UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

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

For the quarterly period ended September 30, 2014

or

¨

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

Commission File Number: 001-36422

 

Sabre Corporation

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

20-8647233

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

3150 Sabre Drive

Southlake, TX 76092

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

(682) 605-1000

(Registrant’s telephone number, including area code)

 

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

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

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

 

Large accelerated filer

 

¨

  

Accelerated filer

 

¨

 

Non-accelerated filer

 

x  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

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

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

 

 

 

 

 

 


 

SABRE CORPORATION

TABLE OF CONTENTS

 

 

 

Page No.

PART I. FINANCIAL INFORMATION

 

 

    Item 1.

Financial Statements:

 

 

 

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

1

 

 

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

2

 

 

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

3

 

 

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

4

 

 

Notes to Consolidated Financial Statements

5

 

    Item 2.

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

27

 

    Item 3.

Quantitative and Qualitative Disclosures About Market Risk

54

 

    Item 4.

Controls and Procedures

54

 

PART II. OTHER INFORMATION

 

 

    Item 1.

Legal Proceedings

55

 

    Item 6.

Exhibits

55

 

 

 

 


 

PART I – FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

SABRE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Revenue

$

756,303

 

 

$

775,823

 

 

$

2,229,286

 

 

$

2,303,399

 

Cost of revenue (1) (2)

 

465,689

 

 

 

474,090

 

 

 

1,399,919

 

 

 

1,423,242

 

Selling, general and administrative (2)

 

169,183

 

 

 

208,033

 

 

 

575,413

 

 

 

620,226

 

Impairment

 

 

 

 

2,837

 

 

 

 

 

 

138,435

 

Restructuring charges

 

4,735

 

 

 

15,889

 

 

 

2,325

 

 

 

15,889

 

Operating income

 

116,696

 

 

 

74,974

 

 

 

251,629

 

 

 

105,607

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(50,153

)

 

 

(63,454

)

 

 

(167,332

)

 

 

(209,653

)

Loss on extinguishment of debt

 

 

 

 

 

 

 

(33,538

)

 

 

(12,181

)

Joint venture equity income

 

2,867

 

 

 

1,841

 

 

 

9,367

 

 

 

7,873

 

Other, net

 

565

 

 

 

(2,429

)

 

 

760

 

 

 

(1,099

)

Total other expense, net

 

(46,721

)

 

 

(64,042

)

 

 

(190,743

)

 

 

(215,060

)

Income (loss) from continuing operations before income taxes

 

69,975

 

 

 

10,932

 

 

 

60,886

 

 

 

(109,453

)

Provision (benefit) for income taxes

 

30,956

 

 

 

7,861

 

 

 

27,878

 

 

 

(5,229

)

Income (loss) from continuing operations

 

39,019

 

 

 

3,071

 

 

 

33,008

 

 

 

(104,224

)

(Loss) income from discontinued operations, net of tax

 

(1,736

)

 

 

3,015

 

 

 

(8,017

)

 

 

(20,895

)

Net income (loss)

 

37,283

 

 

 

6,086

 

 

 

24,991

 

 

 

(125,119

)

Net income attributable to noncontrolling interests

 

720

 

 

 

714

 

 

 

2,168

 

 

 

2,135

 

Net income (loss) attributable to Sabre Corporation

 

36,563

 

 

 

5,372

 

 

 

22,823

 

 

 

(127,254

)

Preferred stock dividends

 

 

 

 

9,242

 

 

 

11,381

 

 

 

27,219

 

Net income (loss) attributable to common shareholders

$

36,563

 

 

$

(3,870

)

 

$

11,442

 

 

$

(154,473

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

0.14

 

 

$

(0.04

)

 

$

0.08

 

 

$

(0.75

)

(Loss) income from discontinued operations

 

(0.01

)

 

 

0.02

 

 

 

(0.03

)

 

 

(0.12

)

Net income (loss) per common share

$

0.14

 

 

$

(0.02

)

 

$

0.05

 

 

$

(0.87

)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

0.14

 

 

$

(0.04

)

 

$

0.08

 

 

$

(0.75

)

(Loss) income from discontinued operations

 

(0.01

)

 

 

0.02

 

 

 

(0.03

)

 

 

(0.12

)

Net income (loss) per common share

$

0.13

 

 

$

(0.02

)

 

$

0.05

 

 

$

(0.87

)

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

264,768

 

 

 

178,140

 

 

 

229,405

 

 

 

178,051

 

Diluted

 

273,330

 

 

 

178,140

 

 

 

237,994

 

 

 

178,051

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends per common share

$

0.09

 

 

$

 

 

$

0.09

 

 

$

 

 

 

(1) Includes amortization of upfront incentive consideration

$

10,388

 

 

$

9,385

 

 

$

33,177

 

 

$

28,736

 

(2) Includes stock-based compensation as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

$

2,172

 

 

$

544

 

 

$

5,618

 

 

$

816

 

Selling, general and administrative

 

3,300

 

 

 

2,142

 

 

 

16,816

 

 

 

4,630

 

See Notes to Consolidated Financial Statements.

 

1


 

SABRE CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net income (loss)

$

37,283

 

 

$

6,086

 

 

$

24,991

 

 

$

(125,119

)

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments (“CTA”):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign CTA gains (losses), net of tax

 

1,522

 

 

 

(612

)

 

 

3,711

 

 

 

(276

)

Reclassification adjustment for realized losses

   on foreign CTA, net of tax

 

 

 

 

 

 

 

 

 

 

8,162

 

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

 

1,522

 

 

 

(612

)

 

 

3,711

 

 

 

7,886

 

Retirement-related benefit plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

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

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

   ended September 30, 2014 and 2013, respectively

 

(229

)

 

 

(2,405

)

 

 

(686

)

 

 

(6,596

)

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

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

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

   months ended September 30, 2014 and 2013, respectively

 

803

 

 

 

955

 

 

 

2,292

 

 

 

2,615

 

Total retirement-related benefit plans

 

574

 

 

 

(1,450

)

 

 

1,606

 

 

 

(3,981

)

Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

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

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

   September 30, 2014 and 2013, respectively

 

(3,799

)

 

 

2,752

 

 

 

(3,181

)

 

 

564

 

Reclassification adjustment for realized losses, net of taxes of

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

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

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

   and 2013, respectively

 

1,684

 

 

 

2,703

 

 

 

2,747

 

 

 

6,312

 

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

 

(2,115

)

 

 

5,455

 

 

 

(434

)

 

 

6,876

 

Share of other comprehensive income of joint venture

 

 

 

 

 

 

 

3,420

 

 

 

 

Other comprehensive (loss) income

 

(19

)

 

 

3,393

 

 

 

8,303

 

 

 

10,781

 

Comprehensive income (loss)

 

37,264

 

 

 

9,479

 

 

 

33,294

 

 

 

(114,338

)

Less: Comprehensive income attributable to

   noncontrolling interests

 

(720

)

 

 

(714

)

 

 

(2,168

)

 

 

(2,135

)

Comprehensive income (loss) attributable to Sabre Corporation

$

36,544

 

 

$

8,765

 

 

$

31,126

 

 

$

(116,473

)

 

See Notes to Consolidated Financial Statements.

 

 

2


 

SABRE CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

 

 

September 30, 2014

 

 

December 31, 2013

 

Assets

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

157,747

 

 

$

308,236

 

Restricted cash

 

755

 

 

 

2,359

 

Accounts receivable, net

 

466,753

 

 

 

434,288

 

Prepaid expenses and other current assets

 

56,315

 

 

 

53,378

 

Current deferred income taxes

 

39,184

 

 

 

41,431

 

Other receivables, net

 

28,902

 

 

 

29,511

 

Assets of discontinued operations

 

9,364

 

 

 

13,624

 

Total current assets

 

759,020

 

 

 

882,827

 

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

 

526,722

 

 

 

498,523

 

Investments in joint ventures

 

142,639

 

 

 

132,082

 

Goodwill

 

2,152,590

 

 

 

2,138,175

 

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

 

307,445

 

 

 

323,035

 

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

 

261,581

 

 

 

311,523

 

Other assets, net

 

522,397

 

 

 

469,543

 

Total assets

$

4,672,394

 

 

$

4,755,708

 

 

 

 

 

 

 

 

 

Liabilities, temporary equity and stockholders’ equity (deficit)

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

$

129,555

 

 

$

111,386

 

Travel supplier liabilities and related deferred revenue

 

107,409

 

 

 

213,504

 

Accrued compensation and related benefits

 

91,700

 

 

 

117,689

 

Accrued subscriber incentives

 

168,019

 

 

 

142,767

 

Deferred revenues

 

176,990

 

 

 

136,380

 

Litigation settlement liability and related deferred revenue

 

75,409

 

 

 

38,920

 

Other accrued liabilities

 

210,196

 

 

 

267,867

 

Current portion of debt

 

22,418

 

 

 

86,117

 

Liabilities of discontinued operations

 

23,881

 

 

 

41,788

 

Total current liabilities

 

1,005,577

 

 

 

1,156,418

 

Deferred income taxes

 

8,601

 

 

 

10,253

 

Other noncurrent liabilities

 

523,728

 

 

 

263,182

 

Long-term debt

 

3,065,440

 

 

 

3,643,548

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

 

Temporary equity

 

 

 

 

 

 

 

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

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

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

 

 

 

 

634,843

 

Stockholders’ equity (deficit)

 

 

 

 

 

 

 

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

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

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

 

2,652

 

 

 

1,786

 

Additional paid-in capital

 

1,911,172

 

 

 

880,619

 

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

 

(5,297

)

 

 

 

Retained deficit

 

(1,797,944

)

 

 

(1,785,554

)

Accumulated other comprehensive loss

 

(41,592

)

 

 

(49,895

)

Noncontrolling interest

 

57

 

 

 

508

 

Total stockholders’ equity (deficit)

 

69,048

 

 

 

(952,536

)

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

$

4,672,394

 

 

$

4,755,708

 

 

See Notes to Consolidated Financial Statements.

 

 

3


 

SABRE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

Operating Activities

 

 

 

 

 

 

 

Net income (loss)

$

24,991

 

 

$

(125,119

)

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

 

 

 

 

 

 

 

Depreciation and amortization

 

230,461

 

 

 

230,277

 

Impairment

 

 

 

 

138,435

 

Restructuring charges

 

3,247

 

 

 

4,089

 

Amortization of upfront incentive consideration

 

33,177

 

 

 

28,736

 

Litigation related (gains) charges

 

(6,132

)

 

 

6,117

 

Stock-based compensation expense

 

22,434

 

 

 

5,446

 

Allowance for doubtful accounts

 

6,371

 

 

 

7,583

 

Deferred income taxes

 

6,232

 

 

 

(19,357

)

Joint venture equity income

 

(9,367

)

 

 

(7,873

)

Dividends received from joint venture investments

 

2,205

 

 

 

 

Amortization of debt issuance costs

 

4,779

 

 

 

5,323

 

Debt modification costs

 

3,290

 

 

 

14,003

 

Loss on extinguishment of debt

 

33,538

 

 

 

12,181

 

Other

 

3,658

 

 

 

(10,210

)

Loss from discontinued operations

 

8,017

 

 

 

20,895

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts and other receivables

 

(58,435

)

 

 

(46,394

)

Prepaid expenses and other current assets

 

(10,612

)

 

 

7,314

 

Capitalized implementation costs

 

(27,602

)

 

 

(48,686

)

Upfront incentive consideration

 

(31,633

)

 

 

(26,634

)

Other assets

 

(58,120

)

 

 

(63,389

)

Accrued compensation and related benefits

 

(23,104

)

 

 

7,361

 

Accounts payable and other accrued liabilities

 

(31,516

)

 

 

109,778

 

Pension and other postretirement benefits

 

(4,200

)

 

 

2,186

 

Cash provided by operating activities

 

121,679

 

 

 

252,062

 

Investing Activities

 

 

 

 

 

 

 

Additions to property and equipment

 

(160,385

)

 

 

(168,744

)

Acquisition, net of cash acquired

 

(31,799

)

 

 

(30,476

)

Proceeds from sale of business

 

 

 

 

10,000

 

Other investing activities

 

235

 

 

 

 

Cash used in investing activities

 

(191,949

)

 

 

(189,220

)

Financing Activities

 

 

 

 

 

 

 

Proceeds of borrowings from lenders

 

148,307

 

 

 

2,540,063

 

Payments on borrowings from lenders

 

(797,028

)

 

 

(2,239,538

)

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

 

672,137

 

 

 

 

Prepayment fee and debt modification and issuance costs

 

(30,490

)

 

 

(19,116

)

Acquisition-related contingent consideration paid

 

(27,000

)

 

 

 

Dividends paid to common shareholders

 

(23,831

)

 

 

 

Other financing activities

 

(1,384

)

 

 

(6,692

)

Cash (used in) provided by financing activities

 

(59,289

)

 

 

274,717

 

Cash Flows from Discontinued Operations

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

 

(25,424

)

 

 

6,352

 

Net cash provided by investing activities

 

3,760

 

 

 

20,502

 

Net cash (used in) provided by discontinued operations

 

(21,664

)

 

 

26,854

 

Effect of exchange rate changes on cash and cash equivalents

 

734

 

 

 

480

 

(Decrease) increase in cash and cash equivalents

 

(150,489

)

 

 

364,893

 

Cash and cash equivalents at beginning of period

 

308,236

 

 

 

126,695

 

Cash and cash equivalents at end of period

$

157,747

 

 

$

491,588

 

See Notes to Consolidated Financial Statements.

 

4


 

SABRE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. General Information

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

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

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

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

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

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

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

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

5


 

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

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

2. Acquisitions

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

3. Discontinued Operations and Dispositions

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

Discontinued Operations

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

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

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

6


 

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

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Revenue

$

 

 

$

12,806

 

 

$

 

 

$

48,549

 

Cost of revenue

 

146

 

 

 

2,882

 

 

 

1,257

 

 

 

14,668

 

Selling, general and administrative

 

680

 

 

 

469

 

 

 

3,023

 

 

 

31,030

 

Operating (loss) income

 

(826

)

 

 

9,455

 

 

 

(4,280

)

 

 

2,851

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(2,559

)

 

 

3,613

 

 

 

(5,917

)

 

 

1,493

 

Loss on sale of businesses, net

 

 

 

 

 

 

 

 

 

 

(27,708

)

Other, net

 

(392

)

 

 

(4,283

)

 

 

(2,044

)

 

 

(880

)

Total other expense, net

 

(2,951

)

 

 

(670

)

 

 

(7,961

)

 

 

(27,095

)

(Loss) income from discontinuing operations before

   income taxes

 

(3,777

)

 

 

8,785

 

 

 

(12,241

)

 

 

(24,244

)

(Benefit) provision for income taxes

 

(2,041

)

 

 

5,770

 

 

 

(4,224

)

 

 

(3,349

)

Net (loss) income from discontinued operations

$

(1,736

)

 

$

3,015

 

 

$

(8,017

)

 

$

(20,895

)

Dispositions

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

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

 

4. Restructuring Charges

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

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

7


 

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

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

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

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

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

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

 

 

Employee Termination Benefits

 

 

Travelocity

 

 

Technology

Organization

 

 

Total

 

Balance as of December 31, 2013

$

17,731

 

 

$

8,163

 

 

$

25,894

 

Charges

 

2,102

 

 

 

 

 

 

2,102

 

Adjustments

 

(3,938

)

 

 

(914

)

 

 

(4,852

)

Payments

 

(9,261

)

 

 

(6,877

)

 

 

(16,138

)

Balance as of September 30, 2014

$

6,634

 

 

$

372

 

 

$

7,006

 

 

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

 

5. Equity Method Investments

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

8


 

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

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Revenue

$

87,039

 

 

$

83,237

 

 

$

263,536

 

 

$

248,814

 

Operating income

 

12,876

 

 

 

15,946

 

 

 

42,961

 

 

 

41,683

 

Net income

 

10,793

 

 

 

8,887

 

 

 

34,863

 

 

 

30,575

 

 

6. Pension and Other Postretirement Benefit Plans

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

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

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Pension Benefits:

 

 

 

 

 

Interest cost

$

4,886

 

 

$

4,483

 

 

$

14,686

 

 

$

13,448

 

Expected return on plan assets

 

(5,909

)

 

 

(5,908

)

 

 

(17,959

)

 

 

(17,726

)

Amortization of prior service credit

 

(358

)

 

 

(359

)

 

 

(1,074

)

 

 

(1,075

)

Amortization of actuarial loss

 

1,290

 

 

 

1,846

 

 

 

3,690

 

 

 

5,537

 

Net periodic (credit) cost

$

(91

)

 

$

62

 

 

$

(657

)

 

$

184

 

Other Benefits:

 

 

 

 

 

Interest cost

 

 

 

 

10

 

 

 

2

 

 

 

30

 

Amortization of prior service credit

 

 

 

 

(3,087

)

 

 

 

 

 

(9,261

)

Amortization of actuarial gain

 

(33

)

 

 

(477

)

 

 

(99

)

 

 

(1,439

)

Net periodic credit

$

(33

)

 

$

(3,554

)

 

$

(97

)

 

$

(10,670

)

 

 

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

 

7. Income Taxes

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

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

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

9


 

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

Tax Receivable Agreement

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

 

8. Debt

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

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

 

 

Rate

 

 

Maturity

 

September 30, 2014

 

 

December 31, 2013

 

Senior secured credit facilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Term Loan B

L + 3.00%

 

 

February 2019

 

$

1,743,938

 

 

$

1,757,250

 

Incremental term loan facility

L + 3.00%

 

 

February 2019

 

 

346,500

 

 

 

349,125

 

Term Loan C

L + 2.50%

 

 

December 2017

 

 

49,313

 

 

 

361,250

 

Revolver, $370 million

L + 2.75%

 

 

February 2019

 

 

 

 

 

 

Revolver, $35 million

L + 3.25%

 

 

February 2018

 

 

 

 

 

 

Senior unsecured notes due 2016

 

8.35%

 

 

March 2016

 

 

400,000

 

 

 

400,000

 

Senior secured notes due 2019

 

8.50%