Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).    Yes  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
 
¨  
  
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 April 25, 2019, 274,711,386 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 March 31,
 
2019
 
2018
Revenue
$
1,049,361

 
$
988,369

Cost of revenue
787,563

 
692,857

Selling, general and administrative
151,391

 
130,111

Operating income
110,407

 
165,401

Other income (expense):
 

 
 

Interest expense, net
(38,013
)
 
(38,109
)
Loss on extinguishment of debt

 
(633
)
Joint venture equity income
533

 
1,171

Other, net
(1,870
)
 
(1,106
)
Total other expense, net
(39,350
)
 
(38,677
)
Income from continuing operations before income taxes
71,057

 
126,724

Provision for income taxes
11,843

 
36,275

Income from continuing operations
59,214

 
90,449

Loss from discontinued operations, net of tax
(1,452
)
 
(1,207
)
Net income
57,762

 
89,242

Net income attributable to noncontrolling interests
912

 
1,362

Net income attributable to common stockholders
$
56,850

 
$
87,880

 
 
 
 
Basic net income per share attributable to common stockholders:
 

 
 

Income from continuing operations
$
0.21

 
$
0.32

Loss from discontinued operations
(0.01
)
 

Net income per common share
$
0.20

 
$
0.32

Diluted net income per share attributable to common stockholders:
 

 
 

Income from continuing operations
$
0.21

 
$
0.32

Loss from discontinued operations
(0.01
)
 

Net income per common share
$
0.20

 
$
0.32

Weighted-average common shares outstanding:
 

 
 

Basic
275,589

 
274,720

Diluted
277,605

 
276,844

 
 
 
 
Dividends per common share
$
0.14

 
$
0.14

See Notes to Consolidated Financial Statements.

1



SABRE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three Months Ended March 31,
 
2019
 
2018
Net income
$
57,762

 
$
89,242

Other comprehensive income, net of tax:
 
 
 
Foreign currency translation adjustments ("CTA"), net of tax
 
 
 
Foreign CTA (losses) gains, net of tax
(2,293
)
 
2,975

Net change in foreign CTA (losses) gains, net of tax
(2,293
)
 
2,975

Retirement-related benefit plans:
 
 
 
Amortization of prior service credits
(278
)
 
(278
)
Amortization of actuarial losses
1,222

 
1,397

Net change in retirement-related benefit plans, net of tax
944

 
1,119

Derivatives and securities:
 
 
 
Unrealized (losses) gains, net of taxes of $1,596 and $(2,021)
(5,409
)
 
7,412

Reclassification adjustment for realized gains (losses), net of taxes of $(555) and $352
2,202

 
(1,749
)
Net change in derivatives and securities, net of tax
(3,207
)
 
5,663

Share of other comprehensive income of joint venture
28

 
129

Other comprehensive (loss) income
(4,528
)
 
9,886

Comprehensive income
53,234

 
99,128

Less: Comprehensive income attributable to noncontrolling interests
(912
)
 
(1,362
)
Comprehensive income attributable to Sabre Corporation
$
52,322

 
$
97,766

 
See Notes to Consolidated Financial Statements.

2





SABRE CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 
March 31, 2019
 
December 31, 2018
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
459,487

 
$
509,265

Accounts receivable, net
617,963

 
508,122

Prepaid expenses and other current assets
163,841

 
170,243

Total current assets
1,241,291

 
1,187,630

Property and equipment, net of accumulated depreciation of $1,596,627 and $1,524,795
753,949

 
790,372

Investments in joint ventures
27,333

 
27,769

Goodwill
2,550,983

 
2,552,369

Acquired customer relationships, net of accumulated amortization of $716,140 and $709,824
316,743

 
323,731

Other intangible assets, net of accumulated amortization of $644,684 and $634,995
279,828

 
289,517

Deferred income taxes
23,810

 
24,322

Other assets, net
665,626

 
610,671

Total assets
$
5,859,563

 
$
5,806,381

 
 
 
 
Liabilities and stockholders’ equity
 

 
 

Current liabilities
 

 
 

Accounts payable
$
220,820

 
$
165,227

Accrued compensation and related benefits
64,503

 
112,866

Accrued subscriber incentives
353,037

 
301,530

Deferred revenues
92,682

 
80,902

Other accrued liabilities
239,075

 
185,178

Current portion of debt
75,548

 
68,435

Tax Receivable Agreement
101,497

 
104,257

Total current liabilities
1,147,162

 
1,018,395

Deferred income taxes
119,062

 
135,753

Other noncurrent liabilities
309,537

 
340,495

Long-term debt
3,318,203

 
3,337,467

Commitments and contingencies (Note 10)


 


Stockholders’ equity
 

 
 

Common Stock: $0.01 par value; 450,000 authorized shares; 293,909 and 291,664 shares issued, 275,629 and 275,352 shares outstanding at March 31, 2019 and December 31, 2018, respectively
2,939

 
2,917

Additional paid-in capital
2,262,424

 
2,243,419

Treasury Stock, at cost, 18,280 and 16,312 shares at March 31, 2019 and December 31, 2018, respectively
(420,301
)
 
(377,980
)
Retained deficit
(750,310
)
 
(768,566
)
Accumulated other comprehensive loss
(137,252
)
 
(132,724
)
Noncontrolling interest
8,099

 
7,205

Total stockholders’ equity
965,599

 
974,271

Total liabilities and stockholders’ equity
$
5,859,563

 
$
5,806,381


See Notes to Consolidated Financial Statements.

3





SABRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 
Three Months Ended March 31,
 
2019
 
2018
Operating Activities
 
 
 
Net income
$
57,762

 
$
89,242

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

 
 

Depreciation and amortization
103,443

 
101,876

Amortization of upfront incentive consideration
19,128

 
19,456

Stock-based compensation expense
15,694

 
12,606

Deferred income taxes
(13,932
)
 
20,413

Allowance for doubtful accounts
5,370

 
2,396

Loss from discontinued operations
1,452

 
1,207

Dividends received from joint venture investments
996

 
865

Amortization of debt issuance costs
993

 
1,003

Joint venture equity income
(533
)
 
(1,171
)
Loss on extinguishment of debt

 
633

Debt modification costs

 
1,558

Other
(1,189
)
 
4,252

Changes in operating assets and liabilities:
 

 
 

Accounts and other receivables
(95,354
)
 
(89,417
)
Prepaid expenses and other current assets
(24,429
)
 
8,482

Capitalized implementation costs
(7,619
)
 
(11,484
)
Upfront incentive consideration
(22,052
)
 
(25,699
)
Other assets
26,078

 
(1,816
)
Accrued compensation and related benefits
(47,150
)
 
(53,525
)
Accounts payable and other accrued liabilities
131,753

 
98,675

Deferred revenue including upfront solution fees
1,589

 
15,640

Cash provided by operating activities
152,000

 
195,192

Investing Activities
 

 
 

Additions to property and equipment
(37,864
)
 
(64,699
)
Cash used in investing activities
(37,864
)
 
(64,699
)
Financing Activities
 

 
 

Payments on Tax Receivable Agreement
(72,790
)
 
(58,908
)
Cash dividends paid to common stockholders
(38,594
)
 
(38,560
)
Repurchase of common stock
(32,146
)
 

Payments on borrowings from lenders
(11,828
)
 
(11,828
)
Net payments on the settlement of equity-based awards
(6,842
)
 
(4,797
)
Debt issuance and modification costs

 
(1,567
)
Other financing activities
(2,114
)
 
(12,811
)
Cash used in financing activities
(164,314
)
 
(128,471
)
Cash Flows from Discontinued Operations
 

 
 

Cash used in operating activities
(48
)
 
(1,139
)
Cash used in discontinued operations
(48
)
 
(1,139
)
Effect of exchange rate changes on cash and cash equivalents
448

 
(1,161
)
Decrease in cash and cash equivalents
(49,778
)
 
(278
)
Cash and cash equivalents at beginning of period
509,265

 
361,381

Cash and cash equivalents at end of period
$
459,487

 
$
361,103

See Notes to Consolidated Financial Statements.


4



SABRE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
 
 
Three Months Ended March 31, 2019
 
 
Stockholders’ Equity (Deficit)
 
 
Common Stock
 
Additional
Paid in
Capital
 
Treasury Stock
 
Retained
Earnings
(Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interest
 
Total
Stockholders'
Equity
 
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2018
 
291,663,954

 
$
2,917

 
$
2,243,419

 
16,311,538

 
$
(377,980
)
 
$
(768,566
)
 
$
(132,724
)
 
$
7,205

 
$
974,271

Comprehensive income
 

 

 

 

 

 
56,850

 
(4,528
)
 
894

 
53,216

Common stock dividends(1)
 

 

 

 

 

 
(38,594
)
 

 

 
(38,594
)
Repurchase of common stock
 

 

 

 
1,491,521

 
(32,146
)
 

 

 

 
(32,146
)
Settlement of stock-based awards
 
2,245,107

 
22

 
3,311

 
477,357

 
(10,175
)
 

 

 

 
(6,842
)
Stock-based compensation expense
 

 

 
15,694

 

 

 

 

 

 
15,694

Balance at March 31, 2019
 
293,909,061

 
$
2,939

 
$
2,262,424

 
18,280,416

 
$
(420,301
)
 
$
(750,310
)
 
$
(137,252
)
 
$
8,099

 
$
965,599

(1) A quarterly cash dividend of $0.14 per share on our common stock

 
 
Three Months Ended March 31, 2018
 
 
Stockholders’ Equity (Deficit)
 
 
Common Stock
 
Additional
Paid in
Capital
 
Treasury Stock
 
Retained
Earnings
(Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interest
 
Total
Stockholders'
Equity
 
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2017
 
289,137,901

 
$
2,891

 
$
2,174,187

 
14,795,726

 
$
(341,846
)
 
$
(1,053,446
)
 
$
(88,484
)
 
$
5,198

 
$
698,500

Comprehensive income
 

 

 

 

 

 
87,880

 
9,886

 
1,377

 
99,143

Common stock dividends(1)
 

 

 

 

 

 
(38,560
)
 

 

 
(38,560
)
Settlement of stock-based awards
 
1,774,147

 
18

 
3,609

 
384,599

 
(8,471
)
 

 

 

 
(4,844
)
Stock-based compensation expense
 

 

 
12,605

 

 

 

 

 

 
12,605

Adoption of New Accounting Standards
 

 

 

 

 

 
79,153

 

 

 
79,153

Balance at March 31, 2018
 
290,912,048

 
$
2,909

 
$
2,190,401

 
15,180,325

 
$
(350,317
)
 
$
(924,973
)
 
$
(78,598
)
 
$
6,575

 
$
845,997

(1) A quarterly cash dividend of $0.14 per share on our common stock

See Notes to Consolidated Financial Statements.




5



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 connect people and places with technology that reimagines the business of travel. We operate our business and present our results through three business segments: (i) Travel Network, our global travel marketplace for travel suppliers and travel buyers, (ii) Airline Solutions, a broad portfolio of software technology products and solutions primarily for airlines, and (iii) Hospitality Solutions, an extensive suite of leading software solutions for 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 months ended March 31, 2019 are not necessarily indicative of results that may be expected for any other interim period or for the year ending December 31, 2019. 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 15, 2019.
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 that utilize significant estimates and assumptions include: (i) estimation for revenue recognition and multiple performance obligation arrangements, (ii) determination of the fair value of assets and liabilities acquired in a business combination, (iii) the evaluation of the recoverability of the carrying value of long-lived assets and goodwill, (iv) assumptions utilized to test recoverability of capitalized implementation costs, (v) judgments in capitalization of software developed for internal use and (vi) the evaluation 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 15, 2019. Additionally, see Note 2. Revenue from Contracts with Customers for additional information on the use of significant estimates and assumptions in recognizing revenue.
Stockholders’ Equity—During the three months ended March 31, 2019, we issued 2,245,107 shares of our common stock as a result of the exercise and settlement of employee equity-based awards. In addition, we had $7 million in net payments from the exercise of employee stock-option awards, which included a $10 million payment 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 $39 million, during each of the three months ended March 31, 2019 and 2018.

6



Share Repurchase Program—In February 2017, we announced the approval of a multi-year share repurchase program (the "Share Repurchase Program") to purchase up to $500 million of Sabre's common stock outstanding. For the three months ended March 31, 2019, we repurchased 1,491,521 shares totaling $32 million pursuant to this Share Repurchase Program. Repurchases under the program may take place in the open market or privately negotiated transactions. Approximately $332 million remains authorized for repurchases under the Share Repurchase Program as of March 31, 2019.
Adoption of New Accounting Standards
In October 2018, the Financial Accounting Standards Board ("FASB") issued updated guidance that permits use of the Overnight Index Swap ("OIS") rate based on the Secured Overnight Financing Rate ("SOFR") as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to the Direct Treasury obligations of the U.S. government, the London Interbank Offered Rate ("LIBOR") swap rate, the OIS rate based on the Fed Funds Effective Rate, and the Securities Industry and Financial Markets Association Municipal Swap Rate. We adopted this standard in the first quarter of 2019, which did not have a material impact on our consolidated financial statements.
    
In February 2016, the 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. In the first quarter of 2019, we adopted the new standard using the modified retrospective approach and elected the package of practical expedients and the hindsight practical expedient. See Note 9. Leases for more information on the impacts from adoption and ongoing considerations.
Recent Accounting Pronouncements

In August 2018, the FASB issued updated guidance on customer's accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. Under this updated standard, when the arrangement includes a license to software developed for internal use, implementation costs are capitalized and amortized on a straight-line basis over the related contract terms, and a liability is also recognized to the extent the payments attributable to the software license are made over time. When the cloud computing arrangement does not include a software license, implementation costs are to be expensed as incurred. The updated standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We do not expect the adoption of this updated standard will have a material impact on our consolidated financial statements.

In June 2016, the FASB issued updated guidance for the measurement of credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. Under this updated standard, the current "incurred loss" approach is replaced with an "expected loss" model for instruments measured at amortized cost. For available-for-sale debt securities, allowances for losses will now be required rather than reducing the instruments carrying value. The updated standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the impact of this standard on our consolidated financial statements.
2. Revenue from Contracts with Customers
Contract Balances
Revenue recognition for a significant portion of our revenue coincides with normal billing terms, including Travel Network's transactional revenues, and Airline Solutions' and Hospitality Solutions' Software-as-a-Service ("SaaS") and hosted revenues. Timing differences among revenue recognition, unconditional rights to bill, and receipt of contract consideration may result in contract assets or contract liabilities. Contract liabilities are included within deferred revenues and other noncurrent liabilities on the consolidated balance sheet. Contract liabilities totaled $169 million and $166 million as of March 31, 2019 and December 31, 2018, respectively. During the three months ended March 31, 2019, we recognized revenue of approximately $18 million from contract liabilities that existed as of December 31, 2018.
Contract assets are included within prepaid expenses and other current assets and other assets, net on the consolidated balance sheet. The following table presents the changes in our contract assets balance (in thousands):
Contract assets as of December 31, 2018
$
79,268

Additions
5,795

Deductions
(11,961
)
Contract assets as of March 31, 2019
$
73,102


7



Our trade accounts receivable, net recorded in accounts receivable, net on the consolidated balance sheet as of March 31, 2019 and December 31, 2018 was $610 million and $501 million, respectively. Our long-term trade unbilled receivables, net recorded in other assets, net on the consolidated balance sheet as of March 31, 2019 and December 31, 2018 was $49 million and $50 million, respectively. These balances relate to license fees billed ratably over the contractual period and recognized when the customer gains control of the software. We evaluate collectability of our accounts receivable based on a combination of factors and record reserves as reflected in Note 1. Summary of Business and Significant Accounting Policies in our consolidated financial statements in our Annual Report on Form 10-K filed with the SEC on February 15, 2019.
Revenue
The following table presents our revenues disaggregated by business (in thousands):
 
Three Months Ended March 31,
 
2019
2018
Air
$
640,478

$
593,245

Lodging, Ground and Sea
90,287

84,117

Other
43,203

43,774

Total Travel Network
773,968

721,136

SabreSonic Passenger Reservation System
127,228

120,022

Commercial and Operations Solutions
83,558

84,568

Other
2,141

2,013

Total Airline Solutions(1)
212,927

206,603

SynXis Software and Services
64,214

60,270

Other
8,617

7,858

Total Hospitality Solutions
72,831

68,128

Eliminations
(10,365
)
(7,498
)
Total Sabre Revenue
$
1,049,361

$
988,369

 
 
 

We may occasionally recognize revenue in the current period for performance obligations partially or fully satisfied in the previous periods resulting from changes in estimates for the transaction price, including any changes to our assessment of whether an estimate of variable consideration is constrained. For the three months ended March 31, 2019 and March 31, 2018, the impact on revenue recognized in the current period, from performance obligations partially or fully satisfied in the previous period, is immaterial.

We recognize revenue under long-term contracts that primarily includes variable consideration based on transactions processed. A majority of our consolidated revenue is recognized as a stand-ready performance obligation with the amount recognized based on the invoiced amounts for services performed, known as right to invoice revenue recognition. Certain of our contracts, primarily in the Airlines Solutions business, contain minimum transaction volumes, which in many instances are not considered substantive as the customer is expected to exceed the minimum in the contract. Unearned performance obligations primarily consist of deferred revenue for fixed implementation fees and future product implementations, which are included in deferred revenue and other noncurrent liabilities in our consolidated balance sheet. We have not disclosed the performance obligation related to contracts containing minimum transaction volume, as it represents a subset of our business, and therefore would not be meaningful in understanding the total future revenues expected to be earned from our long term contracts.

8



3. Income Taxes
Our effective tax rates for the three months ended March 31, 2019 and 2018 were 17% and 29%, respectively. The decrease in the effective tax rate for the three months ended March 31, 2019 as compared to the same period in 2018 was primarily driven by an increase in net favorable U.S. tax permanent differences and various discrete items recorded in each of the respective three month periods, none of which was individually significant. 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 and U.S. tax credits.
We recognize liabilities when we believe that an uncertain tax position may not be fully sustained upon examination by the tax authorities. This evaluation 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 three months ended March 31, 2019, we recognized a tax benefit of $1 million associated with the accrual of income tax reserves net of ancillary benefits across our jurisdictions. Our net unrecognized tax benefits, excluding interest and penalties, included in our consolidated balance sheets, were $73 million and $69 million as of March 31, 2019 and December 31, 2018, respectively.
Tax Receivable Agreement
Immediately prior to the closing of our initial public offering in April 2014, we entered into the Tax Receivable Agreement (the "TRA"), which 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 Loss Carryforwards ("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.
As of March 31, 2019 and December 31, 2018, the current portion of our TRA liability totaled $101 million and $104 million, respectively. As of March 31, 2019 and December 31, 2018, $1 million and $73 million, respectively, are included in other noncurrent liabilities in our consolidated balance sheets. We expect a majority of the future payments under the TRA to be made by January 2020. No payments occurred in years 2014 to 2016. We made payments of $74 million and $60 million in January 2019 and 2018, respectively, which included accrued interest of approximately $2 million and $1 million in the same respective periods. We also made a payment of $30 million in April 2019, including approximately $2 million of accrued interest. 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.
4. Debt
As of March 31, 2019 and December 31, 2018, our outstanding debt included in our consolidated balance sheets totaled $3,394 million and $3,406 million, respectively, which are net of debt issuance costs of $17 million and $18 million, respectively, and unamortized discounts of $7 million for each period presented. The following table sets forth the face values of our outstanding debt as of March 31, 2019 and December 31, 2018 (in thousands):
 
Rate
 
Maturity
 
March 31, 2019
 
December 31, 2018
Senior secured credit facilities:
 
 
 
 
 

 
 

Term Loan A
L + 2.00%
 
July 2022
 
$
520,125

 
$
527,250

Term Loan B(1)
L + 2.00%
 
February 2024
 
1,857,534

 
1,862,237

Revolver, $400 million
L + 2.00%
 
July 2022
 

 

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

 
530,000

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

 
500,000

Capital lease obligations
 
 
 
 
10,655

 
12,368

Face value of total debt outstanding
 
 
 
 
3,418,314

 
3,431,855

Less current portion of debt outstanding
 
 
 
 
(75,548
)
 
(68,435
)
Face value of long-term debt outstanding
 
 
 
 
$
3,342,766

 
$
3,363,420

______________________________
(1)
Pursuant to the March 2, 2018 refinancing, the interest rate on the Term Loan B was reduced from L+2.25% to L+2.00%.

9



 Senior Secured Credit Facilities
In February 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 “2013 Term Loan B”) and $425 million (the “2013 Term Loan C”) and (ii) the existing revolving credit facility with a new revolving credit facility of $352 million (the “2013 Revolver”). In September 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 “2013 Incremental Term Loan Facility”).
In July 2016, Sabre GLBL entered into a series of amendments (the “Credit Agreement Amendments”) to our Amended and Restated Credit Agreement to provide for an incremental term loan under a new class with an aggregate principal amount of $600 million (the “2016 Term Loan A”) and to replace the 2013 Revolver with a new revolving credit facility totaling $400 million (the “2016 Revolver”). The proceeds of $597 million, net of $3 million discount, from the 2016 Term Loan A, were used to repay $350 million of outstanding principal on our 2013 Term Loan B and 2013 Incremental Term Loan Facility, on a pro rata basis, repay the $120 million then-outstanding balance on the 2016 Revolver, and pay $11 million in associated financing fees. We recognized a $4 million loss on extinguishment of debt in connection with these transactions during the year ended December 31, 2016.
On February 22, 2017, Sabre GLBL entered into a Third Incremental Term Facility Amendment to our Amended and Restated Credit Agreement (the “2017 Term Facility Amendment”). The new agreement replaced the 2013 Term Loan B, 2013 Incremental Term Loan Facility and 2013 Term Loan C with a single class of term loan (the "2017 Term Loan B") with an aggregate principal amount of $1,900 million maturing on February 22, 2024. The proceeds of $1,898 million, net of $2 million discount on the 2017 Term Loan B, were used to pay off approximately $1,761 million of all existing classes of outstanding term loans (other than the 2016 Term Loan A), pay related accrued interest and pay $12 million in associated financing fees, which were recorded as debt modification costs in Other, net in the consolidated statement of operations during the three months ended March 31, 2017. The remaining proceeds of the 2017 Term Loan B were used to pay off 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 2017 Term Facility Amendment of $9 million and $3 million, respectively, will continue to be amortized over the remaining term of the 2017 Term Loan B along with the Term Loan B discount of $2 million. See Note 5. Derivatives for information regarding the discontinuation of hedge accounting related to our existing interest rate swaps as a result of the 2017 Term Facility Amendment.
On August 23, 2017, Sabre GLBL entered into a Fourth Incremental Term Facility Amendment to our Amended and Restated Credit Agreement, Term Loan A Refinancing Amendment to the Credit Agreement, and Second Revolving Facility Refinancing Amendment to the Credit Agreement to refinance and modify the terms of the 2017 Term Loan B, the 2016 Term Loan A, and the 2016 Revolver, resulting in a reduction of the applicable margins for each of these instruments and approximately a one-year extension of the maturity of the 2016 Term Loan A and 2016 Revolver (the “2017 Refinancing”). We incurred no additional indebtedness as a result of the 2017 Refinancing. The 2017 Refinancing included a $400 million revolving credit facility ("Revolver") that replaced the 2016 Revolver, as well as the application of the proceeds of the approximately $1,891 million incremental Term Loan B facility (“Term Loan B”) and $570 million Term Loan A facility (“Term Loan A”) to replace the 2017 Term Loan B and the 2016 Term Loan A. The maturity of the Revolver and the Term Loan A was extended from July 18, 2021 to July 1, 2022. The applicable margins for the Term Loan B were reduced to 2.25% per annum for Eurocurrency rate loans and 1.25% per annum for base rate loans. The applicable margins for the Term Loan A and the Revolver were reduced to (i) between 2.50% and 1.75% per annum for Eurocurrency rate loans and (ii) between 1.50% and 0.75% per annum for base rate loans, in each case with the applicable margin for any quarter reduced by 25 basis points (up to 75 basis points total) if the Senior Secured First-Lien Net Leverage Ratio (as defined in the Amended and Restated Credit Agreement) is less than 3.75 to 1.0, 3.00 to 1.0, or 2.25 to 1.0, respectively.
On March 2, 2018, Sabre GLBL entered into a Fifth Incremental Term Facility Amendment to our Amended and Restated Credit Agreement to refinance and modify the terms of the Term Loan B, resulting in a reduction of the applicable margins for the Term Loan B to 2.00% per annum for Eurocurrency rate loans and 1.00% per annum for base rate loans. We incurred no additional indebtedness as a result of this transaction and incurred $2 million in financing fees recorded within Other, net and a $1 million loss on extinguishment of debt, in our consolidated results of operations during the three months ended March 31, 2018.
Under the Amended and Restated Credit Agreement, the loan parties are subject to certain customary non-financial covenants, including certain restrictions on incurring certain types of indebtedness, creation of liens on certain assets, making of certain investments, and payment of dividends, as well as a maximum leverage ratio. Pursuant to Credit Agreement Amendments, effective July 18, 2016, the maximum leverage ratio has been adjusted to be based on the Total Net Leverage Ratio (as defined in the Amended and Restated Credit Agreement) and we are required, at all times (no longer solely when a threshold amount of revolving loans or letters of credit were outstanding), to maintain a Total Net Leverage Ratio of less than 4.5 to 1.0. As of March 31, 2019, we are in compliance with all covenants under the Amended and Restated Credit Agreement.
We had no balance outstanding under the Revolver as of March 31, 2019 and as of December 31, 2018. We had outstanding letters of credit totaling $15 million for each period presented, which reduced our overall credit capacity under the Revolver.
5. 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 expenditures' exposure denominated in foreign currencies. Interest rate swaps are entered into to manage interest rate risk associated with our floating-rate borrowings.

10



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 and ineffective portions of the gain or loss on the derivative instruments, and the hedge components excluded from the assessment of effectiveness are reported as a component of other comprehensive income (loss) (“OCI”). Such items are 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. 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 expenditures' exposure to foreign currency movements, we are a party to certain foreign currency forward contracts that extend until March 2020. We have designated these instruments as cash flow hedges. No hedging ineffectiveness was recorded in earnings relating to the forward contracts during the three months ended March 31, 2019 and 2018. As of March 31, 2019, we estimate that $1 million in losses will be reclassified from other comprehensive income (loss) to earnings over the next 12 months.
As of March 31, 2019 and December 31, 2018, 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 March 31, 2019
Buy Currency
 
Sell Currency
 
Foreign Amount
 
USD Amount
 
Average
Contract Rate
Polish Zloty
 
US Dollar
 
241,000

 
64,845

 
0.2691

Singapore Dollar
 
US Dollar
 
54,150

 
39,951

 
0.7378

British Pound Sterling
 
US Dollar
 
21,600

 
28,665

 
1.3271

Indian Rupee
 
US Dollar
 
2,760,000

 
37,912

 
0.014

Australian Dollar
 
US Dollar
 
23,800

 
17,182

 
0.7219

Swedish Krona
 
US Dollar
 
46,650

 
5,311

 
0.1138

Brazilian Real
 
US Dollar
 
9,000

 
2,221

 
0.2482

Outstanding Notional Amounts as of December 31, 2018
Buy Currency
 
Sell Currency
 
Foreign Amount
 
USD Amount
 
Average
Contract Rate
Polish Zloty
 
US Dollar
 
232,500

 
64,281

 
0.2765

Singapore Dollar
 
US Dollar
 
59,800

 
44,504

 
0.7442

British Pound Sterling
 
US Dollar
 
19,600

 
26,525

 
1.3533

Indian Rupee
 
US Dollar
 
2,880,000

 
39,956

 
0.0139

Australian Dollar
 
US Dollar
 
23,950

 
17,674

 
0.7379

Swedish Krona
 
US Dollar
 
48,250

 
5,678

 
0.1177

Brazilian Real
 
US Dollar
 
14,300

 
3,753

 
0.2615


11



Interest Rate Swap Contracts—Interest rate swaps outstanding during the three months ended March 31, 2019 and 2018 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)
 
1.65%
 
December 29, 2017
 
December 31, 2018
$1,350 million
 
1 month LIBOR(1)
 
2.27%
 
December 31, 2018
 
December 31, 2019
$1,200 million
 
1 month LIBOR(1)
 
2.19%
 
December 31, 2019
 
December 31, 2020
$600 million
 
1 month LIBOR(1)
 
2.81%
 
December 31, 2020
 
December 31, 2021
 
 
 
 
 
 
 
 
 
Not Designated as Hedging Instrument(2)
 
 
 
 
 
 
$750 million
 
1 month LIBOR(3)
 
2.61%
 
December 29, 2017
 
December 31, 2018
$750 million
 
1.67%
 
1 month LIBOR
 
December 29, 2017
 
December 31, 2018
______________________

(1)
Subject to a 0% floor.
(2)
Subject to a 1% floor.
(3)
As of February 22, 2017.
As a result of the 2017 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 interest rate swap payments made are recorded in Other, net in the consolidated statement of operations.  Losses reclassified from other comprehensive income to interest expense related to the derivatives that no longer qualified for hedge accounting were $2 million for the three months ended March 31, 2018 and were fully amortized as of December 31, 2018. 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 did not have a material impact to our consolidated results of operations for the three months ended March 31, 2018. We had no undesignated derivatives as of March 31, 2019.
In connection with the 2017 Term Facility Amendment, we entered into forward starting interest rate swaps effective March 31, 2017 to hedge the interest payments associated with $750 million of the floating-rate 2017 Term Loan B. The total notional amount outstanding is $750 million for the years 2018 and 2019. In September 2017, we entered into forward starting interest rate swaps to hedge the interest payments associated with $750 million of the floating-rate Term Loan B. The total notional outstanding of $750 million becomes effective December 31, 2019 and extends through the full year 2020. In April 2018, we entered into forward starting interest rate swaps to hedge the interest payments associated with $600 million, $300 million and $450 million of the floating-rate Term Loan B related to the years 2019, 2020 and 2021, respectively. In December 2018, we entered into forward starting interest rate swaps to hedge the interest payments associated with $150 million of the floating-rate Term Loan B for the years 2020 and 2021. We have designated these swaps as cash flow hedges.
The estimated fair values of our derivatives designated as hedging instruments as of March 31, 2019 and December 31, 2018 are as follows (in thousands):
 
 
Derivative Assets (Liabilities)
 
 
 
 
Fair Value as of
Derivatives Designated as Hedging Instruments
 
Consolidated Balance Sheet Location
 
March 31, 2019
 
December 31, 2018
Foreign exchange contracts
 
Other accrued liabilities
 
$
(1,221
)
 
$
(4,285
)
Interest rate swaps
 
Prepaid expenses and other current assets
 
1,736

 
3,674

Interest rate swaps
 
Other assets, net
 

 
295

Interest rate swaps
 
Other noncurrent liabilities
 
(5,013
)
 

 
 
 
 
$
(4,498
)
 
$
(316
)


12



The effects of derivative instruments, net of taxes, on OCI for the three months ended March 31, 2019 and 2018 are as follows (in thousands):
 
 
Amount of Gain (Loss) Recognized in OCI on Derivative, Effective Portion
 
 
Three Months Ended March 31,
Derivatives in Cash Flow Hedging Relationships
 
2019
 
2018
Foreign exchange contracts
 
$
(255
)
 
$
2,363

Interest rate swaps
 
(5,154
)
 
5,548

Total
 
$
(5,409
)
 
$
7,911


 
 
 
 
Amount of (Gain) Loss Reclassified from Accumulated OCI into Income, Effective Portion
Derivatives in Cash Flow Hedging Relationships
 
Income Statement Location
 
Three Months Ended March 31,
 
 
2019
 
2018
Foreign exchange contracts
 
Cost of revenue
 
$
2,722

 
$
(3,311
)
Interest rate swaps
 
Interest expense, net
 
(520
)
 
1,562

Total
 
 
 
$
2,202

 
$
(1,749
)
6. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market for that asset or liability. Guidance on fair value measurements and disclosures establishes a valuation hierarchy for disclosure of inputs used in measuring fair value defined as follows:
Level 1-Inputs are unadjusted quoted prices that are available in active markets for identical assets or liabilities.
Level 2-Inputs include quoted prices for similar assets and liabilities in active markets and quoted prices in non-active markets, inputs other than quoted prices that are observable, and inputs that are not directly observable, but are corroborated by observable market data.
Level 3-Inputs that are unobservable and are supported by little or no market activity and reflect the use of significant management judgment.
The classification of a financial asset or liability within the hierarchy is determined based on the least reliable level of input that is significant to the fair value measurement. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. We also consider the counterparty and our own non-performance risk in our assessment of fair value.
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
Foreign Currency Forward Contracts—The fair value of the foreign currency forward contracts is estimated based upon pricing models that utilize Level 2 inputs derived from or corroborated by observable market data such as currency spot and forward rates.
Interest Rate Swaps—The fair value of our interest rate swaps is estimated using a combined income and market-based valuation methodology based upon Level 2 inputs, including credit ratings and forward interest rate yield curves obtained from independent pricing services reflecting broker market quotes.
The following tables present our assets (liabilities) that are required to be measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018 (in thousands):
 
 
 
Fair Value at Reporting Date Using
 
March 31, 2019
 
Level 1
 
Level 2
 
Level 3
Derivatives:
 
 
 
 
 
 
 
Foreign currency forward contracts
$
(1,221
)
 
$

 
$
(1,221
)
 
$

Interest rate swap contracts
(3,277
)
 

 
(3,277
)
 

Total
$
(4,498
)
 
$

 
$
(4,498
)
 
$

 

13



 
 
 
Fair Value at Reporting Date Using
 
December 31, 2018
 
Level 1
 
Level 2
 
Level 3
Derivatives:
 
 
 
 
 
 
 
Foreign currency forward contracts
$
(4,285
)
 
$

 
$
(4,285
)
 
$

Interest rate swap contracts
3,969

 

 
3,969

 

Total
$
(316
)

$

 
$
(316
)
 
$

There were no transfers between Levels 1 and 2 within the fair value hierarchy for the three months ended March 31, 2019.
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 a similar liability when traded as an asset in an active market, 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 March 31, 2019 and December 31, 2018, (in thousands):
 
 
Fair Value at
 
Carrying Value at (1)
Financial Instrument
 
March 31, 2019
 
December 31, 2018
 
March 31, 2019
 
December 31, 2018
Term Loan A
 
$
517,524

 
$
520,000

 
$
518,527

 
$
525,514

Term Loan B
 
1,845,925

 
1,798,233

 
1,852,051

 
1,856,496

Revolver, $400 million
 

 

 

 

5.375% Senior secured notes due 2023
 
543,247

 
529,799

 
530,000

 
530,000

5.25% Senior secured notes due 2023
 
512,235

 
495,248

 
500,000

 
500,000

  
______________________________
(1) Excludes net unamortized debt issuance costs.
7. Accumulated Other Comprehensive Income (Loss)
As of March 31, 2019 and December 31, 2018, the components of accumulated other comprehensive income (loss), net of related deferred income taxes, are as follows (in thousands):
 
March 31, 2019
 
December 31, 2018
Defined benefit pension and other post retirement benefit plans
$
(138,486
)
 
$
(139,430
)
Unrealized foreign currency translation gain
4,935

 
7,201

Unrealized loss on foreign currency forward contracts and interest rate swaps
(3,701
)
 
(495
)
Total accumulated other comprehensive loss, net of tax
$
(137,252
)
 
$
(132,724
)
The amortization of actuarial losses and periodic service credits associated with our retirement-related benefit plans is primarily included in other, net in the consolidated statements of operations. See Note 5. Derivatives, for information on the income statement line items affected as the result of reclassification adjustments associated with derivatives.

14



8. 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 March 31,
 
2019
 
2018
Numerator:
 
 
 
Income from continuing operations
$
59,214

 
$
90,449

Less: Net income attributable to noncontrolling interests
912

 
1,362

Net income from continuing operations available to common stockholders, basic and diluted
$
58,302

 
$
89,087

Denominator:
 
 
 
Basic weighted-average common shares outstanding
275,589

 
274,720

Add: Dilutive effect of stock options and restricted stock awards
2,016

 
2,124

Diluted weighted-average common shares outstanding
277,605

 
276,844

Earning per share from continuing operations:
 
 
 
Basic
$
0.21

 
$
0.32

Diluted
$
0.21

 
$
0.32

Basic earnings per share are based on the weighted-average number of common shares outstanding during each period. Diluted earnings per share are based on the weighted-average number of common shares outstanding plus the effect of all dilutive common stock equivalents during each period. The calculation of diluted weighted-average shares excludes the impact of 1 million and 3 million of anti-dilutive common stock equivalents for each of the three months ended March 31, 2019 and 2018, respectively.
9. Leases
In the first quarter of 2019, we adopted ASC 842, Leases, which replaced the previous accounting standard, ASC 840. The new lease standard is a right-of-use model, requiring most lessee agreements to be recorded on the balance sheet. The intent of the standard is to provide greater transparency about lessee obligations and activities. The primary impact to our financial statements is that most operating leases are recorded on our consolidated balance sheet and enhanced disclosures are required for both operating and finance leases. As permitted by ASC 842, our accounting policy is to evaluate lessee agreements with a minimum term greater than one year for recording on the balance sheet.
We adopted the standard using the modified retrospective approach, as of January 1, 2019. Prior year's financial results were not restated. On the adoption date, we recorded a right-of-use asset for $72 million in other assets, net, with a corresponding offset to other accrued liabilities and other noncurrent liabilities for $25 million and $47 million, respectively. There was no impact to retained deficit from adoption of the new standard.
The following table presents the components of lease expense (in thousands):
 
Three Months Ended March 31, 2019
Operating lease cost
$
6,324

Finance lease cost:
 
Amortization of right-of-use assets
$
1,785

Interest on lease liabilities
142

Total finance lease cost
$
1,927










15



The following table presents supplemental cash flow information related to leases (in thousands):
 
Three Months Ended March 31, 2019
Supplemental Cash Flow Information
 
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows used in operating leases
$
6,473

Operating cash flows used in finance leases
142

Financing cash flows used in finance leases
1,713

Right-of-use assets obtained in exchange for lease obligations:
 
Operating leases
5,175

Finance leases

The following table presents supplemental balance sheet information related to leases (in thousands):
 
March 31, 2019
Operating Leases
 
Operating lease right-of-use assets
$
65,670

Other accrued liabilities
24,901

Other noncurrent liabilities
47,278

Total operating lease liabilities
$
72,179

Finance Leases
 
Property and equipment
$
34,952

Accumulated depreciation
(21,907
)
Property and equipment, net
$
13,045

Other accrued liabilities
$
6,862

Other noncurrent liabilities
3,793

Total finance lease liabilities
$
10,655

The following table presents other supplemental information related to leases:
 
March 31, 2019
Weighted Average Remaining Lease Term (in years)
 
Operating leases
4.9

Finance leases
1.4

Weighted Average Discount Rate
 
Operating leases
5.2
%
Finance leases
4.7
%
Our leases have remaining minimum terms that range between one and nine years. Some of our leases include options to extend for up to five additional years; others include options to terminate the agreement within three years. Future minimum lease payments under non-cancellable leases as of March 31, 2019 are as follows (in thousands):
Year Ending December 31,
Operating Leases
 
Finance Leases
2019
$
19,981

 
$
5,472

2020
19,053

 
5,610

2021
13,024

 

2022
9,043

 

2023
6,103

 

Thereafter
16,343

 

Total
83,547

 
11,082

Imputed Interest
(11,368
)
 
(427
)
Total
$
72,179

 
$
10,655



16



10. Contingencies
Legal Proceedings
While certain legal proceedings and related indemnification obligations to which we are a party specify the amounts claimed, these claims may not represent reasonably possible losses. Given the inherent uncertainties of litigation, the ultimate outcome of these matters cannot be predicted at this time, nor can the amount of possible loss or range of loss, if any, be reasonably estimated, except in circumstances where an aggregate litigation accrual has been recorded for probable and reasonably estimable loss contingencies. A determination of the amount of accrual required, if any, for these contingencies is made after careful analysis of each matter. The required accrual may change in the future due to new information or developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters.        
Antitrust Litigation and Investigations
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.
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. The Second Circuit heard oral arguments on this matter in December 2018.
As a result of the jury's verdict, 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. In January 2018, the court denied US Airways' motion seeking attorneys' fees and costs, based on the fact that the appeal of the underlying judgment remains pending, as discussed above. The court's denial of the motion was without prejudice, and US Airways may refile the motion if it prevails on the appeal.
In the fourth quarter of 2016, we 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 during 2016. As noted above, the amount of attorneys' fees and costs to be awarded is subject to conclusion of the appellate process and, if US Airways ultimately prevails on the appeal, final decision by the trial court, which may itself be appealed. 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.

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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. In August 2018, the plaintiffs sought leave from the court to withdraw their motion for class certification. In October 2018, the court denied the plaintiffs’ motion for class certification with prejudice. The case is now proceeding on an individual basis only. We believe that the losses associated with this case are neither probable nor estimable and therefore have not accrued any losses as of March 31, 2019. 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.
European Commission’s Directorate-General for Competition ("EC") Investigation
On November 23, 2018, the EC announced that it has opened an investigation of us and another GDS to assess whether our respective agreements with airlines and travel agents may restrict competition in breach of European Union antitrust rules. We are fully cooperating with the EC’s investigation and are unable to make any prediction regarding its outcome at this time. There is no legal deadline for the EC to bring an antitrust investigation to an end, and the duration of the investigation is uncertain. Depending on the findings of the EC, the outcome of the investigation could have a material adverse effect on our business, financial condition and results of operations. We may incur significant fees, costs and expenses for as long as this investigation is ongoing. We intend to vigorously defend against any allegations of anticompetitive activity by the EC.
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.
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. Our case has been listed for hearing with the Supreme Court, and it has not yet been presented. We have appealed the tax assessments for the assessment years ended March 2013 to March 2016 with the ITAT and no trial date has been set for these subsequent years.
In addition, Sabre Asia Pacific Pte Ltd ("SAPPL") is currently a defendant in similar income tax litigation brought by the DIT. The dispute arose when the DIT asserted that SAPPL has a permanent establishment within the meaning of the Income Tax Treaty between Singapore and India and accordingly issued tax assessments for assessment years ending March 2000 through March 2005. SAPPL appealed the tax assessments, and the Indian Commissioner of Income Tax (Appeals) returned a mixed verdict. SAPPL filed further appeals with the ITAT. The ITAT ruled in SAPPL’s favor, finding that no income would be chargeable to tax for assessment years ending March 2000 through March 2005. The DIT appealed those decisions to the Delhi High Court. No hearing date has been set. The DIT also assessed taxes on a similar basis for assessment years ending March 2006 through March 2014 and appeals for assessment years ending March 2006 through 2014 are pending before the ITAT.
If the DIT were to fully prevail on every claim against us, including SAPPL, we could be subject to taxes, interest and penalties of approximately $43 million as of March 31, 2019. 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.

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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 Relating to Routine Proceedings
We are also engaged from time to time in other routine legal and tax proceedings incidental to our business. We do not believe that any of these routine proceedings will have a material impact on the business or our financial condition.
Other
SynXis Central Reservation System
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 Sabre Hospitality Solutions SynXis Central Reservation System (the “HS 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 HS Central Reservation System; used the account credentials to view a credit card summary page on the HS 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 HS 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 HS Central Reservation System was stopped and is no longer possible. There is no indication that any of our systems beyond the HS 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, engaged a payment card industry data ("PCI") forensic investigator to investigate this incident at the payment card brands' request. We have notified customers and other companies that use or interact with, directly or indirectly, the HS Central Reservation System about the incident. We are also cooperating with various governmental authorities that are investigating this incident. Separately, in November 2017, Sabre Hospitality Solutions observed a pattern of activity that, after further investigation, led it to believe that an unauthorized party improperly obtained access to certain hotel user credentials for purposes of accessing the HS Central Reservation System. We deactivated the compromised accounts and notified law enforcement of this activity. We also notified the payment card brands, and at their request, we have engaged a PCI forensic investigator to investigate this incident. We have not found any evidence of a breach of the network security of the HS Central Reservation System, and we believe that the number of affected reservations represents only a fraction of 1% of the bookings in the HS Central Reservation System. Although the costs related to these incidents, including any associated penalties assessed by any governmental authority or payment card brand or indemnification obligations to our customers, 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 them. We maintain insurance that covers certain aspects of cyber risks, and we continue to work with our insurance carriers in these matters.
Other Tax Matters
We operate in numerous jurisdictions in which taxing authorities may challenge our position with respect to income- and non-income based taxes. We routinely receive inquiries and may also from time to time receive challenges or assessments from these taxing authorities. With respect to non-income based taxes, we recognize liabilities when we believe it is probable that amounts will be owed to the taxing authorities and such amounts are estimable. For example, in most countries we pay and collect Value Added Tax (“VAT”) when procuring goods and services, or providing services, within the normal course of business. VAT receivables are established in jurisdictions where VAT paid exceeds VAT collected and are recoverable through the filing of refund claims. These receivables have inherent audit and collection risks unique to the specific jurisdictions that evaluate our refund claims. As of March 31, 2019, we have approximately $21 million in VAT receivables for which refund claims have been filed with the Greek government. Although we have paid these amounts and believe we are entitled to a refund, the Greek tax authorities have challenged our position that such amounts are recoverable. In Greece, as in other jurisdictions, we intend to vigorously defend our positions against any claims that are not insignificant, including through litigation when necessary. As of March 31, 2019, we do not believe that an adverse outcome is probable with respect to the claims of the Greek tax authorities or any other jurisdiction; as a result, we have not accrued any material amounts for exposure related to such contingencies or adverse decisions. Nevertheless, we may incur expenses in future periods related to such matters, including litigation costs and possible pre-payment of a portion of any assessed tax amount to defend our position, and if our positions are ultimately rejected, it could have a material impact to our results of operations.

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11. 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 CODM utilizes Adjusted Gross Profit, Adjusted Operating Income 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, finance, human resources, legal, corporate systems, amortization of acquired intangible assets, impairment and related charges, 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 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.
The performance of our segments is evaluated primarily on Adjusted Gross Profit, Adjusted Operating Income and Adjusted EBITDA which are not recognized terms under GAAP. Our uses of Adjusted Gross Profit, Adjusted Operating Income 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, the cost of revenue portion of depreciation and amortization, amortization of upfront incentive compensation and stock-based compensation included in cost of revenue.
We define Adjusted Operating Income as operating income adjusted for joint venture equity income, acquisition-related amortization, acquisition-related costs, litigation (reimbursements) costs, net, and stock-based compensation.
We define Adjusted EBITDA as income from continuing operations adjusted for depreciation and amortization of property and equipment, amortization of capitalized implementation costs, acquisition-related amortization, amortization of upfront incentive consideration, interest expense, net, loss on extinguishment of debt, other, net, acquisition-related costs, litigation costs (reimbursements), net, stock-based compensation and provision for income taxes.

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Segment information for the three months ended March 31, 2019 and 2018 is as follows (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Revenue
 

 
 

Travel Network
$
773,968

 
$
721,136

Airline Solutions
212,927

 
206,603

Hospitality Solutions
72,831

 
68,128

Eliminations
(10,365
)
 
(7,498
)
Total revenue
$
1,049,361

 
$
988,369

Adjusted Gross Profit(a)
 

 
 

Travel Network
$
282,680

 
$
298,017

Airline Solutions
78,131

 
89,764

Hospitality Solutions
15,710

 
20,243

Corporate
(3,431
)
 
(3,444
)
Total
$
373,090

 
$
404,580

Adjusted Operating Income(b)
 
 
 
Travel Network
$
193,172

 
$
211,845

Airline Solutions
15,424

 
30,712

Hospitality Solutions
(5,717
)
 
2,137

Corporate
(47,117
)
 
(47,098
)
Total
$
155,762

 
$
197,596

Adjusted EBITDA(c)
 

 
 

Travel Network
$
242,855

 
$
261,588

Airline Solutions
58,394

 
74,419

Hospitality Solutions
7,005

 
11,759

Total segments
308,254

 
347,766

Corporate
(45,905
)
 
(46,428
)
Total
$
262,349

 
$
301,338

Depreciation and amortization
 

 
 

Travel Network
$
30,555

 
$
30,287

Airline Solutions
42,970

 
43,707

Hospitality Solutions
12,723

 
9,622

Total segments
86,248

 
83,616

Corporate
17,195

 
18,260

Total
$
103,443

 
$
101,876

Capital Expenditures
 

 
 

Travel Network
$
4,986

 
$
14,295

Airline Solutions
12,490

 
24,345

Hospitality Solutions
3,496

 
10,174

Total segments
20,972

 
48,814

Corporate
16,892

 
15,885

Total
$
37,864

 
$
64,699

______________________________

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(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 March 31,
 
2019
 
2018
Adjusted Gross Profit
$
373,090

 
$
404,580

Less adjustments:
 

 
 

Selling, general and administrative
151,391

 
130,111

Cost of revenue adjustments:
 

 
 

Depreciation and amortization(1)
84,920

 
83,926

Amortization of upfront incentive consideration(2)
19,128

 
19,456

Stock-based compensation
7,244

 
5,686

Operating income
$
110,407

 
$
165,401

(b)
The following table sets forth the reconciliation of Adjusted Operating Income to operating income in our statement of operations (in thousands): 
 
Three Months Ended March 31,
 
2019
 
2018
Adjusted Operating Income
$
155,762

 
$
197,596

Less adjustments:
 

 
 

Joint venture equity income
533

 
1,171

Acquisition-related amortization(1c)
15,984

 
17,590

Acquisition-related costs(5)
11,706

 

Litigation costs, net(4)
1,438

 
828

Stock-based compensation
15,694

 
12,606

Operating income
$
110,407

 
$
165,401

(c)
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 March 31,
 
2019
 
2018
Adjusted EBITDA
$
262,349

 
$
301,338

Less adjustments:
 
 
 
Depreciation and amortization of property and equipment(1a)
75,348

 
74,463

Amortization of capitalized implementation costs(1b)
12,111

 
9,823

Acquisition-related amortization(1c)
15,984

 
17,590

Amortization of upfront incentive consideration(2)
19,128

 
19,456

Interest expense, net
38,013

 
38,109

Loss on extinguishment of debt

 
633

Other, net(3)
1,870

 
1,106

Acquisition-related costs(5)
11,706

 

Litigation costs, net(4)
1,438

 
828

Stock-based compensation
15,694

 
12,606

Provision for income taxes
11,843

 
36,275

Income from continuing operations
$
59,214

 
$
90,449

______________________________________________________

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(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, as well as amortization of contract acquisition costs.
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.
(2)
Our Travel Network business at times provides upfront incentive consideration to travel agency subscribers at the inception or modification of a service contract, which are capitalized and amortized to cost of revenue over an average expected life of the service contract, generally over three to five years. This consideration is made with the objective of increasing the number of clients or to ensure or improve customer loyalty. These 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. These 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)
Other, net primarily 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)
Litigation costs, net represent charges associated with antitrust litigation. See Note 10. Contingencies.
(5)
Acquisition-related costs represent fees and expenses incurred associated with the 2018 agreement to acquire Farelogix Inc. ("Farelogix"), which is anticipated to close in 2019.
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,” "outlook," “believes,” “may,” "intends," "provisional," "plans," “will,” “predicts,” “potential,” “anticipates,” “estimates,” "should,” “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 15, 2019. 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 15, 2019.
Overview
We connect people and places with technology that reimagines the business of travel. Effective the first quarter of 2018, we operate through three business segments: (i) Travel Network, our global business-to-business travel marketplace for travel suppliers and travel buyers, (ii) Airline Solutions, a broad portfolio of software technology products and solutions primarily for airlines, and (iii) Hospitality Solutions, an extensive suite of leading software solutions for 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 Solutions 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 stock-based compensation expense, litigation costs, corporate headcount-related costs and other items that are not identifiable with either one of our segments.

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Recent Developments Affecting our Results of Operations
In 2019, we expect to substantially complete our transition to utilize the agile development methodology. This method is characterized by a more dynamic development process with iterative activities that involve planning, designing, coding and testing. The agile approach results in more frequent and incremental revisions to software and releases with shorter development cycles that may be less likely to meet the criteria for capitalization in accordance with GAAP. In addition, our resources continue to focus on re-platforming efforts to open source and cloud-based solutions. As expected, these continued investments have reduced our capitalization of certain costs, with a corresponding increase in technology operating expenses.
In April 2019, a customer of Travel Network and Airline Solutions, Jet Airways (India) Ltd., suspended flight operations. While this situation did not significantly impact our results of operations for the three months ended March 31, 2019, we expect our revenues to be negatively impacted for the remainder of 2019 and in the future if a swift resolution is not identified for the carrier. We also expect a near-term impact on our revenue from the 737 MAX situation, including impacts from recent accidents and subsequent aircraft groundings. Additionally for Airline Solutions, certain customers (Pakistan International Airlines Corporation, Bangkok Airways Public Company Limited, and Philippine Airlines, Inc.) previously made decisions in 2018 to transition from our services which will dilute our growth rates on a year-over-year basis.
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 in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting our Results” in our Annual Report on Form 10-K filed with the SEC on February 15, 2019. 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 15, 2019.
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 Solutions and Hospitality Solutions primarily generate 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 and through other professional service fees including Digital Experience ("DX"). 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. Airline Solutions also generates revenue through software licensing and maintenance fees.
Cost of Revenue
Cost of revenue incurred by Travel Network, Airline Solutions and Hospitality Solutions consists of expenses related to technology operations including hosting, third-party software and expensed research and development labor costs, other 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 such as corporate systems and risk and security. Corporate cost of revenue also includes certain expenses such as stock-based compensation, restructuring charges, legal reserves and other items not identifiable with one of our segments.
Depreciation and amortization included in cost of revenue is associated with property and equipment, amortization of capitalized implementation costs which relates to Airline Solutions and Hospitality Solutions, intangible assets for technology purchased through acquisitions, 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 or reimbursements, costs to defend legal disputes, bad debt expense, depreciation and amortization and other overhead costs.

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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 Solutions and Hospitality Solutions pay 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, and Lodging, Ground and Sea ("LGS")) 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 primary metric utilized by Hospitality Solutions is booking transactions processed through the SynXis Central Reservation System. The following table sets forth these key metrics for the periods indicated (in thousands):
 
Three Months Ended March 31,
 
 
 
2019
 
2018
 
% Change
Travel Network
 

 
 

 
 
Direct Billable Bookings - Air
138,561

 
134,651

 
2.9%
Direct Billable Bookings - LGS
16,376

 
16,181

 
1.2%
Total Direct Billable Bookings
154,937

 
150,832

 
2.7%
Airline Solutions Passengers Boarded
186,177

 
174,643

 
6.6%
Hospitality Solutions Central Reservation System Transactions
23,024

 
16,963

 
35.7%
Non-GAAP Financial Measures
We have included both financial measures compiled in accordance with GAAP and certain non-GAAP financial measures in this Quarterly Report on Form 10-Q, including Adjusted Gross Profit, Adjusted Operating Income (Loss), Adjusted Net Income from continuing operations ("Adjusted Net Income"), Adjusted EBITDA, Free Cash Flow and ratios based on these financial measures.
We define Adjusted Gross Profit as operating income (loss) adjusted for selling, general and administrative expenses, the cost of revenue portion of depreciation and amortization, amortization of upfront incentive consideration, and stock-based compensation included in cost of revenue.
We define Adjusted Operating Income (Loss) as operating income (loss) adjusted for joint venture equity income, acquisition-related amortization, acquisition-related costs, litigation costs (reimbursements), net and stock-based compensation.
We define Adjusted Net Income as net income attributable to common stockholders adjusted for income (loss) from discontinued operations, net of tax, net income attributable to noncontrolling interests, acquisition-related amortization, loss on extinguishment of debt, other, net, acquisition-related costs, litigation costs (reimbursements), net, stock-based compensation, and tax impact of net income adjustments.
We define Adjusted EBITDA as Adjusted Net Income adjusted for depreciation and amortization of property and equipment, amortization of capitalized implementation costs, amortization of upfront incentive consideration, interest expense, net, and the remaining provision for income taxes.
We define Free Cash Flow as cash provided by operating activities less cash used in additions to property and equipment.
We define Adjusted Net Income from continuing operations per share as Adjusted Net Income divided by diluted weighted-average common shares outstanding.
These non-GAAP financial measures are key metrics used by management and our board of directors to monitor our ongoing core operations because historical results have been significantly impacted by events that are unrelated to our core operations as a result of changes to our business and the regulatory environment. We believe that these non-GAAP financial measures are used by investors, analysts and other interested parties as measures of financial performance and to evaluate our ability to service debt obligations, fund capital expenditures and meet working capital requirements. We also believe that Adjusted Gross Profit, Adjusted Operating Income (Loss), Adjusted Net Income and Adjusted EBITDA assist investors in company-to-company and period-to-period comparisons by excluding differences caused by variations in capital structures (affecting interest expense), tax positions and the impact of depreciation and amortization expense. In addition, amounts derived from Adjusted EBITDA are a primary component of certain covenants under our senior secured credit facilities.

25



Adjusted Gross Profit, Adjusted Operating Income (Loss), Adjusted Net Income, Adjusted EBITDA, Free Cash Flow and ratios based on these financial measures are not recognized terms under GAAP. These non-GAAP financial measures and ratios based on them are unaudited and have important limitations as analytical tools, and should not be viewed in isolation and do not purport to be alternatives to net income as indicators of operating performance or cash flows from operating activities as measures of liquidity. These non-GAAP financial measures and ratios based on them exclude some, but not all, items that affect net income or cash flows from operating activities and these measures may vary among companies. Our use of these measures has limitations as an analytical tool, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are:
these non-GAAP financial measures exclude certain recurring, non-cash charges such as stock-based compensation expense and amortization of acquired intangible assets;
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted Gross Profit and Adjusted EBITDA do not reflect cash requirements for such replacements;
Adjusted Operating Income (Loss), Adjusted Net Income and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;
Adjusted EBITDA does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our indebtedness;
Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us;
Free Cash Flow removes the impact of accrual-basis accounting on asset accounts and non-debt liability accounts, and does not reflect the cash requirements necessary to service the principal payments on our indebtedness; and
other companies, including companies in our industry, may calculate Adjusted Gross Profit, Adjusted Operating Income (Loss), Adjusted Net Income, Adjusted EBITDA or Free Cash Flow differently, which reduces their usefulness as comparative measures.


26



The following table sets forth the reconciliation of net income (loss) attributable to common stockholders to Adjusted Net Income, Adjusted EBITDA and Adjusted Operating Income (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Net income attributable to common stockholders
$
56,850

 
$
87,880

Loss from discontinued operations, net of tax
1,452

 
1,207

Net income attributable to noncontrolling interests(1)
912

 
1,362

Income from continuing operations
59,214

 
90,449

Adjustments:
 

 
 

Acquisition-related amortization(2a)
15,984

 
17,590

Loss on extinguishment of debt

 
633

Other, net(4)
1,870

 
1,106

Acquisition-related costs(6)
11,706

 

Litigation costs(5)
1,438

 
828

Stock-based compensation
15,694

 
12,606

Tax impact of net income adjustments(7)
(11,707
)
 
(2,002
)
Adjusted Net Income from continuing operations
$
94,199

 
$
121,210

Adjusted Net Income from continuing operations per share
$
0.34

 
$
0.44

Diluted weighted-average common shares outstanding
277,605

 
276,844

 
 
 
 
Adjusted Net Income from continuing operations
$
94,199

 
$
121,210

Adjustments:
 

 
 

Depreciation and amortization of property and equipment(2b)
75,348

 
74,463

Amortization of capitalized implementation costs(2c)
12,111

 
9,823

Amortization of upfront incentive consideration(3)
19,128

 
19,456

Interest expense, net
38,013

 
38,109

Remaining provision for income taxes
23,550

 
38,277

Adjusted EBITDA
$
262,349

 
$
301,338

Less:
 
 
 
Depreciation and amortization(2)
103,443

 
101,876

Amortization of upfront incentive consideration(3)
19,128

 
19,456

Acquisition-related amortization(2a)
(15,984
)
 
(17,590
)
Adjusted Operating Income
$
155,762

 
$
197,596


27



The following tables set forth the reconciliation of operating income (loss) in our statement of operations to Adjusted Gross Profit, Adjusted EBITDA and Adjusted Operating Income (Loss) by business segment (in thousands):
 
Three Months Ended March 31, 2019
 
Travel
Network
 
Airline
Solutions
 
Hospitality
Solutions
 
Corporate
 
Total
Operating income (loss)
$
192,639

 
15,424

 
$
(5,717
)
 
$
(91,939
)
 
$
110,407

Add back:
 
 
 
 
 
 
 
 
 
Selling, general and administrative
43,460

 
22,677

 
9,960

 
75,294

 
151,391

Cost of revenue adjustments:
 
 
 
 
 
 
 
 
 
Depreciation and amortization(2)
27,453

 
40,030

 
11,467

 
5,970

 
84,920

Amortization of upfront incentive consideration(3)
19,128

 

 

 

 
19,128

Stock-based compensation

 

 

 
7,244

 
7,244

Adjusted Gross Profit
282,680

 
78,131

 
15,710

 
(3,431
)
 
373,090

Selling, general and administrative
(43,460
)
 
(22,677
)
 
(9,960
)
 
(75,294
)
 
(151,391
)
Joint venture equity income
533

 

 

 

 
533

Selling, general and administrative adjustments:
 
 
 
 
 
 
 
 
 
Depreciation and amortization(2)
3,102

 
2,940

 
1,255

 
11,226

 
18,523

Acquisition-related costs(6)

 

 

 
11,706

 
11,706

Litigation costs(5)

 

 

 
1,438

 
1,438

Stock-based compensation

 

 

 
8,450

 
8,450

Adjusted EBITDA
242,855

 
58,394

 
7,005

 
(45,905
)
 
262,349

Less:


 


 


 


 


Depreciation and amortization(2)
30,555

 
42,970

 
12,722

 
17,196

 
103,443

Amortization of upfront incentive consideration(3)
19,128

 

 

 

 
19,128

Acquisition-related amortization(2a)

 

 

 
(15,984
)
 
(15,984
)
Adjusted Operating Income (Loss)
$
193,172

 
$
15,424

 
$
(5,717
)
 
$
(47,117
)
 
$
155,762

 
Three Months Ended March 31, 2018
 
Travel
Network
 
Airline
Solutions
 
Hospitality
Solutions
 
Corporate
 
Total
Operating income (loss)
$
210,674

 
30,712

 
$
2,137

 
$
(78,122
)
 
$
165,401

Add back:
 
 
 
 
 
 
 
 
 
Selling, general and administrative
40,505

 
18,217

 
9,416

 
61,973

 
130,111

Cost of revenue adjustments: