UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

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

For the quarterly period ended June 30, 2014

or

¨

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

Commission File Number: 001-36422

 

Sabre Corporation

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

20-8647233

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

3150 Sabre Drive

Southlake, TX 76092

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

(682) 605-1000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:    Yes  x    No  ¨

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

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

 

Large accelerated filer

 

¨

  

Accelerated filer

 

¨

 

Non-accelerated filer

 

x  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

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

As of August 4, 2014, 264,759,541 shares of the Registrant’s Common Stock, par value $0.01 per share, were outstanding.

 

 

 

 

 

 


 

SABRE CORPORATION

TABLE OF CONTENTS

 

 

 

Page No.

PART I. FINANCIAL INFORMATION

 

 

    Item 1.

Financial Statements:

 

 

 

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2014 and 2013

1

 

 

Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2014 and 2013

2

 

 

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

3

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013

4

 

 

Notes to Consolidated Financial Statements

5

 

    Item 2.

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

27

 

    Item 3.

Quantitative and Qualitative Disclosures About Market Risk

53

 

    Item 4.

Controls and Procedures

53

 

PART II. OTHER INFORMATION

 

 

    Item 1.

Legal Proceedings

54

 

    Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

54

 

    Item 6.

Exhibits

55

 

 

 

 


 

PART I – FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

SABRE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Revenue

$

717,573

 

 

$

768,232

 

 

$

1,472,983

 

 

$

1,527,576

 

Cost of revenue (1) (2)

 

444,276

 

 

 

467,365

 

 

 

934,021

 

 

 

949,152

 

Selling, general and administrative (2)

 

205,152

 

 

 

212,364

 

 

 

404,029

 

 

 

412,193

 

Impairment

 

 

 

 

135,598

 

 

 

 

 

 

135,598

 

Operating income (loss)

 

68,145

 

 

 

(47,095

)

 

 

134,933

 

 

 

30,633

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(53,235

)

 

 

(63,669

)

 

 

(117,179

)

 

 

(146,199

)

Loss on extinguishment of debt

 

(30,558

)

 

 

 

 

 

(33,538

)

 

 

(12,181

)

Joint venture equity income

 

4,059

 

 

 

3,286

 

 

 

6,500

 

 

 

6,032

 

Other, net

 

1,082

 

 

 

(3,796

)

 

 

195

 

 

 

1,330

 

Total other expense, net

 

(78,652

)

 

 

(64,179

)

 

 

(144,022

)

 

 

(151,018

)

Loss from continuing operations before income taxes

 

(10,507

)

 

 

(111,274

)

 

 

(9,089

)

 

 

(120,385

)

Benefit for income taxes

 

(5,495

)

 

 

(8,142

)

 

 

(3,078

)

 

 

(13,090

)

Loss from continuing operations

 

(5,012

)

 

 

(103,132

)

 

 

(6,011

)

 

 

(107,295

)

Loss from discontinued operations, net of tax

 

(5,183

)

 

 

(12,893

)

 

 

(6,281

)

 

 

(23,910

)

Net loss

 

(10,195

)

 

 

(116,025

)

 

 

(12,292

)

 

 

(131,205

)

Net income attributable to noncontrolling interests

 

702

 

 

 

837

 

 

 

1,448

 

 

 

1,421

 

Net loss attributable to Sabre Corporation

 

(10,897

)

 

 

(116,862

)

 

 

(13,740

)

 

 

(132,626

)

Preferred stock dividends

 

2,235

 

 

 

9,005

 

 

 

11,381

 

 

 

17,977

 

Net loss attributable to common shareholders

$

(13,132

)

 

$

(125,867

)

 

$

(25,121

)

 

$

(150,603

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

$

(0.03

)

 

$

(0.63

)

 

$

(0.09

)

 

$

(0.71

)

Discontinued operations

 

(0.02

)

 

 

(0.07

)

 

 

(0.03

)

 

 

(0.13

)

Basic and diluted loss per share attributable to common

   shareholders

 

(0.05

)

 

 

(0.71

)

 

 

(0.12

)

 

 

(0.85

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average common shares outstanding

 

243,801

 

 

 

178,060

 

 

 

211,431

 

 

 

178,007

 

 

(1) Includes amortization of upfront incentive consideration

$

11,742

 

 

$

9,752

 

 

$

22,789

 

 

$

19,351

 

(2) Includes stock-based compensation as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

$

1,940

 

 

$

(186

)

 

$

3,446

 

 

$

272

 

Selling, general and administrative

 

9,443

 

 

 

222

 

 

 

13,516

 

 

 

2,488

 

  

See Notes to Consolidated Financial Statements.

 

 

1


 

SABRE CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net loss

$

(10,195

)

 

$

(116,025

)

 

$

(12,292

)

 

$

(131,205

)

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments (“CTA”):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign CTA gains (losses), net of tax

 

1,292

 

 

 

(113

)

 

 

2,188

 

 

 

336

 

Reclassification adjustment for realized losses

   on foreign CTA, net of tax

 

 

 

 

 

 

 

 

 

 

8,162

 

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

 

1,292

 

 

 

(113

)

 

 

2,188

 

 

 

8,498

 

Retirement-related benefit plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service credits, net of taxes of

   $129 and $1,337 for the three months ended June 30,

   2014 and 2013, respectively, and $258 and $2,700

   for the six months ended June 30, 2014 and 2013,

   respectively

 

(229

)

 

 

(2,108

)

 

 

(458

)

 

 

(4,190

)

Amortization of actuarial losses, net of taxes of

   $(423) and $(532) for the three months ended June 30,

   2014 and 2013, respectively, and $(844) and $(1,069)

   for the six months ended June 30, 2014 and 2013,

   respectively

 

745

 

 

 

838

 

 

 

1,491

 

 

 

1,659

 

Total retirement-related benefit plans

 

516

 

 

 

(1,270

)

 

 

1,033

 

 

 

(2,531

)

Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses), net of taxes of $(263) and

   $222 for the three months ended June 30, 2014

   and 2013, respectively, and $(430) and $827

   for the six months ended June 30, 2014 and

   2013, respectively

 

410

 

 

 

(80

)

 

 

618

 

 

 

(2,188

)

Reclassification adjustment for realized losses, net of

    taxes of $(684) and $(1,241) for the three months

   ended June 30, 2014 and 2013, respectively, and

   $(1,552) and $(2,469) for the six months ended June 30,

   2014 and 2013, respectively

 

417

 

 

 

1,856

 

 

 

1,062

 

 

 

3,609

 

Net change in unrealized gains on derivatives, net of tax

 

827

 

 

 

1,776

 

 

 

1,680

 

 

 

1,421

 

Share of other comprehensive income of joint venture

 

3,420

 

 

 

 

 

 

3,420

 

 

 

 

Other comprehensive income

 

6,055

 

 

 

393

 

 

 

8,321

 

 

 

7,388

 

Comprehensive loss

 

(4,140

)

 

 

(115,632

)

 

 

(3,971

)

 

 

(123,817

)

Less: Comprehensive income attributable to

   noncontrolling interests

 

(702

)

 

 

(837

)

 

 

(1,448

)

 

 

(1,421

)

Comprehensive loss attributable to Sabre Corporation

$

(4,842

)

 

$

(116,469

)

 

$

(5,419

)

 

$

(125,238

)

  

See Notes to Consolidated Financial Statements.

 

 

2


 

SABRE CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

 

 

June 30, 2014

 

 

December 31, 2013

 

Assets

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

252,380

 

 

$

308,236

 

Restricted cash

 

1,052

 

 

 

2,359

 

Accounts receivable, net

 

456,674

 

 

 

434,288

 

Prepaid expenses and other current assets

 

46,435

 

 

 

53,378

 

Current deferred income taxes

 

40,504

 

 

 

41,431

 

Other receivables, net

 

31,202

 

 

 

29,511

 

Assets of discontinued operations

 

10,953

 

 

 

13,624

 

Total current assets

 

839,200

 

 

 

882,827

 

Property and equipment, net of accumulated depreciation of  $792,330 and $722,916

 

512,262

 

 

 

498,523

 

Investments in joint ventures

 

142,003

 

 

 

132,082

 

Goodwill

 

2,138,263

 

 

 

2,138,175

 

Trademarks and brandnames, net of accumulated amortization of $549,566 and $545,597

 

312,066

 

 

 

323,035

 

Other intangible assets, net of accumulated amortization of $938,233 and $889,904

 

263,204

 

 

 

311,523

 

Other assets, net

 

508,707

 

 

 

469,543

 

Total assets

$

4,715,705

 

 

$

4,755,708

 

 

 

 

 

 

 

 

 

Liabilities, temporary equity and stockholders’ equity (deficit)

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

$

131,409

 

 

$

111,386

 

Travel supplier liabilities and related deferred revenue

 

141,803

 

 

 

213,504

 

Accrued compensation and related benefits

 

72,537

 

 

 

117,689

 

Accrued subscriber incentives

 

168,756

 

 

 

142,767

 

Deferred revenues

 

169,756

 

 

 

136,380

 

Litigation settlement liability and related deferred revenue

 

48,263

 

 

 

38,920

 

Other accrued liabilities

 

238,589

 

 

 

267,867

 

Current portion of debt

 

22,401

 

 

 

86,117

 

Liabilities of discontinued operations

 

24,797

 

 

 

41,788

 

Total current liabilities

 

1,018,311

 

 

 

1,156,418

 

Deferred income taxes

 

10,090

 

 

 

10,253

 

Other noncurrent liabilities

 

567,327

 

 

 

263,182

 

Long-term debt

 

3,069,502

 

 

 

3,643,548

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

Temporary equity

 

 

 

 

 

 

 

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

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

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

 

 

 

 

634,843

 

Stockholders’ equity (deficit)

 

 

 

 

 

 

 

Common Stock: $0.01 par value;  450,000,000 authorized shares; 265,186,666

    and 178,633,409  shares issued, 264,749,280 and 178,491,568 outstanding

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

 

2,652

 

 

 

1,786

 

Additional paid-in capital

 

1,906,031

 

 

 

880,619

 

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

 

(5,297

)

 

 

 

Retained deficit

 

(1,810,675

)

 

 

(1,785,554

)

Accumulated other comprehensive loss

 

(41,573

)

 

 

(49,895

)

Noncontrolling interest

 

(663

)

 

 

508

 

Total stockholders’ equity (deficit)

 

50,475

 

 

 

(952,536

)

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

$

4,715,705

 

 

$

4,755,708

 

  

See Notes to Consolidated Financial Statements.

 

 

3


 

SABRE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

Six Months Ended

June 30,

 

 

2014

 

 

2013

 

Operating Activities

 

 

 

 

 

 

 

Net loss

$

(12,292

)

 

$

(131,205

)

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

 

 

 

 

 

 

 

Depreciation and amortization

 

158,748

 

 

 

153,910

 

Impairment

 

 

 

 

135,598

 

Amortization of upfront incentive consideration

 

22,789

 

 

 

19,351

 

Litigation related charges, net

 

33

 

 

 

4,078

 

Stock-based compensation expense

 

16,962

 

 

 

2,760

 

Allowance for doubtful accounts

 

3,652

 

 

 

6,531

 

Deferred income taxes

 

(17,508

)

 

 

(19,550

)

Joint venture equity income

 

(6,500

)

 

 

(6,032

)

Amortization of debt issuance costs

 

3,243

 

 

 

3,637

 

Debt modification costs

 

3,290

 

 

 

14,003

 

Loss on extinguishment of debt

 

33,538

 

 

 

12,181

 

Other

 

8,583

 

 

 

(4,243

)

Loss from discontinued operations

 

6,281

 

 

 

23,910

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts and other receivables

 

(35,593

)

 

 

(76,995

)

Prepaid expenses and other current assets

 

1,300

 

 

 

6,529

 

Capitalized implementation costs

 

(17,597

)

 

 

(38,663

)

Upfront incentive consideration

 

(25,936

)

 

 

(18,686

)

Other assets

 

(13,050

)

 

 

(19,621

)

Accrued compensation and related benefits

 

(45,436

)

 

 

(28,126

)

Accounts payable and other accrued liabilities

 

(4,899

)

 

 

131,689

 

Pension and other postretirement benefits

 

(2,100

)

 

 

 

Cash provided by operating activities

 

77,508

 

 

 

171,056

 

Investing Activities

 

 

 

 

 

 

 

Additions to property and equipment

 

(110,583

)

 

 

(111,487

)

Proceeds from sale of business

 

 

 

 

10,000

 

Other investing activities

 

235

 

 

 

(3,475

)

Cash used in investing activities

 

(110,348

)

 

 

(104,962

)

Financing Activities

 

 

 

 

 

 

 

Proceeds of borrowings from lenders

 

148,307

 

 

 

2,190,063

 

Payments on borrowings from lenders

 

(791,427

)

 

 

(2,218,908

)

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

 

672,645

 

 

 

 

Prepayment fee and debt modification and issuance costs

 

(30,490

)

 

 

(17,199

)

Other financing activities

 

(2,616

)

 

 

(4,123

)

Cash used in financing activities

 

(3,581

)

 

 

(50,167

)

Cash Flows from Discontinued Operations

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

 

(24,360

)

 

 

24,295

 

Net cash provided by investing activities

 

3,760

 

 

 

20,502

 

Net cash (used in) provided by discontinued operations

 

(20,600

)

 

 

44,797

 

Effect of exchange rate changes on cash and cash equivalents

 

1,165

 

 

 

(1,407

)

(Decrease) increase in cash and cash equivalents

 

(55,856

)

 

 

59,317

 

Cash and cash equivalents at beginning of period

 

308,236

 

 

 

126,695

 

Cash and cash equivalents at end of period

$

252,380

 

 

$

186,012

 

  

See Notes to Consolidated Financial Statements.

 

 

4


 

SABRE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. General Information

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

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

Initial Public Offering and Share-based Compensation—On April 23, 2014, we closed our initial public offering of our common stock in which we sold 39,200,000 shares, and on April 25, 2014, the underwriters exercised in full their overallotment option which resulted in the sale of an additional 5,880,000 shares of our common stock. Our shares of common stock were sold at an initial public offering price of $16.00 per share, which generated $673 million of net proceeds from the offering after deducting underwriting discounts and commissions and offering expenses. Upon closing of our initial public offering, we redeemed all of our outstanding shares of Series A Cumulative Preferred Stock in exchange for 40,343,529 shares of our common stock.

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

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

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

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

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

5


 

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

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

 

2. Discontinued Operations and Dispositions

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

Discontinued Operations

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

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

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

6


 

Results of Discontinued Operations—We have reported the results of operations of Holiday Autos and Zuji as discontinued operations. The following table summarizes the results of our discontinued operations (in thousands):

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Revenue

$

 

 

$

17,291

 

 

$

 

 

$

35,743

 

Cost of revenue

 

763

 

 

 

7,452

 

 

 

1,111

 

 

 

11,786

 

Selling, general and administrative

 

1,313

 

 

 

17,281

 

 

 

2,343

 

 

 

30,562

 

Operating loss

 

(2,076

)

 

 

(7,442

)

 

 

(3,454

)

 

 

(6,605

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(2,197

)

 

 

(1,515

)

 

 

(3,358

)

 

 

(2,120

)

Loss on sale of businesses, net

 

 

 

 

(16,879

)

 

 

 

 

 

(27,708

)

Other, net

 

(2,710

)

 

 

3,507

 

 

 

(1,652

)

 

 

3,404

 

Total other expense, net

 

(4,907

)

 

 

(14,887

)

 

 

(5,010

)

 

 

(26,424

)

Loss from discontinuing operations before

   income taxes

 

(6,983

)

 

 

(22,329

)

 

 

(8,464

)

 

 

(33,029

)

Benefit for income taxes

 

(1,800

)

 

 

(9,436

)

 

 

(2,183

)

 

 

(9,119

)

Net loss from discontinued operations

$

(5,183

)

 

$

(12,893

)

 

$

(6,281

)

 

$

(23,910

)

 

Dispositions

Disposition of Certain Assets of Travelocity—In February 2014, as a further step in our restructuring plans for Travelocity, we completed a sale of assets associated with Travelocity Partner Network (“TPN”), a business-to-business private white label website offering, for $10 million in upfront proceeds. Pursuant to the sale agreement, we will receive two annual earn-out payments, totaling up to $10 million, if the purchaser exceeds certain revenue thresholds during the calendar years ending December 31, 2014 and 2015. In connection with the sale, Travelocity entered into a Transition Services Agreement (“TSA”) with the acquirer to provide services to maintain the websites and certain technical and administrative functions for the acquirer until a complete transition occurs. Consideration received under both agreements has been allocated to the disposition and the services provided under the TSA; therefore, a significant portion of the upfront proceeds have been deferred, based on fair value of the TSA services. We recognized a loss on the disposition of $3 million, prior to considering the potential earn-out payments. We recognized a $3 million receivable for earn-out proceeds, which offset the loss from disposition utilizing the loss recovery method and resulted in no net impact to operating income for the disposition. The earn-out receivable is reviewed for recovery on a periodic basis and a charge will be recorded to operating income if it is determined that we will receive less than $3 million of earn-out proceeds. Any proceeds received in excess of $3 million will be recognized as operating income in the period collected.

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

 

3. Restructuring Charges

Travelocity Restructuring—In the third quarter of 2013, we initiated plans to restructure Travelocity, shifting Travelocity in the United States and Canada away from a fixed-cost model to a lower-cost, performance-based shared revenue structure. On August 22, 2013 we entered into an exclusive, long-term strategic marketing agreement with Expedia (“Expedia SMA”), in which Expedia will power the technology platforms for Travelocity’s existing U.S. and Canadian websites, as well as provide Travelocity with access to Expedia’s supply and customer service platforms. On March 6, 2014, we amended and restated the Expedia SMA to reflect changes in certain commercial terms and also agreed to a separate put/call agreement (“Put/Call Agreement”) that supersedes the previous put/call arrangement, the term of which is consistent with the Expedia SMA. The Expedia SMA represents a strategic decision to reduce direct costs associated with Travelocity and provide our customers with the benefit of Expedia’s long term investment in its technology platform as well as its supply and customer service platforms, which we expect to increase conversion and operational efficiency and allows us to shift our focus to Travelocity’s marketing strengths. Both parties began development and implementation after signing the Expedia SMA. As of June 30, 2014, substantially all supplier offerings have been migrated to the Expedia platform. Based on the terms of the Expedia SMA, Expedia earned an incentive payment of $8 million in January 2014 and an additional $3 million in March 2014. We are amortizing these payments over the non-cancellable term of the Expedia SMA as a reduction to revenue.

7


 

Expedia pays us a performance-based marketing fee that varies based on the amount of travel booked through Travelocity-branded websites powered by Expedia under this collaborative arrangement. The marketing fee we receive is recorded as marketing fee revenue and the cost we incur to promote the Travelocity brand and for marketing is recorded as selling, general and administrative expense in our results of operations. Correspondingly, we are winding down certain internal processes, including back office functions, as transactions move from our technology platforms to those of Expedia.

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

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

We recorded restructuring charges of $1 million in our results of operations during the three and six months ended June 30, 2014. In addition, we recorded adjustments to our original estimates of employee termination benefits of $1 million and $4 million during the three and six months ended June 30, 2014, respectively, primarily as the result of certain employees transferring to the acquirer of the TPN business without a required severance payment. We estimate that we will incur additional charges in 2014 of approximately $9 million consisting of $6 million in contract termination costs and $3 million of other related costs.

Technology Restructuring—Our corporate expenses include a technology organization that provides development and support activities to our business segments. Costs associated with our technology organization are charged to the business segments primarily based on its usage of development resources. For the year ended December 31, 2013, the majority of costs associated with the technology organization were incurred by Travel Network and Airline and Hospitality Solutions. In the fourth quarter of 2013, we initiated a restructuring plan to simplify our technology organization, better align costs with our current business, reduce our spending on third-party resources, increase focus on product development and reduce our employee base by approximately 350 employees. The majority of this plan has been completed as of June 30, 2014 and we do not expect to record material charges in 2014 related to this action.

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

 

 

Employee Termination Benefits

 

 

Travelocity

 

 

Technology

Organization

 

 

Total

 

Balance as of December 31, 2013

$

17,731

 

 

$

8,163

 

 

$

25,894

 

Charges

 

1,000

 

 

 

 

 

 

1,000

 

Adjustments

 

(3,445

)

 

 

(915

)

 

 

(4,360

)

Payments

 

(7,496

)

 

 

(5,996

)

 

 

(13,492

)

Balance as of June 30, 2014

$

7,790

 

 

$

1,252

 

 

$

9,042

 

 

The charges included in our restructuring accruals do not include items charged directly to expense (e.g., asset impairments) and other periodic costs recognized as incurred, as those items are not reflected in the restructuring reserve in our consolidated balance sheet. Restructuring charges are not allocated to the segments for segment reporting purposes (see Note 14, Segment Information).

 

4. Equity Method Investments

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

8


 

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

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Revenue

$

96,683

 

 

$

90,123

 

 

$

176,497

 

 

$

165,577

 

Operating income

 

18,666

 

 

 

15,744

 

 

 

30,085

 

 

 

25,737

 

Net income

 

14,360

 

 

 

11,595

 

 

 

24,070

 

 

 

21,688

 

 

5. Pension and Other Postretirement Benefit Plans

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

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

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Pension Benefits:

 

 

 

 

 

Interest cost

$

4,900

 

 

$

4,465

 

 

$

9,800

 

 

$

8,965

 

Expected return on plan assets

 

(6,025

)

 

 

(5,868

)

 

 

(12,050

)

 

 

(11,818

)

Amortization of prior service credit

 

(358

)

 

 

(358

)

 

 

(716

)

 

 

(716

)

Amortization of actuarial loss

 

1,200

 

 

 

1,851

 

 

 

2,400

 

 

 

3,691

 

Net periodic (credit) cost

$

(283

)

 

$

90

 

 

$

(566

)

 

$

122

 

Other Benefits:

 

 

 

 

 

Interest cost

$

 

 

$

10

 

 

$

2

 

 

$

21

 

Amortization of prior service credit

 

 

 

 

(3,087

)

 

 

 

 

 

(6,174

)

Amortization of actuarial gain

 

(33

)

 

 

(481

)

 

 

(66

)

 

 

(963

)

Net periodic credit

$

(33

)

 

$

(3,558

)

 

$

(64

)

 

$

(7,116

)

  

We made contributions of $2 million to fund our defined benefit pension plans during the six months ended June 30, 2014 and no contributions during the six months ended June 30, 2013. Annual contributions to our defined benefit pension plans in the United States and Canada are based on several factors that may vary from year to year. Thus, past contributions are not always indicative of future contributions. Based on current assumptions, we expect to make $9 million in contributions to our defined benefit pension plans for the remainder of 2014.

 

6. Income Taxes

Our effective tax rates for the six months ended June 30, 2014 and 2013 were 34% and 11%, respectively. The increase in the effective tax rate for the six months ended June 30, 2014 as compared to the same period in 2013 was primarily due to the impairment of nondeductible goodwill in the prior year, the amount of current year losses for which no tax benefit can be recognized relative to the amount of pre-tax income, the reduction of a portion of our valuation allowances in the current year and the impact of other discrete items.

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

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

9


 

appropriate. Our net unrecognized tax benefits, excluding interest and penalties, included in our consolidated balance sheets, were $67 million and $61 million as of June 30, 2014 and December 31, 2013, respectively.

Tax Receivable Agreement

Immediately prior to the closing of our initial public offering, we entered into an income tax receivable agreement (“TRA”) that provides those stockholders and equity award holders that were our stockholders and equity award holders, respectively, immediately prior to the closing of our initial public offering (collectively, the “Existing Stockholders”) the right to receive future payments from us of 85% of the amount of cash savings, if any, in U.S. federal income tax that we and our subsidiaries realize as a result of the utilization of certain tax assets attributable to periods prior to our initial public offering, including federal net operating losses, capital losses and the ability to realize tax amortization of certain intangible assets (collectively, the “Pre-IPO Tax Assets”). We recognized a liability of $321 million after considering the valuation allowance of $66 million recorded against the Pre-IPO Tax Assets. The TRA liability was recorded as a reduction to additional paid-in capital and an increase to other noncurrent liabilities. No payments have been made under the TRA during the six months ended June 30, 2014 and we do not expect material payments to occur prior to 2017. Any payments made under the TRA will be classified as a financing activity in our statement of cash flows.

 

7. Debt

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

As of June 30, 2014 and December 31, 2013, our outstanding debt included in our consolidated balance sheets totaled $3,092 million and $3,730 million, respectively, net of unamortized discounts of $16 million and $20 million, respectively. The following table sets forth the face values of our outstanding debt as of June 30, 2014 and December 31, 2013 (in thousands):

 

 

Rate

 

 

Maturity

 

June 30, 2014

 

 

December 31, 2013

 

Senior secured credit facilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Term Loan B

L + 3.25%

 

 

February 2019

 

$

1,748,375

 

 

$

1,757,250

 

Incremental term loan facility

L + 3.50%

 

 

February 2019

 

 

347,375

 

 

 

349,125

 

Term Loan C

L + 3.00%

 

 

December 2017

 

 

49,313

 

 

 

361,250

 

Revolver, $370 million

L + 3.00%

 

 

February 2019

 

 

 

 

 

 

Revolver, $35 million

L + 3.75%

 

 

February 2018

 

 

 

 

 

 

Senior unsecured notes due 2016

 

8.35%

 

 

March 2016

 

 

400,000

 

 

 

400,000

 

Senior secured notes due 2019

 

8.50%

 

 

May 2019

 

 

480,000

 

 

 

800,000

 

Mortgage facility

 

5.80%

 

 

March 2017

 

 

82,729

 

 

 

83,286

 

Face value of total debt outstanding

 

 

 

 

 

 

 

3,107,792

 

 

 

3,750,911

 

Less current portion of debt outstanding

 

 

 

 

 

 

 

(22,401

)

 

 

(86,117

)

Face value of long-term debt outstanding

 

 

 

 

 

 

$

3,085,391

 

 

$

3,664,794

 

  

Senior Secured Credit Facilities

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

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

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

10


 

and 2.25%, respectively, with a step down to 3.00% and 2.00%, respectively, if the Senior Secured Leverage Ratio (as defined in the Amended and Restated Credit Agreement) is less than or equal to 3.25 to 1.00. It also reduced the Eurocurrency rate floor to 1.00% and the Base rate floor to 2.00%. The repriced Term Loan B includes a 1% repricing premium if we pay off or refinance all or a portion of the Term Loan B within six months of February 20, 2014.

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

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

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

As of June 30, 2014 and December 31, 2013, we had no outstanding balance under the Extended and Unextended Revolver. As of June 30, 2014, we had outstanding letters of credit totaling $65 million, which reduces our overall credit capacity under the Revolver. As of December 31, 2013, we had outstanding letters of credit totaling $67 million, of which $66 million reduced our overall credit capacity under the Revolver and $1 million was collateralized with restricted cash.

Principal Payments

Term Loan B and the Incremental Term Loan Facility mature on February 19, 2019, and require principal payments in equal quarterly installments of 0.25%. Term Loan C matures on December 31, 2017. As a result of the April 2014 prepayment, quarterly principal payments on Term Loan C are no longer required. We are obligated to pay $17 million on September 30, 2017 and the remaining balance on December 31, 2017. The Extended Revolver matures on February 19, 2019 and the Unextended Revolver matures on February 19, 2018. For the six months ended June 30, 2014, we made $323 million of principal payments of which $296 million was the prepayment on Term Loan C. We are scheduled to make $21 million in principal payments over the next twelve months.

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

Interest

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

11


 

 

 

Eurocurrency borrowings

 

 

Base rate borrowings

 

 

Applicable Margin

 

 

Floor

 

 

Applicable Margin

 

 

Floor

 

Term Loan B, prior to Repricing Amendments

 

4.00

%

 

 

1.25

%

 

 

3.00

%

 

 

2.25

%

Term Loan B, subsequent to Repricing Amendments

 

3.25

%

 

 

1.00

%

 

 

2.25

%

 

 

2.00

%

Incremental term loan facility

 

3.50

%

 

 

1.00

%

 

 

2.50

%

 

 

2.00

%

Term Loan C

 

3.00

%

 

 

1.00

%

 

 

2.00

%

 

 

2.00

%

Revolver, $370 million

 

3.00

%

 

N/A

 

 

 

2.00

%

 

N/A

 

Revolver, $35 million

 

3.75

%

 

N/A

 

 

 

2.75

%

 

N/A

 

  

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

We have elected the three-month LIBOR as the floating interest rate on all $2,145 million of our outstanding term loans. As of June 30, 2014, the interest rate, including applicable margin, is 4.25% for the Term Loan B of $1,748 million; 4.5% for the Incremental Term Loan Facility of $347 million; and 4% for the Term Loan C of $49 million. Interest payments are due on the last day of each quarter. Interest on a portion of the outstanding loan is hedged with interest rate swaps (see Note 8, Derivatives).

In connection with the prepayment on Term Loan C and the Repricing Amendments, we recognized losses on extinguishment of debt of $1 million and $3 million, respectively. In addition, we incurred costs totaling $3 million as a result of the Repricing Amendments which were recorded as interest expense. In 2013, we incurred costs totaling $19 million associated with the Amended and Restated Credit Agreement and the Incremental Term Loan Facility. We charged $14 million to interest expense during the first quarter of 2013, and capitalized $3 million and $2 million as debt issuance costs during the first and third quarter of 2013, respectively. We also recognized a loss on extinguishment of debt of $12 million for the six months ended June 30, 2013 as a result of the Amended and Restated Credit Agreement. As of June 30, 2014, we had $26 million of unamortized debt issuance costs included in other assets in our consolidated balance sheets associated with all debt transactions under the Amended and Restated Credit Agreement and the previous senior secured credit agreement. These costs are being amortized to interest expense over the maturity period of the Amended and Restated Credit Agreement. Our effective interest rates for the three and six months ended June 30, 2014 and 2013, inclusive of amounts charged to interest expense as described above, are as follows:

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Including the impact of interest rate swaps

 

5.46

%

 

 

6.18

%

 

 

5.82

%

 

 

7.59

%

Excluding the impact of interest rate swaps

 

4.73

%

 

 

5.45

%

 

 

5.14

%

 

 

6.89

%

  

Senior Unsecured Notes

As of June 30, 2014, we have, at face value, $400 million in senior unsecured notes currently bearing interest at a rate of 8.35% and maturing on March 15, 2016 (“2016 Notes”). The 2016 Notes include certain non-financial covenants, including restrictions on incurring certain types of debt, entering into certain sale and leaseback transactions and entering into mergers, consolidations or a transfer of substantially all our assets. As of June 30, 2014, we are in compliance with all covenants under the 2016 Notes. We are obligated to pay $33 million in interest per year until 2016. Payments are due in March and September each year.

Senior Secured Notes

We have, at face value, $480 million in senior secured notes bearing interest at a rate of 8.50% and maturing on May 15, 2019 (“2019 Notes”). The 2019 Notes include certain non-financial covenants, including certain restrictions on incurring certain types of indebtedness, creation of liens on certain assets, making of certain investments, and payment of dividends. These covenants are similar in nature to those existing in the Amended and Restated Credit Agreement. As of June 30, 2014, we are in compliance with all covenants under the 2019 Notes. We are obligated to pay $41 million in interest per year until 2019. Payments are due in May and November each year.

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

12


 

prepaid $320 million, or 40%, of the outstanding principal on the 2019 Notes at the redemption price of 108.5% of the principal amount. As a result of the prepayment, we recognized a loss on extinguishment of $30 million, which included the $27 million redemption premium.

Mortgage Facility

We have $83 million outstanding under a mortgage facility for the buildings, land and furniture and fixtures located at our headquarters facilities in Southlake, Texas. The mortgage facility bears interest at a rate of 5.7985% per annum and matures on April 1, 2017. The mortgage facility includes certain customary non-financial covenants, including restrictions on incurring liens other than permitted liens, dissolving the borrower or changing our business, forgiving debt, changing our principal place of business and transferring the property. As of June 30, 2014, we are in compliance with all covenants under the mortgage facility. We are obligated to pay $6 million in debt service (inclusive of interest and principal) per year until 2017, with payments due monthly.

Aggregate Maturities

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

 

 

Amount

 

Six months ending December 31, 2014

$

11,185

 

2015

 

22,435

 

2016

 

422,493

 

2017

 

150,303

 

2018

 

21,250

 

Thereafter

 

2,480,126

 

Total

$

3,107,792

 

 

 

8. Derivatives

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

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

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

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

Our interest rate swaps are not designated in a cash flow hedging relationship because we no longer qualified for hedge accounting treatment following the amendment and restatement of our senior secured credit facility in February of 2013 (see Note 7, Debt). Derivatives not designated as hedging instruments are carried at fair value with changes in fair value reflected in the consolidated statement of operations.

13


 

Forward Contracts—In order to hedge our operational exposure to foreign currency movements, we are a party to certain foreign currency forward contracts that extend until June 1, 2015. We have designated these instruments as cash flow hedges. No hedging ineffectiveness was recorded in earnings relating to the forward contracts during the three and six months ended June 30, 2014 and 2013. As the outstanding contracts settle, it is estimated that $2 million in gains will be reclassified from other comprehensive income (loss) to earnings. We have also entered into short-term forward contracts to hedge a portion of our foreign currency exposure related to travel supplier liability payments. As part of our risk management strategy, these derivatives were not designated for hedge accounting at inception; therefore, the change in fair value of these contracts is recorded in our consolidated statements of operations.

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

 

June 30, 2014 Outstanding Notional Amount

 

Buy Currency

 

Sell Currency

 

Foreign Amount

 

 

USD Amount

 

 

Average Contract Rate

 

US Dollar

 

Australian Dollar

 

 

6,475

 

 

$

5,837

 

 

 

0.9015

 

Euro

 

US Dollar

 

 

16,950

 

 

 

23,190

 

 

 

1.3681

 

British Pound Sterling

 

US Dollar

 

 

20,100

 

 

 

33,258

 

 

 

1.6546

 

Indian Rupee

 

US Dollar

 

 

1,143,000

 

 

 

17,640

 

 

 

0.0154

 

Polish Zloty

 

US Dollar

 

 

184,700

 

 

 

59,542

 

 

 

0.3224

 

 

December 31, 2013 Outstanding Notional Amount

 

Buy Currency

 

Sell Currency

 

Foreign Amount

 

 

USD Amount

 

 

Average Contract Rate

 

US Dollar

 

Australian Dollar

 

 

5,625

 

 

$

5,041

 

 

 

0.8962

 

Australian Dollar

 

US Dollar

 

 

975

 

 

 

996

 

 

 

1.0215

 

Euro

 

US Dollar

 

 

12,800

 

 

 

16,624

 

 

 

1.2988

 

British Pound Sterling

 

US Dollar

 

 

18,450

 

 

 

28,908

 

 

 

1.5668

 

Indian Rupee

 

US Dollar

 

 

1,174,000

 

 

 

18,593

 

 

 

0.0158

 

Polish Zloty

 

US Dollar

 

 

170,400

 

 

 

52,748

 

 

 

0.3096

 

  

Interest Rate Swap Contracts—In April 2007, in connection with our then existing senior secured credit facilities, we entered into six interest rate swaps. Under the terms of the swaps, the interest rate payments and receipts are quarterly on the last day of January, April, July and October. The reset dates on the swaps are also the last day of January, April, July and October each year until maturity.

The table below includes the outstanding interest rate swaps as of June 30, 2014. No interest rate swaps matured during the three and six months ended June 30, 2014 and 2013.

 

 

Notional Amount

 

Interest Rate
Received

 

Interest Rate Paid

 

 

Effective Date

 

Maturity Date

Outstanding:

$400 million

 

1 month LIBOR

 

 

2.03

%

 

July 29, 2011

 

September 30, 2014

 

$350 million

 

1 month LIBOR

 

 

2.51

%

 

April 30, 2012

 

September 30, 2014

 

$750 million

 

 

 

 

 

 

 

 

 

 

  

The objective of the swaps is to hedge the interest payments associated with floating-rate liabilities on the notional amounts of a portion of our senior secured debt as summarized in the table above. Our interest rate swaps are not designated in a cash flow hedging relationship because we no longer qualified for hedge accounting treatment following the amendment and restatement of our senior secured credit facility in February 2013 (see Note 7, Debt). Derivatives not designated as hedging instruments are carried at fair value with changes in fair value recognized in the consolidated statements of operations.

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

 

 

 

Derivative Assets

 

 

 

 

 

Fair Value as of

 

Derivatives designated as hedging instruments

 

Balance Sheet Location

 

June 30, 2014

 

 

December 31, 2013

 

Foreign exchange contracts

 

Prepaid expenses

 

$

1,730

 

 

$

5,374

 

14


 

  

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

 

 

 

Amount of Gain (Loss) Recognized in OCI on Derivative

(Effective Portion)

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

Derivatives in Cash Flow Hedging Relationships

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Foreign exchange contracts

$

410

 

 

$

(80

)

 

$

618

 

 

$

(2,188

)

 

 

 

 

 

Amount of Gain (Loss) Reclassified from Accumulated OCI into

Income (Effective Portion)

 

 

 

Income Statement

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,