Sabre Corporation
Sabre Corp (Form: 10-Q, Received: 08/01/2017 16:09:20)

 


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 June 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 July 26, 2017 , 278,678,333 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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Revenue
$
900,663

 
$
845,242

 
$
1,816,016

 
$
1,704,785

Cost of revenue
643,067

 
556,317

 
1,250,653

 
1,110,582

Selling, general and administrative
146,856

 
146,886

 
291,297

 
280,742

Impairment and related charges
92,022

 

 
92,022

 

Operating income
18,718

 
142,039

 
182,044

 
313,461

Other income (expense):
 

 
 

 
 
 
 
Interest expense, net
(38,097
)
 
(37,210
)
 
(77,658
)
 
(78,412
)
Joint venture equity income
513

 
763

 
1,411

 
1,526

Other, net
(752
)
 
876

 
(15,986
)
 
4,236

Total other expense, net
(38,336
)
 
(35,571
)
 
(92,233
)
 
(72,650
)
(Loss) income from continuing operations before income taxes
(19,618
)
 
106,468

 
89,811

 
240,811

(Benefit) Provision for income taxes
(15,466
)
 
31,273

 
16,241

 
72,697

(Loss) income from continuing operations
(4,152
)
 
75,195

 
73,570

 
168,114

(Loss) income from discontinued operations, net of tax
(1,222
)
 
(2,098
)
 
(1,699
)
 
11,252

Net (loss) income
(5,374
)
 
73,097

 
71,871

 
179,366

Net income attributable to noncontrolling interests
1,113

 
1,078

 
2,419

 
2,180

Net (loss) income attributable to common stockholders
$
(6,487
)
 
$
72,019

 
$
69,452

 
$
177,186

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

 
 

 
 
 
 
(Loss) income from continuing operations
$
(0.02
)
 
$
0.27

 
$
0.26

 
$
0.60

(Loss) income from discontinued operations

 
(0.01
)
 
(0.01
)
 
0.04

Net (loss) income per common share
$
(0.02
)
 
$
0.26

 
$
0.25

 
$
0.64

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

 
 

 
 
 
 
(Loss) income from continuing operations
$
(0.02
)
 
$
0.26

 
$
0.25

 
$
0.59

(Loss) income from discontinued operations

 
(0.01
)
 
(0.01
)
 
0.04

Net (loss) income per common share
$
(0.02
)
 
$
0.25

 
$
0.25

 
$
0.63

Weighted-average common shares outstanding:
 

 
 

 
 
 
 
Basic
278,441

 
277,392

 
277,900

 
276,480

Diluted
278,441

 
283,001

 
279,919

 
282,648

 
 
 
 
 
 
 
 
Dividends per common share
$
0.14

 
$
0.13

 
$
0.28

 
$
0.26

See Notes to Consolidated Financial Statements .

1



SABRE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Net (loss) income
$
(5,374
)
 
$
73,097

 
$
71,871

 
$
179,366

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments ("CTA"), net of tax
 
 
 
 
 
 
 
Foreign CTA gains
8,483

 
1,909

 
7,669

 
1,539

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

 

 

 
(198
)
Net change in foreign CTA losses, net of tax
8,483

 
1,909

 
7,669

 
1,341

Retirement-related benefit plans:
 
 
 
 
 
 
 
Amortization of prior service credits, net of taxes of $259, $130, $259 and $259
(99
)
 
(228
)
 
(457
)
 
(457
)
Amortization of actuarial losses, net of taxes of $(1,355), $(516), $(1,355) and $(1,031)
520

 
909

 
2,395

 
1,819

Total retirement-related benefit plans
421

 
681

 
1,938

 
1,362

Derivatives and available-for-sale securities:
 
 
 
 
 
 
 
Unrealized losses, net of taxes of $(804), $1,062, $(1,648) and $2,321
2,345

 
777

 
7,000

 
285

Reclassification adjustment for realized losses, net of taxes of $(683), $(55), $(1,598) and $(340)
806

 
93

 
3,677

 
1,012

Net change in derivatives and available-for-sale securities, net of tax
3,151

 
870

 
10,677

 
1,297

Share of other comprehensive income of joint venture
118

 

 
50

 

Other comprehensive income
12,173

 
3,460

 
20,334

 
4,000

Comprehensive income
6,799

 
76,557

 
92,205

 
183,366

Less: Comprehensive income attributable to noncontrolling interests
(1,113
)
 
(1,078
)
 
(2,419
)
 
(2,180
)
Comprehensive income attributable to Sabre Corporation
$
5,686

 
$
75,479

 
$
89,786

 
$
181,186

 
See Notes to Consolidated Financial Statements.

2





SABRE CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
 
June 30, 2017
 
December 31, 2016
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
306,696

 
$
364,114

Accounts receivable, net
512,167

 
400,667

Prepaid expenses and other current assets
108,215

 
88,600

Total current assets
927,078

 
853,381

Property and equipment, net of accumulated depreciation of $1,109,669 and $986,890
791,735

 
753,279

Investments in joint ventures
26,146

 
25,582

Goodwill
2,551,448

 
2,548,447

Acquired customer relationships, net of accumulated amortization of $674,440 and $646,850
362,152

 
387,632

Other intangible assets, net of accumulated amortization of $566,263 and $538,380
359,922

 
387,805

Deferred income taxes
111,902

 
95,285

Other assets, net
559,495

 
673,159

Total assets
$
5,689,878

 
$
5,724,570

 
 
 
 
Liabilities and stockholders’ equity
 

 
 

Current liabilities
 

 
 

Accounts payable
$
152,485

 
$
168,576

Accrued compensation and related benefits
109,420

 
102,037

Accrued subscriber incentives
266,438

 
216,011

Deferred revenues
176,335

 
187,108

Other accrued liabilities
237,583

 
222,879

Current portion of debt
60,050

 
169,246

Tax Receivable Agreement
74,977

 
100,501

Total current liabilities
1,077,288

 
1,166,358

Deferred income taxes
96,842

 
88,957

Other noncurrent liabilities
439,966

 
567,359

Long-term debt
3,425,949

 
3,276,281

Commitments and contingencies (Note 11)


 


Stockholders’ equity
 

 
 

Common Stock: $0.01 par value; 450,000,000 authorized shares; 288,618,730 and 285,461,125 shares issued, 278,628,948 and 276,949,802 shares outstanding at June 30, 2017 and December 31, 2016, respectively
2,886

 
2,854

Additional paid-in capital
2,148,148

 
2,105,843

Treasury Stock, at cost, 9,989,782 and 8,511,323 shares at June 30, 2017 and December 31, 2016, respectively
(254,156
)
 
(221,746
)
Retained deficit
(1,149,598
)
 
(1,141,116
)
Accumulated other comprehensive loss
(102,465
)
 
(122,799
)
Noncontrolling interest
5,018

 
2,579

Total stockholders’ equity
649,833

 
625,615

Total liabilities and stockholders’ equity
$
5,689,878

 
$
5,724,570


See Notes to Consolidated Financial Statements.

3





SABRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Six Months Ended June 30,
 
2017
 
2016
Operating Activities
 
 
 
Net income
$
71,871

 
$
179,366

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

 
 

Depreciation and amortization
198,687

 
194,726

Amortization of upfront incentive consideration
32,293

 
26,233

Litigation-related credits

 
(25,527
)
Stock-based compensation expense
22,758

 
23,099

Allowance for doubtful accounts
5,356

 
6,131

Impairment and related charges
92,022

 

Deferred income taxes
(16,121
)
 
59,315

Joint venture equity income
(1,411
)
 
(1,526
)
Dividends received from joint venture investments
896

 

Amortization of debt issuance costs
3,640

 
3,892

Loss on modification of debt
11,730

 

Other
7,135

 
3,030

Loss (income) from discontinued operations
1,699

 
(11,252
)
Changes in operating assets and liabilities:
 

 
 

Accounts and other receivables
(125,913
)
 
(83,551
)
Prepaid expenses and other current assets
(1,434
)
 
(15,354
)
Capitalized implementation costs
(31,444
)
 
(43,268
)
Upfront incentive consideration
(37,260
)
 
(47,228
)
Other assets
(31,207
)
 
(13,639
)
Accrued compensation and related benefits
7,170

 
(25,663
)
Accounts payable and other accrued liabilities
41,702

 
12,963

Deferred revenue including upfront solution fees
25,707

 
22,037

Cash provided by operating activities
277,876

 
263,784

Investing Activities
 

 
 

Additions to property and equipment
(167,410
)
 
(164,593
)
Acquisition, net of cash acquired

 
(164,977
)
Cash used in investing activities
(167,410
)
 
(329,570
)
Financing Activities
 

 
 

Proceeds of borrowings from lenders
1,897,625

 
378,000

Payments on borrowings from lenders
(1,856,803
)
 
(485,796
)
Payments on Tax Receivable Agreement
(99,241
)
 

Debt issuance and modification costs
(12,380
)
 

Net proceeds on the settlement of equity-based awards
9,383

 
4,808

Cash dividends paid to common stockholders
(77,934
)
 
(72,060
)
Repurchase of common stock
(22,213
)
 

Other financing activities
(749
)
 
714

Cash used in financing activities
(162,312
)
 
(174,334
)
Cash Flows from Discontinued Operations
 

 
 

Cash used in operating activities
(2,780
)
 
(12,407
)
Cash provided by investing activities

 

Cash used in discontinued operations
(2,780
)
 
(12,407
)
Effect of exchange rate changes on cash and cash equivalents
(2,792
)
 
(293
)
Decrease in cash and cash equivalents
(57,418
)
 
(252,820
)
Cash and cash equivalents at beginning of period
364,114

 
321,132

Cash and cash equivalents at end of period
$
306,696

 
$
68,312

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 six months ended June 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 six months ended June 30, 2017 , we issued 3,157,605 shares of our common stock as a result of the exercise and settlement of employee equity-based awards. In addition, we received $20 million in proceeds from the exercise of employee stock-option awards and paid $10 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 $78 million , and $0.13 per share, totaling $72 million , during the six months ended June 30, 2017 and 2016 , respectively. In July 2017, our board of directors declared a cash dividend of $0.14 per share, payable on September 29, 2017, to stockholders of record on September 21, 2017.
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 six months ended June 30, 2017 , we repurchased 1,015,558 shares totaling $22 million pursuant to this share repurchase program.


5



Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board ("FASB") issued updated guidance to state that registrants should consider additional qualitative disclosures if the impact of an issued but not yet adopted Accounting Standards Update ("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 expect 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 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 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 plan to early adopt this standard in the third quarter of 2017, which is not expected to 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.
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. Based on our initial assessment, we expect to adopt this new standard using the modified retrospective transition method that will result in a cumulative adjustment as of the date of the adoption. Upon initial evaluation, the following are some of the anticipated impacts of adoption:

6



allocation of contract revenues among various products and solutions, and the timing of when those revenues are recognized, will be impacted primarily due to accounting for variable consideration within the standard, for a subset of our Airline Solutions business,
a term license will be considered a distinct performance obligation with revenue recognition occurring once control is transferred to the customer, resulting in acceleration of revenue recognition, while maintenance services will continue to be recognized over the term of the contract, particularly for our Airline Solutions business, and
deferral of incremental costs to obtain a contract, and recognition of them over the contract period or expected customer life will result in the recognition of a deferred charge on our balance sheet and will impact our Airline and Hospitality Solutions segment.
We are continuing to evaluate all of the provisions of each of these standards and their impacts to our current accounting policies, processes, controls and systems.
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.
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.


7



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.
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 six months ended June 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.


8



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 six months ended June 30, 2017 , discontinued operations for our Travelocity business did not have material pretax income or loss. Our provision for income tax, for the three and six months ended June 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.
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 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 recorded a charge of $92 million ( $59 million , net of tax), during the three months ended June 30, 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.  The contract with the customer provides for recoverability of at least a portion of net capitalized costs, and our current best estimate has been considered in the impairment charge. Given the uncertainty associated with the ultimate settlement of this dispute, there could be further adjustments to our consolidated statement of operations, including contract liabilities or estimated cash receipts, which we are entitled to under termination clauses. 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 six months ended June 30, 2017 and 2016 were 18% and 30% , respectively. The decrease in the effective tax rate for the six months ended June 30, 2017 as compared to the same period in 2016 was primarily driven by the tax impact from the impairment charge associated with an Airline Solutions' customer contract (see Note 4, Impairment and Related Charges), which was recognized as a discrete benefit in the second quarter of 2017, and 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 second 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 $54 million and $49 million as of June 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 five years. No payments occurred in years 2014 to 2016 and we made payments of $101 million , which included accrued interest of approximately $1 million ,

9



in January 2017. As of June 30, 2017, the current portion of our TRA liability totaled $75 million , which includes a negligible amount of accrued interest. The remaining portion of $213 million is included in other noncurrent liabilities in our consolidated balance sheet as of June 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.
6. Debt
As of June 30, 2017 and December 31, 2016 , our outstanding debt included in our consolidated balance sheets totaled $3,486 million and $3,446 million , respectively, which are net of debt issuance costs of $25 million and $27 million , respectively, and unamortized discounts of $7 million and $6 million , respectively. The following table sets forth the face values of our outstanding debt as of June 30, 2017 and December 31, 2016 (in thousands):
 
Rate
 
Maturity
 
June 30, 2017
 
December 31, 2016
Senior secured credit facilities:
 
 
 
 
 

 
 

Term Loan A
L + 2.50%
 
July 2021
 
$
570,000

 
$
585,000

Term Loan B
L + 2.75%
 
February 2024
 
1,890,500

 

Prior Term Loan B (1)
L + 3.00%
 
February 2019
 

 
1,420,896

Incremental Term Loan Facility (1)
L + 3.50%
 
February 2019
 

 
282,354

Term Loan C (1)
L + 3.00%
 
December 2017
 

 
49,313

Revolver, $400 million
L + 2.50%
 
July 2021
 

 

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 (2)
5.80%
 
April 2017
 

 
79,741

Capital lease obligations
 
 
 
 
27,844

 
31,190

Face value of total debt outstanding
 
 
 
 
3,518,344

 
3,478,494

Less current portion of debt outstanding
 
 
 
 
(60,050
)
 
(169,246
)
Face value of long-term debt outstanding
 
 
 
 
$
3,458,294

 
$
3,309,248

______________________________
(1)
Refinanced on February 22, 2017 by the Term Loan B.
(2)
Extinguished on March 31, 2017 using proceeds from the Term Loan B.
  Senior Secured Credit Facilities
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 are 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 are 2.75% for Eurocurrency borrowings and 1.75% for base rate borrowings, with a step down to 2.50% for Eurocurrency borrowings and 1.50% for base rate borrowings if the Senior Secured Leverage Ratio (as defined in the Amended and Restated Credit Agreement) is less than or equal to 2.50 to 1.00.
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 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”).

10



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 are 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 June 30, 2017 and as of December 31, 2016 . We had outstanding letters of credit totaling $22 million and $35 million as of June 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.
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 June 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 six months ended June 30, 2017 and 2016 . As of June 30, 2017 , we estimate that $6 million in gains will be reclassified from other comprehensive income (loss) to earnings over the next 12 months.



11



As of June 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 June 30, 2017
Buy Currency
 
Sell Currency
 
Foreign Amount
 
USD Amount
 
Average
Contract Rate
Australian Dollar
 
US Dollar
 
25,650

 
19,310

 
0.7528

British Pound Sterling
 
US Dollar
 
21,900

 
27,907

 
1.2743

Indian Rupee
 
US Dollar
 
1,219,000

 
17,916

 
0.0147

Polish Zloty
 
US Dollar
 
227,000

 
57,868

 
0.2549

Singapore Dollar
 
US Dollar
 
57,000

 
41,039

 
0.7200

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 six months ended June 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
 
 
 
 
 
 
 
 
 
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.

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 $3 million for the  three and six months ended June 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 $3 million recorded in earnings in Other, net for the  three and six months ended June 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 to hedge the interest payments associated with  $750 million  of the floating-rate Term Loan B. We have designated these swaps as cash flow hedges, which were effective March 31, 2017. The total notional amount outstanding is  $750 million  in each of the remaining six months in 2017 and the full years 2018 and 2019. 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. 

12



The estimated fair values of our derivatives as of June 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
 
June 30, 2017
 
December 31, 2016
Foreign exchange contracts
 
Other accrued liabilities
 
$

 
$
(7,360
)
Foreign exchange contracts
 
Prepaid expenses and other
 
5,522

 

Interest rate swaps
 
Other accrued liabilities
 
(281
)
 
(8,345
)
Interest rate swaps
 
Other noncurrent liabilities
 
(2,303
)
 
(7,339
)
 
 
 
 
$
2,938

 
$
(23,044
)
 
 
Derivative Assets (Liabilities)
 
 
 
 
Fair Value as of
Derivatives Not Designated as Hedging Instruments
 
Consolidated Balance Sheet Location
 
June 30, 2017
 
December 31, 2016
Interest rate swaps
 
Prepaid expenses and other
 
$
421

 
$

Interest rate swaps
 
Other assets, net
 
199

 

Interest rate swaps
 
Other accrued liabilities
 
(7,775
)
 

Interest rate swaps
 
Other noncurrent liabilities
 
(3,742
)
 

 
 
 
 
$
(10,897
)
 
$


The effects of derivative instruments, net of taxes, on OCI for the three and six months ended June 30, 2017 and 2016 are as follows (in thousands):
 
 
Amount of Net Gain (Loss) Recognized in OCI on Derivative
(Effective Portion)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Derivatives in Cash Flow Hedging Relationships
 
2017
 
2016
 
2017
 
2016
Foreign exchange contracts
 
$
3,457

 
$
(3,599
)
 
$
8,578

 
$
(558
)
Interest rate swaps
 
(1,183
)
 
(1,607
)
 
(1,848
)
 
(5,560
)
Total
 
$
2,274

 
$
(5,206
)
 
$
6,730

 
$
(6,118
)

 
 
 
 
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 June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Foreign exchange contracts
 
Cost of revenue
 
$
(636
)
 
$
93

 
$
884

 
$
1,012

Interest rate swaps
 
Interest Expense
 
1,443

 
582

 
2,794

 
1,164

Total
 
 
 
$
807

 
$
675

 
$
3,678

 
$
2,176

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.

13



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 June 30, 2017 and December 31, 2016 (in thousands):
 
 
 
Fair Value at Reporting Date Using
 
June 30, 2017
 
Level 1
 
Level 2
 
Level 3
Derivatives
 
 
 
 
 
 
 
Foreign currency forward contracts
$
5,522

 
$

 
$
5,522

 
$

Interest rate swap contracts
(13,481
)
 

 
(13,481
)
 

Total
$
(7,959
)
 
$

 
$
(7,959
)
 
$

 
 
 
 
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 six months ended June 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.
The following table presents the fair value and carrying value of our senior notes and borrowings under our senior secured credit facilities as of June 30, 2017 and December 31, 2016 , (in thousands):
 
 
Fair Value at
 
Carrying Value at (2)
Financial Instrument
 
June 30, 2017
 
December 31, 2016
 
June 30, 2017
 
December 31, 2016
Term Loan A
 
$
571,069

 
$
583,538

 
$
567,993

 
$
582,595

Term Loan B
 
1,905,860

 

 
1,885,272

 

Prior Term Loan B (1)
 

 
1,435,993

 

 
1,417,616

Incremental Term Loan Facility (1)
 

 
283,413

 

 
282,354

Term Loan C (1)
 

 
49,436

 

 
49,237

Revolver, $400 million
 

 

 

 

5.375% Senior secured notes due 2023
 
554,165

 
542,919

 
530,000

 
530,000

5.25% Senior secured notes due 2023
 
520,780

 
515,000

 
500,000

 
500,000

  
______________________________
(1)
Refinanced on February 22, 2017 by the Term Loan B.
(2)
Excludes net unamortized debt issuance costs.


14



9. Accumulated Other Comprehensive Income (Loss)
As of June 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):
 
June 30, 2017
 
December 31, 2016
Defined benefit pension and other post retirement benefit plans
$
(103,099
)
 
$
(105,036
)
Unrealized loss on foreign currency forward contracts, interest rate swaps, and available-for-sale securities
(4,821
)
 
(15,499
)
Unrealized foreign currency translation gain (loss)
5,455

 
(2,264
)
Total accumulated other comprehensive loss, net of tax
$
(102,465
)
 
$
(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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
(Loss) income from continuing operations
$
(4,152
)
 
$
75,195

 
$
73,570

 
$
168,114

Less: Net income attributable to noncontrolling interests
1,113

 
1,078

 
2,419

 
2,180

Net (loss) income from continuing operations available to common stockholders, basic and diluted
$
(5,265
)
 
$
74,117

 
$
71,151

 
$
165,934

Denominator:
 
 
 
 
 
 
 
Basic weighted-average common shares outstanding
278,441

 
277,392

 
277,900

 
276,480

Add: Dilutive effect of stock options and restricted stock awards

 
5,609

 
2,019

 
6,168

Diluted weighted-average common shares outstanding
278,441

 
283,001

 
279,919

 
282,648

Earning per share from continuing operations:
 
 
 
 
 
 
 
Basic
$
(0.02
)
 
$
0.27

 
0.26

 
0.60

Diluted
$
(0.02
)
 
$
0.26

 
0.25

 
0.59

 
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. For the three months ended June 30, 2017, we had 6 million common stock equivalents associated with stock options and restricted stock awards. As we recognized a loss from continuing operations during the three months ended June 30, 2017, these common stock equivalents were excluded from the calculation of diluted earnings per share as their inclusion would have been anti-dilutive. As a result, basic and diluted earnings per share are equal for the three months ended June 30, 2017. The calculation of diluted weighted-average shares excludes the impact of 5 million of anti-dilutive common stock equivalents for the six months ended June 30, 2017 and 1 million of anti-dilutive common stock equivalents for each of the three and six months ended June 30, 2016 .
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.
    

15



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.
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 June 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.

16



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 believe that the losses associated with this case are neither probable nor estimable and therefore have not accrued any losses as of June 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 disputes against 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. Although the carriers never withdrew their agreement to defend us, they recently have taken the position in the lawsuit that they had no duty to defend or indemnify us. If we prevail, we may recover some or all amounts previously tendered to the insurance companies for payment within the limits of the policies and may be entitled to 18% interest on such amounts, all of which will be recorded in the period cash is received. In December 2016, the judge issued an order on the parties’ competing motions for summary judgment.  The judge partially granted Sabre’s motion, concluding the carriers had a duty to defend Sabre in the underlying American Airlines litigation and that their conflict of interest precluded the carriers from controlling the defense of the litigation.  The judge denied the carriers’ motion seeking summary judgment and dismissal of Sabre’s complaint. The carriers' subsequent appeal of this ruling has been denied. To date, settlement discussions have been unsuccessful. Discovery is closed, and a trial date has been set for October 2017.
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 and July 10, 2009, stating that no income would be chargeable to tax for assessment years ending March 1998 and March 1999, and from March 2000 through March 2006. The DIT appealed those decisions to the Delhi High Court, which found in our favor on July 19, 2010. The DIT has appealed the decision to the Supreme Court of India and no trial date has been set. We have appealed the tax assessments for the assessment years ended March 2013 and March 2014 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

17



DIT also assessed taxes on a similar basis for assessment years ending March 2006 through March 2013 and appeals for assessment years ending March 2006 through 2013 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 $45 million as of June 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 June 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 six months ended June 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 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.

18



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, and we engaged a PCI forensic investigator to investigate this incident. The PCI forensic investigation is ongoing. We have notified customers and other companies that use or interact with, directly or indirectly, the SHS Central Reservation System about the incident. Although the costs related to this incident, 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.
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.

19



We define Adjusted EBITDA as income (loss) 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, 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 six months ended June 30, 2017 and 2016 is as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Revenue
 

 
 

 
 
 
 
Travel Network
$
635,615

 
$
597,910

 
$
1,299,092

 
$
1,223,386

Airline and Hospitality Solutions
271,780

 
252,169

 
529,756

 
490,549

Eliminations
(6,732
)
 
(4,837
)
 
(12,832
)
 
(9,150
)
Total revenue
$
900,663

 
$
845,242

 
$
1,816,016

 
$
1,704,785

 
 
 
 
 
 
 
 
Adjusted Gross Profit (a)
 

 
 

 
 
 
 
Travel Network
$
274,149

 
$
281,986

 
$
593,167

 
$
586,900

Airline and Hospitality Solutions
122,842

 
108,469

 
228,190

 
209,345

Corporate
(28,413
)
 
(17,190
)
 
(52,002
)
 
(34,784
)
Total
$
368,578

 
$
373,265

 
$
769,355

 
$
761,461

 
 
 
 
 
 
 
 
Adjusted EBITDA (b)
 

 
 

 
 
 
 
Travel Network
$
245,891

 
$
251,587

 
$
536,113

 
$
524,761

Airline and Hospitality Solutions
101,725

 
91,945

 
187,242

 
174,883

Total segments
347,616

 
343,532

 
723,355

 
699,644

Corporate
(86,199
)
 
(72,048
)
 
(164,377
)
 
(140,680
)
Total
$
261,417

 
$
271,484

 
$
558,978

 
$
558,964

 
 
 
 
 
 
 
 
Depreciation and amortization
 

 
 

 
 
 
 
Travel Network
$
20,641

 
$
19,676

 
$
41,109

 
$
38,206

Airline and Hospitality Solutions
39,857

 
36,555

 
78,634

 
72,348

Total segments
60,498

 
56,231

 
119,743

 
110,554

Corporate
32,519

 
42,212

 
78,944

 
84,172

Total
$
93,017

 
$
98,443

 
$
198,687

 
$
194,726

 
 
 
 
 
 
 
 
Adjusted Capital Expenditures (c)
 

 
 

 
 
 
 
Travel Network
$
22,983

 
$
24,185

 
$
49,256

 
$
47,155

Airline and Hospitality Solutions
56,227

 
71,045

 
118,389

 
131,465

Total segments
79,210

 
95,230

 
167,645

 
178,620

Corporate
14,230

 
17,202

 
31,209

 
29,241

Total
$
93,440

 
$
112,432

 
$
198,854

 
$
207,861

______________________________

20



(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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Adjusted Gross Profit
$
368,578

 
$
373,265

 
$
769,355

 
$
761,461

Less adjustments:
 

 
 

 
 

 
 

Selling, general and administrative
146,856

 
146,886

 
291,297

 
280,742

Impairment and related charges (7)
92,022

 

 
92,022

 

Cost of revenue adjustments:
 

 
 

 
 

 
 

Depreciation and amortization (1)
76,015

 
65,372

 
149,712

 
131,879

Restructuring and other costs (4)
12,976

 

 
12,976

 

Amortization of upfront incentive consideration (2)
16,161

 
13,896

 
32,293

 
26,233

Stock-based compensation
5,830

 
5,072

 
9,011

 
9,146

Operating income
$
18,718

 
$
142,039

 
$
182,044

 
$
313,461

(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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Adjusted EBITDA
$
261,417

 
$
271,484

 
$
558,978

 
$
558,964

Less adjustments:
 
 
 
 
 
 
 
Depreciation and amortization of property and equipment (1a)
63,810

 
56,214

 
125,110

 
109,879

Amortization of capitalized implementation costs (1b)
8,948

 
8,211

 
18,137

 
16,699

Acquisition-related amortization (1c)
20,259

 
34,018

 
55,440

 
68,148

Amortization of upfront incentive consideration (2)
16,161

 
13,896

 
32,293

 
26,233

Impairment and related charges (7)
92,022

 

 
92,022

 

Interest expense, net
38,097

 
37,210

 
77,658

 
78,412

Other, net (3)
752

 
(876
)
 
15,986

 
(4,236
)
Restructuring and other costs (4)
25,304

 
1,116

 
25,304

 
1,240

Acquisition-related costs (5)

 
516

 

 
624

Litigation costs (reimbursements), net (6)
958

 
1,901

 
4,459

 
(1,945
)
Stock-based compensation
14,724

 
12,810

 
22,758

 
23,099

Provision for income taxes
(15,466
)
 
31,273

 
16,241

 
72,697

(Loss) income from continuing operations
$
(4,152
)
 
$
75,195

 
$
73,570

 
$
168,114

______________________________________________________
(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 first quarter of 2017, we recognized a $12 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 (see Note 11, Contingencies).
(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

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process has commenced, and due to the uncertainty of the ultimate outcome, we have recorded this estimated charge (see Note 4, Impairment and Related Charges).
(c)
Includes capital expenditures and capitalized implementation costs as summarized below (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Additions to property and equipment
$
79,092

 
$
89,121

 
$
167,410

 
$
164,593

Capitalized implementation costs
14,348

 
23,311

 
31,444

 
43,268

Adjusted Capital Expenditures
$
93,440

 
$
112,432

 
$
198,854

 
$
207,861

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," "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.
Recent Developments Affecting our Results of Operations
In May 2017, we notified 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 the contract with the customer, 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. The contract with the customer provides for recoverability of at

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least a portion of net capitalized costs, and our current best estimate has been considered in the impairment charge. Given the uncertainty associated with the ultimate settlement of this dispute, there could be further adjustments to our consolidated statement of operations, including the release of certain contract liabilities or cash receipts in excess of our estimates, which we are entitled to under termination clauses. The impairment charge did not impact our cash flows from operations for the second quarter. 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.
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. The future rate of growth of our Airline Solutions revenues is expected to 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, as well as by the previously announced termination of our air reservation system agreement with Southwest Airlines. 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.
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 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.


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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 June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Travel Network
 

 
 

 
 
 
 
 
 
 
 
Direct Billable Bookings - Air
114,855

 
111,902

 
2.6%
 
242,219

 
231,768

 
4.5%
Direct Billable Bookings - Non-Air
16,056

 
15,892

 
1.0%
 
31,394