Document

 


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, 2017
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
 
20-8647322
(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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
x
  
Accelerated filer
 
¨
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨ 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   x
As of October 26, 2017, 274,821,778 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.




SABRE CORPORATION
TABLE OF CONTENTS
 
 
 
 
Page No.
    Item 1.
 
 
 
 
 
 
     Item 2.
     Item 3.
     Item 4.
 
 
     Item 1.
     Item 1A.
     Item 2.
     Item 6.
 




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,
 
2017
 
2016
 
2017
 
2016
Revenue
$
900,606

 
$
838,982

 
$
2,716,622

 
$
2,543,767

Cost of revenue
631,970

 
593,650

 
1,882,623

 
1,704,232

Selling, general and administrative
91,840

 
155,182

 
383,137

 
435,924

Impairment and related charges

 

 
92,022

 

Operating income
176,796

 
90,150

 
358,840

 
403,611

Other income (expense):
 

 
 

 
 
 
 
Interest expense, net
(38,919
)
 
(38,002
)
 
(116,577
)
 
(116,414
)
Loss on extinguishment of debt
(1,012
)
 
(3,683
)
 
(1,012
)
 
(3,683
)
Joint venture equity income
357

 
718

 
1,768

 
2,244

Other, net
(3,802
)
 
281

 
(19,788
)
 
4,517

Total other expense, net
(43,376
)
 
(40,686
)
 
(135,609
)
 
(113,336
)
Income from continuing operations before income taxes
133,420

 
49,464

 
223,231

 
290,275

Provision for income taxes
40,595

 
7,208

 
56,836

 
79,905

Income from continuing operations
92,825

 
42,256

 
166,395

 
210,370

(Loss) Income from discontinued operations, net of tax
(529
)
 
(394
)
 
(2,228
)
 
10,858

Net income
92,296

 
41,862

 
164,167

 
221,228

Net income attributable to noncontrolling interests
1,307

 
1,047

 
3,726

 
3,227

Income attributable to common stockholders
$
90,989

 
$
40,815

 
$
160,441

 
$
218,001

 
 
 
 
 
 
 
 
Basic net income per share attributable to common
stockholders:
 

 
 

 
 
 
 
Income from continuing operations
$
0.33

 
$
0.15

 
$
0.59

 
$
0.75

(Loss) income from discontinued operations

 

 
(0.01
)
 
0.04

Net income per common share
$
0.33

 
$
0.15

 
$
0.58

 
$
0.79

Diluted net income per share attributable to common stockholders:
 

 
 

 
 
 
 
Income from continuing operations
$
0.33

 
$
0.15

 
$
0.58

 
$
0.73

(Loss) income from discontinued operations

 

 
(0.01
)
 
0.04

Net income per common share
$
0.33

 
$
0.14

 
$
0.57

 
$
0.77

Weighted-average common shares outstanding:
 

 
 

 
 
 
 
Basic
277,477

 
278,399

 
277,754

 
277,125

Diluted
278,369

 
283,462

 
279,648

 
282,919

 
 
 
 
 
 
 
 
Dividends per common share
$
0.14

 
$
0.13

 
$
0.42

 
$
0.39

See Notes to Consolidated Financial Statements.

1



SABRE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
92,296

 
$
41,862

 
$
164,167

 
$
221,228

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments ("CTA"), net of tax
 
 
 
 
 
 
 
Foreign CTA gains (losses)
2,781

 
(819
)
 
10,450

 
720

Reclassification adjustment for realized losses on foreign CTA, net of tax

 

 

 
(198
)
Net change in foreign CTA gains (losses), net of tax
2,781

 
(819
)
 
10,450

 
522

Retirement-related benefit plans:
 
 
 
 
 
 
 
Amortization of prior service credits, net of taxes of $129, $130, $388 and $389
(229
)
 
(229
)
 
(686
)
 
(686
)
Amortization of actuarial losses, net of taxes of $(392), $(520), $(1,747) and $(1,551)
745

 
1,033

 
3,141

 
2,852

Total retirement-related benefit plans
516

 
804

 
2,455

 
2,166

Derivatives and available-for-sale securities:
 
 
 
 
 
 
 
Unrealized gains, net of taxes of $(1,045), ($1,663), $(2,693) and $658
2,561

 
11,076

 
9,561

 
11,361

Reclassification adjustment for realized (gains) losses, net of taxes of $67, $(154), $(1,531) and $(494)
(216
)
 
227

 
3,461

 
1,240

Net change in derivatives and available-for-sale securities, net of tax
2,345

 
11,303

 
13,022

 
12,601

Share of other comprehensive income of joint ventures
323

 
(336
)
 
372

 
(336
)
Other comprehensive income
5,965

 
10,952

 
26,299

 
14,953

Comprehensive income
98,261

 
52,814

 
190,466

 
236,181

Less: Comprehensive income attributable to noncontrolling interests
(1,307
)
 
(1,047
)
 
(3,726
)
 
(3,227
)
Comprehensive income attributable to Sabre Corporation
$
96,954

 
$
51,767

 
$
186,740

 
$
232,954

 
See Notes to Consolidated Financial Statements.

2





SABRE CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
 
September 30, 2017
 
December 31, 2016
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
268,268

 
$
364,114

Accounts receivable, net
567,266

 
400,667

Prepaid expenses and other current assets
111,358

 
88,600

Total current assets
946,892

 
853,381

Property and equipment, net of accumulated depreciation of $1,173,326 and $986,890
800,094

 
753,279

Investments in joint ventures
26,776

 
25,582

Goodwill
2,553,867

 
2,548,447

Acquired customer relationships, net of accumulated amortization of $680,756 and $646,850
357,039

 
387,632

Other intangible assets, net of accumulated amortization of $580,158 and $538,380
346,028

 
387,805

Deferred income taxes
73,658

 
95,285

Other assets, net
562,134

 
673,159

Total assets
$
5,666,488

 
$
5,724,570

 
 
 
 
Liabilities and stockholders’ equity
 

 
 

Current liabilities
 

 
 

Accounts payable
$
150,265

 
$
168,576

Accrued compensation and related benefits
104,415

 
102,037

Accrued subscriber incentives
269,778

 
216,011

Deferred revenues
163,556

 
187,108

Other accrued liabilities
251,525

 
222,879

Current portion of debt
59,019

 
169,246

Tax Receivable Agreement
59,452

 
100,501

Total current liabilities
1,058,010

 
1,166,358

Deferred income taxes
84,782

 
88,957

Other noncurrent liabilities
468,075

 
567,359

Long-term debt
3,410,532

 
3,276,281

Commitments and contingencies (Note 11)


 


Stockholders’ equity
 

 
 

Common Stock: $0.01 par value; 450,000,000 authorized shares; 288,896,172 and 285,461,125 shares issued, 274,756,197 and 276,949,802 shares outstanding at September 30, 2017 and December 31, 2016, respectively
2,889

 
2,854

Additional paid-in capital
2,162,128

 
2,105,843

Treasury Stock, at cost, 14,139,975 and 8,511,323 shares at September 30, 2017 and December 31, 2016, respectively
(329,857
)
 
(221,746
)
Retained deficit
(1,097,149
)
 
(1,141,116
)
Accumulated other comprehensive loss
(96,500
)
 
(122,799
)
Noncontrolling interest
3,578

 
2,579

Total stockholders’ equity
645,089

 
625,615

Total liabilities and stockholders’ equity
$
5,666,488

 
$
5,724,570


See Notes to Consolidated Financial Statements.

3





SABRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2017
 
2016
Operating Activities
 
 
 
Net income
$
164,167

 
$
221,228

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

 
 

Depreciation and amortization
295,729

 
303,956

Amortization of upfront incentive consideration
50,298

 
43,372

Litigation-related credits

 
(25,527
)
Stock-based compensation expense
34,413

 
36,012

Allowance for doubtful accounts
7,879

 
9,232

Impairment and related charges
92,022

 

Deferred income taxes
8,340

 
66,676

Joint venture equity income
(1,768
)
 
(2,244
)
Dividends received from joint venture investments
1,088

 

Amortization of debt issuance costs
4,916

 
6,738

Loss on modification of debt
14,758

 

Loss on extinguishment of debt
1,012

 
3,683

Other
10,680

 
4,303

Loss (income) from discontinued operations
2,228

 
(10,858
)
Changes in operating assets and liabilities:
 

 
 

Accounts and other receivables
(188,021
)
 
(70,906
)
Prepaid expenses and other current assets
518

 
(19,508
)
Capitalized implementation costs
(47,968
)
 
(64,577
)
Upfront incentive consideration
(61,087
)
 
(55,284
)
Other assets
(20,957
)
 
(18,105
)
Accrued compensation and related benefits
2,161

 
(21,540
)
Accounts payable and other accrued liabilities
53,444

 
8,424

Deferred revenue including upfront solution fees
32,054

 
17,459

Cash provided by operating activities
455,906

 
432,534

Investing Activities
 

 
 

Additions to property and equipment
(242,811
)
 
(254,232
)
Acquisition, net of cash acquired

 
(164,481
)
Other investing activities
(141
)
 

Cash used in investing activities
(242,952
)
 
(418,713
)
Financing Activities
 

 
 

Proceeds of borrowings from lenders
1,897,625

 
1,055,000

Payments on borrowings from lenders
(1,868,655
)
 
(994,287
)
Payments on Tax Receivable Agreement
(99,241
)
 

Debt issuance and modification costs
(19,052
)
 
(11,377
)
Net proceeds on the settlement of equity-based awards
11,466

 
17,111

Cash dividends paid to common stockholders
(116,474
)
 
(108,358
)
Repurchase of common stock
(97,671
)
 

Other financing activities
(8,934
)
 
(4,736
)
Cash used in financing activities
(300,936
)
 
(46,647
)
Cash Flows from Discontinued Operations
 

 
 

Cash used in operating activities
(3,636
)
 
(15,766
)
Cash provided by investing activities

 

Cash used in discontinued operations
(3,636
)
 
(15,766
)
Effect of exchange rate changes on cash and cash equivalents
(4,228
)
 
(536
)
Decrease in cash and cash equivalents
(95,846
)
 
(49,128
)
Cash and cash equivalents at beginning of period
364,114

 
321,132

Cash and cash equivalents at end of period
$
268,268

 
$
272,004

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. ("Sabre GLBL") is the principal operating subsidiary and sole direct subsidiary of Sabre Holdings. Sabre GLBL 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 two business segments: (i) Travel Network, our global travel marketplace for travel suppliers and travel buyers, and (ii) Airline and Hospitality Solutions, an extensive suite of travel industry leading software solutions primarily for airlines and hoteliers.
Basis of Presentation—The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“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, 2017 are not necessarily indicative of results that may be expected for any other interim period or for the year ending December 31, 2017. The accompanying interim financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K filed with the SEC on February 17, 2017.
We consolidate all majority-owned subsidiaries and companies over which we exercise control through majority voting rights. No entities are consolidated due to control through operating agreements, financing agreements, or as the primary beneficiary of a variable interest entity.
The consolidated financial statements include our accounts after elimination of all significant intercompany balances and transactions. All dollar amounts in the financial statements and the tables in the notes, except per share amounts, are stated in thousands of U.S. dollars unless otherwise indicated. All amounts in the notes reference results from continuing operations unless otherwise indicated.
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 consist of significant estimates and assumptions, include, among other things, the estimation of the collectability of accounts receivable, estimation of future cancellations of bookings processed through the Sabre global distribution system (“GDS”), revenue recognition for software arrangements, 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, the evaluation of the recoverability of customer implementation costs, assumptions utilized to evaluate the recoverability of deferred customer advance and discounts, and estimation of uncertainties surrounding the calculation of our tax assets and liabilities. Our use of estimates and the related accounting policies are discussed in the consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K filed with the SEC on February 17, 2017.
Stockholders’ Equity—During the nine months ended September 30, 2017, we issued 3,435,047 shares of our common stock as a result of the exercise and settlement of employee equity-based awards. In addition, we received $22 million in proceeds from the exercise of employee stock-option awards and paid $11 million of income tax withholdings associated with the settlement of employee restricted-stock awards. We paid quarterly cash dividends on our common stock of $0.14 per share, totaling $116 million, and $0.13 per share, totaling $108 million, during the nine months ended September 30, 2017 and 2016, respectively.
Share Repurchase Program
In February 2017, we announced the approval of a multi-year share repurchase program to purchase up to $500 million of Sabre's common stock outstanding. Repurchases under the program may take place in the open market or privately negotiated transactions. For the nine months ended September 30, 2017, we repurchased 5,153,241 shares totaling $98 million pursuant to this share repurchase program.


5




Recent Accounting Pronouncements
In August 2017, the Financial Accounting Standards Board ("FASB") issued updated guidance to expand and simplify the application of hedge accounting. The updated standard eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. The Accounting Standards Update ("ASU") is effective for annual periods beginning after December 15, 2018, with early adoption permitted. We do not expect that the adoption of this updated standard will have a material impact on our consolidated financial statements.
In May 2017, the FASB issued updated guidance regarding changes to the terms or conditions of a share-based payment award which requires an entity to apply modification accounting under the current standard on stock compensation. Under this updated standard, a new fair value measurement is assessed on the modified award, with any incremental fair value of the new award recognized as additional compensation cost. The ASU is effective for annual periods beginning after December 15, 2017, with early adoption permitted. We adopted this standard in the third quarter of 2017, which did not have a material impact on our consolidated financial statements.
In March 2017, the FASB issued updated guidance improving the presentation requirements related to reporting the service cost component of net benefit costs to require that the service cost component be reported in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period, disaggregating the component from other net benefit costs. Net benefit cost is composed of several items, which reflect different aspects of an employer's financial arrangements as well as the cost of benefits earned by employees. The updated guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those annual periods for public business entities. We do not expect that the adoption of this updated standard will have a material impact on our consolidated financial statements.
In January 2017, the FASB issued updated guidance to state that registrants should consider additional qualitative disclosures if the impact of an issued but not yet adopted ASU is unknown or cannot be reasonably estimated and to include a description of the effect of the accounting policies that the registrant expects to apply, if determined. Transition guidance included in certain issued but not yet adopted ASUs was also updated to reflect this amendment. The updated guidance was effective upon issuance and we have adopted this standard and have made the required disclosures.
In January 2017, the FASB issued an updated guidance simplifying the subsequent measurement of goodwill by eliminating “Step 2” from the goodwill impairment test. The updated guidance is effective for public companies’ annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for annual or interim goodwill impairment tests performed on testing dates after January 1, 2017. We plan to adopt this standard in 2017 and do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued updated guidance clarifying the definition of a business to help companies evaluate whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The amendments in this update are effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted in any interim or annual period provided that the entire ASU is adopted. We early adopted this standard effective first quarter of 2017, which did not have a material impact on our consolidated financial statements.
In October 2016, the FASB issued updated guidance which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The updated guidance will be effective in the first quarter of 2018 and early adoption is permitted. We early adopted this standard effective first quarter of 2017, which did not impact our consolidated financial statements.
In February 2016, FASB issued updated guidance requiring organizations that lease assets—referred to as "lessees"—to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases, when the lease has a term of more than 12 months. The updated standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We are currently evaluating the impact of this standard on our consolidated financial statements.
In January 2016, the FASB issued updated guidance on accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure for financial instruments. Under this updated standard, entities must measure equity investments at fair value and recognize changes in fair value in net income. For equity investments without readily determinable fair values, entities have the option to either measure these investments at fair value or at cost adjusted for changes in observable prices less impairment. The updated guidance does not apply to equity method investments or investments in consolidated subsidiaries. This new standard is effective for public companies for annual periods, including interim periods, beginning after December 15, 2017. We do not expect that the adoption of this updated standard will have a material impact on our consolidated financial statements.

6



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. On July 9, 2015, the FASB approved to defer the effective date of the new standard which is now effective for annual and interim reporting periods beginning after December 15, 2017. We expect to adopt this new standard using the modified retrospective transition method which will result in a cumulative adjustment as of the date of the adoption. We have substantially completed our evaluation of the guidance and determined the key areas of impact on our financial results and are currently in the process of quantifying the impacts. Our quantification of the impacts is ongoing and will not be finalized until the period of adoption. To date, our assessments have identified the following anticipated impacts:
We do not expect significant changes to revenue recognition for our Travel Network and Hospitality Solutions businesses
Our Airline Solutions business is expected to primarily be impacted by the new standard due to the following:
Under current revenue recognition guidance, we recognize revenue related to license fee and maintenance agreements ratably over the life of the contract. Under the new guidance, revenue for license fees will be recognized upon delivery of the license and ongoing maintenance services will continue to be recognized ratably over the length of the contract. For existing open agreements, this change will result in a beginning balance sheet adjustment and reduced revenue in subsequent years from these agreements, and before the impact of new sales.
Allocation of contract revenues among various products and solutions, and the timing of the recognition of those revenues, will be impacted by agreements with tiered pricing or variable rate structures that do not correspond with the goods or services delivered to the customer. For existing open agreements, this change will also result in a beginning balance sheet adjustment and reduced revenue in subsequent years from these agreements.
In the year of adoption, as a result of the new revenue recognition standard, the changes detailed above will result in a significant beginning balance sheet adjustment and we preliminarily estimate our consolidated revenue could be reduced by approximately $40 million to $80 million. Our assessment is ongoing and subject to finalization, such that the actual impact of the adoption may differ materially from this estimated range. This estimate will be updated in our Annual Report on Form 10-K for the year ending December 31, 2017.
Capitalization of incremental costs to obtain a contract (such as sales commissions), and recognition of these costs over the contract period will result in the recognition of an asset on our balance sheet and will impact our Airline and Hospitality Solutions segment. We currently expect that our results of operations will not be significantly impacted from the capitalization of these incremental costs.
We are continuing to evaluate the impacts of the new guidance to our results of operations, current accounting policies, processes, controls, systems and financial statement disclosures.
2. Acquisitions
Airpas Aviation
In April 2016, we completed the acquisition of Airpas Aviation, a software provider and consultancy company which offers route profitability and cost management software solutions. We acquired all of the outstanding stock and ownership interest of Airpas Aviation for net cash consideration of $9 million. Assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The allocation of purchase price includes $12 million of assets acquired, primarily consisting of $5 million of goodwill, not deductible for tax purposes, and $5 million of intangible assets. The intangible assets consist mainly of $4 million of acquired customer relationships with a useful life of 10 years and $1 million of purchased technology with a useful life of 5 years. Airpas Aviation is integrated and managed as part of our Airline and Hospitality Solutions segment. The acquisition of Airpas Aviation did not have a material impact to our consolidated financial statements, and therefore pro forma information is not presented.
Trust Group
In January 2016, we completed the acquisition of the Trust Group, a central reservations, revenue management and hotel
marketing provider, expanding our presence in Europe, the Middle East, and Africa ("EMEA") and Asia Pacific ("APAC"). The net cash consideration for the Trust Group was $156 million. The acquisition was funded using proceeds from our 5.25% senior secured notes due in 2023 and cash on hand. The Trust Group is integrated and managed as part of our Airline and Hospitality Solutions segment.

7



Purchase Price Allocation
A summary of the acquisition price and estimated fair values of assets acquired and liabilities assumed as of the date of acquisition is as follows (in thousands):
Cash and cash equivalents
$
4,209

Accounts receivable
10,564

Other current assets
917

Goodwill
98,930

Intangible assets:

Customer relationships
52,292

Purchased technology
23,362

Trademarks and brand names
2,183

Property and equipment, net
1,556

Current liabilities
(11,091
)
Deferred income taxes
(22,548
)
Total acquisition price
$
160,374

The goodwill recognized reflects expected synergies from combined operations and also the acquired assembled workforce of the Trust Group in EMEA and APAC. The goodwill is assigned to our Airline and Hospitality Solutions segment, of which $10 million is deductible for tax purposes. The weighted-average useful lives of the intangible assets acquired are 13 years for customer relationships, 2 years for purchased technology and 2 years for trademarks and brand names.
The acquisition of the Trust Group did not have a material impact to our consolidated financial statements, and therefore pro forma information is not presented.
Abacus
On July 1, 2015, we completed the acquisition of the remaining 65% interest in Abacus International Pte Ltd, a Singapore-based business-to-business travel e-commerce provider that serves the Asia-Pacific region, which is now named Sabre Asia Pacific Pte Ltd ("SAPPL"). Prior to the acquisition, SAPPL was 65% owned by a consortium of 11 airlines and the remaining 35% was owned by us. Separately, SAPPL has signed new long-term agreements with the consortium of 11 airlines to continue to utilize the Abacus GDS. In the third and fourth quarters of 2015, SAPPL completed the acquisition of the remaining interest in three national marketing companies, Abacus Distribution Systems (Hong Kong), Abacus Travel Systems (Singapore) and Abacus Distribution Systems Sdn Bhd (Malaysia) (the “NMCs” and, together with SAPPL, “Abacus”). SAPPL previously owned noncontrolling interests in the NMCs. The net cash consideration for Abacus was $443 million, which includes the effect of net working capital adjustments. The acquisition was funded with a combination of cash on hand and a $70 million draw on our revolving credit facility, which has since been repaid.

8



Purchase Price Allocation
A summary of the acquisition price and estimated fair values of assets acquired and liabilities assumed as of the date of acquisition is as follows (in thousands), which includes estimates for contingent liabilities of $25 million related to tax uncertainties:
Cash and cash equivalents
$
65,641

Accounts receivable, net
49,099

Other current assets
12,522

Intangible assets:
 
Customer relationships
319,000

Reacquired rights(1) 
113,500

Purchased technology
14,000

Supplier agreements
13,000

Trademarks and brand names
4,000

Property and equipment, net
6,402

Other assets
66,423

Current liabilities
(123,307
)
Noncurrent liabilities
(44,245
)
Noncurrent deferred income taxes
(78,054
)
Goodwill
292,267

 
710,248

Fair value of Sabre Corporation's previously held equity investment in AIPL
(200,000
)
Fair value of AIPL's previously held equity investment in NMCs
(1,880
)
Total acquisition price
$
508,368

______________________
(1) In connection with the acquisition of Abacus, we reacquired certain contractual rights that provided Abacus the exclusive right, within the Asia-Pacific region, to operate and profit from the Sabre GDS.

In connection with our acquisition of Abacus, we recognized a gain of $78 million for the year ended December 31, 2015, as a result of the remeasurement of our previously-held 35% equity interest in Abacus to its fair value as of the acquisition date. The fair value of the previously-held equity interest of $202 million in Abacus was estimated by applying a market approach and an income approach. The fair value measurement of the previously-held equity interest is based on significant inputs not observable in the market, and therefore represents Level 3 measurements (see Note 8, Fair Value, for a description of the fair value hierarchy). The fair value estimate for the previously-held equity interest is based on (i) a discount rate commensurate with the risks and inherent uncertainty in the business, (ii) an assumed long-term sustainable growth rate based on our most recent views of the long-term outlook, and (iii) assumed financial multiples of reporting entities deemed to be similar to Abacus. In addition, we recognized a gain of $12 million for the year ended December 31, 2015, associated with the settlement of a pre-existing agreement between us and SAPPL related to data processing services. The $78 million remeasurement gain and the $12 million settlement gain are reflected in other, net in our consolidated statements of operations in the year ended December 31, 2015. In the first quarter of 2017, we recognized a $16 million reversal of a liability resulting from renegotiation of an agreement with a travel agency in March 2017 that was considered to be out of market in our purchase accounting. The $16 million reversal is included as a reduction of cost of revenue in our consolidated statements of operations for the nine months ended September 30, 2017.
The goodwill recognized reflects expected synergies from combined operations and also the acquired assembled workforce of Abacus. The goodwill recognized is assigned to our Travel Network business and is not deductible for tax purposes. The useful lives of the intangible assets acquired are 20 years for customer relationships, 7 years for reacquired rights, 3 years for purchased technology, 7 years for supplier agreements and 2 years for trademarks and brand names.
3. Discontinued Operations
In the first quarter of 2015, we completed the divestiture of our Travelocity business through the sale of Travelocity.com and lastminute.com. Our Travelocity business has no remaining operations subsequent to these dispositions. The financial results of our Travelocity business are included in net income from discontinued operations in our consolidated statements of operations for all periods presented. For the three and nine months ended September 30, 2017, discontinued operations for our Travelocity business did not have material pretax income or loss. Our provision for income tax, for the nine months ended September 30, 2016, as it relates to our discontinued operations, included a $17 million tax benefit associated with the resolution of uncertain tax positions in our discontinued Travelocity business.



9



4. Impairment and Related Charges
Capitalized implementation costs and deferred customer advances and discounts are reviewed for impairment if events and circumstances indicate that their carrying amounts may not be recoverable. See Note 2, General Information in our consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on February 17, 2017 for more information. In May 2017, we notified an airline customer from our Airline Solutions’ business that, given the substantial amount of uncertainty of reaching an agreement regarding the implementation of services pursuant to the contract with the customer, we commenced a formal contract dispute resolution process. As a result of the uncertainty regarding this customer, we evaluated the recoverability of net capitalized contract costs related to the customer and recorded a charge of $92 million ($59 million, net of tax), during the second quarter of 2017. This charge was estimated based on a review of all balances with the customer including capitalized implementation costs, deferred customer advances and discounts, deferred revenue, contract liabilities, and other deferred charges. In the third quarter of 2017, the customer entered insolvency proceedings and our assessment did not result in a change to the impairment charge. We will continue to monitor our position through the insolvency proceedings. Given the uncertainty associated with the ultimate resolution of this dispute, there could be further adjustments to our consolidated statement of operations. This impairment charge was primarily non-cash and was recorded to Impairment and related charges in our consolidated statement of operations in the second quarter of 2017.
5. Income Taxes
Our effective tax rates for the nine months ended September 30, 2017 and 2016 were 25% and 28%, respectively. The decrease in the effective tax rate for the nine months ended September 30, 2017 as compared to the same period in 2016 was primarily driven by a relative increase in full year forecasted earnings in lower tax jurisdictions. The difference between our effective tax rates and the U.S. federal statutory income tax rate primarily results from our geographic mix of taxable income in various tax jurisdictions.
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 appropriate. In the third quarter of 2017, we recognized a tax expense of $1 million associated with the accrual of income tax reserves across our jurisdictions. Our net unrecognized tax benefits, excluding interest and penalties, included in our consolidated balance sheets, were $57 million and $49 million as of September 30, 2017 and December 31, 2016, respectively. 
Tax Receivable Agreement
Immediately prior to the closing of our initial public offering in April 2014, we entered into a tax receivable agreement (“TRA”) that provides the right to receive future payments from us to 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 “Pre-IPO Existing Stockholders”). The future payments will equal 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 (“NOLs”), capital losses and the ability to realize tax amortization of certain intangible assets (collectively, the “Pre-IPO Tax Assets”). Consequently, stockholders who are not Pre-IPO Existing Stockholders will only be entitled to the economic benefit of the Pre-IPO Tax Assets to the extent of our continuing 15% interest in those assets. These payment obligations are our obligations and not obligations of any of our subsidiaries. The actual utilization of the Pre-IPO Tax Assets, as well as the timing of any payments under the TRA, will vary depending upon a number of factors, including the amount, character and timing of our and our subsidiaries’ taxable income in the future.
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, we estimate that payments under the TRA relating to the Pre-IPO Tax Assets total $387 million, excluding interest. The TRA payments accrue interest in accordance with the terms of the TRA. The estimate of future payments considers the impact of Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), which imposes an annual limit on the ability of a corporation that undergoes an ownership change to use its net operating loss carryforwards to reduce its liability. We do not anticipate any material limitations on our ability to utilize U.S federal net operating loss carryforwards ("NOLs") under Section 382 of the Code. We expect a majority of the future payments under the TRA to be made over the next six years. No payments occurred in years 2014 to 2016 and we made payments of $101 million, which included accrued interest of approximately $1 million, in January 2017. As of September 30, 2017, the current portion of our TRA liability totaled $59 million, which includes $1 million of accrued interest. The remaining portion of $229 million is included in other noncurrent liabilities in our consolidated balance sheet as of September 30, 2017. Payments under the TRA are not conditioned upon the parties’ continuing ownership of the company. Changes in the utility of the Pre-IPO Tax Assets will impact the amount of the liability recorded in respect of the TRA. Changes in the utility of these Pre-IPO Tax Assets are recorded in income tax expense and any changes in the obligation under the TRA are recorded in other expense.



10



6. Debt
As of September 30, 2017 and December 31, 2016, our outstanding debt included in our consolidated balance sheets totaled $3,470 million and $3,446 million, respectively, which are net of debt issuance costs of $24 million and $27 million, respectively, and unamortized discounts of $10 million and $6 million, respectively. The following table sets forth the face values of our outstanding debt as of September 30, 2017 and December 31, 2016 (in thousands):
 
Rate
 
Maturity
 
September 30, 2017
 
December 31, 2016
Senior secured credit facilities:
 
 
 
 
 

 
 

New Term Loan A
L + 2.25%
 
July 2022
 
$
562,875

 
$

New Term Loan B
L + 2.25%
 
February 2024
 
1,885,774

 

Term Loan A(1)
L + 2.50%
 
July 2021
 

 
585,000

Term Loan B(1)
L + 2.75%
 
February 2024
 

 

Prior Term Loan B(2)
L + 3.00%
 
February 2019
 

 
1,420,896

Incremental Term Loan Facility(2)
L + 3.50%
 
February 2019
 

 
282,354

Term Loan C(2)
L + 3.00%
 
December 2017
 

 
49,313

Revolver, $400 million(3)
L + 2.25%
 
July 2022
 

 

5.375% senior secured notes due 2023
5.375%
 
April 2023
 
530,000

 
530,000

5.25% senior secured notes due 2023
5.25%
 
November 2023
 
500,000

 
500,000

Mortgage facility(4)
5.80%
 
April 2017
 

 
79,741

Capital lease obligations
 
 
 
 
24,485

 
31,190

Face value of total debt outstanding
 
 
 
 
3,503,134

 
3,478,494

Less current portion of debt outstanding
 
 
 
 
(59,019
)
 
(169,246
)
Face value of long-term debt outstanding
 
 
 
 
$
3,444,115

 
$
3,309,248

______________________________
(1)
Refinanced on August 23, 2017 by the New Term Loan A and the New Term Loan B. Term Loan B was executed on February 22, 2017.
(2)
Refinanced on February 22, 2017 by the Term Loan B.
(3)
Pursuant to the August 23, 2017 refinancing, the interest rate on the Preexisting Revolver was reduced from L+2.50% to L+2.25% and the maturity was extended from July 2021 to July 2022.
(4)
Extinguished on March 31, 2017 using proceeds from the Term Loan B.
 Senior Secured Credit Facilities
On August 23, 2017, Sabre GLBL entered into a Fourth Incremental Term Facility Amendment to our Amended and Restated Credit Agreement, Term Loan A Refinancing Amendment to the Credit Agreement, and Second Revolving Facility Refinancing Amendment to the Credit Agreement to refinance and modify the terms of the Term Loan B, the Term Loan A, and the existing Revolver ("Preexisting Revolver"), resulting in a reduction of the applicable margins for each of these instruments and approximately a one-year extension of the maturity of the Term Loan A and Preexisting Revolver (the “Refinancing”). We incurred no additional indebtedness as a result of the Refinancing. The Refinancing included a $400 million revolving credit facility ("Revolver") that replaced the $400 million Preexisting Revolver, as well as the application of the proceeds of the approximately $1,891 million incremental Term Loan B facility (“New Term Loan B”) and $570 million Term Loan A facility (“New Term Loan A”) to pay in full the $1,891 million of the Term Loan B and $570 million of Term Loan A incurred prior to August 23, 2017 under the Term Facility Agreement. The maturity of the Revolver and the New Term Loan A was extended from July 18, 2021 to July 1, 2022.
The applicable margins for the New Term Loan B were reduced to 2.25% per annum for Eurocurrency rate loans and 1.25% per annum for base rate loans. The applicable margins for the New Term Loan A and the Revolver were reduced to (i) between 2.50% and 1.75% per annum for Eurocurrency rate loans and (ii) between 1.50% and 0.75% per annum for base rate loans, in each case with the applicable margin for any quarter reduced by 25 basis points (up to 75 basis points total) if the Senior Secured First-Lien Net Leverage Ratio (as defined in the Amended and Restated Credit Agreement) is less than 3.75 to 1.0, 3.00 to 1.0, or 2.25 to 1.0, respectively. The applicable interest rate margins opened at 2.25% per annum for Eurocurrency rate loans and 1.25% per annum for base rate loans until receipt of the first compliance certificate, which is expected to be delivered by November 14, 2017.
On February 22, 2017, Sabre GLBL entered into a Third Incremental Term Facility Amendment to our Amended and Restated Credit Agreement (the “Term Facility Amendment”). The new agreement replaced the Prior Term Loan B, Incremental Term Loan Facility and Term Loan C (each as defined below) with a single class of term loan (the "Term Loan B") with an aggregate principal amount of $1,900 million maturing on February 22, 2024. Principal payments on the Term Loan B were due on a quarterly basis equal to 0.25% of the aggregate amount outstanding with the remaining amount outstanding due at maturity. The applicable margins for the Term Loan B were 2.75% between February 22, 2017 and August 23, 2017. The proceeds of $1,898 million, net of $2 million discount on the Term Loan B, were used to pay off approximately $1,761 million of all existing classes of outstanding term loans (other than the Term Loan A) and related accrued interest incurred prior to February 22, 2017 and $12 million in associated financing fees, which were recorded as debt modification costs in Other, net in the consolidated statement of operations. The remaining proceeds were used for purposes of repaying approximately $80 million of Sabre’s outstanding mortgage on its corporate headquarters on March 31, 2017, and for other general corporate purposes. Unamortized debt issuance costs and discount related to existing classes of outstanding term loans prior to the Term Facility Amendment of $9 million and $3 million, respectively, will

11



continue to be amortized over the remaining term of the Term Loan B along with the Term Loan B discount of $2 million. See Note 7, Derivatives for information regarding the discontinuation of hedge accounting related to our existing interest rate swaps as a result of the Term Facility Amendment.
On February 19, 2013, Sabre GLBL entered into 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 “Prior 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, which we now refer to as the Prior Revolver. On September 30, 2013, Sabre GLBL entered into an agreement to amend the Amended and Restated Credit Agreement to add a new class of term loans in the amount of $350 million (the “Incremental Term Loan Facility”).
On July 18, 2016, Sabre GLBL entered into a series of amendments to our Amended and Restated Credit Agreement (the “Credit Agreement Amendments”) to provide for an incremental term loan under a new class with an aggregate principal amount of $600 million (the “Term Loan A”) and to replace the Prior Revolver with a new revolving credit facility totaling $400 million (the “Revolver”), both of which mature in July 2021. Principal payments on the Term Loan A were due on a quarterly basis equal to 1.25% of its initial aggregate principal amount during the first two years of its term and 2.50% of its initial aggregate principal amount during the next three years of its term. The applicable margins for the Term Loan A and the Revolver are 2.50% for Eurocurrency borrowings and 1.50% for base rate borrowings, with a step down to 2.25% for Eurocurrency borrowings and 1.25% for base rate borrowings if the Senior Secured Leverage Ratio (as defined in the Amended and Restated Credit Agreement) is less than 2.50 to 1.00. The Term Loan A and the Revolver included an accelerated maturity of November 19, 2018, if on November 19, 2018 the Prior Term Loan B and Incremental Term Loan Facility had not been repaid in full or refinanced with a maturity date subsequent to July 18, 2021. As a result of the Term Facility Amendment, this refinancing has occurred. The amount of the Revolver commitments available as a letter of credit subfacility was set at $150 million.
The proceeds of $597 million, net of $3 million discount, on Term Loan A, were used to repay $350 million of outstanding principal on our Prior Term Loan B and Incremental Term Loan Facility, on a pro rata basis, repay the $120 million outstanding balance on our Prior Revolver immediately prior to the execution of the Credit Agreement Amendments, and to pay $11 million in associated financing fees. We are utilizing the remaining proceeds for general corporate purposes. We recognized a $4 million loss on extinguishment of debt in connection with these transactions.
We had no balance outstanding under the Revolver as of September 30, 2017 and as of December 31, 2016. We had outstanding letters of credit totaling $24 million and $35 million as of September 30, 2017 and December 31, 2016, respectively, which reduced our overall credit capacity under the Revolver.
7. 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 certain 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 hedge portions of our revenues and expenses denominated in foreign currencies with forward contracts. For example, when the dollar strengthens significantly against the foreign currencies, the decline in present value of future foreign currency expense is offset by losses 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 expense is offset by gains 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) ("OCI") 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 Other, net in the consolidated statements of operations during the current period. Derivatives not designated as hedging instruments are carried at fair value with changes in fair value reflected in Other, net in the consolidated statement of operations.

12



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 2018. 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, 2017 and 2016. As of September 30, 2017, we estimate that $6 million in gains will be reclassified from other comprehensive income (loss) to earnings over the next 12 months.
As of September 30, 2017 and December 31, 2016, 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):
Outstanding Notional Amounts as of September 30, 2017
Buy Currency
 
Sell Currency
 
Foreign Amount
 
USD Amount
 
Average
Contract Rate
Australian Dollar
 
US Dollar
 
22,500

 
17,060

 
0.7582

British Pound Sterling
 
US Dollar
 
26,800

 
34,966

 
1.3047

Indian Rupee
 
US Dollar
 
1,309,000

 
19,373

 
0.0148

Polish Zloty
 
US Dollar
 
257,000

 
67,325

 
0.2620

Singapore Dollar
 
US Dollar
 
75,800

 
55,191

 
0.7281

Outstanding Notional Amounts as of December 31, 2016
Buy Currency
 
Sell Currency
 
Foreign Amount
 
USD Amount
 
Average
Contract Rate
Australian Dollar
 
US Dollar
 
17,000

 
12,574

 
0.7396

Euro
 
US Dollar
 
1,800

 
2,031

 
1.1283

British Pound Sterling
 
US Dollar
 
17,750

 
23,691

 
1.3347

Indian Rupee
 
US Dollar
 
1,174,500

 
16,786

 
0.0143

Polish Zloty
 
US Dollar
 
258,250

 
64,778

 
0.2508

Singapore Dollar
 
US Dollar
 
47,700

 
34,383

 
0.7208

Interest Rate Swap Contracts—Interest rate swaps outstanding during the nine months ended September 30, 2017 and 2016 are as follows:
Notional Amount
 
Interest Rate
Received
 
Interest Rate Paid
 
Effective Date
 
Maturity Date
Designated as Hedging Instrument
 
 
 
 
 
 
$750 million
 
1 month LIBOR(1)
 
1.48%
 
December 31, 2015
 
December 30, 2016
$750 million
 
1 month LIBOR(2)
 
1.15%
 
March 31, 2017
 
December 31, 2017
$750 million
 
1 month LIBOR(2)
 
1.65%
 
December 29, 2017
 
December 31, 2018
$750 million
 
1 month LIBOR(2)
 
2.08%
 
December 31, 2018
 
December 31, 2019
$750 million
 
1 month LIBOR(2)
 
1.86%
 
December 31, 2019
 
December 31, 2020
 
 
 
 
 
 
 
 
 
Not Designated as Hedging Instrument(3)
 
 
 
 
 
 
$750 million
 
1 month LIBOR(1)
 
2.19%
 
December 30, 2016
 
December 29, 2017
$750 million
 
1.18%
 
1 month LIBOR(1)
 
March 31, 2017
 
December 31, 2017
$750 million
 
1 month LIBOR(1)
 
2.61%
 
December 29, 2017
 
December 31, 2018
$750 million
 
1.67%
 
1 month LIBOR(1)
 
December 29, 2017
 
December 31, 2018
______________________

(1)
Subject to a 1% floor.
(2)
Subject to a 0% floor.
(3)
As of February 22, 2017.


13



As a result of the Term Facility Amendment in the first quarter of 2017, we discontinued hedge accounting for our existing swap agreements as of February 22, 2017. Accumulated losses of $14 million in other comprehensive income as of the date hedge accounting was discontinued is amortized into interest expense through the maturity date of the respective swap agreements, and future interest rate swap payments made will be recorded in Other, net.  Losses reclassified from other comprehensive income to interest expense related to the derivatives that no longer qualified for hedge accounting were $2 million and $5 million for the three and nine months ended September 30, 2017, respectively. We also entered into new interest rate swaps with offsetting terms that are not designated as hedging instruments. Adjustments to the fair value of interest rate swaps not designated as hedging instruments resulted in a gain of $2 million and $5 million recorded in earnings in Other, net for the three and nine months ended September 30, 2017, respectively. We had no undesignated derivatives as of December 31, 2016.
In connection with the Term Facility Amendment, we entered into new forward starting interest rate swaps effective March 31, 2017 to hedge the interest payments associated with $750 million of the floating-rate Term Loan B. The total notional amount outstanding is $750 million in the remaining three months of 2017 and the full years 2018 and 2019. In September 2017, we entered into new forward starting interest rate swaps to hedge the interest payments associated with $750 million of the floating-rate Term Loan B. The total notional outstanding of $750 million becomes effective December 31, 2019 and extends through the full year 2020. We have designated these swaps as cash flow hedges. The effective portion of changes in the fair value of the interest rate swaps 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 estimated fair values of our derivatives as of September 30, 2017 and December 31, 2016 are as follows (in thousands):
 
 
Derivative Assets (Liabilities)
 
 
 
 
Fair Value as of
Derivatives Designated as Hedging Instruments
 
Consolidated Balance Sheet Location
 
September 30, 2017
 
December 31, 2016
Foreign exchange contracts
 
Other accrued liabilities
 
$

 
$
(7,360
)
Foreign exchange contracts
 
Prepaid expenses and other
 
5,796

 

Interest rate swaps
 
Other accrued liabilities
 
(498
)
 
(8,345
)
Interest rate swaps
 
Other noncurrent liabilities
 
(952
)
 
(7,339
)
 
 
 
 
$
4,346

 
$
(23,044
)
 
 
Derivative Assets (Liabilities)
 
 
 
 
Fair Value as of
Derivatives Not Designated as Hedging Instruments
 
Consolidated Balance Sheet Location
 
September 30, 2017
 
December 31, 2016
Interest rate swaps
 
Prepaid expenses and other
 
$
648

 
$

Interest rate swaps
 
Other assets, net
 
12

 

Interest rate swaps
 
Other accrued liabilities
 
(7,878
)
 

Interest rate swaps
 
Other noncurrent liabilities
 
(1,823
)
 

 
 
 
 
$
(9,041
)
 
$


The effects of derivative instruments, net of taxes, on OCI for the three and nine months ended September 30, 2017 and 2016 are as follows (in thousands):
 
 
Amount of Net 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
 
2017
 
2016
 
2017
 
2016
Foreign exchange contracts
 
$
1,800

 
$
1,282

 
$
10,378

 
$
724

Interest rate swaps
 
810

 
171

 
(1,038
)
 
(5,389
)
Total
 
$
2,610

 
$
1,453

 
$
9,340

 
$
(4,665
)

 
 
 
 
Amount of Net Losses (Gains) Reclassified from Accumulated OCI into Income (Effective Portion)
Derivatives in Cash Flow Hedging Relationships
 
Income Statement Location
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Foreign exchange contracts
 
Cost of revenue
 
$
(1,385
)
 
$
227

 
$
(502
)
 
$
1,240

Interest rate swaps
 
Interest Expense
 
1,169

 
589

 
3,963

 
1,753

Total
 
 
 
$
(216
)
 
$
816

 
$
3,461

 
$
2,993



14



8. 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.
The classification of a financial asset or liability 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 is 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 is 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.
The following tables present our assets (liabilities) that are required to be measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016 (in thousands):
 
 
 
Fair Value at Reporting Date Using
 
September 30, 2017
 
Level 1
 
Level 2
 
Level 3
Derivatives
 
 
 
 
 
 
 
Foreign currency forward contracts
$
5,796

 
$

 
$
5,796

 
$

Interest rate swap contracts
(10,491
)
 

 
(10,491
)
 

Total
$
(4,695
)
 
$

 
$
(4,695
)
 
$

 
 
 
 
Fair Value at Reporting Date Using
 
December 31, 2016
 
Level 1
 
Level 2
 
Level 3
Derivatives
 
 
 
 
 
 
 
Foreign currency forward contracts
$
(7,360
)
 
$

 
$
(7,360
)
 
$

Interest rate swap contracts
(15,684
)
 

 
(15,684
)
 

Total
$
(23,044
)

$

 
$
(23,044
)
 
$

There were no transfers between Levels 1 and 2 within the fair value hierarchy for the nine months ended September 30, 2017.
Other Financial Instruments
The carrying value of our financial instruments including cash and cash equivalents, and accounts receivable approximates their fair values. The fair values of our senior secured notes due 2023 and term loans under our Amended and Restated Credit Agreement are determined based on quoted market prices for the similar liability when traded as an asset in an active market, a Level 2 input. The outstanding principal balance of our mortgage facility approximated its fair value as of December 31, 2016. The fair value of the mortgage facility was determined based on estimates of current interest rates for similar debt, a Level 2 input.

15



The following table presents the fair value and carrying value of our senior notes and borrowings under our senior secured credit facilities as of September 30, 2017 and December 31, 2016, (in thousands):
 
 
Fair Value at
 
Carrying Value at (4)
Financial Instrument
 
September 30, 2017
 
December 31, 2016
 
September 30, 2017
 
December 31, 2016
New Term Loan A
 
$
564,282

 
$

 
$
560,424

 
$

New Term Loan B
 
1,898,738

 

 
1,878,452

 

Term Loan A(1)
 

 
583,538

 

 
582,595

Term Loan B(1)
 

 

 

 

Prior Term Loan B(2)
 

 
1,435,993

 

 
1,417,616

Incremental Term Loan Facility(2)
 

 
283,413

 

 
282,354

Term Loan C(2)
 

 
49,436

 

 
49,237

Revolver, $400 million(3)
 

 

 

 

5.375% Senior secured notes due 2023
 
549,085

 
542,919

 
530,000

 
530,000

5.25% Senior secured notes due 2023
 
516,840

 
515,000

 
500,000

 
500,000

  
______________________________
(1)
Refinanced on August 23, 2017 by the New Term Loan A and the New Term Loan B. Term Loan B was executed on February 22, 2017.
(2)
Refinanced on February 22, 2017 by the Term Loan B.
(3)
Pursuant to the August 23, 2017 refinancing, the interest rate on the Preexisting Revolver was reduced from L+2.50% to L+2.25% and the maturity was extended from July 2021 to July 2022.
(4)
Excludes net unamortized debt issuance costs.

9. Accumulated Other Comprehensive Income (Loss)
As of September 30, 2017 and December 31, 2016, the components of accumulated other comprehensive income (loss), net of related deferred income taxes, are as follows (in thousands):
 
September 30, 2017
 
December 31, 2016
Defined benefit pension and other post retirement benefit plans
$
(102,583
)
 
$
(105,036
)
Unrealized loss on foreign currency forward contracts, interest rate swaps, and available-for-sale securities
(2,476
)
 
(15,499
)
Unrealized foreign currency translation gain (losses)
8,559

 
(2,264
)
Total accumulated other comprehensive loss, net of tax
$
(96,500
)
 
$
(122,799
)
The amortization of actuarial losses and periodic service credits associated with our retirement-related benefit plans is included in selling, general and administrative expenses. See Note 7, Derivatives, for information on the income statement line items affected as the result of reclassification adjustments associated with derivatives. 
10. Earnings Per Share
The following table reconciles the numerators and denominators used in the computations of basic and diluted earnings per share from continuing operations (in thousands, except per share data):
 
Three Months Ended September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
Income from continuing operations
$
92,825

 
$
42,256

 
$
166,395

 
$
210,370

Less: Net income attributable to noncontrolling interests
1,307

 
1,047

 
3,726

 
3,227

Net income from continuing operations available to common stockholders, basic and diluted
$
91,518

 
$
41,209

 
$
162,669

 
$
207,143

Denominator:
 
 
 
 
 
 
 
Basic weighted-average common shares outstanding
277,477

 
278,399

 
277,754

 
277,125

Add: Dilutive effect of stock options and restricted stock awards
892

 
5,063

 
1,894

 
5,794

Diluted weighted-average common shares outstanding
278,369

 
283,462

 
279,648

 
282,919

Earning per share from continuing operations:
 
 
 
 
 
 
 
Basic
$
0.33

 
$
0.15

 
0.59

 
0.75

Diluted
$
0.33

 
$
0.15

 
0.58

 
0.73

 
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 5

16



million and 1 million of anti-dilutive common stock equivalents for each of the nine months ended September 30, 2017 and 2016, respectively.
11. Contingencies
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.    
Antitrust Litigation and DOJ Investigation
US Airways Antitrust Litigation
In April 2011, US Airways filed suit against 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 fewer than 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, relating to our contracts with US Airways, which US Airways claims contain anticompetitive provisions, and an alleged conspiracy with the other GDSs, allegedly to maintain the industry structure and not to compete for content. We strongly deny all of the allegations made by US Airways.
Sabre filed summary judgment motions in April 2014. In January 2015, the court issued an order granting Sabre's summary judgment motions in part, eliminating a majority of US Airways' alleged damages and rejecting its request for injunctive relief by which US Airways sought to bar Sabre from enforcing certain provisions in our contracts. In September 2015, the court also dismissed US Airways' claim for declaratory relief. In February 2017, US Airways sought reconsideration of the court's opinion dismissing the claim for declaratory relief, which the court denied in March 2017.
The trial on the remaining claims commenced in October 2016. In December 2016, the jury issued a verdict in favor of US Airways with respect to its claim under Section 1 of the Sherman Act regarding Sabre's contract with US Airways and awarded it $5 million in single damages. The jury rejected US Airways' claim alleging a conspiracy with the other GDSs. We continue to believe that our business practices and contract terms are lawful. In January 2017, we filed a motion seeking judgment as a matter of law in favor of Sabre on the one claim on which the jury found for US Airways, which the court denied in March 2017.
Based on the jury’s verdict, in March 2017 the court entered final judgment in favor of US Airways in the amount of $15 million, which is three times the jury’s award of $5 million as required by the Sherman Act. US Airways is also entitled to receive reasonable attorneys’ fees and costs under the Sherman Act. As such, it filed a motion seeking approximately $125 million in attorneys’ fees and costs, the amount of which we strongly dispute. To date, the court has not ruled on US Airways’ motion seeking attorneys’ fees and costs.
In April 2017, we filed an appeal with the United States Court of Appeals for the Second Circuit seeking a reversal of the judgment. US Airways also filed a counter-appeal challenging earlier court orders, including the above-referenced orders dismissing and/or issuing summary judgment as to portions of its claims and damages. In connection with this appeal, we posted an appellate bond equal to the aggregate amount of the $15 million judgment entered plus interest, which stayed the judgment pending the appeal. If we also choose to appeal any judgment awarding attorneys’ fees and costs to US Airways, we may be required to file another appellate bond equal to the amount awarded by the court, plus interest, which, to the extent required by the issuer of the bond, we expect to secure with letters of credit issued under our Revolver.
We have accrued a loss of $32 million, which represents the court's final judgment of $15 million, plus our estimate of $17 million for US Airways' reasonable attorneys’ fees, expenses and costs. We are unable to estimate the exact amount of the loss associated with the verdict, but we estimate that there is a range of outcomes between $32 million and $65 million, inclusive of the trebled damage award of approximately $15 million. No amount within the range is considered a better estimate than any other amount within the range and therefore, the minimum within the range was recorded in selling, general and administrative expense for the fourth quarter of 2016. As noted above, the amount of attorneys' fees and costs to be awarded is subject to final decision by the court. The ultimate resolution of this matter may be greater or less than the amount recorded and, if greater, could adversely affect our results of operations. We have and will incur significant fees, costs and expenses for as long as the lawsuit, including any appeal, 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, including any appeal or changes to our business that may be required as a result of the litigation. Depending on the outcome of the litigation, any of these consequences could have a material adverse effect on our business, financial condition and results of operations.

17



Putative Class Action Lawsuit on Antitrust Claims
In July 2015, a putative class action lawsuit was filed against us and two other GDSs, in the United States District Court for the Southern District of New York. The plaintiffs, who are asserting claims on behalf of a putative class of consumers in various states, are generally alleging that the GDSs conspired to negotiate for full content from the airlines, resulting in higher ticket prices for consumers, in violation of various federal and state laws. The plaintiffs sought an unspecified amount of damages in connection with their state law claims, and they requested injunctive relief in connection with their federal claim. In July 2016, the court granted, in part, our motion to dismiss the lawsuit, finding that plaintiffs’ state law claims are preempted by federal law, thereby precluding their claims for damages. The court declined to dismiss plaintiffs’ claim seeking an injunction under federal antitrust law. The plaintiffs may appeal the court’s dismissal of their state law claims upon a final judgment. We believe that the losses associated with this case are neither probable nor estimable and therefore have not accrued any losses as of September 30, 2017. We may incur significant fees, costs and expenses for as long as this litigation is ongoing. We intend to vigorously defend against the remaining claims.
Putative Class Action Lawsuit on Cybersecurity Incident
In July 2017, a putative class action lawsuit was filed against us in the United States District Court for the Central District of California. The plaintiffs are asserting various claims under state law, including tort, contract and statutory claims, on behalf of a putative class of individuals residing in the United States and whose personally identifiable information allegedly was disclosed, in connection with the cybersecurity incident involving unauthorized access to payment information contained in a subset of hotel reservations process through the SHS Central Reservation System. The plaintiffs are seeking equitable relief and an unspecified amount of damages in connection with their claims. We filed a motion to dismiss the lawsuit in September 2017, which the court granted in October 2017, dismissing the plaintiffs' claims in their entirety, without prejudice. The plaintiffs have until mid-November to amend their allegations and refile their complaint. We believe that the losses associated with this case are neither probable nor estimable and therefore have not accrued any losses as of September 30, 2017. We may incur significant fees, costs and expenses for as long as this litigation is ongoing. We intend to vigorously defend against this matter. See “—Other” below for more information and an update on our internal investigation.
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. We have not received any communications from the DOJ regarding this matter for several years; however, we have not been notified that this matter is closed.
Insurance Carriers
We have resolved disputes with some of our insurance carriers for failing to reimburse defense costs incurred in our previous litigation with American Airlines, which we settled in October 2012. Both insurance carriers admitted there is coverage and agreed to defend us, 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 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. In August 2017, we settled this matter for the aggregate amount of $58 million recorded as a reduction to selling, general and administrative expenses ("SG&A"), which was partially offset by accrued legal and related expenses of $15 million due to be paid in the fourth quarter of 2017. In our consolidated results of operations for the three months ended, September 30, 2017, the net of tax impact from this settlement was $27 million. In the third quarter of 2017, we received $29 million of the aggregate settled amount and $29 million is due in the first quarter of 2018.
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. The DIT has continued to issue further tax assessments on a similar basis for subsequent years; however, the tax assessments for assessment years ending March 2007 and later are no longer material. We appealed the tax assessments for assessment years ending March 1998 through March 2006 and the Indian Commissioner of Income Tax Appeals returned a mixed verdict. We filed further appeals with the Income Tax Appellate Tribunal (“ITAT”). The ITAT ruled in our favor on June 19, 2009

18



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. The initial Supreme Court hearing has now been scheduled. We have appealed the tax assessments for the assessment years ended March 2013 and March 2015 with the ITAT and no trial date has been set for these subsequent years.
In addition, SAPPL is currently a defendant in similar income tax litigation brought by the DIT. The dispute arose when the DIT asserted that SAPPL has a permanent establishment within the meaning of the Income Tax Treaty between Singapore and India and accordingly issued tax assessments for assessment years ending March 2000 through March 2005. SAPPL appealed the tax assessments, and the Indian Commissioner of Income Tax (Appeals) returned a mixed verdict. SAPPL filed further appeals with the ITAT. The ITAT ruled in SAPPL’s favor, finding that no income would be chargeable to tax for assessment years ending March 2000 through March 2005. The DIT appealed those decisions to the Delhi High Court. No hearing date has been set. The DIT also assessed taxes on a similar basis for assessment years ending March 2006 through March 2014 and appeals for assessment years ending March 2006 through 2014 are pending before the ITAT.
If the DIT were to fully prevail on every claim against us, including SAPPL, we could be subject to taxes, interest and penalties of approximately $47 million as of September 30, 2017. We intend to continue to aggressively defend against each of the foregoing 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. We do not believe this outcome is more likely than not and therefore have not made any provisions or recorded any liability for the potential resolution of any of these claims.
Indian Service Tax Litigation
SAPPL's Indian subsidiary is also subject to litigation by the India Director General (Service Tax) ("DGST"), which has assessed the subsidiary for multiple years related to its alleged failure to pay service tax on marketing fees and reimbursements of expenses. Indian courts have returned verdicts favorable to the Indian subsidiary. The DGST has appealed the verdict to the Indian Supreme Court. We do not believe that an adverse outcome is probable and therefore have not made any provisions or recorded any liability for the potential resolution of any of these claims.
Litigation and Administrative Audit Proceedings Relating to Hotel Occupancy Taxes
On January 23, 2015, we sold Travelocity.com to Expedia. Pursuant to the Travelocity Purchase Agreement, we will continue to be liable for pre-closing liabilities of Travelocity, including fees, charges, costs and settlements relating to litigation arising from hotels booked on the Travelocity platform prior to our previous long-term strategic marketing agreement with Expedia (the “Expedia SMA”). Fees, charges, costs and settlements relating to litigation from hotels booked on Travelocity.com subsequent to the Expedia SMA and prior to the date of the sale of Travelocity.com will be shared with Expedia in accordance with the terms set forth in the Expedia SMA. We are jointly and severally liable for certain indemnification obligations under the Travelocity Purchase Agreement for liabilities that may arise out of these litigation matters, which could adversely affect our cash flow.
Beginning in 2004, various state and local governments in the United States have filed more than 80 lawsuits against us and other OTAs pertaining primarily to whether our discontinued Travelocity segment and other OTAs owe sales or occupancy taxes on the revenues they earned from facilitating hotel reservations, where the customer paid us an amount at the time of booking that included (i) service fees, which we collected and retained, and (ii) the price of the hotel room and amounts for occupancy or other local taxes, which we passed along to the hotel supplier. The complaints generally allege, among other things, that the defendants failed to pay to the relevant taxing authority hotel occupancy taxes on the service fees. Several lawsuits also allege that the OTAs owe state or local taxes on their fees for facilitating car rental reservations. Courts have dismissed many of these lawsuits, some for failure to exhaust administrative remedies and some on the basis that we are not subject to sales or occupancy tax. The remaining lawsuits are in various stages of litigation. We have also settled some cases individually, most for amounts not material to our results of operations, 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.
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. As of September 30, 2017 and 2016, our reserve was not material for the potential resolution of issues identified related to litigation involving hotel and car sales, occupancy or excise taxes. We did not record material charges associated with these cases during the three and nine months ended September 30, 2017 and 2016. 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, two 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 is pending in Texas state court, where the court is currently considering the plaintiffs’ motion to certify a class action; and the other is pending in federal court, but has been

19



stayed pending the outcome of the Texas state court action. We believe the notice we provided was appropriate and therefore have not accrued any losses related to these cases.
Furthermore, 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.
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.
Other
As previously disclosed, we became aware of an incident involving unauthorized access to payment information contained in a subset of hotel reservations processed through the SHS Central Reservation System. Our investigation was supported by third party experts, including a leading cybersecurity firm. Our investigation determined that an unauthorized party: obtained access to account credentials that permitted access to a subset of hotel reservations processed through the SHS Central Reservation System; used the account credentials to view a credit card summary page on the SHS Central Reservation System and access payment card information (although we use encryption, this credential had the right to see unencrypted card data); and first obtained access to payment card information and some other reservation information on August 10, 2016. The last access to payment card information was on March 9, 2017. The unauthorized party was able to access information for certain hotel reservations, including cardholder name; payment card number; card expiration date; and, for a subset of reservations, card security code. The unauthorized party was also able, in some cases, to access certain information such as guest name(s), email, phone number, address, and other information if provided to the SHS Central Reservation System. Information such as Social Security, passport, or driver’s license number was not accessed. The investigation did not uncover forensic evidence that the unauthorized party removed any information from the system, but it is a possibility. We took successful measures to ensure this unauthorized access to the SHS Central Reservation System was stopped and is no longer possible. There is no indication that any of our systems beyond the SHS Central Reservation System, such as Sabre’s Airline Solutions and Travel Network platforms, were affected or accessed by the unauthorized party. We notified law enforcement and the payment card brands, who engaged a PCI forensic investigator to investigate this incident. We have notified customers and other companies that use or interact with, directly or indirectly, the SHS Central Reservation System about the incident. We are also cooperating with various governmental authorities that are investigating this incident. Although the costs related to this incident, including any associated penalties assessed by any governmental authority or payment card brand, as well as any other impacts or remediation related to this incident, may be material, it is not possible at this time to determine whether we will incur, or to reasonably estimate the amount of, any liabilities in connection with this incident. See “—Putative Class Action Lawsuit on Cybersecurity Incident” above for a discussion of a lawsuit filed in connection with this incident. We maintain insurance that covers certain aspects of cyber risks, and we continue to work with our insurance carriers in this matter.
12. 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 two reportable segments: (i) Travel Network and (ii) Airline and Hospitality Solutions, which 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 software-as-a-service (“SaaS”) based and hosted applications and platforms to market to the travel industry.
In January 2016 and April 2016, we completed the acquisitions of the Trust Group and Airpas Aviation, respectively, which are integrated and managed as part of our Airline and Hospitality Solutions segment.
Our CODM utilizes Adjusted Gross Profit and Adjusted EBITDA as the measures of profitability to evaluate performance of our segments and allocate resources. Corporate includes a technology organization that provides development and support activities to our segments. The majority of costs associated with our technology organization are allocated to the segments primarily based on the segments' usage of resources. Benefit expenses, facility costs and depreciation expense on the corporate headquarters building are allocated to the segments based on headcount. Unallocated corporate costs include certain shared expenses such as accounting, human resources, legal, corporate systems, and other shared technology costs, as well as all amortization of intangible assets and any related impairments that originate from purchase accounting, stock-based compensation, restructuring charges, legal reserves, 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 fees charged by Travel Network to Airline and Hospitality Solutions for airline trips booked through our GDS.

20



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 Gross Profit and Adjusted EBITDA which are not recognized terms under GAAP. Our uses of Adjusted Gross Profit 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 Gross Profit as operating income adjusted for selling, general and administrative expenses, impairment and related charges, amortization of upfront incentive consideration, and the cost of revenue portion of depreciation and amortization, restructuring and other costs, and stock-based compensation included in cost of revenue.
We define Adjusted EBITDA as income from continuing operations adjusted for depreciation and amortization of property and equipment, amortization of capitalized implementation costs, acquisition-related amortization, amortization of upfront incentive consideration, impairment and related charges, interest expense, net, other, net, restructuring and other costs, acquisition-related costs, litigation costs (reimbursements), net, stock-based compensation, loss on extinguishment of debt and income taxes.
We define Adjusted Capital Expenditures as additions to property and equipment and capitalized implementation costs during the periods presented.
Segment information for the nine months ended September 30, 2017 and 2016 is as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenue
 

 
 

 
 
 
 
Travel Network
$
632,349

 
$
582,364

 
$
1,931,441

 
$
1,805,750

Airline and Hospitality Solutions
274,923

 
262,391

 
804,679

 
752,940

Eliminations
(6,666
)
 
(5,773
)
 
(19,498
)
 
(14,923
)
Total revenue
$
900,606

 
$
838,982

 
$
2,716,622

 
$
2,543,767

 
 
 
 
 
 
 
 
Adjusted Gross Profit (a)
 

 
 

 
 
 
 
Travel Network
$
270,140

 
$
255,657

 
$
863,307

 
$
842,557

Airline and Hospitality Solutions
132,069

 
114,136

 
360,259

 
323,481

Corporate
(30,977
)
 
(24,812
)
 
(82,979
)
 
(59,596
)
Total
$
371,232

 
$
344,981

 
$
1,140,587

 
$
1,106,442

 
 
 
 
 
 
 
 
Adjusted EBITDA (b)
 

 
 

 
 
 
 
Travel Network
$
237,295

 
$
219,865

 
$
773,408

 
$
744,626

Airline and Hospitality Solutions
111,653

 
95,072

 
298,895

 
269,955

Total segments
348,948

 
314,937

 
1,072,303

 
1,014,581

Corporate
(86,022
)
 
(77,080
)
 
(250,399
)
 
(217,760
)
Total
$
262,926

 
$
237,857

 
$
821,904

 
$
796,821

 
 
 
 
 
 
 
 
Depreciation and amortization
 

 
 

 
 
 
 
Travel Network
$
20,511

 
$
19,519

 
$
61,620

 
$
57,725

Airline and Hospitality Solutions
43,205

 
41,732

 
121,839

 
114,080

Total segments
63,716

 
61,251

 
183,459

 
171,805

Corporate
33,326

 
47,979

 
112,270

 
132,151

Total
$
97,042

 
$
109,230

 
$
295,729

 
$
303,956

 
 
 
 
 
 
 
 
Adjusted Capital Expenditures (c)
 

 
 

 
 
 
 
Travel Network
$
19,895

 
$
25,763

 
$
69,151

 
$
72,918

Airline and Hospitality Solutions
53,034

 
68,990

 
171,423

 
200,455

Total segments
72,929

 
94,753

 
240,574

 
273,373

Corporate
18,996

 
16,195

 
50,205

 
45,436

Total
$
91,925

 
$
110,948

 
$
290,779

 
$
318,809

______________________________

21



(a)
The following table sets forth the reconciliation of Adjusted Gross Profit to operating income in our statement of operations (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Adjusted Gross Profit
$
371,232

 
$
344,981

 
$
1,140,587

 
$
1,106,442

Less adjustments:
 

 
 

 
 

 
 

Selling, general and administrative
91,840

 
155,182

 
383,137

 
435,924

Impairment and related charges(7)

 

 
92,022

 

Cost of revenue adjustments:
 

 
 

 
 

 
 

Depreciation and amortization (1)
79,976

 
77,397

 
229,688

 
209,276

Restructuring and other costs (4)

 

 
12,976

 

Amortization of upfront incentive consideration (2)
18,005

 
17,139

 
50,298

 
43,372

Stock-based compensation
4,615

 
5,113

 
13,626

 
14,259

Operating income
$
176,796

 
$
90,150

 
$
358,840

 
$
403,611

(b)
The following table sets forth the reconciliation of Adjusted EBITDA to income from continuing operations in our statement of operations (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Adjusted EBITDA
$
262,926

 
$
237,857

 
$
821,904

 
$
796,821

Less adjustments:
 
 
 
 
 
 
 
Depreciation and amortization of property and equipment (1a)
66,332

 
58,271

 
191,442

 
168,150

Amortization of capitalized implementation costs (1b)
10,484

 
11,529

 
28,621

 
28,228

Acquisition-related amortization (1c)
20,226

 
39,430

 
75,666

 
107,578

Amortization of upfront incentive consideration (2)
18,005

 
17,139

 
50,298

 
43,372

Impairment and related charges(7)

 

 
92,022

 

Interest expense, net
38,919

 
38,002

 
116,577

 
116,414

Loss on extinguishment of debt
1,012

 
3,683

 
1,012

 
3,683

Other, net (3)
3,802

 
(281
)
 
19,788

 
(4,517
)
Restructuring and other costs (4)

 
583

 
25,304

 
1,823

Acquisition-related costs (5)

 
90

 

 
714

Litigation costs (reimbursements), net (6)
(40,929
)
 
7,034

 
(36,470
)
 
5,089

Stock-based compensation
11,655

 
12,913

 
34,413

 
36,012

Provision for income taxes
40,595

 
7,208

 
56,836

 
79,905

Income from continuing operations
$
92,825

 
$
42,256

 
$
166,395

 
$
210,370

______________________________________________________
(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 years 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.
(3)
In the nine months ended 2017, we recognized a $15 million loss related to debt modification costs associated with our debt refinancing. In the first quarter of 2016, we recognized a gain of $6 million associated with the receipt of an earn-out payment from the sale of a business in 2013. In addition, other, net includes 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 represent 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. In the second quarter of 2017, we recorded a $25 million charge associated with an announced action to reduce our workforce. This reduction aligns our operations with business needs and implements an ongoing cost and organizational structure consistent with our expected growth needs and opportunities.
(5)
Acquisition-related costs represent fees and expenses incurred associated with the acquisition of the Trust Group and Airpas Aviation (see Note 2, Acquisitions).
(6)
Litigation costs (reimbursements), net represent charges and legal fee reimbursements associated with antitrust litigation. In the third quarter of 2017, we recorded a $43 million reimbursement, net of accrued legal and related expenses, from a settlement with our insurance carriers with respect to the American Airlines litigation (see Note 11, Contingencies).

22



(7)
In the three months ended June 30, 2017, we recorded an impairment charge of $92 million associated with net capitalized contract costs related to an Airline Solutions' customer based on our analysis of the recoverability of such amounts. A formal contract dispute resolution process was commenced and due to the uncertainty of the ultimate outcome, we recorded this estimated charge. In the third quarter of 2017, the customer entered insolvency proceedings and our assessment of the impairment charge recorded in the second quarter did not change (see Note 4, Impairment and Related Charges).
(c)
Includes capital expenditures and capitalized implementation costs as summarized below (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Additions to property and equipment
$
75,401

 
$
89,639

 
$
242,811

 
$
254,232

Capitalized implementation costs
16,524

 
21,309

 
47,968

 
64,577

Adjusted Capital Expenditures
$
91,925

 
$
110,948

 
$
290,779

 
$
318,809

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q, including this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2, contains information that may constitute forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts, such as statements regarding our future financial condition or results of operations, our prospects and strategies for future growth, the development and introduction of new products, and the implementation of our marketing and branding strategies. In many cases, you can identify forward-looking statements by terms such as "expects," "potential," "will," "estimates," "outlook," "preliminary," "could," "should," "may," "intend," "believes," "anticipates," "predicts," "plans," or the negative of these terms or other comparable terminology. The forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions and are subject to risks, uncertainties and changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement. Certain of these risks, uncertainties, and changes in circumstances are described in the "Risk Factors" section of this Quarterly Report on Form 10-Q and in the “Risk Factors” and “Forward-Looking Statements” sections included in our Annual Report on Form 10-K filed with the SEC on February 17, 2017. 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. You are cautioned not to place undue reliance on these forward-looking statements. Unless required by law, we undertake 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 Annual Report on Form 10-K filed with the SEC on February 17, 2017.
Overview
We are a leading technology solutions provider to the global travel and tourism industry. We operate through two business segments: (i) Travel Network, our global business-to-business travel marketplace for travel suppliers and travel buyers, and (ii) Airline and Hospitality Solutions, an extensive suite of leading software solutions primarily for airlines and hoteliers. 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 analytics.
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 GDS; for Airline and Hospitality Solutions, this fee is a recurring usage-based fee for the use of our SaaS and hosted systems, as well as upfront fees and professional service fees. Items that are not allocated to our business segments are identified as corporate and primarily include certain shared technology costs, stock-based compensation expense, litigation costs, corporate headcount-related costs, and other items that are not identifiable with either one of our segments.
In January 2016, we completed the acquisition of the Trust Group, a central reservations, revenue management and hotel marketing provider, expanding our presence in EMEA and APAC, for net cash consideration of $156 million. The Trust Group is integrated and managed as part of our Airline and Hospitality Solutions segment.

23



Recent Developments Affecting our Results of Operations
In May 2017, we notified AirBerlin, an airline customer of our Airline Solutions’ business that, given the substantial amount of uncertainty of reaching an agreement regarding the implementation of services pursuant to their contract, we are commencing a formal contract dispute resolution process.  As a result of the uncertainty, we evaluated the recoverability of net capitalized contract costs related to the customer and impacts from associated future contractual obligations and recorded a charge of $92 million ($59 million, net of tax), during the three months ended June 30, 2017. Given the uncertainty associated with the ultimate resolution of this dispute, there could be further adjustments to our consolidated statement of operations. In the third quarter of 2017, the customer entered insolvency proceedings and our assessment did not result in a change to the impairment charge. The impairment charge did not impact our cash flows from operations. This impairment charge resulted in a material impact on our financial results, and related matters may adversely impact our future results of operations and cash flow.
The rate of growth of Airline Solutions revenue is impacted by the previously announced termination of an agreement with Southwest Airlines related to services and processing for their legacy reservations system. Future revenues may be negatively impacted by, among other things, reduced sales of our software solutions and lower growth in Passengers Boarded due to delayed or uncertain implementations and the insolvency of an airline carrier, Alitalia Compagnia Aerea Italiana S.p.A. operating as Alitalia (“Alitalia”), that has recently implemented our services.
Factors Affecting our Results
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” included in our Annual Report on Form 10-K filed with the SEC on February 17, 2017. 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 this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K filed with the SEC on February 17, 2017.
Components of Revenues and Expenses
Revenues
Travel Network primarily generates revenues from Direct Billable Bookings processed on our GDS as well as the sale of aggregated bookings data to carriers. Airline and Hospitality Solutions primarily generates revenue through upfront solution fees and recurring usage-based fees for the use of our software solutions hosted on secure platforms or deployed through our SaaS platform. Airline and Hospitality Solutions also generates revenue through professional service fees and software licensing fees. In addition, certain professional service fees are discrete sales opportunities that may have a high degree of variability from period to period, and we cannot guarantee that we will have such fees in the future consistent with prior periods.
In connection with the adoption of the new revenue recognition standard effective January 1, 2018, based on preliminary information, in the year of adoption and subsequent years, we currently expect a significant reduction in revenues for the Airline Solutions business for existing open contracts as of that date, and before the impact of new sales. See "—Recent Accounting Pronouncements."
Cost of Revenue
Cost of revenue incurred by Travel Network and Airline and Hospitality Solutions consists of expenses related to our technology infrastructure that hosts our GDS and software solutions, salaries and benefits, and allocated overhead such as facilities and other support costs. Cost of revenue for Travel Network also includes incentive consideration expense representing payments or other consideration to travel agencies for reservations made on our GDS which accrue on a monthly basis.
Corporate cost of revenue includes expenses associated with our technology organization that provides development and support activities to our segments. The costs associated with our technology organization that do not get allocated to the segments based on the segments’ usage of resources primarily include shared technology infrastructure and labor costs. Corporate cost of revenue also includes stock-based compensation expense, professional service fees and other items that are not directly identifiable with our segments. Over time, we expect a substantial increase in stock-based compensation expense, as we have moved to granting broad-based equity awards annually, rather than biennially, beginning in March 2016 primarily in the form of restricted stock units.  These awards generally vest over a four-year period, with 25% vesting annually.  Stock compensation expense is based on the number of restricted stock units granted and the stock price on the date of grant, which is amortized over the four-year vesting period.
Depreciation and amortization included in cost of revenue is associated with property and equipment, amortization of contract implementation costs which relates to Airline and Hospitality Solutions, intangible assets for technology purchased through acquisitions or established with our take-private transaction, and software developed for internal use that supports our revenue, businesses and systems. Cost of revenue also includes amortization of upfront incentive consideration representing upfront

24



payments or other consideration provided 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, including stock-based compensation, for employees that sell our services to new customers and administratively support the business, information technology and communication costs, professional service fees, certain settlement charges and costs to defend legal disputes, bad debt expense, depreciation and amortization and other overhead costs. Over time, we expect a substantial increase in stock-based compensation expense as described above.

Intersegment Transactions
We account for significant intersegment transactions as if the transactions were with third parties, that is, at estimated current market prices. Airline and Hospitality Solutions pays fees to Travel Network for airline trips and hotel stays booked through our GDS.
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 these key metrics for the periods indicated (in thousands):
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Travel Network
 

 
 

 
 
 
 
 
 
 
 
Direct Billable Bookings - Air
114,259

 
110,585

 
3.3%
 
356,478

 
342,353

 
4.1%
Direct Billable Bookings - Non-Air
15,540

 
15,165

 
2.5%
 
46,934

 
46,078

 
1.9%
Total Direct Billable Bookings
129,799

 
125,750

 
3.2%
 
403,412

 
388,431

 
3.9%
Airline Solutions Passengers Boarded
186,887

 
206,332

 
(9.4)%
 
599,097

 
589,512

 
1.6%
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 Gross Profit, Adjusted Net Income, Adjusted EBITDA, Adjusted Capital Expenditures, Free Cash Flow, and ratios based on these financial measures.
We define Adjusted Gross Profit as operating income (loss) adjusted for selling, general and administrative expenses, impairment and related charges, amortization of upfront incentive consideration, and the cost of revenue portion of depreciation and amortization, restructuring and other costs, litigation costs, net, and stock-based compensation included in cost of revenue.
We define Adjusted Net Income as net income attributable to common stockholders adjusted for income (loss) from discontinued operations, net of tax, net income attributable to noncontrolling interests, acquisition-related amortization, impairment and related charges, loss on extinguishment of debt, other, net, restructuring and other costs, acquisition-related costs, litigation costs (reimbursements), net, stock-based compensation, and the 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 the 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/EIP Adjusted EBITDA metric referenced in the section entitled “Compensation Discussion and Analysis” in our 2017 Proxy Statement, which are calculated for the purposes of our 2016 annual incentive compensation program.
We define Adjusted Net Income from continuing operations per share as Adjusted Net Income divided by the applicable share count. We have selected Adjusted Net Income from continuing operations per share, along with revenue, as the metrics for our 2017 annual incentive compensation program.
We define Adjusted Capital Expenditures as additions to property and equipment and capitalized implementation costs.

25



We define Free Cash Flow as cash provided by operating activities less cash used in additions to property and equipment.
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 include 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 Profit, 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 Gross Profit, Adjusted Net Income, Adjusted EBITDA, Adjusted Capital Expenditures, 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:
these non-GAAP financial measures exclude certain recurring, non-cash charges such as stock-based compensation expense and amortization of acquired intangible assets;
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 Profit 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 removes the impact of accrual-basis accounting on asset accounts and non-debt liability accounts, and does not reflect the cash requirements necessary to service the principal payments on our indebtedness; and
other companies, including companies in our industry, may calculate Adjusted Gross Profit, Adjusted Net Income, Adjusted EBITDA, Adjusted Capital Expenditures, or Free Cash Flow differently, which reduces their usefulness as comparative measures.












26



The following table sets forth the reconciliation of net income attributable to common stockholders to Adjusted Net Income and Adjusted EBITDA (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net income attributable to common stockholders
$
90,989

 
$
40,815

 
$
160,441

 
$
218,001

Loss (income) from discontinued operations, net of tax
529

 
394

 
2,228

 
(10,858
)
Net income attributable to noncontrolling interests(1)
1,307

 
1,047