 

 

 

 

 

 

 

2,126

 

 

 

2,126

 

Adjusted EBITDA

$

183,728

 

 

$

56,940

 

 

$

7,403

 

 

$

 

 

$

(46,722

)

 

$

201,349

 

 

 

36


 

 

Nine Months Ended September 30, 2014

 

 

Travel

Network

 

 

Airline and

Hospitality

Solutions

 

 

Travelocity

 

 

Eliminations

 

 

Corporate

 

 

Total

 

Operating income (loss)

$

515,093

 

 

$

117,957

 

 

$

(29,326

)

 

$

 

 

$

(352,095

)

 

$

251,629

 

Add back:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

76,810

 

 

 

38,555

 

 

 

202,240

 

 

 

(7,498

)

 

 

265,306

 

 

 

575,413

 

Restructuring charges

 

 

 

 

 

 

 

 

 

 

 

 

 

2,325

 

 

 

2,325

 

Cost of revenue adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization(2)

 

44,943

 

 

 

79,034

 

 

 

3,585

 

 

 

 

 

 

29,584

 

 

 

157,146

 

Amortization of upfront incentive

   consideration(3)

 

33,177

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33,177

 

Restructuring and other costs (5)

 

 

 

 

 

 

 

 

 

 

 

 

 

10,016

 

 

 

10,016

 

Litigation and taxes, including penalties(6)

 

 

 

 

 

 

 

 

 

 

 

 

 

1,127

 

 

 

1,127

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

5,618

 

 

 

5,618

 

Amortization of Expedia SMA incentive

   payments

 

 

 

 

 

 

 

7,625

 

 

 

 

 

 

 

 

 

7,625

 

Adjusted Gross Margin

 

670,023

 

 

 

235,546

 

 

 

184,124

 

 

 

(7,498

)

 

 

(38,119

)

 

 

1,044,076

 

Selling, general and administrative

 

(76,810

)

 

 

(38,555

)

 

 

(202,240

)

 

 

7,498

 

 

 

(265,306

)

 

 

(575,413

)

Joint venture equity income

 

9,367

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,367

 

Joint venture intangible amortization(2a)

 

2,403

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,403

 

Selling, general and administrative adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization(2)

 

1,654

 

 

 

695

 

 

 

 

 

 

 

 

 

70,966

 

 

 

73,315

 

Restructuring and other costs (5)

 

 

 

 

 

 

 

 

 

 

 

 

 

11,715

 

 

 

11,715

 

Litigation and taxes, including penalties(6)

 

 

 

 

 

 

 

 

 

 

 

 

 

11,370

 

 

 

11,370

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

16,816

 

 

 

16,816

 

Management fees(7)

 

 

 

 

 

 

 

 

 

 

 

 

 

23,701

 

 

 

23,701

 

Adjusted EBITDA

$

606,637

 

 

$

197,686

 

 

$

(18,116

)

 

$

 

 

$

(168,857

)

 

$

617,350

 

 

  

 

Nine Months Ended September 30, 2013

 

 

Travel

Network

 

 

Airline and

Hospitality

Solutions

 

 

Travelocity

 

 

Eliminations

 

 

Corporate

 

 

Total

 

Operating income (loss)

$

505,446

 

 

$

88,260

 

 

$

(1,298

)

 

$

 

 

$

(486,801

)

 

$

105,607

 

Add back:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

82,204

 

 

 

39,784

 

 

 

271,839

 

 

 

(514

)

 

 

226,913

 

 

 

620,226

 

Impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

138,435

 

 

 

138,435

 

Restructuring charges

 

 

 

 

 

 

 

 

 

 

 

 

 

15,889

 

 

 

15,889

 

Cost of revenue adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization(2)

 

36,182

 

 

 

55,193

 

 

 

7,354

 

 

 

 

 

 

51,712

 

 

 

150,441

 

Amortization of upfront incentive

   consideration(3)

 

28,736

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28,736

 

Restructuring and other costs (5)

 

 

 

 

 

 

 

 

 

 

 

 

 

4,521

 

 

 

4,521

 

Litigation and taxes, including penalties(6)

 

 

 

 

 

 

 

 

 

 

 

 

 

19,864

 

 

 

19,864

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

816

 

 

 

816

 

Adjusted Gross Margin

 

652,568

 

 

 

183,237

 

 

 

277,895

 

 

 

(514

)

 

 

(28,651

)

 

 

1,084,535

 

Selling, general and administrative

 

(82,204

)

 

 

(39,784

)

 

 

(271,839

)

 

 

514

 

 

 

(226,913

)

 

 

(620,226

)

Joint venture equity income

 

7,873

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,873

 

Joint venture intangible amortization(2a)

 

2,403

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,403

 

Selling, general and administrative adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization(2)

 

1,628

 

 

 

2,032

 

 

 

1,472

 

 

 

 

 

 

74,704

 

 

 

79,836

 

Restructuring and other costs (5)

 

 

 

 

 

 

 

 

 

 

 

 

 

5,886

 

 

 

5,886

 

Litigation and taxes, including penalties(6)

 

 

 

 

 

 

 

 

 

 

 

 

 

11,679

 

 

 

11,679

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

4,630

 

 

 

4,630

 

Management fees(7)

 

 

 

 

 

 

 

 

 

 

 

 

 

7,347

 

 

 

7,347

 

Adjusted EBITDA

$

582,268

 

 

$

145,485

 

 

$

7,528

 

 

$

 

 

$

(151,318

)

 

$

583,963

 

 

37


 

The components of Adjusted Capital Expenditures are presented below (in thousands):

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Additions to property and equipment

$

49,802

 

 

$

57,257

 

 

$

160,385

 

 

$

168,744

 

Capitalized implementation costs

 

10,005

 

 

 

10,023

 

 

 

27,602

 

 

 

48,686

 

Adjusted Capital Expenditures

$

59,807

 

 

$

67,280

 

 

$

187,987

 

 

$

217,430

 

 

The following tables present information from our statements of cash flows and sets forth the reconciliation of Free Cash Flow and Adjusted Free Cash Flow to cash provided by operating activities, the most directly comparable GAAP measure (in thousands):

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

Cash provided by operating activities

$

121,679

 

 

$

252,062

 

Cash used in investing activities

 

(191,949

)

 

 

(189,220

)

Cash (used in) provided by financing activities

 

(59,289

)

 

 

274,717

 

  

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

Cash provided by operating activities

$

121,679

 

 

$

252,062

 

Additions to property and equipment

 

(160,385

)

 

 

(168,744

)

Free Cash Flow

 

(38,706

)

 

 

83,318

 

Adjustments:

 

 

 

 

 

 

 

Restructuring and other costs(5) (9)

 

38,527

 

 

 

12,933

 

Litigation settlement and tax payments for certain items(6) (10)

 

69,286

 

 

 

46,221

 

Other litigation costs(6) (9)

 

11,148

 

 

 

10,668

 

Management fees(7) (9)

 

23,701

 

 

 

7,347

 

Travelocity working capital as impacted by the Expedia SMA

   and the sale of TPN(8)

 

100,145

 

 

 

 

Adjusted Free Cash Flow

$

204,101

 

 

$

160,487

 

 

  

 

(1)

Net income attributable to noncontrolling interests represents an adjustment to include earnings allocated to noncontrolling interests held in Sabre Travel Network Middle East of 40% for all periods presented and in Sabre Seyahat Dagitim Sistemleri A.S. of 40% beginning in April 2014 for the three and nine months ended September 30, 2014.

(2)

Depreciation and amortization expenses:

a.

Acquisition related amortization represents amortization of intangible assets from the take-private transaction in 2007 as well as intangibles associated with acquisitions since that date and amortization of the excess basis in our underlying equity in joint ventures.

b.

Depreciation and amortization of property and equipment includes software developed for internal use.

c.

Amortization of capitalized implementation costs represents amortization of upfront costs to implement new customer contracts under our SaaS and hosted revenue model.

(3)

Our Travel Network business at times provides upfront incentive consideration to travel agency subscribers at the inception or modification of a service contract, which are capitalized and amortized to cost of revenue over an average expected life of the service contract, generally over three to five years. Such consideration is made with the objective of increasing the number of clients or to ensure or improve customer loyalty. Such service contract terms are established such that the supplier and other fees generated over the life of the contract will exceed the cost of the incentive consideration provided upfront. Such service contracts with travel agency subscribers require that the customer commit to achieving certain economic objectives and generally have terms requiring repayment of the upfront incentive consideration if those objectives are not met.

(4)

Other, net primarily represents foreign exchange gains and losses related to the remeasurement of foreign currency denominated balances included in our consolidated balance sheets into the relevant functional currency.

(5)

Restructuring and other costs represents charges associated with business restructuring and associated changes implemented which resulted in severance benefits related to employee terminations, integration and facility opening or closing costs and other business reorganization costs.

(6)

Litigation settlement and tax payments for certain items represent charges or settlements associated with airline antitrust litigation as well as payments or reserves taken in relation to certain retroactive hotel occupancy and excise tax disputes.

(7)

We paid an annual management fee to TPG Global, LLC (“TPG”) and Silver Lake Management Company (“Silver Lake”) in an amount between (i) $5 million and (ii) $7 million, the actual amount of which is calculated based upon 1% of Adjusted EBITDA, as defined in the management services agreement (the “MSA”), earned by the company in such fiscal year up to a maximum of $7 million. In addition, the MSA provided for the reimbursement of certain costs incurred by TPG and Silver Lake, which are included in this line item. The MSA was terminated in connection with our initial public offering.

38


 

(8)

Represents the impact of the Expedia SMA and the sale of TPN on working capital for the nine months ended September 30, 2014, which is primarily attributable to the migration of bookings from our technology platform to Expedia’s platform and wind down activities associated with TPN (see “Factors Affecting our Results and Comparability—Travelocity Restructuring”).

(9)

The adjustments to reconcile cash provided by operating activities to Adjusted Free Cash Flow reflect the amounts expensed in our statements of operations in the respective periods adjusted for cash and non-cash portions in instances where material.

(10)

Includes payment credits used by American Airlines to pay for purchases of our technology services during the nine months ended September 30, 2014 and 2013. The payment credits were provided by us as part of our litigation settlement with American Airlines. Also includes a $50 million payment to American Airlines made in the third quarter of 2014 in conjunction with the new Airline Solutions contract, which will be amortized as a reduction to revenue over the contract term. This payment reduces payment credits originally offered to American Airlines as a part of the litigation settlement in 2012, contingent upon the signature of a new reservation agreement, which were extended to include the combined American Airlines and US Airways reservation contract. The payment credits would have been utilized for future billings under the new agreement.

 

Results of Operations

The following table sets forth our consolidated statement of operations data for each of the periods presented:

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

(Amounts in thousands)

 

Revenue

$

756,303

 

 

$

775,823

 

 

$

2,229,286

 

 

$

2,303,399

 

Cost of revenue

 

465,689

 

 

 

474,090

 

 

 

1,399,919

 

 

 

1,423,242

 

Selling, general and administrative

 

169,183

 

 

 

208,033

 

 

 

575,413

 

 

 

620,226

 

Impairment

 

 

 

 

2,837

 

 

 

 

 

 

138,435

 

Restructuring charges

 

4,735

 

 

 

15,889

 

 

 

2,325

 

 

 

15,889

 

Operating income

 

116,696

 

 

 

74,974

 

 

 

251,629

 

 

 

105,607

 

Interest expense, net

 

(50,153

)

 

 

(63,454

)

 

 

(167,332

)

 

 

(209,653

)

Loss on extinguishment of debt

 

 

 

 

 

 

 

(33,538

)

 

 

(12,181

)

Joint venture equity income

 

2,867

 

 

 

1,841

 

 

 

9,367

 

 

 

7,873

 

Other, net

 

565

 

 

 

(2,429

)

 

 

760

 

 

 

(1,099

)

Income (loss) from continuing operations

   before income taxes

 

69,975

 

 

 

10,932

 

 

 

60,886

 

 

 

(109,453

)

Provision (benefit) for income taxes

 

30,956

 

 

 

7,861

 

 

 

27,878

 

 

 

(5,229

)

Income (loss) from continuing operations

$

39,019

 

 

$

3,071

 

 

$

33,008

 

 

$

(104,224

)

 

Three Months Ended September 30, 2014 and 2013

Revenue

 

 

Three Months Ended

September 30,

 

 

 

 

 

2014

 

 

2013

 

 

Change

 

 

(Amounts in thousands)

 

 

 

 

 

 

 

 

 

Revenue by Segment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Travel Network

$

466,278

 

 

$

449,562

 

 

$

16,716

 

 

 

4

%

Airline and Hospitality Solutions

 

208,685

 

 

 

182,505

 

 

 

26,180

 

 

 

14

%

Travelocity

 

88,853

 

 

 

160,811

 

 

 

(71,958

)

 

 

(45

)%

Eliminations

 

(4,638

)

 

 

(17,055

)

 

 

12,417

 

 

 

73

%

Total Adjusted Revenue

 

759,178

 

 

 

775,823

 

 

 

(16,645

)

 

 

(2

)%

Amortization of Expedia SMA incentive payments

 

(2,875

)

 

 

 

 

 

(2,875

)

 

**

%

Total revenue

$

756,303

 

 

$

775,823

 

 

$

(19,520

)

 

 

(3

)%

  

 

**  not meaningful

Revenue decreased $20 million, or 3%, for the three months ended September 30, 2014 compared to the same period in the prior year.

39


 

Travel Network—Revenue increased $17 million, or 4%, for the three months ended September 30, 2014 compared to the same period in the prior year.

The $17 million increase in revenue primarily resulted from:

a $10 million increase in transaction-based revenue to $407 million as a result of a 3% increase in Direct Billable Bookings to 95 million in the three months ended September 30, 2014 driven by growth in all regions partially offset by the decline in air travel in Venezuela. The increase in Direct Billable Bookings was partially offset by a decrease in the average booking fee, primarily due to the impact on our average booking fee from the US Airways merger with American Airlines; and

a $7 million increase in other revenue primarily related to media and marketing services and also certain services we provide to our joint ventures.

Airline and Hospitality Solutions—Revenue increased $26 million, or 14%, for the three months ended September 30, 2014 compared to the same period in the prior year.

The $26 million increase in revenue primarily resulted from:

a $15 million increase in Airline Solutions’ SabreSonic Customer Sales and Service (“SabreSonic CSS”) revenue for the three months ended September 30, 2014 compared to the same period in the prior year. PBs increased 10 million, or 8%, to 137 million for the three months ended September 30, 2014 which resulted in an increase in revenue of $6 million. The increase in PBs was driven by growth from existing customers. In addition, we recognized $9 million in revenue during the three months ended September 30, 2014 associated with the extension of a services contract with a significant customer. This contract was extended in conjunction with a litigation settlement agreement with that customer in 2012. These increases in revenue were partially offset by a decrease in professional services provided to SabreSonic CSS customers;

a $6 million increase in Airline Solutions’ commercial and operations solutions revenue, primarily the result of higher revenue from professional services; and

a $5 million increase in Hospitality Solutions revenue for the three months ended September 30, 2014 compared to the same period in the prior year driven by an increase in Central Reservation System (“CRS”) transactions.

Travelocity—Revenue decreased $72 million, or 45%, for the three months ended September 30, 2014 compared to the same period in the prior year. The decrease in revenue was primarily due to a $39 million decrease as a result of the restructuring of our Travelocity business in the U.S. and Canada where we shifted from the merchant revenue model to the marketing fee revenue model in connection with the Expedia SMA. In addition, revenue decreased $31 million due to the sale of Travelocity’s TPN business in February 2014.

Eliminations—Intersegment eliminations decreased $12 million, or 73%, for the three months ended September 30, 2014 compared to the prior year due to a reduction in the amount of incentive consideration payable to Travelocity from Travel Network as a result of the change in Travelocity’s business model. Air travel booked through our Travelocity-branded websites powered by Expedia is contractually required to be processed by Travel Network through the beginning of 2019.

Cost of revenue

 

 

Three Months Ended

September 30,

 

 

 

 

 

2014

 

 

2013

 

 

Change

 

 

(Amounts in thousands)

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Travel Network

$

250,063

 

 

$

242,056

 

 

$

8,007

 

 

 

3

%

Airline and Hospitality Solutions

 

113,937

 

 

 

117,967

 

 

 

(4,030

)

 

 

(3

)%

Travelocity

 

23,166

 

 

 

58,101

 

 

 

(34,935

)

 

 

(60

)%

Eliminations

 

(4,595

)

 

 

(16,932

)

 

 

12,337

 

 

 

73

%

Total segment cost of revenue

 

382,571

 

 

 

401,192

 

 

 

(18,621

)

 

 

(5

)%

Corporate

 

25,478

 

 

 

14,092

 

 

 

11,386

 

 

 

81

%

Depreciation and amortization

 

47,252

 

 

 

49,421

 

 

 

(2,169

)

 

 

(4

)%

Amortization of upfront incentive consideration

 

10,388

 

 

 

9,385

 

 

 

1,003

 

 

 

11

%

Total cost of revenue

$

465,689

 

 

$

474,090

 

 

$

(8,401

)

 

 

(2

)%

40


 

Cost of revenue decreased by $8 million, or 2%, for the three months ended September 30, 2014 compared to the same period in the prior year.

Travel Network—Cost of revenue increased $8 million, or 3%, for the three months ended September 30, 2014 compared to the same period in the prior year. The increase primarily resulted from an $8 million increase in incentive consideration.

Airline and Hospitality Solutions—Cost of revenue decreased $4 million, or 3%, for the three months ended September 30, 2014 compared to the same period in the prior year. The decrease is the result of a $6 million decrease in labor costs, partially offset by a $2 million increase in technology and transaction-related expenses driven by higher transaction volumes.

Travelocity—Cost of revenue decreased $35 million, or 60%, for the three months ended September 30, 2014 compared to the same period in the prior year primarily due to the impact of the Expedia SMA and the sale of our TPN and TBiz businesses. The decrease in cost of revenue is primarily driven by reduced labor and call center costs, lower transaction-related expenses including credit card fees and lower data processing costs.

Eliminations—Intersegment eliminations decreased $12 million, or 73%, for the three months ended September 30, 2014 compared to the prior year due to a reduction in the amount of incentive consideration payable to Travelocity from Travel Network as a result of the change in Travelocity’s business model. Air travel booked through our Travelocity-branded websites powered by Expedia is contractually required to be processed by Travel Network through the beginning of 2019.

Corporate—Cost of revenue associated with corporate unallocated costs increased $11 million, or 81%, for the three months ended September 30, 2014 compared to the same period in the prior year. The increase is primarily due to a $7 million settlement received in the same period of the prior year from a service provider and an increase of $7 million in unallocated labor costs compared to the same period of the prior year, partially offset by a decrease of $5 million in expenses associated with the general excise tax litigation with the State of Hawaii compared to the same period in the prior year.

Depreciation and amortization—Depreciation and amortization decreased $2 million, or 4%, for the three months ended September 30, 2014 compared to the same period in the prior year. The decrease is primarily due to a decrease in amortization of acquisition-related intangible assets, partially offset by an increase driven by the completion and amortization of software developed for internal use.

Amortization of upfront incentive consideration—Amortization of upfront incentive consideration increased $1 million, or 11%, for the three months ended September 30, 2014 compared to the same period in the prior year. The increase is primarily due to an increase in upfront consideration provided to travel agencies in the three months ended September 30, 2014 compared to the prior year.

Selling, general and administrative expenses

 

 

Three Months Ended

September 30,

 

 

 

 

 

2014

 

 

2013

 

 

Change

 

 

(Amounts in thousands)

 

 

 

 

 

 

 

 

 

Personnel

$

63,257

 

 

$

71,738

 

 

$

(8,481

)

 

 

(12

)%

Advertising and promotion

 

34,834

 

 

 

41,007

 

 

 

(6,173

)

 

 

(15

)%

Commission payments to affiliates

 

4,521

 

 

 

22,281

 

 

 

(17,760

)

 

 

(80

)%

Bad debt

 

2,717

 

 

 

(127

)

 

 

2,844

 

 

 

**

%

Management fees

 

193

 

 

 

5,221

 

 

 

(5,028

)

 

 

(96

)%

Other

 

39,201

 

 

 

40,968

 

 

 

(1,767

)

 

 

(4

)%

Depreciation and amortization

 

24,460

 

 

 

26,945

 

 

 

(2,485

)

 

 

(9

)%

Total selling, general and administrative

$

169,183

 

 

$

208,033

 

 

$

(38,850

)

 

 

(19

)%

  

 

**  not meaningful

Selling, general and administrative expenses decreased by $39 million, or 19%, for the three months ended September 30, 2014 compared to the same period in the prior year. The decrease was primarily due to a decrease of $18 million in commission payments to affiliates mainly as a result of the sale of our TPN business in February 2014, a decrease of $8 million in personnel costs primarily in Travelocity due to our restructuring activities, a $6 million decrease in advertising and promotion due to reduced advertising activity in channels with lower profitability and a $5 million decrease in management fees paid to TPG and Silver Lake.

41


 

Impairment

 

 

Three Months Ended

September 30,

 

 

 

 

 

2014

 

 

2013

 

 

Change

 

 

(Amounts in thousands)

 

 

 

 

 

 

 

 

 

Impairment

$

 

 

$

2,837

 

 

$

(2,837

)

 

 

**

%

  

 

**  not meaningful

During the three months ended September 30, 2013, we recorded a $3 million impairment charge of software developed for internal use and other definite-lived intangible assets associated with Travelocity—Europe.

Interest expense, net

 

 

Three Months Ended

September 30,

 

 

 

 

 

2014

 

 

2013

 

 

Change

 

 

(Amounts in thousands)

 

 

 

 

 

 

 

 

 

Interest expense, net

$

50,153

 

 

$

63,454

 

 

$

(13,301

)

 

 

(21

)%

 

Interest expense, net, decreased $13 million, or 21%, for the three months ended September 30, 2014 compared to the same period in the prior year. The decrease is primarily the result of the prepayments on our 2019 Notes and Term Loan C and a lower effective interest rate as a result of the Repricing Amendments completed in February 2014.

Joint venture equity income

 

 

Three Months Ended

September 30,

 

 

 

 

 

2014

 

 

2013

 

 

Change

 

 

(Amounts in thousands)

 

 

 

 

 

 

 

 

 

Joint venture equity income

$

2,867

 

 

$

1,841

 

 

$

1,026

 

 

 

56

%

 

Joint venture equity income increased by $1 million for the three months ended September 30, 2014 compared to the same period in the prior year.

Other (income) expenses, net

 

 

Three Months Ended

September 30,

 

 

 

 

2014

 

 

2013

 

 

Change

 

(Amounts in thousands)

 

 

 

 

 

 

 

Other (income) expenses, net

$

(565

)

 

$

2,429

 

 

$

(2,994

)

 

**%

  

 

**  not meaningful

Other (income) expenses, net, increased $3 million for the three months ended September 30, 2014 compared to the prior year. The increase was driven primarily by realized and unrealized foreign currency exchange gains.

42


 

Provision for income taxes

 

 

Three Months Ended

September 30,

 

 

 

 

2014

 

 

2013

 

 

Change

 

(Amounts in thousands)

 

 

 

 

 

 

 

Provision for income taxes

$

30,956

 

 

$

7,861

 

 

$

23,095

 

 

**%

 

  

 

**  not meaningful

Our effective tax rates for the three months ended September 30, 2014 and 2013 were 44% and 72%, respectively. The decrease in the effective tax rate for the three months ended September 30, 2014 as compared to the same period in 2013 was primarily due to an increase in forecasted earnings in lower tax jurisdictions and a decrease in nondeductible losses and other discrete tax items relative to the amount of pre-tax income.

The differences between our effective tax rates and the U.S. federal statutory income tax rate primarily result from our geographic mix of taxable income in various tax jurisdictions as well as the discrete tax items referenced above.

Nine Months Ended September 30, 2014 and 2013

Revenue

 

 

Nine Months Ended

September 30,

 

 

 

 

 

2014

 

 

2013

 

 

Change

 

 

(Amounts in thousands)

 

 

 

 

 

 

 

 

 

Revenue by Segment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Travel Network

$

1,420,341

 

 

$

1,381,105

 

 

$

39,236

 

 

 

3

%

Airline and Hospitality Solutions

 

571,975

 

 

 

522,794

 

 

 

49,181

 

 

 

9

%

Travelocity

 

268,848

 

 

 

457,518

 

 

 

(188,670

)

 

 

(41

)%

Eliminations

 

(24,253

)

 

 

(58,018

)

 

 

33,765

 

 

 

58

%

Total Adjusted Revenue

 

2,236,911

 

 

 

2,303,399

 

 

 

(66,488

)

 

 

(3

)%

Amortization of Expedia SMA incentive payments

 

(7,625

)

 

 

 

 

 

(7,625

)

 

**

%

Total revenue

$

2,229,286

 

 

$

2,303,399

 

 

$

(74,113

)

 

 

(3

)%

  

 

**  not meaningful

Revenue decreased $74 million, or 3%, for the nine months ended September 30, 2014 compared to the same period in the prior year.

Travel Network—Revenue increased $39 million, or 3%, for the nine months ended September 30, 2014 compared to the same period in the prior year.

The $39 million increase in revenue primarily resulted from:

a $20 million increase in transaction-based revenue to $1,242 million as a result of a 7 million increase in Direct Billable Bookings, or 3%, to 292 million for the nine months ended September 30, 2014. This increase was offset by a 1% decrease in the average booking fee primarily due to the resolution of a billing dispute with US Airways, the impact on our average booking fee from US Airways merger with American Airlines and the unfavorable political and economic environment in Venezuela. See “Liquidity and Capital Resources—Political and Economic Environment in Venezuela” for a description of the impact of the environment in Venezuela to our business;

a $12 million increase in other revenue primarily related to media and marketing services and also certain services we provide to our joint ventures; and

a $7 million increase due to an intersegment fee charged by Travel Network to Travelocity in the second quarter of 2014 for not meeting certain minimum booking levels, which is a customary fee charged to travel agencies that process bookings through our GDS as a result of not meeting contractual minimum booking levels. This fee, which we do not expect to reoccur in subsequent periods, was recorded as revenue on Travel Network and expensed on Travelocity in our segment results and is eliminated in consolidation.

43


 

Airline and Hospitality Solutions—Revenue increased $49 million, or 9%, for the nine months ended September 30, 2014 compared to the same period in the prior year.

The $49 million increase in revenue primarily resulted from:

a $22 million increase in Airline Solutions’ SabreSonic CSS revenue for the nine months ended September 30, 2014 compared to the same period in the prior year. PBs increased 27 million, or 8%, to 386 million for the nine months ended September 30, 2014 which resulted in an increase in revenue of $13 million. The increase in PBs was driven by growth from existing customers. In addition, we recognized $9 million in revenue during the three months ended September 30, 2014 associated with the extension of a services contract with a significant customer. This contract was extended in conjunction with a litigation settlement agreement with that customer in 2012. These increases were partially offset by a decrease in revenue from professional services;

a $15 million increase in Airline Solutions’ commercial and operations solutions revenue, primarily the result of higher revenue from professional services combined with growth in operations solutions; and

a $12 million increase in Hospitality Solutions revenue for the nine months ended September 30, 2014 compared to the same period in the prior year driven by an increase in CRS transactions.

Travelocity—Revenue decreased $189 million, or 41%, for the nine months ended September 30, 2014 compared to the same period in the prior year. The decrease in revenue was primarily due to a $105 million decrease as a result of the restructuring of our Travelocity business discussed above, as well as a decrease of $83 million due to the sale of both Travelocity’s TPN business in February of 2014 and TBiz in June of 2013.

Eliminations—Intersegment eliminations decreased $34 million, or 58%, for the nine months ended September 30, 2014 compared to the prior year due to a reduction in the amount of incentive consideration payable to Travelocity from Travel Network as a result of the change in Travelocity’s business model. Air travel booked through our Travelocity-branded websites powered by Expedia is contractually required to be processed by Travel Network through the beginning of 2019. The reduction in incentive consideration payable was partially offset by the $7 million fee Travel Network charged to Travelocity discussed above.

Cost of revenue

 

 

Nine Months Ended

September 30,

 

 

 

 

 

2014

 

 

2013

 

 

Change

 

 

(Amounts in thousands)

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Travel Network

$

750,318

 

 

$

728,496

 

 

$

21,822

 

 

 

3

%

Airline and Hospitality Solutions

 

336,429

 

 

 

339,554

 

 

 

(3,125

)

 

 

(1

)%

Travelocity

 

84,722

 

 

 

179,623

 

 

 

(94,901

)

 

 

(53

)%

Eliminations

 

(16,754

)

 

 

(57,505

)

 

 

40,751

 

 

 

71

%

Total segment cost of revenue

 

1,154,715

 

 

 

1,190,168

 

 

 

(35,453

)

 

 

(3

)%

Corporate

 

54,881

 

 

 

53,897

 

 

 

984

 

 

 

2

%

Depreciation and amortization

 

157,146

 

 

 

150,441

 

 

 

6,705

 

 

 

4

%

Amortization of upfront incentive consideration

 

33,177

 

 

 

28,736

 

 

 

4,441

 

 

 

15

%

Total cost of revenue

$

1,399,919

 

 

$

1,423,242

 

 

$

(23,323

)

 

 

(2

)%

 

Cost of revenue decreased by $23 million, or 2%, for the nine months ended September 30, 2014 compared to the same period in the prior year.

Travel Network—Cost of revenue increased $22 million, or 3%, for the nine months ended September 30, 2014 compared to the same period in the prior year. The increase primarily resulted from a $27 million increase in incentive consideration, partially offset by a decrease in labor and other costs.

Airline and Hospitality Solutions—Cost of revenue decreased $3 million, or 1%, for the nine months ended September 30, 2014 compared to the same period in the prior year. The decrease is the result of a $11 million decrease in labor costs, partially offset by a $7 million increase in technology and transaction-related expenses driven by higher transaction volumes.

Travelocity—Cost of revenue decreased $95 million, or 53%, for the nine months ended September 30, 2014 compared to the same period in the prior year primarily due to the impact of the Expedia SMA and the sale of our TPN and TBiz businesses. The

44


 

decrease in cost of revenue is primarily driven by reduced labor and call center costs, lower transaction-related expenses including credit card fees and lower data processing costs.

Eliminations—Intersegment eliminations decreased $41 million, or 71%, for the nine months ended September 30, 2014 compared to the prior year due to a reduction in the amount of incentive consideration payable to Travelocity from Travel Network as a result of the change in Travelocity’s business model. Air travel booked through our Travelocity-branded websites powered by Expedia is contractually required to be processed by Travel Network through the beginning of 2019.

Corporate—Cost of revenue associated with corporate unallocated costs increased $1 million, or 2%, for the nine months ended September 30, 2014 compared to the same period in the prior year. The increase is primarily due to a $13 million increase in unallocated labor and other costs and a $7 million settlement received from a service provider in the same period of the prior year, partially offset by a $19 million decrease in expenses associated with the general excise tax litigation with the State of Hawaii compared to the same period in the prior year.

Depreciation and amortization—Depreciation and amortization increased $7 million, or 4%, for the nine months ended September 30, 2014 compared to the same period in the prior year. The increase is primarily due to the completion and amortization of software developed for internal use, partially offset by a decrease in amortization of intangible assets.

Amortization of upfront incentive consideration—Amortization of upfront incentive consideration increased $4 million, or 15%, for the nine months ended September 30, 2014 compared to the same period in the prior year. The increase is primarily due to an increase in upfront consideration provided to travel agencies in the nine months ended September 30, 2014 compared to the prior year.

Selling, general and administrative expenses

 

 

Nine Months Ended

September 30,

 

 

 

 

 

2014

 

 

2013

 

 

Change

 

 

(Amounts in thousands)

 

 

 

 

 

 

 

 

 

Personnel

$

192,942

 

 

$

213,813

 

 

$

(20,871

)

 

 

(10

)%

Advertising and promotion

 

133,795

 

 

 

127,838

 

 

 

5,957

 

 

 

5

%

Commission payments to affiliates

 

21,813

 

 

 

58,759

 

 

 

(36,946

)

 

 

(63

)%

Bad debt

 

6,372

 

 

 

7,129

 

 

 

(757

)

 

 

(11

)%

Management fees

 

23,701

 

 

 

5,221

 

 

 

18,480

 

 

 

354

%

Other

 

130,715

 

 

 

127,630

 

 

 

3,085

 

 

 

2

%

Depreciation and amortization

 

73,315

 

 

 

79,836

 

 

 

(6,521

)

 

 

(8

)%

Eliminations

 

(7,240

)

 

 

 

 

 

(7,240

)

 

 

**

%

Total selling, general and administrative

$

575,413

 

 

$

620,226

 

 

$

(44,813

)

 

 

(7

)%

  

 

**  not meaningful

Selling, general and administrative expenses decreased by $45 million, or 7%, for the nine months ended September 30, 2014 compared to the same period in the prior year. The decreases in commission payments to affiliates of $37 million and personnel costs of $21 million are primarily the result of our Travelocity restructuring activities including the sale of our TPN business in February 2014. The decrease in depreciation and amortization of $7 million is driven by decreases in amortization of acquisition-related intangible assets. These decreases were partially offset by an $18 million increase in management fees paid to TPG and Silver Lake related to our initial public offering and a $6 million increase in advertising and promotion primarily in our Travelocity business in the U.S. and Canada in conjunction with the Expedia SMA.

45


 

Impairment

 

 

Nine Months Ended

September 30,

 

 

 

 

 

2014

 

 

2013

 

 

Change

 

 

(Amounts in thousands)

 

 

 

 

 

 

 

 

 

Impairment

$

 

 

$

138,435

 

 

$

(138,435

)

 

 

**

%

  

 

**  not meaningful

In connection with the disposals of TBiz and Holiday Autos in the second quarter of 2013, we initiated an impairment analysis of goodwill in the Travelocity segment which resulted in impairment charges of $96 million associated with Travelocity—North America and $42 million associated with Travelocity—Europe. As a result of the impairment charges, the Travelocity segment had no remaining goodwill.

 

Interest expense, net

 

 

Nine Months Ended

September 30,

 

 

 

 

 

2014

 

 

2013

 

 

Change

 

 

(Amounts in thousands)

 

 

 

 

 

 

 

 

 

Interest expense, net

$

167,332

 

 

$

209,653

 

 

$

(42,321

)

 

 

(20

)%

 

Interest expense, net, decreased $42 million, or 20%, for the nine months ended September 30, 2014 compared to the same period in the prior year. The decrease is primarily due to the prepayments on our 2019 Notes and Term Loan C and a lower effective interest rate as a result of our repricing amendments completed in February 2014. In addition, interest expense decreased due to lower modification expenses and lower imputed interest expense related to payments made in the fourth quarter of 2013 for our litigation settlement payable to American Airlines.

Loss on extinguishment of debt

 

 

Nine Months Ended

September 30,

 

 

 

 

2014

 

 

2013

 

 

Change

 

(Amounts in thousands)

 

 

 

 

 

 

 

Loss on extinguishment of debt

$

33,538

 

 

$

12,181

 

 

$

21,357

 

 

**%

  

 

**  not meaningful

During the nine months ended September 30, 2014, we recognized losses on extinguishment of debt of $31 million in connection with the prepayments on our 2019 Notes and Term Loan C and $3 million related to the repricing of our Term Loan B completed in February 2014. During the nine months ended September 30, 2013, we recognized a loss on extinguishment of debt of $12 million as a result of our Amended and Restated Credit Agreement (see “Liquidity and Capital Resources—Senior Secured Credit Facilities”).

Joint venture equity income

 

 

Nine Months Ended

September 30,

 

 

 

 

 

2014

 

 

2013

 

 

Change

 

 

(Amounts in thousands)

 

 

 

 

 

 

 

 

 

Joint venture equity income

$

9,367

 

 

$

7,873

 

 

$

1,494

 

 

 

19

%

 

Joint venture equity income increased by $1 million for the nine months ended September 30, 2014 compared to the same period in the prior year.

46


 

Other (income) expenses, net

 

 

Nine Months Ended

September 30,

 

 

 

 

2014

 

 

2013

 

 

Change

 

(Amounts in thousands)

 

 

 

 

 

 

 

Other (income) expenses, net

$

(760

)

 

$

1,099

 

 

$

(1,859

)

 

**%

  

 

**  not meaningful

Other income, net, increased $2 million for the nine months ended September 30, 2014 compared to the prior year. The increase was driven primarily by realized and unrealized foreign currency exchange gains.

Provision (benefit) for income taxes

 

 

Nine Months Ended

September 30,

 

 

 

 

2014

 

 

2013

 

 

Change

 

(Amounts in thousands)

 

 

 

 

 

 

 

Provision (benefit) for income taxes

$

27,878

 

 

$

(5,229

)

 

$

33,107

 

 

**%

 

  

 

**  not meaningful

Our effective tax rates for the nine months ended September 30, 2014 and 2013 were 46% and 5%, respectively. The increase in the effective tax rate for the nine months ended September 30, 2014 as compared to the same period in 2013 was primarily due to the impairment of nondeductible goodwill in the prior year, the amount of current year losses for which no tax benefit can be recognized relative to the amount of pre-tax income and the impact of other discrete items, partially offset by the increase in forecasted earnings in lower tax jurisdictions.

The differences between our effective tax rates and the U.S. federal statutory income tax rate primarily result from our geographic mix of taxable income in various tax jurisdictions as well as the discrete tax items referenced above.

 

Liquidity and Capital Resources

On April 23, 2014, we closed our initial public offering of our common stock in which we sold 39,200,000 shares, and on April 25, 2014, the underwriters exercised in full their overallotment option which resulted in the sale of an additional 5,880,000 shares of our common stock. Our shares of common stock were sold at an initial public offering price of $16.00 per share, which generated $672 million of net proceeds from the offering after deducting underwriting discounts and commissions and offering expenses.

We used the net proceeds from this offering to repay (i) $296 million aggregate principal amount of our Term Loan C (see “—Senior Secured Credit Facilities”) and (ii) $320 million aggregate principal amount of our senior secured notes due 2019 at a redemption price of 108.5% of the principal amount. We also used the net proceeds from our offering to pay the $27 million redemption premium and $13 million in accrued but unpaid interest on the 2019 Notes. We used the remaining portion of the net proceeds from our offering to pay a $21 million fee, in the aggregate, to TPG and Silver Lake pursuant to a management services agreement, which was thereafter terminated.

Our principal sources of liquidity are: (i) cash flows from operations, (ii) cash and cash equivalents and (iii) borrowings under our $405 million Revolver (see “—Senior Secured Credit Facilities”). Borrowing availability under our Revolver is reduced by our outstanding letters of credit and restricted cash collateral. As of September 30, 2014 and December 31, 2013, our cash and cash equivalents, Revolver, and outstanding letters of credit were as follows (in thousands):

 

 

September 30, 2014

 

 

December 31, 2013

 

Cash and cash equivalents

$

157,747

 

 

$

308,236

 

Revolver outstanding balance

$

 

 

$

 

Available balance under the Revolver

$

345,106

 

 

$

285,671

 

Outstanding letters of credit

$

(60,057

)

 

$

(67,949

)

 

We consider cash equivalents to be highly liquid investments that are readily convertible into cash. Securities with contractual maturities of three months or less, when purchased, are considered cash equivalents. We record changes in a book overdraft position,

47


 

in which our bank account is not overdrawn but recently issued and outstanding checks result in a negative general ledger balance, as cash flows from financing activities.

We invest in a money market fund which is classified as cash and cash equivalents in our consolidated balance sheets and statements of cash flows. We held no short-term investments as of September 30, 2014 and December 31, 2013.

Utilization

We utilize cash and cash equivalents primarily to pay our operating expenses, make capital expenditures, invest in our products and offerings, pay quarterly dividends on our common stock and service our debt and other long-term liabilities. In the fourth quarter of 2013, we used a portion of our cash and cash equivalents to make a $100 million litigation settlement payment to American Airlines. In the third quarter of 2014, we made a $50 million payment to American Airlines in conjunction with the new Airline Solutions contract, which will be amortized as a reduction to revenue over the contract term. This payment reduces non-cash payment credits originally offered to American Airlines as a part of the litigation settlement in 2012, contingent upon the signature of a new reservation agreement, which were extended to include the combined American Airlines and US Airways reservation contract. The non-cash payment credits would have been utilized for future billings under the new agreement.

 

For the nine months ended September 30, 2014, we have used $100 million of our cash and cash equivalents to wind down working capital in Travelocity impacted by the Expedia SMA and the sale of TPN as described under “Factors Affecting our Results and Comparability—Travelocity Restructuring.”

 

In the third quarter of 2014, we paid $30 million of contingent consideration and contingent employment payments related to the acquisition of PRISM in 2012 and $32 million for the acquisition of certain assets and liabilities of Genares Worldwide Reservation Services, Ltd.

Ability to Generate Cash in the Future

Our ability to generate cash depends on many factors beyond our control, and any failure to meet our debt service obligations could harm our business, financial condition and results of operations. Our ability to make payments on and to refinance our indebtedness, and to fund working capital needs, planned capital expenditures and dividends will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive, business, legislative, regulatory and other factors that are beyond our control.

Senior Secured Credit Facilities

On February 19, 2013, Sabre GLBL Inc. entered into an agreement that amended and restated its senior secured credit facilities (the “Amended and Restated Credit Agreement”). The agreement replaced (i) the existing term loans with new classes of term loans of $1,775 million (the “Term Loan B”) and $425 million (the “Term Loan C”) and (ii) the existing revolving credit facility with a new revolving credit facility of $352 million (the “Revolver”). Term Loan B matures on February 19, 2019 and amortizes in equal quarterly installments of 0.25%. Term Loan C matures on December 31, 2017. As a result of the April 2014 prepayment, quarterly principal payments on Term Loan C are no longer required. We are obligated to pay $17 million on September 30, 2017 and the remaining balance on December 31, 2017. A portion of the Revolver matures on February 19, 2018. On September 30, 2013, Sabre GLBL Inc. entered into an agreement to amend its amended and restated credit agreement to add a new class of term loans in the amount of $350 million (the “Incremental Term Loan Facility”). Sabre GLBL Inc. has used a portion, and intends to use the remainder, of the proceeds of the Incremental Term Loan Facility for working capital and one-time costs associated with the Expedia SMA and sale of TPN, including the payment of travel suppliers for travel consumed that originated on our technology platforms and for general corporate purposes. The Incremental Term Loan Facility matures on February 19, 2019 and amortizes in equal quarterly installments of 0.25% commencing with the last business day of December 2013. We are scheduled to make $22 million in principal payments on our senior secured credit facilities over the next twelve months. On February 20, 2014, we entered into a series of amendments to our Amended and Restated Credit Agreement (“Repricing Amendments”) to, among other things, (i) reduce the interest rate margin applicable to the Term Loan B to (x) between 3.00% to 3.25% per annum for Eurocurrency rate loans and (y) between 2.00% to 2.25% per annum for base rate loans and (ii) reduce the Eurocurrency rate floor to 1.00% and the base rate floor to 2.00%. In addition, the Repricing Amendments extended the maturity date of $317 million of the Revolver to February 19, 2019 and (ii) provided for a revolving commitment increase of $53 million under the extended portion of the Revolver, increasing total commitments under the Revolver to $405 million. The extended portion of the Revolver includes an accelerated maturity of November 19, 2018 if on November 19, 2018, the Term Loan B (or permitted refinancings thereof) remains outstanding with a maturity date occurring less than one year after the maturity date of the extended portion of the Revolver.

In April 2014, we made partial prepayments totaling $296 million of our outstanding indebtedness under the Term Loan C portion of our senior secured credit facilities using proceeds from our initial public offering.

48


 

Under the Amended and Restated Credit Agreement, the loan parties are subject to certain customary non-financial covenants, including certain restrictions on incurring certain types of indebtedness, creation of liens on certain assets, making of certain investments, and payment of dividends, as well as a maximum senior secured leverage ratio, which applies if our revolver utilization exceeds certain thresholds. This ratio is calculated as senior secured debt (net of cash) to EBITDA, as defined by the credit agreement. This ratio was 5.5 to 1.0 for 2013 and is 5.0 to 1.0 for 2014. The definition of EBITDA is based on a trailing twelve months EBITDA adjusted for certain items including non-recurring expenses and the pro forma impact of cost saving initiatives.

We are also required to pay down the term loans by an amount equal to 50% of annual excess cash flow, as defined in the Amended and Restated Credit Agreement. No excess cash flow payment is required in 2014 with respect to our results for the year ended December 31, 2013. This percentage requirement may decrease or be eliminated if certain leverage ratios are achieved. We are further required to pay down the term loan with proceeds from certain asset sales or borrowings as defined in the Amended and Restated Credit Agreement.

Liquidity Outlook

We believe that cash flows from operations, cash and cash equivalents on hand and the Revolver provide adequate liquidity for our operational and capital expenditures, quarterly dividends on our common stock and other obligations over the next twelve months. From time to time, we may supplement our current liquidity through debt or equity offerings to support future strategic investments or to pay down our $400 million of senior unsecured notes due in 2016, if we decide not to refinance this indebtedness.

Dividends

During the third quarter of 2014, we paid a quarterly cash dividend of $0.09 per share of our common stock totaling $24 million. No dividends were declared or paid in the six months ended June 30, 2014 or in the year ended December 31, 2013. We expect to continue to pay quarterly cash dividends on our common stock, subject to declaration of our board of directors. On October 29, 2014, our board of directors declared a cash dividend of $0.09 per share of our common stock, payable on December 30, 2014, to shareholders of record as of December 15, 2014. We intend to fund this dividend, as well as any future dividends, from cash generated from our operations. Future cash dividends, if any, will be at the discretion of our board of directors and the amount of cash dividends per share will depend upon, among other things, our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions, number of shares of common stock outstanding and other factors the board of directors may deem relevant. The timing and amount of future dividend payments will be at the discretion of our board of directors.

Redemption of Preferred Stock

Prior to the closing of our initial public offering, we amended our Certificate of Incorporation and exercised our right to redeem all of our Series A Cumulative Preferred Stock. The amendment to our Certificate of Incorporation modified the redemption feature of the Series A Cumulative Preferred Stock to allow for settlement using cash, shares of our common stock or a mix of cash and shares of our common stock. On April 23, 2014, we redeemed all of our outstanding shares of Series A Cumulative Preferred Stock in exchange for 40,343,529 shares of our common stock, which was delivered pro rata to the holders thereof concurrently with the closing of our initial public offering.

Tax Receivable Agreement

Immediately prior to the closing of our initial public offering, we entered into an income tax receivable agreement (“TRA”). Based on current tax laws and assuming that we and our subsidiaries earn sufficient taxable income to realize the full tax benefits subject to the TRA, (i) we expect that future payments under the TRA could aggregate to between $330 million and $380 million over the next six years (assuming no changes to current limitations on our ability to utilize our NOLs under Section 382 of the Internal Revenue Code), which we estimate will represent approximately 85% to 95% of the total payments we will be required to make under the TRA and (ii) we do not expect material payments to occur before 2016. Payments to the recipients under the TRA are not conditioned upon the recipient continuing to be an equity holder in the Company.

Political and Economic Environment in Venezuela

Venezuela has imposed currency controls, including volume restrictions on the conversion of bolivars to U.S. dollars, which impact the ability of certain of our airline customers operating in the country to obtain U.S. dollars to make timely payments to us. Consequently, the collection of accounts receivable due to us can be, and has been, delayed. Due to the nature of this delay, we have recorded specific reserves against all outstanding balances due to us and are deferring the recognition of any future revenues effective January 1, 2014 until cash is collected in accordance with our policies. Accordingly, our accounts receivable are subject to a general collection risk, as there can be no assurance that we will be paid from such customers in a timely manner, if at all. We collected approximately $7 million and $14 million of accounts receivable due to us during the three and nine months ended September 30, 2014, respectively, and have $9 million of accounts receivable outstanding as of September 30, 2014, which will be recognized as

49


 

revenue when cash is received. We collected an additional $1 million of accounts receivable due to us during October 2014. In January 2014, Venezuela announced a dual-foreign exchange rate system, which has effectively devalued the local currency and subjected airlines to an exchange rate for U.S. dollars available at auctions that has been significantly higher than the official exchange rate. In conjunction with the political and economic uncertainty in Venezuela, demand for travel by local consumers has declined. Certain airlines have scaled back operations in response to the reduced demand as well as the currency controls which has impacted our airline customers in Venezuela. As a result, we expect our revenues derived from our Venezuelan operations in 2014 to be reduced as compared to our revenues for 2013. During the year ended December 31, 2013, we derived 1% of our total revenue from our airline customers operating in Venezuela.

Financing Arrangements

Our financing arrangements include our senior secured credit facilities, senior secured notes due 2019, senior unsecured notes due 2016 and a mortgage facility. As of September 30, 2014 and December 31, 2013, our outstanding debt included in our consolidated balance sheets totaled $3,088 million and $3,730 million, respectively, net of unamortized discounts of $15 million and $20 million, respectively. The following table sets forth the face values of our outstanding debt as of September 30, 2014 and December 31, 2013 (in thousands):

 

 

Rate (1)

 

 

Maturity

 

September 30, 2014

 

 

December 31, 2013

 

Senior secured credit facilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Term Loan B

L + 3.00%

 

 

February 2019

 

$

1,743,938

 

 

$

1,757,250

 

Incremental term loan facility

    L + 3.00% (2)

 

 

February 2019

 

 

346,500

 

 

 

349,125

 

Term Loan C

    L + 2.50% (2)

 

 

December 2017

 

 

49,313

 

 

 

361,250

 

Revolver, $370 million

L + 2.75%

 

 

February 2019

 

 

 

 

 

 

Revolver, $35 million

L + 3.25%

 

 

February 2018

 

 

 

 

 

 

Senior unsecured notes due 2016

 

8.35%

 

 

March 2016

 

 

400,000

 

 

 

400,000

 

Senior secured notes due 2019

 

8.50%

 

 

May 2019

 

 

480,000

 

 

 

800,000

 

Mortgage facility

 

5.80%

 

 

March 2017

 

 

82,457

 

 

 

83,286

 

Face value of total debt outstanding

 

 

 

 

 

 

 

3,102,208

 

 

 

3,750,911

 

Less current portion of debt outstanding

 

 

 

 

 

 

 

(22,418

)

 

 

(86,117

)

Face value of long-term debt outstanding

 

 

 

 

 

 

$

3,079,790

 

 

$

3,664,794

 

  

 

(1)

“L” refers to LIBOR.

(2)

Effective October 1, 2014, the rates for the Incremental term loan facility and Term Loan C are L + 3.50% and L + 3.00%, respectively.

Future Minimum Contractual Obligations

On February 20, 2014, we entered into the Repricing Amendments, one of which reduced the Term Loan B’s applicable margin for Eurocurrency and Base rate borrowings to 3.25% and 2.25%, respectively, with a step down to 3.00% and 2.00%, respectively, if the Senior Secured Leverage Ratio is less than or equal to 3.25 to 1.00. It also reduced the Eurocurrency rate floor to 1.00% and the Base rate floor to 2.00%. As of September 30, 2014, future minimum payments required under our senior secured credit facilities, senior unsecured notes due 2016 and senior secured notes due 2019 were as follows (in thousands):

 

 

Total Debt

Payments (1)

 

Three months ending December 31, 2014

$

47,522

 

2015

 

181,840

 

2016

 

576,329

 

2017

 

228,384

 

2018

 

180,253

 

Thereafter

 

2,516,077

 

Total

$

3,730,405

 

  

 

(1)

Excludes all interest and principal related to our mortgage facility. Includes all interest and principal related to the senior unsecured notes due 2016 and the senior secured notes due 2019. Also includes all interest and principal related to borrowings under the senior secured credit facility, the Term Loan C portion of which will mature in 2017, the Term Loan B portion of which will mature in 2019 and the Incremental Term Loan Facility portion of which will mature in 2019. Under certain circumstances, we may be required to pay a percentage of the excess cash flow, if any, generated each year to our lenders which obligation is not reflected in the table above. Interest on the term loan is based on LIBOR plus an applicable margin and includes the effect of interest rate swaps. For purposes of this table, we have used projected LIBOR rates for all future periods. See Note 8, Debt, to our consolidated financial statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q.

 

50


 

Immediately prior to the closing of our initial public offering, we entered into an income tax receivable agreement (“TRA”). Based on current tax laws and assuming that we and our subsidiaries earn sufficient taxable income to realize the full tax benefits subject to the TRA, (i) we expect that future payments under the TRA could aggregate to between $330 million and $380 million over the next six years (assuming no changes to current limitations on our ability to utilize our NOLs under Section 382 of the Code), which we estimate will represent approximately 85% to 95% of the total payments we will be required to make under the TRA and (ii) we do not expect material payments to occur before 2016. Payments to the recipients under the TRA are not conditioned upon the recipient continuing to be an equity holder in the Company.

As of September 30, 2014, purchase orders for the next twelve months totaled $143 million and were not material in the years thereafter. There were no other material changes to our future minimum contractual obligations as of December 31, 2013 as previously disclosed in our prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act on April 17, 2014.

Cash Flows

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

 

(Amounts in thousands)

 

Cash provided by operating activities

$

121,679

 

 

$

252,062

 

Cash used in investing activities

 

(191,949

)

 

 

(189,220

)

Cash (used in) provided by financing activities

 

(59,289

)

 

 

274,717

 

Cash (used in) provided by discontinued operations

 

(21,664

)

 

 

26,854

 

Effect of exchange rate changes on cash and cash equivalents

 

734

 

 

 

480

 

(Decrease) increase in cash and cash equivalents

$

(150,489

)

 

$

364,893

 

 

Operating Activities

Cash provided by operating activities for the nine months ended September 30, 2014 was $122 million and consisted of net income of $25 million, adjustments for non-cash and other items of $342 million and a decrease in cash from changes in operating assets and liabilities of $245 million. The adjustments for non-cash and other items consist primarily of $230 million of depreciation and amortization, $34 million loss on extinguishment of debt, $33 million in amortization of upfront incentive consideration, $22 million stock-based compensation expense and $8 million of losses from discontinued operations, partially offset by $9 million of joint venture equity income. The decrease in cash from changes in operating assets and liabilities of $245 million was primarily the result of a $58 million increase in accounts receivable due to seasonality, $58 million increase in other assets primarily due to a $50 million payment made to American Airlines in conjunction with the new Airlines Solutions contract, $32 million used for upfront incentive consideration, $28 million used for capitalized implementation costs, a $32 million decrease in accounts payable and other accrued liabilities and a $23 million decrease in accrued compensation and related benefits. The decrease in accounts payable and other accrued liabilities was due to the payment of travel supplier liabilities for Travelocity North America of $106 million as a result of the change in Travelocity’s business model and sale of TPN, partially offset by an increase in deferred revenue and trade payables.

Cash provided by operating activities for the nine months ended September 30, 2013 was $252 million and consisted of net loss of $125 million, adjustments for non-cash and other items of $436 million and a decrease in cash of $58 million from changes in operating assets and liabilities. The adjustments for non-cash and other items consist primarily of $230 million of depreciation and amortization, $138 million of goodwill impairment charges, $29 million in amortization of upfront incentive consideration, $14 million of debt modification costs, $12 million of loss on extinguishment of debt and $21 million of losses from discontinued operations, partially offset by $19 million of deferred taxes. The decrease in cash of $58 million from changes in operating assets and liabilities was primarily the result of an increase in other assets of $63 million due to increases in deferred customer discounts, $49 million used for capitalized implementation costs, an increase of $46 million in accounts receivables in all of our segments due to seasonality and $27 million used for upfront incentive consideration. These decreases were partially offset by an increase of $110 million in accounts payable and other accrued liabilities primarily due to seasonality in travel supplier liabilities.

Investing Activities

For the nine months ended September 30, 2014, we used cash of $160 million on capital expenditures, including $134 million related to software developed for internal use, $7 million related to software developed for sale and $19 million related to purchases of property, plant and equipment.

For the nine months ended September 30, 2013, we used cash of $169 million on capital expenditures, including $144 million related to software developed for internal use and $24 million related to purchases of property, plant and equipment. In addition, we paid contingent consideration of $27 million related to the acquisition of PRISM in 2012 and we received $10 million in proceeds from the sale of TBiz.

51


 

Financing Activities

For the nine months ended September 30, 2014, we used $59 million for financing activities. Significant highlights of our financing activities include:

we entered into the Repricing Amendments which resulted in proceeds of $148 million from new lenders which were utilized to repay prior lenders. There was no net change in our outstanding indebtedness as a result of the Repricing Amendments;

we raised $672 million net proceeds from our initial public offering and utilized the net proceeds to repay $296 million aggregate principal amount of our Term Loan C and $320 million aggregate principal amount of our 2019 Notes;

we paid down $32 million of the term loan outstanding as part of quarterly principal repayments;

we paid $30 million in debt-related costs including a $27 million prepayment fee on our 2019 Notes;

we paid $27 million in contingent consideration associated with our acquisition of PRISM in 2012; and

we paid $24 million in dividends on our common stock.

For the nine months ended September 30, 2013, we generated $275 million from financing activities. Significant highlights of our financing activities included:

we raised $2,540 million through the issuance of the Term Loan B and Term Loan C;

we utilized $2,178 million of the Term Loan B and Term Loan C proceeds to pay down term loans under our prior senior credit facility;

we incurred $19 million in debt issuance and third-party debt modification costs; and

we paid down $61 million of the term loan outstanding as part of quarterly principal repayments.

Off Balance Sheet Arrangements

We had no off balance sheet arrangements during the nine months ended September 30, 2014 and year ended December 31, 2013.

Recent Accounting Pronouncements

In August 2014, the Financial Accounting Standards Board (“FASB”) issued guidance on management’s responsibility in the evaluation and disclosures of going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of the company’s ability to continue as a going concern within one year of the date the financial statements are issued. If substantial doubt exists in the company’s ability to continue as a going concern, certain disclosures are required to be provided. The standard is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. We do not believe that the adoption will have a material impact on our consolidated financial statements.

In June 2014, the FASB issued final guidance that a performance target in a share-based payment that affects vesting and that could be achieved after the requisite service period should be accounted for as a performance condition. The guidance was issued to resolve diversity in practice. The standard is effective for annual and interim reporting periods beginning after December 15, 2015. We do not believe that the adoption will have a material impact on our consolidated financial statements.

In May 2014, the FASB issued a comprehensive update to revenue recognition guidance that will replace current standards. Under the updated standard, revenue is recognized when a company transfers promised goods or services to customers in an amount that reflects the consideration that is expected to be received for those goods and services. The updated standard also requires additional disclosures on the nature, timing, and uncertainty of revenue and related cash flows. The standard is effective for annual and interim reporting periods beginning after December 15, 2016. We are currently evaluating the impact this standard will have on our consolidated financial statements.

In April 2014, the FASB issued updated guidance that raises the threshold for disposals to qualify as discontinued operations and allows companies to have significant continuing involvement and continuing cash flows with the discontinued operations. The standard also requires additional disclosures for discontinued operations and new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. The standard is effective for annual and interim reporting periods beginning in 2015. Early adoption is permitted in certain circumstances. We do not believe that the adoption will have a material impact on our consolidated financial statements.

52


 

In February 2013, the FASB issued guidance regarding the reporting of amounts reclassified out of accumulated other comprehensive income (“OCI”) to net income. The standard requires companies to disclose the individual income statement line items in which the accumulated other comprehensive income amounts have been reclassified. Additionally, a tabular reconciliation of amounts recorded to other comprehensive income for the period is required. We have incorporated the new disclosure guidance on the reclassification of accumulated other comprehensive income into the footnotes to our consolidated financial statements.

In January 2013, the FASB issued updated guidance on when it is appropriate to reclassify currency translation adjustments (“CTA”) into earnings. This guidance is intended to reduce the diversity in practice in accounting for CTA when an entity ceases to have a controlling interest in a subsidiary group or group of assets that is a business within a foreign entity and when there is a loss of a controlling financial interest in a foreign entity or a step acquisition. The standard is effective for annual and interim reporting periods for fiscal years beginning after December 15, 2013. The adoption of this guidance did not have a material impact on our consolidated financial statements.

Critical Accounting Policies

This discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect our reported assets and liabilities, revenues and expenses and other financial information. Actual results may differ significantly from these estimates, and our reported financial condition and results of operations could vary under different assumptions and conditions. In addition, our reported financial condition and results of operations could vary due to a change in the application of a particular accounting standard.

We regard an accounting estimate underlying our financial statements as a “critical accounting estimate” if the accounting estimate requires us to make assumptions about matters that are uncertain at the time of estimation and if changes in the estimate are reasonably likely to occur and could have a material effect on the presentation of financial condition, changes in financial condition, or results of operations. For a discussion of the accounting policies involving material estimates and assumptions that we believe are most critical to the preparation of our financial statements, how we apply such policies and how results differing from our estimates and assumptions would affect the amounts presented in our financial statements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” included in our prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act on April 17, 2014.

 

53


 

ITEM  3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the potential loss from adverse changes in: (i) prevailing interest rates, (ii) foreign exchange rates, (iii) credit risk and (iv) inflation. Our exposure to market risk relates to interest payments due on our long-term debt, revolving credit facility, derivative instruments, income on cash and cash equivalents, accounts receivable and payable and travel supplier liabilities and related deferred revenue. We manage our exposure to these risks through established policies and procedures. We do not engage in trading, market making or other speculative activities in the derivatives markets. Our objective is to mitigate potential income statement, cash flow and fair value exposures resulting from possible future adverse fluctuations in interest and foreign exchange rates.

We enter into interest rate swap agreements to manage interest rate risk exposure. For a description of our hedging objectives and strategy, see Note 9, Derivatives, to our consolidated financial statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q. Our outstanding interest rate swaps matured during the third quarter of 2014 and we had no interest rate swaps outstanding as of September 30, 2014. The matured interest rate swaps had effectively converted $750 million of floating interest rate senior secured debt into a fixed rate obligation. The terms of the matured interest rate swaps were as follows:

Notional Amount

 

Interest Rate Received

 

Interest Rate Paid

 

 

Effective Date

 

Maturity Date

$400 million

 

1 month LIBOR

 

 

2.03

%

 

July 29, 2011

 

September 30, 2014

$350 million

 

1 month LIBOR

 

 

2.51

%

 

April 30, 2012

 

September 30, 2014

$750 million

 

 

 

 

 

 

 

 

 

 

We expect to enter into interest rate swaps or other hedging agreements in the near future to continue to manage our exposure to interest rate risks related to our long-term debt.

There were no other material changes in our market risk since December 31, 2013 as previously disclosed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures About Market Risk” included in our prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act on April 17, 2014.

 

ITEM  4.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on such evaluation, the Company’s principal executive officer and principal financial officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective.

Internal Control Over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

 

54


 

Part II. Other Information

 

ITEM 1.

LEGAL PROCEEDINGS

The Company and its subsidiaries are from time to time engaged in routine legal proceedings incidental to our business. For a description of our material legal proceedings, see Note 14, Contingencies, to our consolidated financial statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

 

ITEM 6.

EXHIBITS

The following exhibits are filed as part of this Quarterly Report on Form 10-Q.

 

Exhibit
Number

  

Description of Exhibit

10.54+

 

Letter Agreement by and between Sabre and Carl Sparks dated April 21, 2014

10.55+

 

Employment Agreement by and between Sabre Corporation and Rachel Gonzalez dated September 2, 2014

31.1

  

Rule 13a-14(a) Certification of Principal Executive Officer

31.2

  

Rule 13a-14(a) Certification of Principal Financial Officer

32.1

  

Section 1350 Certification of Principal Executive Officer

32.2

  

Section 1350 Certification of Principal Financial Officer

101.INS

  

XBRL Instance Document

101.SCH

  

XBRL Taxonomy Extension Schema

101.CAL

  

XBRL Taxonomy Extension Calculation Linkbase

101.DEF

  

XBRL Taxonomy Extension Definition Linkbase

101.LAB

  

XBRL Taxonomy Extension Label Linkbase

101.PRE

  

XBRL Taxonomy Extension Presentation Linkbase

 

+

Indicates management contract or compensatory plan or arrangement.

 

 

55


 

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

SABRE CORPORATION

 

 

 

 

(Registrant)

 

Date: November 12, 2014

 

 

 

By:

 

 

/s/ Richard A. Simonson

 

 

 

 

Richard A. Simonson

 

 

 

 

Chief Financial Officer

 

 

 

 

(principal financial officer of the registrant)