NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Business and Significant Accounting Policies
Description of Business
Sabre Corporation is a Delaware corporation formed in December 2006. On March 30, 2007, Sabre Corporation acquired Sabre Holdings Corporation (“Sabre Holdings”). Sabre Holdings is the sole subsidiary of Sabre Corporation. Sabre GLBL Inc. (“Sabre GLBL”) is the principal operating subsidiary and sole direct subsidiary of Sabre Holdings. Sabre GLBL or its direct or indirect subsidiaries conduct all of our businesses. In these consolidated financial statements, references to “Sabre,” the “Company,” “we,” “our,” “ours,” and “us” refer to Sabre Corporation and its consolidated subsidiaries unless otherwise stated or the context otherwise requires.
We connect people and places with technology that reimagines the business of travel. We operate through
two
business segments: (i) Travel Network, our global travel marketplace for travel suppliers and travel buyers, and (ii) Airline and Hospitality Solutions, an extensive suite of travel industry leading software solutions primarily for airlines and hoteliers.
Basis of Presentation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). We consolidate all majority owned subsidiaries and companies over which we exercise control through majority voting rights. No entities are consolidated due to control through operating agreements, financing agreements, or as the primary beneficiary of a variable interest entity. The consolidated financial statements include our accounts after elimination of all significant intercompany balances and transactions. All dollar amounts in the financial statements and the tables in the notes, except per share amounts, are stated in thousands of U.S. dollars unless otherwise indicated. All amounts in the notes reference results from continuing operations unless otherwise indicated.
The preparation of these annual 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 GDS, revenue recognition for software arrangements, determination of the fair value of assets and liabilities acquired in a business combination, determination of the fair value of derivatives, the evaluation of the recoverability of the carrying value of intangible assets and goodwill, assumptions utilized in the determination of pension and other postretirement benefit liabilities, estimation of loss contingencies, and evaluation of uncertainties surrounding the calculation of our tax assets and liabilities.
Revenue Recognition
We employ a number of revenue models across our businesses, depending on the dynamics of the industry segment and the technology on which the revenue is based. Some revenue models are used in multiple businesses. Travel Network primarily employs the transaction revenue model. Airline and Hospitality Solutions primarily employs the SaaS and hosted and professional service fees revenue models, as well as the software licensing fee model to a lesser extent. Contracts with the same customer which are entered into at or around the same period are analyzed for revenue recognition purposes on a combined basis across our businesses which can impact our revenue recognized.
We report revenue net of any revenue based taxes assessed by governmental authorities that are imposed on and concurrent with specific revenue producing transactions.
Transaction Revenue Model
—This model accounts for substantially all of Travel Network’s revenues. We define a direct billable booking as any booking that generates a fee directly to Travel Network. Transaction fees include, but are not limited to, transaction fees paid by travel suppliers for selling their inventory through the Sabre global distribution system (“GDS”) and transaction fees paid by travel agency subscribers related to their use of the Sabre GDS. Pursuant to this model, a transaction occurs when a travel agency or corporate travel department books, or reserves, a travel supplier’s product on the Sabre GDS. We receive revenue from a travel supplier, travel agency or corporate travel department depending upon the commercial arrangement represented in each of their contracts. Transaction revenue for airline travel reservations is recognized at the time of the booking of the reservation, net of estimated future cancellations. Our transaction fee cancellation reserve, calculated based on our historical experience, was
$16 million
and
$14 million
at
December 31, 2017
and
2016
, respectively. Transaction revenue for car rental, hotel bookings and other travel providers is recognized at the time the reservation is used by the customer. We evaluate whether it is appropriate to record the gross amount of our revenues and related costs by considering a number of factors, including, among other things, whether we are the primary obligor under the arrangement, change the product or perform part of the service and have latitude in establishing prices.
Software-as-a-Service and Hosted Revenue Model
—SaaS and hosted is the primary revenue model employed by Airline and Hospitality Solutions. In this revenue model, we host software solutions on secure platforms, or deploy it through our SaaS solutions, we maintain the software and manage the related infrastructure. Our customers, which include airlines, airports and hotel companies, pay us an upfront solutions fee and a recurring usage-based fee for the use of the software pursuant to contracts with terms that typically range between
three
and
ten
years and generally include minimum annual volume requirements. This usage-based fee arrangement allows our customers to pay for software normally on a monthly basis, to the extent that it is used. Contracts with the same customer which are entered into at or around the same period are analyzed for revenue recognition purposes on a combined basis. Revenue from upfront solution fees is generally recognized over the term of the agreement beginning when the solution is implemented. The amount of periodic usage fees is typically based on a metric relevant to the software’s purpose. We recognize revenue from recurring usage based fees in the period earned, which typically fluctuates based on a real time metric, such as the actual number of passengers boarded or the actual number of hotel bookings made in a given month and may differ from contractual minimums, if applicable.
Professional Service Fees Revenue Model
—Our SaaS and hosted offerings can be sold as part of multiple element agreements for which we also provide professional services. Our professional services are primarily focused on helping customers achieve better utilization of and return on their software investment. Often we provide these services during the implementation phase of our SaaS solutions. In such cases, we account for professional service revenue separately from upfront solution fees and recurring usage-based fees, with value
assigned to each element based on its relative selling price to the total selling price. We perform a market analysis on a periodic basis to determine the range of selling prices for each product and service. Estimated selling prices are set for each product and service delivered to customers. The revenue for professional services is generally recognized over the period the services are performed, once any acceptance criteria is met.
Software Licensing Fee Revenue Model
—The software licensing fee revenue model is utilized by Airline and Hospitality Solutions. Under this model, we generate revenue by charging customers for the installation and use of our software products. Some contracts under this model generate additional revenue for the maintenance of the software product. When software is sold without associated customization or implementation services, revenue from software licensing fees is recognized when all of the following are met: (i) the software is delivered, (ii) fees are fixed or determinable, (iii) no undelivered elements are essential to the functionality of delivered software, and (iv) collection is probable. When software is sold with customization or implementation services, revenue from software licensing fees is recognized based on the percentage of completion of the customization and implementation services. Fees for software maintenance are recognized ratably over the life of the contract. We are unable to determine vendor specific objective evidence of fair value for software maintenance fees. Therefore, when fees for software maintenance are included in software license agreements, revenue from the software license, customization, implementation and the maintenance are recognized ratably over the related contract term.
Incentive Consideration
Certain service contracts with significant travel agency customers contain booking productivity clauses and other provisions that allow travel agency customers to receive cash payments or other consideration. We establish liabilities for these commitments and recognize the related expense as these travel agencies earn incentive consideration based on the applicable contractual terms. Periodically, we make cash payments to these travel agencies at inception or modification of a service contract which are capitalized and amortized to cost of revenue over the expected life of the service contract, which is generally
three
to
five years
. Deferred charges related to such contracts are recorded in other assets, net on the consolidated balance sheets. The service contracts are priced so that the additional airline and other booking fees generated over the life of the contract will exceed the cost of the incentive consideration provided. Incentive consideration paid to the travel agency represents a commission paid to the travel agency for booking travel on our GDS and the amounts paid to travel agencies represent fair value for the services provided.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs incurred by our continuing operations totaled
$18 million
,
$24 million
and
$19 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. We did not have any advertising costs incurred by our discontinued Travelocity segment in 2017 and 2016 and these costs totaled
$10 million
for the year ended December 31,
2015
, which are included in net (loss) income from discontinued operations.
Cash and Cash Equivalents and Restricted Cash
We classify all highly liquid instruments, including money market funds and money market securities with original maturities of three months or less, as cash equivalents.
Allowance for Doubtful Accounts and Concentration of Credit Risk
We evaluate the collectability of our accounts receivable based on a combination of factors. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations to us, such as bankruptcy filings or failure to pay amounts due to us or others, we record a specific reserve for bad debts against amounts due to reduce the recorded receivable to the amount we reasonably believe will be collected. For all other customers, we record reserves for bad debts based on historical experience and the length of time the receivables are past due. We maintained an allowance for doubtful accounts of approximately
$43 million
and
$37 million
at
December 31, 2017
and
2016
, respectively.
Effective January 1, 2014, we have recorded specific reserves against all accounts receivable outstanding due to us from all airlines in Venezuela and are deferring the recognition of any future revenues until cash is collected. Accounts receivable outstanding from customers in Venezuela totaled
$25 million
and
$19 million
as of
December 31, 2017
and
2016
, which will be recognized as revenue when cash is received. In 2017 and early 2018, we discontinued services to certain carriers in Venezuela with outstanding receivable balances of
$17 million
as of December 31, 2017. We do not believe that these amounts are collectible, and these amounts are fully reserved. Effective January 1, 2018, the new revenue recognition standard described below will result in a change to the ongoing accounting treatment for customers accounted for on a cash basis. We do not anticipate this change will result in a material impact to our consolidated financial statements.
Our customers are primarily located in the United States, Canada, Europe, Latin America and Asia, and are concentrated in the travel industry.
We generate a significant portion of our revenues and corresponding accounts receivable from services provided to the commercial air travel industry.
As of
December 31, 2017
and
2016
, approximately
$357 million
, or
77%
, and
$274 million
, or
74%
,
respectively, of our trade accounts receivable were attributable to these customers, in each case excluding balances associated with our discontinued Travelocity segment. Our other accounts receivable are generally due from other participants in the travel and transportation industry. Substantially all of our accounts receivable represents trade balances. We generally do not require security or collateral from our customers as a condition of sale.
We regularly monitor the financial condition of the air transportation industry. We believe the credit risk related to the air carriers’ difficulties is significantly mitigated by the fact that we collect a significant portion of the receivables from these carriers through the Airline Clearing House (“ACH”) and other similar clearing houses.
As of
December 31, 2017
, approximately
81%
of our air customers make payments through the ACH which accounts for approximately
95%
of our air revenue.
For these carriers, we believe the use of ACH mitigates our credit risk with respect to airline bankruptcies. For those carriers from which we do not collect payments through the ACH or other similar clearing houses, our credit risk is higher. We monitor these carriers and account for the related credit risk through our normal reserve policies.
Derivative Financial Instruments
We recognize all derivatives on the consolidated balance sheets at fair value. If the derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are offset against the change in fair value of the hedged item through earnings (a “fair value hedge”) or recognized in other comprehensive income until the hedged item is recognized in earnings (a “cash flow hedge”). The ineffective portion of the change in fair value of a derivative designated as a hedge is immediately recognized in earnings. For derivative instruments not designated as hedging instruments, the gain or loss resulting from the change in fair value is recognized in current earnings during the period of change. No hedging ineffectiveness was recorded in earnings during the periods presented.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization, which is calculated on the straight-line basis. Our depreciation and amortization policies are as follows:
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|
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Buildings
|
Lesser of lease term or 35 years
|
Leasehold improvements
|
Lesser of lease term or useful life
|
Furniture and fixtures
|
5 to 15 years
|
Equipment, general office and computer
|
3 to 5 years
|
Software developed for internal use
|
3 to 5 years
|
We capitalize certain costs related to our infrastructure, software applications and reservation systems under authoritative guidance on software developed for internal use. Capitalizable costs consist of (a) certain external direct costs of materials and services incurred in developing or obtaining internal use computer software and (b) payroll and payroll related costs for employees who are directly associated with and who devote time to our GDS and web-related development projects. Costs incurred during the preliminary project stage or costs incurred for data conversion activities and training, maintenance and general and administrative or overhead costs are expensed as incurred. Costs that cannot be separated between maintenance of, and relatively minor upgrades and enhancements to, internal use software are also expensed as incurred. See Note
6. Balance Sheet Components
, for amounts capitalized as property and equipment in our consolidated balance sheets. Depreciation and amortization of property and equipment totaled
$256 million
,
$226 million
and
$214 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. Amortization of software developed for internal use, included in depreciation and amortization, totaled
$203 million
,
$176 million
and
$170 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
Property and equipment are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets used in combination to generate cash flows largely independent of other assets may not be recoverable. We did not record any property and equipment impairment charges for the years ended
December 31, 2017
,
2016
and
2015
.
Business Combinations
Business combinations are accounted for under the acquisition method of accounting. Under this method, the assets acquired and liabilities assumed are recognized at their respective fair values as of the date of acquisition. The excess, if any, of the acquisition price over the fair values of the assets acquired and liabilities assumed is recorded as goodwill. For significant acquisitions, we utilize third-party appraisal firms to assist us in determining the fair values for certain assets acquired and liabilities assumed. The measurement of these fair values requires us to make significant estimates and assumptions which are inherently uncertain.
Adjustments to the fair values of assets acquired and liabilities assumed are made until we obtain all relevant information regarding the facts and circumstances that existed as of the acquisition date (the “measurement period”), not to exceed one year from the date of the acquisition. In the third quarter of 2015, we adopted ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, which requires us to recognize measurement-period adjustments in the period in which we determine the amounts, including the effect on earnings of any amounts we would have recorded in previous periods if the accounting had been completed at the acquisition date.
Goodwill and Intangible Assets
Goodwill is the excess of the purchase price over the fair value of identifiable tangible and intangible assets acquired in business combinations. Goodwill is not amortized but are reviewed for impairment on an annual basis or more frequently if events and circumstances indicate the carrying amount may not be recoverable. Definite-lived intangible assets are amortized on a straight-line basis and assigned useful economic lives of
two
to
thirty
years, depending on classification. The useful economic lives are evaluated on an annual basis.
We perform our annual assessment of possible impairment of goodwill as of October 1 of each year. We begin with the qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying value before applying the quantitative assessment described below. If it is determined through the evaluation of events or circumstances that the carrying value may not be recoverable, we perform a comparison of the estimated fair value of the reporting unit to which the goodwill has been assigned to the sum of the carrying value of the assets and liabilities of that unit. If the sum of the carrying value of the assets and liabilities of a reporting unit exceeds the estimated fair value of that reporting unit, the carrying value of the reporting unit’s goodwill is reduced to its fair value through an adjustment to the goodwill balance, resulting in an impairment charge. We have
three
reporting units associated with our continuing operations: Travel Network, Airline Solutions and Hospitality Solutions. We did not record any goodwill impairment charges for the years ended
December 31, 2017
and
2016
. See Note
5. Goodwill and Intangible Assets
, for additional information.
Definite-lived intangible assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of definite lived intangible assets used in combination to generate cash flows largely independent of other assets may not be recoverable. If impairment indicators exist for definite-lived intangible assets, the undiscounted future cash flows associated with the expected service potential of the assets are compared to the carrying value of the assets. If our projection of undiscounted future cash flows is in excess of the carrying value of the intangible assets, no impairment charge is recorded. If our projection of undiscounted cash flows is less than the carrying value, the intangible assets are measured at fair value and an impairment charge is recorded based on the excess of the carrying value of the assets to its fair value. We did not record material intangible asset impairment charges for the years ended
December 31, 2017
,
2016
and
2015
. See Note
5. Goodwill and Intangible Assets
, for additional information.
Equity Method Investments
We utilize the equity method to account for our interests in joint ventures and investments in stock of other companies that we do not control but over which we exert significant influence. We periodically evaluate equity and debt investments in entities accounted for under the equity method for impairment by reviewing updated financial information provided by the investee, including valuation information from new financing transactions by the investee and information relating to competitors of investees when available. On July 1, 2015, we completed the acquisition of the remaining
65%
interest in Abacus International Pte Ltd, now named Sabre Asia Pacific Pte Ltd (“SAPPL”), a former joint venture, which we previously accounted for under the equity method. In addition to the acquisition in SAPPL, we also own voting interests in various national marketing companies ranging from
20%
to
49%
, a voting interest of
40%
in ESS Elektroniczne Systemy Spzedazy Sp. zo.o, and a voting interest of
20%
in Asiana Sabre, Inc. The carrying value of these investments in joint venture amounts to
$24 million
and
$22 million
as of
December 31, 2017
and
2016
.
Capitalized Implementation Costs
We incur upfront costs to implement new customer contracts under our SaaS revenue model. We capitalize these costs, including (a) certain external direct costs of materials and services incurred to implement a customer contract and (b) payroll and payroll related costs for employees who are directly associated with and devote time to implementation activities. Capitalized implementation costs are amortized on a straight-line basis over the related contract term, ranging from
three
to
ten years
, as they are recoverable through deferred or future revenues associated with the relevant contract. These assets are reviewed for recoverability on a periodic basis or when an event occurs that could impact the recoverability of the assets, such as a significant contract modification or early renewal of contract terms. Recoverability is measured based on the future estimated revenue and direct costs of the contract compared to the capitalized implementation costs. See Note
6. Balance Sheet Components
, for amounts capitalized within other assets, net in our consolidated balance sheets. Amortization of capitalized implementation costs, included in depreciation and amortization, totaled
$40 million
,
$37 million
and
$31 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
Deferred Customer Advances and Discounts
Deferred advances to customers and customer discounts are amortized in future periods as the related revenue is earned. The assets are reviewed for recoverability based on future contracted revenues and estimated direct costs of the contract. Contracts are priced to generate total revenues over the life of the contract that exceed any discounts or advances provided and any upfront costs incurred to implement the customer contract.
Income Taxes
Deferred income tax assets and liabilities are determined based on differences between financial reporting and income tax basis of assets and liabilities and are measured using the tax rates and laws in effect at the time of such determination. We regularly review our deferred tax assets for recoverability and a valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. In assessing the need for a valuation allowance, we make estimates and assumptions regarding projected future taxable income, our ability to carry back operating losses to prior periods, the reversal of deferred tax liabilities and implementation of tax planning strategies. We reassess these assumptions regularly which could cause an increase or decrease to the valuation allowance resulting in an increase or decrease in the effective tax rate, and could materially impact our results of operations.
We recognize liabilities when we believe that an uncertain tax position may not be fully sustained upon examination by the tax authorities. Liabilities are recognized for uncertain tax positions that do not pass a two-step approach for recognition and measurement. First, we evaluate the tax position for recognition by determining if based solely on its technical merits, it is more likely than not to be sustained upon examination. Secondly, for positions that pass the first step, we measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We recognize penalties and interest accrued related to income taxes as a component of the provision for income taxes.
The Tax Cuts and Jobs Act (the “TCJA”), which was enacted on December 22, 2017, imposes a tax on global low-taxed intangible income (“GILTI”) in tax years beginning after December 31, 2017. GILTI provisions are applicable to certain profits of a controlled foreign corporation that exceed the U.S. stockholder's deemed “routine” investment return under the TCJA and results in income includable in the return of U.S. shareholders. We recognize liabilities, if any, related to this provision of the TCJA in the year in which the liability arises and not as a deferred tax liability.
Pension and Other Postretirement Benefits
We recognize the funded status of our defined benefit pension plans and other postretirement benefit plans in our consolidated balance sheets. The funded status is the difference between the fair value of plan assets and the benefit obligation as of the balance sheet date. The fair value of plan assets represents the cumulative contributions made to fund the pension and other postretirement benefit plans which are invested primarily in domestic and foreign equities and fixed income securities. The benefit obligation of our pension and other postretirement benefit plans are actuarially determined using certain assumptions approved by us. The benefit obligation is adjusted annually in the fourth quarter to reflect actuarial changes and may also be adjusted upon the adoption of plan amendments. These adjustments are initially recorded in accumulated other comprehensive income (loss) and are subsequently amortized over the life expectancy of the plan participants as a component of net periodic benefit costs.
Equity-Based Compensation
We account for our stock awards and options by recognizing compensation expense, measured at the grant date based on the fair value of the award, on a straight-line basis over the award vesting period, giving consideration as to whether the amount of compensation cost recognized at any date is equal to the portion of grant date value that is vested at that date. With the adoption of ASU 2016-09, we recognize equity-based compensation expense net of any actual forfeitures.
We measure the grant date fair value of stock option awards as calculated by the Black-Scholes option-pricing model which requires certain subjective assumptions, including the expected term of the option, the expected volatility of our common stock, risk-free interest rates and expected dividend yield. The expected term is estimated by using the “simplified method” which is based on the midpoint between the vesting date and the expiration of the contractual term. We utilized the simplified method due to the lack of sufficient historical experience under our current grant terms. The expected volatility is based on both the historical volatility of our stock price as well as implied volatilities from exchange traded options on our stock. The expected risk-free interest rates are based on the yields of U.S. Treasury securities with maturities appropriate for the expected term of the stock options. The expected dividend yield was based on the calculated yield on our common stock at the time of grant assuming annual dividends totaling
$0.56
per share for awards granted in 2017.
Foreign Currency
We remeasure foreign currency transactions into the relevant functional currency and record the foreign currency transaction gains or losses as a component of other, net in our consolidated statements of operations. We translate the financial statements of our non-U.S. dollar functional currency foreign subsidiaries into U.S. dollars in consolidation and record the translation gains or losses as a component of other comprehensive income (loss). Translation gains or losses of foreign subsidiaries related to divested businesses are reclassified into earnings as a component of other, net in our consolidated statements of operations once the liquidation of the respective foreign subsidiaries is substantially complete. The majority of our foreign subsidiaries related to divested businesses are classified as discontinued operations in our consolidated statements of operations.
Adoption of New Accounting Standards
In May 2017, the Financial Accounting Standards Board ("FASB") issued updated guidance regarding changes to the terms or conditions of a share-based payment award which requires an entity to apply modification accounting under the current standard on stock compensation. Under this updated standard, a new fair value measurement is assessed on the modified award, with any incremental fair value of the new award recognized as additional compensation cost. The Accounting Standard Update ("ASU") is effective for annual periods beginning after December 15, 2017, with early adoption permitted. We adopted this standard in the third quarter of 2017, which did not have a material impact on our consolidated financial statements.
In January 2017, the FASB issued updated guidance to state that registrants should consider additional qualitative disclosures if the impact of an issued but not yet adopted ASU is unknown or cannot be reasonably estimated and to include a description of the effect of the accounting policies that the registrant expects to apply, if determined. Transition guidance included in certain issued but not yet adopted ASUs was also updated to reflect this amendment. The updated guidance was effective upon issuance and we have adopted this standard and have made the required disclosures.
In January 2017, the FASB issued an updated guidance simplifying the subsequent measurement of goodwill by eliminating “Step 2” from the goodwill impairment test. The updated guidance is effective for public companies’ annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for annual or interim goodwill impairment tests performed on testing dates after January 1, 2017. We early adopted this standard in the fourth quarter of 2017, which did not have a material impact on our consolidated financial statements.
In January 2017, the FASB issued updated guidance clarifying the definition of a business to help companies evaluate whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The amendments in this update are effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted in any interim or annual period provided that the entire ASU is adopted. We early adopted this standard effective first quarter of 2017, which did not have a material impact on our consolidated financial statements.
In October 2016, the FASB issued updated guidance which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The updated guidance will be effective in the first quarter of 2018 and early adoption is permitted. We early adopted this standard effective first quarter of 2017, which did not impact our consolidated financial statements.
In August 2016, the FASB issued an updated guidance on how companies present and classify certain cash receipts and cash payments in the statement of cash flows. The updated guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years for public business entities. Early adoption is permitted in any interim or annual period provided that the entire ASU is adopted. We early adopted this standard effective fourth quarter of 2016, which did not have a material impact on our consolidated financial statements.
In the first quarter of 2016, we adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. This guidance was issued by the FASB under their initiative to reduce complexity in financial reporting. The amendments of the updated standard include, among other things, the requirement to recognize excess tax benefits (or deficiencies) through earnings, the election of a policy to either estimate forfeitures when determining periodic expense or recognize actual forfeitures when they occur, and an increase in the allowable income tax withholding from the minimum to the maximum statutory rate. In recent years, we have realized significant excess tax benefits associated with settled equity-based awards that have not been recognized due to certain accounting policy elections we made under the previous accounting standard, combined with the significant amount of our net operating loss carryforwards. As a result of the adoption of ASU 2016-09, we recorded a cumulative effect adjustment as of January 1, 2016 to increase retained earnings by
$92 million
with a corresponding increase to deferred tax assets in order to recognize excess tax benefits that can be used to reduce income taxes payable in the future. Effective January 1, 2016, excess tax benefits or deficiencies are recognized in our results of operations and are included in cash flows from operating activities in our statement of cash flows. In accordance with the updated standard, we elected to recognize actual forfeitures of equity-based awards as they occur. As we previously estimated forfeitures to determine stock-based compensation expense, this change resulted in a cumulative effect adjustment as of January 1, 2016 to reduce retained earnings by
$2 million
, net of tax. For the years ended December 31, 2017 and 2016, we recognized
$5 million
and
$35 million
, respectively, in excess tax benefits associated with employee equity-based awards, as a result of the adoption of this standard. There were no other material impacts to our consolidated financial statements as a result of adopting this updated standard.
Recent Accounting Pronouncements
In August 2017, the FASB issued updated guidance to expand and simplify the application of hedge accounting. The updated standard eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. The ASU is effective for annual periods beginning after December 15, 2018, with early adoption permitted. We do not expect that the adoption of this updated standard will have a material impact on our consolidated financial statements.
In March 2017, the FASB issued updated guidance improving the presentation requirements related to reporting the service cost component of net benefit costs to require that the service cost component be reported in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period, disaggregating the component from other net benefit costs. Net benefit cost is composed of several items, which reflect different aspects of an employer's financial arrangements as well as the cost of benefits earned by employees. The updated guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those annual periods for public business entities. We do not expect that the adoption of this updated standard will have a material impact on our consolidated financial statements.
In February 2016, the FASB issued updated guidance requiring organizations that lease assets—referred to as "lessees"—to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases, when the lease has a term of more than 12 months. The updated standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We are currently evaluating the impact of this standard on our consolidated financial statements.
In January 2016, the FASB issued updated guidance on accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure for financial instruments. Under this updated standard, entities must measure equity investments at fair value and recognize changes in fair value in net income. For equity investments without readily determinable fair values, entities have the option to either measure these investments at fair value or at cost adjusted for changes in observable prices less impairment. The updated guidance does not apply to equity method investments or investments in consolidated subsidiaries. This new standard is effective for public companies for annual periods, including interim periods, beginning after December 15, 2017. We do not expect that the adoption of this updated standard will have a material impact on our consolidated financial statements.
In May 2014, the FASB issued a comprehensive update to revenue recognition guidance that will replace current standards. Under the updated standard, revenue is recognized when a company transfers promised goods or services to customers in an amount that reflects the consideration that is expected to be received for those goods and services. The updated standard also requires additional disclosures on the nature, timing, and uncertainty of revenue and related cash flows. On July 9, 2015, the FASB approved to defer the effective date of the new standard which is now effective for annual and interim reporting periods beginning after December 15, 2017. We have adopted this new standard as of January 1, 2018 using the modified retrospective transition method which will result in a cumulative adjustment as of the date of the adoption. We have substantially completed our evaluation of the guidance and determined the key areas of impact on our financial results and are currently in the process of quantifying the impacts. Our quantification of the impacts is ongoing and will not be finalized until the period of adoption. To date, our assessments have identified the following anticipated impacts:
•
We do not expect significant changes to revenue recognition for our Travel Network and Hospitality Solutions businesses
•
Our Airline Solutions business is expected to primarily be impacted by the new standard due to the following:
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Under current revenue recognition guidance, we recognize revenue related to license fee and maintenance agreements ratably over the life of the contract. Under the new guidance, revenue for license fees will be recognized upon delivery of the license and ongoing maintenance services will continue to be recognized ratably over the length of the contract. For existing open agreements, this change will result in a beginning balance sheet adjustment and reduced revenue in subsequent years from these agreements, and before the impact of new sales.
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Allocation of contract revenues among various products and solutions, and the timing of the recognition of those revenues, will be impacted by agreements with tiered pricing or variable rate structures that do not correspond with the goods or services delivered to the customer. For existing open agreements, this change will also result in a beginning balance sheet adjustment and reduced revenue in subsequent years from these agreements.
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–
|
In the year of adoption, as a result of the new revenue recognition standard, the changes detailed above will result in a significant beginning balance sheet adjustment and we preliminarily estimate our consolidated revenue could be reduced by approximately
$40 million
to
$50 million
.
|
|
|
•
|
Capitalization of incremental costs to obtain a contract (such as sales commissions), and recognition of these costs over the contract period will result in the recognition of an asset on our balance sheet and will impact our Airline and Hospitality Solutions segment. We currently expect that our results of operations will not be significantly impacted from the capitalization of these incremental costs.
|
We anticipate that the impacts described above will result in a net reduction to our opening retained deficit as of January 1, 2018 of approximately
$100 million
to
$130 million
with a corresponding increase in current and long-term unbilled receivables, contract assets and other assets. Implications to tax related accounts are not included in these estimated amounts.
Our assessment of each of the foregoing is ongoing and subject to finalization, such that the actual impact of the adoption may differ materially from the estimated ranges described above.
We are continuing to evaluate the impacts of the new guidance to our results of operations, current accounting policies, processes, controls, systems and financial statement disclosures.
2. Acquisitions
Airpas Aviation
In April 2016, we completed the acquisition of Airpas Aviation, a software provider and consultancy company which offers route profitability and cost management software solutions. We acquired all of the outstanding stock and ownership interest of Airpas Aviation for net cash consideration of
$9 million
. Assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The allocation of purchase price includes
$12 million
of assets acquired, primarily consisting of
$5 million
of goodwill, not deductible for tax purposes, and
$5 million
of intangible assets. The intangible assets consist mainly of
$4 million
of acquired customer relationships with a useful life of
10 years
and
$1 million
of purchased technology with a useful life of
5 years
. Airpas Aviation is integrated and managed as part of our Airline and Hospitality Solutions segment. The acquisition of Airpas Aviation did not have a material impact to our consolidated financial statements, and therefore pro forma information is not presented.
Trust Group
In January 2016, we completed the acquisition of the Trust Group, a central reservations, revenue management and hotel
marketing provider, expanding our presence in Europe, the Middle East, and Africa ("EMEA") and Asia Pacific ("APAC"). The net cash consideration for the Trust Group was
$156 million
. The acquisition was funded using proceeds from our
5.25%
senior secured notes due in 2023 and cash on hand. The Trust Group has been integrated and is managed as part of our Airline and Hospitality Solutions segment.
Purchase Price Allocation
A summary of the acquisition price and estimated fair values of assets acquired and liabilities assumed as of the date of acquisition is as follows (in thousands):
|
|
|
|
|
Cash and cash equivalents
|
$
|
4,209
|
|
Accounts receivable
|
10,564
|
|
Other current assets
|
917
|
|
Goodwill
|
98,930
|
|
Intangible assets:
|
|
Customer relationships
|
52,292
|
|
Purchased technology
|
23,362
|
|
Trademarks and brand names
|
2,183
|
|
Property and equipment, net
|
1,556
|
|
Current liabilities
|
(11,091
|
)
|
Deferred income taxes
|
(22,548
|
)
|
Total acquisition price
|
$
|
160,374
|
|
The goodwill recognized reflects expected synergies from combined operations and also the acquired assembled workforce of the Trust Group in EMEA and APAC. The goodwill recognized is assigned to our Airline and Hospitality Solutions segment and is not deductible for tax purposes. The weighted-average useful lives of the intangible assets acquired are
13 years
for customer relationships,
2 years
for purchased technology and
2 years
for trademarks and brand names.
The acquisition of the Trust Group did not have a material impact to our consolidated financial statements, and therefore pro forma information is not presented.
Abacus
On July 1, 2015, we completed the acquisition of the remaining
65%
interest in Abacus International Pte Ltd, a Singapore-based business-to-business travel e-commerce provider that serves the Asia-Pacific region, which is now named SAPPL. Prior to the acquisition, SAPPL was
65%
owned by a consortium of
11
airlines and the remaining
35%
was owned by us. Separately, SAPPL has signed new long-term agreements with the consortium of
11
airlines to continue to utilize the GDS. In the third and fourth quarters of 2015, SAPPL completed the acquisition of the remaining interest in
three
national marketing companies, Abacus Distribution Systems (Hong Kong), Abacus Travel Systems (Singapore) and Abacus Distribution Systems Sdn Bhd (Malaysia) (the “NMCs” and, together with SAPPL, “Abacus”). SAPPL previously owned noncontrolling interests in the NMCs. The net cash consideration for Abacus was
$443 million
, which includes the effect of the net working capital adjustments. The acquisition was funded with a combination of cash on hand and a
$70 million
draw on our revolving credit facility, which has since been repaid.
Purchase Price Allocation
A summary of the acquisition price and estimated fair values of assets acquired and liabilities assumed as of the date of acquisition is as follows (in thousands), which includes estimates for contingent liabilities of
$25 million
related to tax uncertainties:
|
|
|
|
|
Cash and cash equivalents
|
$
|
65,641
|
|
Accounts receivable, net
|
49,099
|
|
Other current assets
|
12,522
|
|
Intangible assets:
|
|
Customer relationships
|
319,000
|
|
Reacquired rights
(1)
|
113,500
|
|
Purchased technology
|
14,000
|
|
Supplier agreements
|
13,000
|
|
Trademarks and brand names
|
4,000
|
|
Property and equipment, net
|
6,402
|
|
Other assets
|
66,423
|
|
Current liabilities
|
(123,307
|
)
|
Noncurrent liabilities
|
(44,245
|
)
|
Noncurrent deferred income taxes
|
(78,054
|
)
|
Goodwill
|
292,267
|
|
|
710,248
|
|
Fair value of Sabre Corporation's previously held equity investment in SAPPL
|
(200,000
|
)
|
Fair value of SAPPL's previously held equity investment in national marketing companies
|
(1,880
|
)
|
Total acquisition price
|
$
|
508,368
|
|
______________________
(1)
In connection with the acquisition of Abacus, we reacquired certain contractual rights that provided Abacus the exclusive right, within the Asia-Pacific region, to operate and profit from the Sabre GDS.
In connection with our acquisition of Abacus, we recognized a gain of
$78 million
for the year ended December 31, 2015, as a result of the remeasurement of our previously-held
35%
equity interest in Abacus to its fair value as of the acquisition date. The fair value of the previously-held equity interest of
$202 million
in Abacus was estimated by applying a market approach and an income approach. The fair value measurement of the previously-held equity interest is based on significant inputs not observable in the market, and therefore represents Level 3 measurements (see Note
10. Fair Value Measurements
, for a description of the fair value hierarchy). The fair value estimate for the previously-held equity interest is based on (i) a discount rate commensurate with the risks and inherent uncertainty in the business, (ii) an assumed long-term sustainable growth rate based on our most recent views of the long-term outlook, and (iii) assumed financial multiples of reporting entities deemed to be similar to Abacus. In addition, we recognized a gain of
$12 million
for year the ended December 31, 2015, associated with the settlement of a pre-existing agreement between us and SAPPL related to data processing services. The
$78 million
remeasurement gain and the
$12 million
settlement gain are reflected in other, net in our consolidated statements of operations. In the first quarter of 2017, we recognized a
$16 million
reversal of a liability resulting from renegotiation of an agreement with a travel agency in March 2017 that was considered to be out of market in our purchasing accounting. The
$16 million
reversal is included as a reduction of cost of revenue in our consolidated statement of operations for the year ended December 31, 2017.
The goodwill recognized reflects expected synergies from combined operations and also the acquired assembled workforce of Abacus. The goodwill recognized is assigned to our Travel Network business and is not deductible for tax purposes. The useful lives of the intangible assets acquired are
20
years for customer relationships,
7
years for reacquired rights,
3
years for purchased technology,
7
years for supplier agreements and
2
years for trademarks and brand names.
Unaudited Pro Forma Financial Information
The following unaudited pro forma results of operations information give effect to the acquisitions of Abacus as if it occurred on January 1, 2014. The unaudited pro forma results of operations information include adjustments to: (i) eliminate historical revenue and cost of revenue between us, SAPPL and the NMCs; (ii) remove historical amortization recognized by SAPPL associated with its upfront incentive consideration and software developed for internal use, which are replaced by acquired intangible assets; and (iii) add amortization expense associated with acquired intangible assets.
The following unaudited pro forma results of operations information is presented in thousands:
|
|
|
|
|
|
Year Ended December 31,
|
|
2015
|
Revenue
|
$
|
3,109,310
|
|
Income from continuing operations
|
165,006
|
|
Net income attributable to common stockholders
|
475,933
|
|
The unaudited pro forma financial information is for informational purposes only and is not necessarily indicative of what our financial performance would have been had the acquisition been completed on the date assumed nor is such unaudited pro forma combined financial information necessarily indicative of the results to be expected in any future period.
3. Discontinued Operations
Travelocity.com
—On January 23, 2015, we sold Travelocity.com to Expedia Inc. ("Expedia"), pursuant to the terms of an Asset Purchase Agreement (the “Travelocity Purchase Agreement”), dated January 23, 2015, by and among Sabre GLBL and Travelocity.com LP, and Expedia. The signing and closing of the Travelocity Purchase Agreement occurred contemporaneously. Expedia purchased Travelocity.com pursuant to the Travelocity Purchase Agreement for cash consideration of
$280 million
. The net assets of Travelocity.com disposed of primarily included a trade name with a carrying value of
$55 million
. We recognized a gain on sale of
$143 million
, net of tax, in the first quarter of 2015.
lastminute.com—
On March 1, 2015, we sold lastminute.com to Bravofly Rumbo Group. The transaction was completed through the transfer of net liabilities
as of the date of sale consisting primarily of a working capital deficit of
$70 million
, partially offset by assets sold including intangible assets of
$27 million
.
We did not receive any cash proceeds or any other significant consideration in the transaction
other than payments for specific services to be provided to the acquirer under a transition services agreement which concluded on March 31, 2016. Additionally, at the time of sale, the acquirer entered into a long-term agreement with us to continue to utilize our GDS for bookings, which generates incentive consideration paid by us to the acquirer. We recognized a gain on sale of
$24 million
, net of tax, in the first quarter of 2015.
Financial Information of Discontinued Operations
The results of our discontinued operations are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Revenue
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
24,815
|
|
Cost of revenue
|
—
|
|
|
—
|
|
|
21,520
|
|
Selling, general and administrative
(3)
|
4,456
|
|
|
11,619
|
|
|
(23,077
|
)
|
Operating (loss) income
|
(4,456
|
)
|
|
(11,619
|
)
|
|
26,372
|
|
Other income (expense):
|
|
|
|
|
|
|
Gain on sale of businesses
(1)
|
—
|
|
|
305
|
|
|
294,276
|
|
Other, net
|
2,094
|
|
|
(1,025
|
)
|
|
4,640
|
|
Total other income (expense), net
|
2,094
|
|
|
(720
|
)
|
|
298,916
|
|
(Loss) income from discontinuing operations before income taxes
|
(2,362
|
)
|
|
(12,339
|
)
|
|
325,288
|
|
(Benefit) provision for income taxes
(2)
|
(430
|
)
|
|
(17,888
|
)
|
|
10,880
|
|
Net (loss) income from discontinued operations
|
$
|
(1,932
|
)
|
|
$
|
5,549
|
|
|
$
|
314,408
|
|
______________________________________
|
|
(1)
|
The year ended December 31, 2015 includes
$31 million
of reclassified cumulative translation gains associated with our lastminute.com subsidiaries. See “Divestiture of lastminute.com—Cumulative Translation Adjustments” for additional information.
|
|
|
(2)
|
The year ended December 31, 2016 includes a
$17 million
tax benefit associated with the resolution of uncertain tax positions. The year ended December 31, 2015 includes a U.S. tax benefit of
$93 million
; see “Divestiture of lastminute.com—U.S. Tax Benefit” for additional information.
|
|
|
(3)
|
For the year ended December 31, 2015, selling, general and administrative includes a gain of
$40 million
as a result of the favorable final ruling from the Supreme Court of Hawaii and receipt of a cash refund related to our litigation of hotel occupancy taxes. See Note
15. Commitments and Contingencies
, for additional information.
|
Our Travelocity business has no remaining operations subsequent to these dispositions. The financial results of our Travelocity business are included in net income from discontinued operations in our consolidated statements of operations for all periods presented. For the year ended
December 31, 2017
, discontinued operations for our Travelocity business primarily incurred expenses associated with legal contingencies related to hotel occupancy taxes. See Note
15. Commitments and Contingencies
, for additional information.
Divestiture of lastminute.com
Cumulative Translation Adjustments
Cumulative translation adjustment (“CTA”) gains or losses of foreign subsidiaries related to divested businesses are reclassified into earnings once the liquidation of the respective foreign subsidiaries is substantially complete. During the year ended December 31, 2015, we substantially completed the liquidation of our lastminute.com subsidiaries and, therefore, reclassified
$19 million
, net of tax, of CTA gains from accumulated comprehensive income (loss) to our results of discontinued operations.
U.S. Tax Benefit
We wrote off the remaining U.S. tax basis in goodwill and intangible assets during the fourth quarter of 2015, the period in which we completed the wind down of lastminute.com activities. As a result, we recognized a U.S. tax benefit of
$93 million
in our results of discontinued operations.
4. Impairment and Related Charges
Capitalized implementation costs and deferred customer advances and discounts are reviewed for impairment if events and circumstances indicate that their carrying amounts may not be recoverable. See Note
1. Summary of Business and Significant Accounting Policies
for more information. Given the substantial amount of uncertainty of reaching an agreement regarding the implementation of services pursuant to the contract with an Airline Solutions' customer, we evaluated the recoverability of net capitalized contract costs related to the customer and recorded a charge of
$81 million
during the year ended
December 31, 2017
. This charge was estimated based on a review of all balances with the customer including capitalized implementation costs, deferred customer advances and discounts, deferred revenue, contract liabilities, and other deferred charges. We will continue to monitor our position through the insolvency proceedings; however, there is no further exposure to our consolidated balance sheet as of
December 31, 2017
. Given the uncertainty associated with the ultimate resolution of this dispute, there could be further impacts to our consolidated statement of operations. This impairment charge was primarily non-cash and was recorded to Impairment and related charges in our consolidated statement of operations for the year ended
December 31, 2017
. See Note
15. Commitments and Contingencies
--Other for additional information.
5. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill during the years ended
December 31, 2017
and
2016
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Travel Network
|
|
Airline and
Hospitality
Solutions
|
|
Total
Goodwill
|
Balance as of December 31, 2015
|
$
|
2,099,580
|
|
|
$
|
340,851
|
|
|
$
|
2,440,431
|
|
Acquired
|
4,894
|
|
|
105,990
|
|
|
110,884
|
|
Adjustments
(1)
|
68
|
|
|
(2,936
|
)
|
|
(2,868
|
)
|
Balance as of December 31, 2016
|
2,104,542
|
|
|
443,905
|
|
|
2,548,447
|
|
Acquired
|
439
|
|
|
—
|
|
|
439
|
|
Adjustments
(1)
|
(159
|
)
|
|
6,260
|
|
|
6,101
|
|
Balance as of December 31, 2017
|
$
|
2,104,822
|
|
|
$
|
450,165
|
|
|
$
|
2,554,987
|
|
________________________
|
|
(1)
|
Includes net foreign currency effects during the year.
|
The following table presents our intangible assets as of
December 31, 2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Acquired customer relationships
|
$
|
1,038,106
|
|
|
$
|
(687,072
|
)
|
|
$
|
351,034
|
|
|
$
|
1,034,483
|
|
|
$
|
(646,851
|
)
|
|
$
|
387,632
|
|
Trademarks and brand names
|
332,238
|
|
|
(126,312
|
)
|
|
205,926
|
|
|
332,238
|
|
|
(114,430
|
)
|
|
217,808
|
|
Reacquired rights
|
113,500
|
|
|
(40,695
|
)
|
|
72,805
|
|
|
113,500
|
|
|
(24,481
|
)
|
|
89,019
|
|
Purchased technology
|
427,823
|
|
|
(390,139
|
)
|
|
37,684
|
|
|
427,823
|
|
|
(366,456
|
)
|
|
61,367
|
|
Acquired contracts, supplier and distributor agreements
|
37,600
|
|
|
(22,410
|
)
|
|
15,190
|
|
|
37,600
|
|
|
(18,953
|
)
|
|
18,647
|
|
Non-compete agreements
|
15,025
|
|
|
(14,459
|
)
|
|
566
|
|
|
15,025
|
|
|
(14,061
|
)
|
|
964
|
|
Total intangible assets
|
$
|
1,964,292
|
|
|
$
|
(1,281,087
|
)
|
|
$
|
683,205
|
|
|
$
|
1,960,669
|
|
|
$
|
(1,185,232
|
)
|
|
$
|
775,437
|
|
Amortization expense relating to intangible assets subject to amortization totaled
$96 million
,
$143 million
and
$107 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. Estimated amortization expense related to intangible assets subject to amortization for each of the five succeeding years and beyond is as follows (in thousands):
|
|
|
|
|
2018
|
$
|
67,983
|
|
2019
|
63,866
|
|
2020
|
62,256
|
|
2021
|
60,743
|
|
2022
|
56,179
|
|
2023 and thereafter
|
372,178
|
|
Total
|
$
|
683,205
|
|
6. Balance Sheet Components
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Prepaid Expenses
|
$
|
69,650
|
|
|
$
|
61,539
|
|
Value added tax receivable, net
|
35,556
|
|
|
26,244
|
|
Other
|
3,547
|
|
|
817
|
|
Prepaid expenses and other current assets
|
$
|
108,753
|
|
|
$
|
88,600
|
|
Property and Equipment, Net
Property and equipment, net consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Buildings and leasehold improvements
|
$
|
151,843
|
|
|
$
|
144,604
|
|
Furniture, fixtures and equipment
|
38,155
|
|
|
35,525
|
|
Computer equipment
|
323,818
|
|
|
288,982
|
|
Software developed for internal use
|
1,521,901
|
|
|
1,271,059
|
|
|
2,035,717
|
|
|
1,740,170
|
|
Accumulated depreciation and amortization
|
(1,236,523
|
)
|
|
(986,891
|
)
|
Property and equipment, net
|
$
|
799,194
|
|
|
$
|
753,279
|
|
Other Assets, Net
Other assets, net consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Capitalized implementation costs, net
|
$
|
208,415
|
|
|
$
|
249,317
|
|
Deferred customer discounts
|
92,373
|
|
|
212,065
|
|
Deferred upfront incentive consideration
|
151,693
|
|
|
125,289
|
|
Other
|
139,461
|
|
|
86,488
|
|
Other assets, net
|
$
|
591,942
|
|
|
$
|
673,159
|
|
Other Noncurrent Liabilities
Other noncurrent liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Tax receivable agreement
|
$
|
170,067
|
|
|
$
|
288,146
|
|
Pension and other postretirement benefits
|
115,114
|
|
|
123,002
|
|
Deferred revenue
|
99,044
|
|
|
77,260
|
|
Other
|
95,960
|
|
|
78,951
|
|
Other noncurrent liabilities
|
$
|
480,185
|
|
|
$
|
567,359
|
|
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Defined benefit pension and other postretirement benefit plans
|
$
|
(102,623
|
)
|
|
$
|
(105,036
|
)
|
Unrealized foreign currency translation gain (loss)
|
11,488
|
|
|
(2,264
|
)
|
Unrealized gain (loss) on foreign currency forward contracts, interest rate swaps and available-for-sale securities
|
2,651
|
|
|
(15,499
|
)
|
Total accumulated other comprehensive loss, net of tax
|
$
|
(88,484
|
)
|
|
$
|
(122,799
|
)
|
The amortization of actuarial losses and periodic service credits associated with our retirement-related benefit plans is included in selling, general and administrative expenses. See Note
9. Derivatives
, for information on the income statement line items affected as the result of reclassification adjustments associated with derivatives.
7. Income Taxes
On December 22, 2017, the TCJA was signed into law. The TCJA contains significant changes to the U.S. corporate income tax system, including a reduction of the federal corporate income tax rate from
35%
to
21%
, a limitation of the tax deduction for interest expense to
30%
of adjusted taxable income (as defined in the TCJA), base erosion provisions related to intercompany foreign payments and global low-taxed income, one-time taxation of offshore earnings at reduced rates in connection with the transition of U.S. international taxation from a worldwide tax system to a territorial tax system, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), and modifying or repealing many business deductions and credits.
As of December 31, 2017, we have not completed our accounting for the tax effects of the enactment of the TCJA due to complexities of the TCJA, pending clarifications, and additional information needed to finalize certain calculations; however, we have made a reasonable estimate of the effects on our existing deferred tax balances, the one-time transition tax and the effect of the TCJA on our liability related to the tax receivable agreement ("TRA"). We expect to finalize the accounting for the effects of the TCJA no later than the fourth quarter of 2018, in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 118. Future adjustments made to the provisional effects will be reported as a component of income tax expense from continuing operations in the reporting period in which any such adjustments are determined.
Provisional amounts
Tax Receivable Agreement: The TRA provides for future payments to Pre-IPO Existing Shareholders (as defined below) for cash savings for U.S. federal income tax realized as a result of the utilization of Pre-IPO Tax assets (as defined below). These cash savings would be realized at the enacted statutory tax rate effective in the year of utilization. As a result of the reduction in the U.S. corporate income tax rate, we recorded a provisional reduction to the liability for future payments of
$58 million
, which is reflected in our income from continuing operations before taxes.
Foreign tax effects: The one-time transition tax is based on our total post-1986 Earnings and Profits ("E&P") of our foreign subsidiaries for which we have previously deferred U.S. income taxation and have not accrued U.S. deferred taxes based on application of the indefinite reinvestment criteria. We recorded a provisional amount for our one-time transition tax liability for the previously untaxed E&P of our foreign subsidiaries, resulting in an increase in income tax expense of
$48 million
. The accounting for the transition tax is not complete because we have not yet completed our calculation of the E&P for these foreign subsidiaries, nor have we concluded whether the November 2 or December 31 E&P measurement date should apply. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets at the applicable E&P measurement date. This amount may change when we determine the appropriate E&P measurement date, finalize the calculation of E&P for which we have previously deferred U.S. federal taxation and finalize the amounts held in cash or other specified assets. Additional withholding taxes were previously provided to the extent they would apply when foreign earnings are distributed. No additional income taxes have been provided for any remaining outside basis difference inherent in these entities as these amounts continue to be indefinitely reinvested in foreign operations. Determining the amount of unrecognized deferred tax liability related to any outside basis difference in these entities (i.e., basis difference in excess of that subject to the one time transition tax) is not practicable.
Deferred tax assets and liabilities: We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. We also adjusted the deferred tax asset for stock based compensation to account for changes to the anticipated future deductibility of our executive compensation. However, we are still analyzing certain aspects of the TCJA and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of our deferred tax balance was not material to the overall income tax expense from continuing operations.
The components of pretax income from continuing operations, generally based on the jurisdiction of the legal entity, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Components of pre-tax income:
|
|
|
|
|
|
|
|
|
Domestic
|
$
|
199,685
|
|
|
$
|
206,182
|
|
|
$
|
262,682
|
|
Foreign
|
177,928
|
|
|
121,853
|
|
|
91,225
|
|
|
$
|
377,613
|
|
|
$
|
328,035
|
|
|
$
|
353,907
|
|
The provision for income taxes relating to continuing operations consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Current portion:
|
|
|
|
|
|
|
|
|
Federal
|
$
|
50,829
|
|
|
$
|
8,357
|
|
|
$
|
1,730
|
|
State and Local
|
2,388
|
|
|
1,346
|
|
|
(6,249
|
)
|
Non U.S.
|
26,060
|
|
|
28,488
|
|
|
26,646
|
|
Total current
|
79,277
|
|
|
38,191
|
|
|
22,127
|
|
Deferred portion:
|
|
|
|
|
|
|
|
|
Federal
|
47,372
|
|
|
60,372
|
|
|
89,682
|
|
State and Local
|
(6,178
|
)
|
|
(4,352
|
)
|
|
5,715
|
|
Non U.S.
|
7,566
|
|
|
(7,566
|
)
|
|
1,828
|
|
Total deferred
|
48,760
|
|
|
48,454
|
|
|
97,225
|
|
Total provision for income taxes
|
$
|
128,037
|
|
|
$
|
86,645
|
|
|
$
|
119,352
|
|
The provision for income taxes relating to continuing operations differs from amounts computed at the statutory federal income tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Income tax provision at statutory federal income tax rate
|
$
|
132,165
|
|
|
$
|
114,812
|
|
|
$
|
123,867
|
|
State income taxes, net of federal benefit
|
(1,727
|
)
|
|
(1,964
|
)
|
|
(1,263
|
)
|
Impact of non U.S. taxing jurisdictions, net
|
(13,492
|
)
|
|
11,482
|
|
|
13,966
|
|
Non-taxable gain on remeasurement of previously-held investment in Abacus
|
—
|
|
|
—
|
|
|
(27,279
|
)
|
Impact of U.S. TCJA
(1)
|
46,563
|
|
|
—
|
|
|
—
|
|
Employee stock based compensation
|
(4,977
|
)
|
|
(34,789
|
)
|
|
—
|
|
Research tax credit
|
(8,777
|
)
|
|
(9,817
|
)
|
|
(3,857
|
)
|
Tax receivable agreement (TRA)
(2)
|
(20,861
|
)
|
|
—
|
|
|
—
|
|
Valuation allowance
|
—
|
|
|
8
|
|
|
3,010
|
|
Other, net
|
(857
|
)
|
|
6,913
|
|
|
10,908
|
|
Total provision for income taxes
|
$
|
128,037
|
|
|
$
|
86,645
|
|
|
$
|
119,352
|
|
|
|
(1)
|
This amount includes
$48 million
of transition tax expense, and the remainder is the net benefit on cumulative deferred taxes.
|
|
|
(2)
|
This amount includes a
$20 million
adjustment to the TRA, which is not taxable.
|
The components of our deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2017
|
|
2016
|
Deferred tax assets:
|
|
|
|
|
|
Accrued expenses
|
$
|
13,716
|
|
|
$
|
30,953
|
|
Employee benefits other than pension
|
22,829
|
|
|
43,197
|
|
Deferred revenue
|
51,151
|
|
|
75,727
|
|
Pension obligations
|
24,989
|
|
|
43,145
|
|
Tax loss carryforwards
|
156,327
|
|
|
312,073
|
|
Non-U.S. operations
|
14,565
|
|
|
(760
|
)
|
Incentive consideration
|
5,381
|
|
|
12,586
|
|
Tax credit carryforwards
|
58,848
|
|
|
58,357
|
|
Suspended loss
|
14,478
|
|
|
23,702
|
|
Other
|
243
|
|
|
(562
|
)
|
Total deferred tax assets
|
362,527
|
|
|
598,418
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Depreciation and amortization
|
(21,317
|
)
|
|
(42,238
|
)
|
Software developed for internal use
|
(180,108
|
)
|
|
(286,653
|
)
|
Intangible assets
|
(134,484
|
)
|
|
(173,838
|
)
|
Unrealized gains and losses
|
(29,669
|
)
|
|
(5,050
|
)
|
Investment in partnership
|
(5,932
|
)
|
|
(9,788
|
)
|
Total deferred tax liabilities
|
(371,510
|
)
|
|
(517,567
|
)
|
Valuation allowance
|
(59,001
|
)
|
|
(74,523
|
)
|
Net deferred tax (liability) asset
|
$
|
(67,984
|
)
|
|
$
|
6,328
|
|
In the first quarter of 2016, we adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. In recent years, we have incurred significant excess tax benefits associated with settled equity-based awards that have not been recognized due to certain accounting policy elections we made under the previous accounting standard, combined with the significant amount of our net operating loss carryforwards. As a result of the adoption of ASU 2016-09, we recorded a cumulative effect adjustment as of January 1, 2016 to increase retained earnings by
$92 million
with a corresponding increase to deferred tax assets in order to recognize excess tax benefits that can be used to reduce income taxes payable in the future. Effective January 1, 2016, excess tax benefits or deficiencies are recognized in our results of operations and are included in cash flows from operating activities in our statement of cash flows. For the years ended December 31, 2017 and 2016, we recognized
$5 million
and
$35 million
, respectively, in excess tax benefits associated with employee equity-based awards, as a result of the adoption of this standard. There were no other material impacts to our consolidated financial statements as a result of adopting this updated standard.
As a result of the enactment of the TCJA, we recorded a one-time transition tax on the undistributed earnings of our foreign subsidiaries, and do not consider these undistributed earnings to be indefinitely reinvested as of December 31, 2017. We consider the undistributed capital investments in our foreign subsidiaries to be indefinitely reinvested as of December 31, 2017.
No
provision has been made for the United States federal and state income taxes on any related outside basis differences. It is not practicable to estimate the unrecognized deferred tax liability for these outside basis differences.
As of
December 31, 2017
, we have U.S. federal net operating loss carryforwards ("NOLs") of approximately
$548 million
, which will expire between
2022
and
2035
. Additionally, we have research tax credit carryforwards of approximately
$44 million
, which will expire between
2019
and
2037
and
$14 million
Alternative Minimum Tax (“AMT”) credit carry forward that does not expire. The TCJA eliminates the AMT for corporate taxpayers in the case of taxable years of a corporation beginning in January 1, 2018, 2019, 2020, and 2021, and provides for refunds of AMT credit carryforwards not otherwise used against federal tax liability over these years. We reclassed
$14 million
of AMT credit carryforwards from deferred tax asset to tax receivable, based on our provisional estimate of AMT refunds we expect to receive. As a result of an ownership change during 2007 and 2015 (as defined in Section 382 of the Code, which imposes an annual limit on the ability of a corporation to use certain tax attributes), all of the U.S. tax NOLs and credit carryforwards are subject to an annual limitation on their ability to be utilized. However, we expect that Section 382 will not limit our ability to fully realize the tax benefits. We have state NOLs of
$12 million
which will expire between 2020 and 2036 and state research tax credit carryforwards of
$13 million
which will expire between 2023 and 2037. We have
$282 million
of deferred tax assets for NOL carryforwards related to certain non U.S. taxing jurisdictions that are primarily from countries with indefinite carryforward periods.
We regularly review our deferred tax assets for realizability and a valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon future taxable income during the periods in which those temporary differences become deductible. In assessing the need for a valuation allowance for our deferred tax assets, we considered all available positive and negative evidence, including our ability to carry back net operating losses to prior periods, the reversal of deferred tax liabilities, tax planning strategies and projected future taxable income. We maintained a state NOL valuation allowance of
$4 million
and
$3 million
as of December 31, 2017 and 2016, respectively. For non-U.S. deferred tax assets of our lastminute.com and other subsidiaries, we maintained a valuation allowance of
$55 million
and
$72 million
as of
December 31, 2017
and
2016
, respectively. We reassess these assumptions regularly which could cause an increase or decrease to the valuation allowance. This assessment could result in an increase or decrease in the effective tax rate which could materially impact our results of operations.
It is our policy to recognize penalties and interest accrued related to income taxes as a component of the provision for income taxes. During the years ended
December 31, 2017
,
2016
and 2015, we recognized expense of
$1 million
,
$5 million
and
$3 million
, respectively. As of
December 31, 2017
and
2016
, we had cumulative accrued interest and penalties of approximately
$22 million
.
A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Balance at beginning of year
|
$
|
49,331
|
|
|
$
|
68,746
|
|
|
$
|
58,616
|
|
Additions for tax positions taken in the current year
|
5,279
|
|
|
538
|
|
|
8,252
|
|
Additions for tax positions of prior years
|
21,669
|
|
|
2,096
|
|
|
(786
|
)
|
Additions for tax positions from acquisitions
|
—
|
|
|
—
|
|
|
11,343
|
|
Reductions for tax positions of prior years
|
—
|
|
|
(17,706
|
)
|
|
(4,599
|
)
|
Reductions for tax positions of expired statute of limitations
|
(1,891
|
)
|
|
(3,743
|
)
|
|
(3,456
|
)
|
Settlements
|
—
|
|
|
(600
|
)
|
|
(624
|
)
|
Balance at end of year
|
$
|
74,388
|
|
|
$
|
49,331
|
|
|
$
|
68,746
|
|
We present unrecognized tax benefits as a reduction to deferred tax assets for net operating losses, similar tax loss or a tax credit carryforward that is available to settle additional income taxes that would result from the disallowance of a tax position, presuming disallowance at the reporting date. The amount of unrecognized tax benefits that were offset against deferred tax assets was
$53 million
,
$32 million
and
$46 million
as of
December 31, 2017
,
2016
, and
2015
respectively.
As of
December 31, 2017
,
2016
, and
2015
, the amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was
$70 million
,
$49 million
and
$69 million
, respectively. We believe that it is reasonably possible that
$4 million
in unrecognized tax benefits may be resolved in the next twelve months.
In the normal course of business, we are subject to examination by taxing authorities throughout the world. The following table summarizes, by major tax jurisdiction, our tax years that remain subject to examination by taxing authorities:
|
|
|
Tax Jurisdiction
|
Years Subject to Examination
|
United Kingdom
|
2013 - forward
|
Singapore
|
2013 - forward
|
Texas
|
2013 - forward
|
Uruguay
|
2013 - forward
|
U.S. Federal
|
2007 - forward
|
We currently have ongoing audits in the United States (2011-2013), India (2003-2016) and Germany (2008-2012). We do not expect that the results of these examinations will have a material effect on our financial condition or results of operations. With a few exceptions, we are no longer subject to income tax examinations by tax authorities for years prior to 2007.
Tax Receivable Agreement
Immediately prior to the closing of our initial public offering in April 2014, we entered into a TRA that provides the right to receive future payments by us to stockholders and equity award holders that were our stockholders and equity award holders, respectively, immediately prior to the closing of our initial public offering (collectively, the “Pre-IPO Existing Stockholders”). The future payments will equal
85%
of the amount of cash savings, if any, in U.S. federal income tax that we and our subsidiaries realize as a result of the utilization of certain tax assets attributable to periods prior to our initial public offering, including federal NOLs, capital losses and the ability to realize tax amortization of certain intangible assets (collectively, the “Pre-IPO Tax Assets”). Consequently, stockholders who are not Pre-IPO Existing Stockholders will only be entitled to the economic benefit of the Pre-IPO Tax Assets to the extent of our continuing
15%
interest in those assets. These payment obligations are our obligations and not obligations of any of our subsidiaries. The actual utilization of the Pre-IPO Tax Assets, as well as the timing of any payments under the TRA, will vary depending upon a number of factors, including the amount, character and timing of our and our subsidiaries’ taxable income in the future.
Based on current tax laws and assuming that we and our subsidiaries earn sufficient taxable income to realize the full tax benefits subject to the TRA, we estimate that aggregate payments under the TRA relating to the Pre-IPO Tax Assets total
$328 million
, excluding interest. This includes a provisional reduction recorded in the fourth quarter of 2017 of
$60 million
in the TRA liability primarily resulting from the enactment of TCJA which reduced the U.S. corporate income tax rate. The TRA payments accrue interest in accordance with the terms of the TRA. The estimate of future payments considers the impact of Section 382 of the Code, which imposes an annual limit on the ability of a corporation that undergoes an ownership change to use its net operating loss carryforwards to reduce its liability. We do not anticipate any material limitations on our ability to utilize NOLs under Section 382 of the Code. We expect a majority of the future payments under the TRA to be made over the next
three years
.
No
payments occurred in years 2014 to 2016. We made payments of
$60 million
and
$101 million
, including accrued interest of approximately
$1 million
each year in January 2018 and 2017, respectively. The remaining portion of
$170 million
is included in other noncurrent liabilities in our consolidated balance sheet as of
December 31, 2017
. Payments under the TRA are not conditioned upon the parties’ continuing ownership of the company. Changes in the utility of the Pre-IPO Tax Assets will impact the amount of the liability recorded in respect of the TRA. Changes in the utility of these Pre-IPO Tax Assets are recorded in income tax expense and any changes in the obligation under the TRA are recorded in other expense.
8. Debt
As of
December 31, 2017
and
2016
, our outstanding debt included in our consolidated balance sheets totaled $
3,456 million
and
$3,446 million
, respectively, net of debt issuance costs of
$23 million
and
$27 million
, respectively, and unamortized discounts of
$9 million
and
$6 million
, respectively. The following table sets forth the face values of our outstanding debt as of
December 31, 2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Rate
|
|
Maturity
|
|
2017
|
|
2016
|
Senior secured credit facilities:
|
|
|
|
|
|
|
|
Term Loan A
|
L + 2.00%
|
|
July 2022
|
|
$
|
555,750
|
|
|
$
|
—
|
|
Term Loan B
|
L + 2.25%
|
|
February 2024
|
|
1,881,048
|
|
|
—
|
|
2016 Term Loan A
(1)
|
L + 2.50%
|
|
July 2021
|
|
—
|
|
|
585,000
|
|
2013 Term Loan B
(2)
|
L + 3.00%
|
|
February 2019
|
|
—
|
|
|
1,420,896
|
|
2013 Incremental term loan facility
(2)
|
L + 3.50%
|
|
February 2019
|
|
—
|
|
|
282,354
|
|
2013 Term Loan C
(2)
|
L + 3.00%
|
|
December 2017
|
|
—
|
|
|
49,313
|
|
Revolver, $400 million
(3)
|
L + 2.00%
|
|
July 2022
|
|
—
|
|
|
—
|
|
5.375% senior secured notes due 2023
|
5.375%
|
|
April 2023
|
|
530,000
|
|
|
530,000
|
|
5.25% senior secured notes due 2023
|
5.25%
|
|
November 2023
|
|
500,000
|
|
|
500,000
|
|
Mortgage facility
(4)
|
5.80%
|
|
April 2017
|
|
—
|
|
|
79,741
|
|
Capital lease obligations
|
|
|
|
|
21,235
|
|
|
31,190
|
|
Face value of total debt outstanding
|
|
|
|
|
3,488,033
|
|
|
3,478,494
|
|
Less current portion of debt outstanding
|
|
|
|
|
(57,138
|
)
|
|
(169,246
|
)
|
Face value of long-term debt outstanding
|
|
|
|
|
$
|
3,430,895
|
|
|
$
|
3,309,248
|
|
______________________________
|
|
(1)
|
Refinanced on August 23, 2017 by Term Loan A.
|
|
|
(2)
|
Refinanced on February 22, 2017 by the 2017 Term Loan B.
|
|
|
(3)
|
Pursuant to the August 23, 2017 refinancing, the interest rate on the Revolver was reduced from L+
2.50%
to L+
2.25%
and the maturity was extended from July 2021 to July 2022.
|
|
|
(4)
|
Extinguished on March 31, 2017 using proceeds from the 2017 Term Loan B.
|
Senior Secured Credit Facilities
In February 2013, Sabre GLBL entered into the Amended and Restated Credit Agreement. The agreement replaced (i) the existing term loans with new classes of term loans of
$1,775 million
(the “2013 Term Loan B”) and
$425 million
(the “2013 Term Loan C”) and (ii) the existing revolving credit facility with a new revolving credit facility of
$352 million
(the “2013 Revolver”). In September 2013, Sabre GLBL entered into an agreement to amend the Amended and Restated Credit Agreement to add a new class of term loans in the amount of
$350 million
(the “2013 Incremental Term Loan Facility”).
In July 2016, Sabre GLBL entered into a series of amendments (the “Credit Agreement Amendments”) to our Amended and Restated Credit Agreement to provide for an incremental term loan under a new class with an aggregate principal amount of
$600 million
(the “2016 Term Loan A”) and to replace the 2013 Revolver with a new revolving credit facility totaling
$400 million
(the “2016 Revolver”). The proceeds of
$597 million
, net of
$3 million
discount, from the 2016 Term Loan A were used to repay
$350 million
of outstanding principal on our 2013 Term Loan B and 2013 Incremental Term Loan Facility, on a pro rata basis, repay the
$120 million
then-outstanding balance on the 2016 Revolver, and pay
$11 million
in associated financing fees. We recognized a
$4 million
loss on extinguishment of debt in connection with these transactions during the year ended December 31, 2016.
On February 22, 2017, Sabre GLBL entered into a Third Incremental Term Facility Amendment to our Amended and Restated Credit Agreement (the “2017 Term Facility Amendment”). The new agreement replaced the 2013 Term Loan B, 2013 Incremental Term Loan Facility and 2013 Term Loan C with a single class of term loan (the "2017 Term Loan B") with an aggregate principal amount of
$1,900 million
maturing on February 22, 2024. The proceeds of
$1,898 million
, net of
$2 million
discount on the 2017 Term Loan B, were used to pay off approximately
$1,761 million
of all existing classes of outstanding term loans (other than the 2016 Term Loan A), pay related accrued interest and pay
$12 million
in associated financing fees, which were recorded as debt modification costs in Other, net in the consolidated statement of operations during the year ended December 31, 2017. The remaining proceeds of the 2017 Term Loan B were used to pay off approximately
$80 million
of Sabre’s outstanding mortgage on its corporate headquarters on March 31, 2017 and for other general corporate purposes. Unamortized debt issuance costs and discount related to existing classes of outstanding term loans prior to the 2017 Term Facility Amendment of
$9 million
and
$3 million
, respectively, will continue to be amortized over the remaining term of the Term Loan B along with the Term Loan B discount of
$2 million
. See Note
9. Derivatives
for information regarding the discontinuation of hedge accounting related to our existing interest rate swaps as a result of the 2017 Term Facility Amendment.
On August 23, 2017, Sabre GLBL entered into a Fourth Incremental Term Facility Amendment to our Amended and Restated Credit Agreement, Term Loan A Refinancing Amendment to the Credit Agreement, and Second Revolving Facility Refinancing Amendment to the Credit Agreement to refinance and modify the terms of the 2017 Term Loan B, the 2016 Term Loan A, and the 2016 Revolver, resulting in a reduction of the applicable margins for each of these instruments and approximately a
one
-year extension of the maturity of the 2016 Term Loan A and 2016 Revolver (the “2017 Refinancing”). We incurred no additional indebtedness as a result of the 2017 Refinancing. The 2017 Refinancing included a
$400 million
revolving credit facility ("Revolver") that replaced the 2016 Revolver, as well as the application of the proceeds of the approximately
$1,891 million
incremental Term Loan B facility (“Term Loan B”) and
$570 million
Term Loan A facility (“Term Loan A”) to replace the 2017 Term Loan B and the 2016 Term Loan A. The maturity of the Revolver and the Term Loan A was extended from July 18, 2021 to July 1, 2022. The applicable margins for the Term Loan B were reduced to
2.25%
per annum for Eurocurrency rate loans and
1.25%
per annum for base rate loans. The applicable margins for the Term Loan A and the Revolver were reduced to (i) between
2.50%
and
1.75%
per annum for Eurocurrency rate loans and (ii) between
1.50%
and
0.75%
per annum for base rate loans, in each case with the applicable margin for any quarter reduced by 25 basis points (up to 75 basis points total) if the Senior Secured First-Lien Net Leverage Ratio (as defined in the Amended and Restated Credit Agreement) is less than
3.75
to 1.0,
3.00
to 1.0, or
2.25
to 1.0, respectively. The applicable interest rate margins opened at
2.25%
per annum for Eurocurrency rate loans and
1.25%
per annum for base rate loans until November 2, 2017.
We had
no balance
outstanding under the Revolver as of
December 31, 2017
or under the 2016 Revolver as of
December 31, 2016
. We had outstanding letters of credit totaling
$21 million
and
$35 million
as of
December 31, 2017
and
2016
, respectively, which reduced our overall credit capacity under the Revolver and 2016 Revolver.
Principal Payments
Principal payments on the Term Loan A are due on a quarterly basis equal to
1.25%
of its initial aggregate principal amount during the first two years of its term and
2.50%
of its initial aggregate principal amount during the next three years of its term. Term Loan B matures on February 22, 2024, and required principal payments in equal quarterly installments of
0.25%
through to the maturity date of which the remaining balance is due. For the year ended December 31, 2017, we made
$48 million
of scheduled principal payments.
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. Based on our results for the year ended December 31, 2016, we were not required to make an excess cash flow payment in 2017, and no excess cash flow payment is required in 2018 with respect to our results for the year ended December 31, 2017. We are further required to pay down the term loan with proceeds from certain asset sales or borrowings as defined in the Amended and Restated Credit Agreement.
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. We have elected the one-month LIBOR as the floating interest rate on all of our outstanding term loans
.
Interest payments are due on the last day of each month as a result of electing one-month LIBOR. Interest on a portion of the outstanding loan is hedged with interest rate swaps (see Note
9. Derivatives
).
|
|
|
|
|
|
Eurocurrency borrowings
|
|
Base rate borrowings
|
|
Applicable Margin
(1)
|
|
Applicable Margin
|
Term Loan A
|
2.00%
|
|
1.00%
|
Term Loan B
|
2.25%
|
|
1.25%
|
Revolver, $400 million
|
2.00%
|
|
1.00%
|
______________________________
|
|
(1)
|
Applicable margins do not reflect potential step ups and downs of Term Loan A and Revolver,
$400 million
, which are determined by the Senior Secured Leverage Ratio. See below for additional information.
|
|
|
(2)
|
Term Loan A, Term Loan B, and Revolver,
$400 million
, are subject to a
0%
floor.
|
Applicable margins for the Term Loan B are
2.25%
per annum for Eurocurrency rate loans and
1.25%
per annum for base rate loans over the life of the loan and are not dependent on the Senior Secured Leverage Ratio. Applicable margins for the Term Loan A and the Revolver step up by 25 basis points for any quarter if the Senior Secured Leverage Ratio is greater than or equal to
3.00
to 1.0. Applicable margins for the Term Loan A and the Revolver under the Amended and Restated Credit Agreement step down 25 basis points for any quarter if the Senior Secured Leverage Ratio is less than
2.25
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 prior to August 22, 2018. In addition, we are required to pay a quarterly commitment fee of
0.250%
per annum for unused Revolver commitments. The commitment fee may increase to
0.375%
per annum if the Senior Secured Leverage Ratio is greater than or equal to
3.00
to 1.0.
Our effective interest rates on borrowings under the Amended and Restated Credit Agreement for the years ended
December 31, 2017
,
2016
and
2015
, inclusive of amounts charged to interest expense, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Including the impact of interest rate swaps
|
4.35
|
%
|
|
4.72
|
%
|
|
4.48
|
%
|
Excluding the impact of interest rate swaps
|
4.03
|
%
|
|
4.55
|
%
|
|
4.48
|
%
|
Senior Secured Notes due 2023
In April 2015, we issued
$530 million
senior secured notes due in April 2023 with a stated interest rate of
5.375%
and received proceeds of
$522 million
, net of underwriting fees and commissions. We used the proceeds to redeem all of the
$480 million
principal of the senior secured notes due 2019, pay the
6.375%
redemption premium of
$31 million
and a make whole premium of
$2 million
, resulting in an extinguishment loss of
$33 million
during the year ended December 31, 2015. The remaining proceeds, combined with cash on hand, were used to pay accrued but unpaid interest of
$19 million
.
In November 2015, we issued
$500 million
senior secured notes due in 2023 with a stated interest rate of
5.25%
. The net proceeds of
$494 million
, net of underwriting fees and commissions, were used to repay
$235 million
of the
$400 million
2016 Notes (as defined below), pay a
$5 million
make-whole premium on the 2016 Notes and pay
$5 million
of accrued but unpaid interest. In addition, we used the net proceeds to repurchase
3,400,000
shares of our common stock totaling
$99 million
. The excess net proceeds, together with cash on hand, were applied to fund the acquisition of the Trust Group, which was completed in January 2016. As a result of the prepayment on the 2016 Notes, we recorded an extinguishment loss of
$6 million
, which includes
$1 million
of unamortized discount and the make-whole premium during the year ended December 31, 2015.
The senior secured notes due 2023 were issued by Sabre GLBL and are guaranteed by Sabre Holdings and each of Sabre GLBL’s existing and subsequently acquired or organized subsidiaries that are borrowers under or guarantors of our senior secured credit facilities. The senior secured notes due 2023 are secured by a first priority security interest in substantially all present and after acquired property and assets of Sabre GLBL and the guarantors of the notes, which also constitutes collateral securing indebtedness under our senior secured facilities on a first priority basis.
Senior Unsecured Notes Due 2016
In March 2016, the remaining principal balance of
$165 million
of our senior unsecured notes matured. We repaid this remaining balance on the senior unsecured notes with a draw on our 2016 Revolver and cash on hand.
Aggregate Maturities
As of
December 31, 2017
, aggregate maturities of our long-term debt were as follows (in thousands):
|
|
|
|
|
|
Amount
|
Years Ending December 31,
|
|
|
2018
|
$
|
57,138
|
|
2019
|
68,495
|
|
2020
|
80,273
|
|
2021
|
75,905
|
|
2022
|
389,405
|
|
Thereafter
|
2,816,817
|
|
Total
|
$
|
3,488,033
|
|
9. Derivatives
Hedging Objectives
-We are exposed to certain risks relating to ongoing business operations. The primary risks managed by using derivative instruments are foreign currency exchange rate risk and interest rate risk. Forward contracts on various foreign currencies are entered into to manage the foreign currency exchange rate risk on operational expenditures' exposure denominated in foreign currencies. Interest rate swaps are entered into to manage interest rate risk associated with our floating-rate borrowings.
In accordance with authoritative guidance on accounting for derivatives and hedging, we designate foreign currency forward contracts as cash flow hedges on operational exposure and certain interest rate swaps as cash flow hedges of floating-rate borrowings.
Cash Flow Hedging Strategy
-To protect against the reduction in value of forecasted foreign currency cash flows, we hedge portions of our revenues and expenses denominated in foreign currencies with forward contracts. For example, when the dollar strengthens significantly against the foreign currencies, the decline in present value of future foreign currency expense is offset by losses in the fair value of the forward contracts designated as hedges. Conversely, when the dollar weakens, the increase in the present value of future foreign currency expense is offset by gains in the fair value of the forward contracts.
We enter into interest rate swap agreements to manage interest rate risk exposure. The interest rate swap agreements modify our exposure to interest rate risk by converting floating-rate debt to a fixed rate basis, thus reducing the impact of interest rate changes on future interest expense and net earnings. These agreements involve the receipt of floating rate amounts in exchange for fixed rate interest payments over the life of the agreements without an exchange of the underlying principal amount.
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) (“OCI”) and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any (ineffective portion), and hedge components excluded from the assessment of effectiveness, are recognized in Other, net in the consolidated statements of operations during the current period. Derivatives not designated as hedging instruments are carried at fair value with changes in fair value reflected in Other, net in the consolidated statement of operations.
Forward Contracts
- In order to hedge our operational expenditures' exposure to foreign currency movements, we are a party to certain foreign currency forward contracts that extend until December 2018. We have designated these instruments as cash flow hedges.
No
hedging ineffectiveness was recorded in earnings relating to the forward contracts during the years ended
December 31, 2017
,
2016
and
2015
. As of
December 31, 2017
, we estimate that
$6 million
in gains will be reclassified from other comprehensive income (loss) to earnings over the next 12 months.
As of
December 31, 2017
and
2016
, we had the following unsettled purchased foreign currency forward contracts that were entered into to hedge our operational exposure to foreign currency movements (in thousands, except for average contract rates):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017 Outstanding Notional Amount
|
Buy Currency
|
|
Sell Currency
|
|
Foreign Amount
|
|
USD Amount
|
|
Average Contract
Rate
|
Polish Zloty
|
|
US Dollar
|
|
225,000
|
|
|
61,016
|
|
|
0.2712
|
|
Singapore Dollar
|
|
US Dollar
|
|
70,750
|
|
|
52,065
|
|
|
0.7359
|
|
British Pound Sterling
|
|
US Dollar
|
|
25,900
|
|
|
34,307
|
|
|
1.3246
|
|
Indian Rupee
|
|
US Dollar
|
|
1,720,000
|
|
|
25,939
|
|
|
0.0151
|
|
Australian Dollar
|
|
US Dollar
|
|
20,750
|
|
|
15,932
|
|
|
0.7678
|
|
Swedish Krona
|
|
US Dollar
|
|
44,100
|
|
|
5,353
|
|
|
0.1214
|
|
Brazilian Real
|
|
US Dollar
|
|
16,800
|
|
|
4,976
|
|
|
0.2962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016 Outstanding Notional Amount
|
Buy Currency
|
|
Sell Currency
|
|
Foreign Amount
|
|
USD Amount
|
|
Average Contract
Rate
|
Polish Zloty
|
|
US Dollar
|
|
258,250
|
|
|
64,778
|
|
|
0.2508
|
|
Singapore Dollar
|
|
US Dollar
|
|
47,700
|
|
|
34,383
|
|
|
0.7208
|
|
British Pound Sterling
|
|
US Dollar
|
|
17,750
|
|
|
23,691
|
|
|
1.3347
|
|
Indian Rupee
|
|
US Dollar
|
|
1,174,500
|
|
|
16,786
|
|
|
0.0143
|
|
Australian Dollar
|
|
US Dollar
|
|
17,000
|
|
|
12,574
|
|
|
0.7396
|
|
Euro
|
|
US Dollar
|
|
1,800
|
|
|
2,031
|
|
|
1.1283
|
|
Interest Rate Swap Contracts
—Interest rate swaps outstanding at
December 31, 2017
and matured during the years ended
December 31, 2017
,
2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
Notional Amount
|
|
Interest Rate
Received
|
|
Interest Rate Paid
|
|
Effective Date
|
|
Maturity Date
|
Designated as Hedging Instrument
|
|
|
|
|
|
|
$750 million
|
|
1 month LIBOR
(1)
|
|
1.48%
|
|
December 31, 2015
|
|
December 30, 2016
|
$750 million
|
|
1 month LIBOR
(2)
|
|
1.15%
|
|
March 31, 2017
|
|
December 31, 2017
|
$750 million
|
|
1 month LIBOR
(2)
|
|
1.65%
|
|
December 29, 2017
|
|
December 31, 2018
|
$750 million
|
|
1 month LIBOR
(2)
|
|
2.08%
|
|
December 31, 2018
|
|
December 31, 2019
|
$750 million
|
|
1 month LIBOR
(2)
|
|
1.86%
|
|
December 31, 2019
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
Not Designated as Hedging Instrument
(1)
|
|
|
|
|
|
|
$750 million
|
|
1 month LIBOR
(3)
|
|
2.19%
|
|
December 30, 2016
|
|
December 29, 2017
|
$750 million
|
|
1.18%
|
|
1 month LIBOR
|
|
March 31, 2017
|
|
December 31, 2017
|
$750 million
|
|
1 month LIBOR
(3)
|
|
2.61%
|
|
December 29, 2017
|
|
December 31, 2018
|
$750 million
|
|
1.67%
|
|
1 month LIBOR
|
|
December 29, 2017
|
|
December 31, 2018
|
|
|
(1)
|
Subject to a
1%
floor.
|
|
|
(2)
|
Subject to a
0%
floor.
|
|
|
(3)
|
As of February 22, 2017.
|
As a result of the 2017 Term Facility Amendment in the first quarter of 2017, we discontinued hedge accounting for our existing swap agreements as of February 22, 2017. Accumulated losses of
$14 million
in other comprehensive income as of the date hedge accounting was discontinued is amortized into interest expense through the maturity date of the respective swap agreements, and interest rate swap payments made thereafter will be recorded in Other, net in the consolidated statement of operations. Losses reclassified from other comprehensive income to interest expense related to the derivatives that no longer qualified for hedge accounting were
$7 million
for the year ended December 31, 2017. We also entered into new interest rate swaps with offsetting terms that are not designated as hedging instruments, which did not have a material impact to our consolidated results of operations. We had
no
undesignated derivatives as of December 31, 2016 and 2015.
In connection with the 2017 Term Facility Amendment, we entered into new forward starting interest rate swaps effective March 31, 2017 to hedge the interest payments associated with
$750 million
of the floating-rate 2017 Term Loan B. The total notional amount outstanding is
$750 million
for the full years 2018 and 2019. In September 2017, we entered into new forward starting interest rate swaps to hedge the interest payments associated with
$750 million
of the floating-rate Term Loan B. The total notional outstanding of
$750 million
becomes effective December 31, 2019 and extends through the full year 2020. We have designated these swaps as cash flow hedges. The effective portion of changes in the fair value of the interest rate swaps is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings.
The estimated fair values of our derivatives designated as hedging instruments as of
December 31, 2017
and
2016
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets (Liabilities)
|
|
|
|
|
Fair Value as of December 31,
|
Derivatives Designated as Hedging Instruments
|
|
Consolidated Balance Sheet Location
|
|
2017
|
|
2016
|
Foreign exchange contracts
|
|
Prepaid expenses and other current assets
|
|
$
|
6,213
|
|
|
$
|
—
|
|
Foreign exchange contracts
|
|
Other accrued liabilities
|
|
—
|
|
|
(7,360
|
)
|
Interest rate swaps
|
|
Prepaid expenses and other current assets
|
|
856
|
|
|
—
|
|
Interest rate swaps
|
|
Other assets, net
|
|
3,093
|
|
|
—
|
|
Interest rate swaps
|
|
Other accrued liabilities
|
|
—
|
|
|
(8,345
|
)
|
Interest rate swaps
|
|
Other noncurrent liabilities
|
|
—
|
|
|
(7,339
|
)
|
Total
|
|
|
|
$
|
10,162
|
|
|
$
|
(23,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets (Liabilities)
|
|
|
|
|
Fair Value as of December 31,
|
Derivatives Not Designated as Hedging Instruments
|
|
Consolidated Balance Sheet Location
|
|
2017
|
|
2016
|
Interest rate swaps
|
|
Other accrued liabilities
|
|
$
|
(7,119
|
)
|
|
$
|
—
|
|
Total
|
|
|
|
$
|
(7,119
|
)
|
|
$
|
—
|
|
The effects of derivative instruments, net of taxes, on OCI for the years ended
December 31, 2017
,
2016
and
2015
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of (Loss) Gain
Recognized in OCI on Derivative, Effective Portion
|
|
|
Year Ended December 31,
|
Derivatives in Cash Flow Hedging Relationships
|
|
2017
|
|
2016
|
|
2015
|
Foreign exchange contracts
|
|
$
|
13,205
|
|
|
$
|
(6,413
|
)
|
|
$
|
(5,505
|
)
|
Interest rate swaps
|
|
2,583
|
|
|
(3,446
|
)
|
|
(7,939
|
)
|
Total
|
|
$
|
15,788
|
|
|
$
|
(9,859
|
)
|
|
$
|
(13,444
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Loss (Gain) Reclassified from Accumulated
OCI into Income, Effective Portion
|
|
|
|
|
Year Ended December 31,
|
Derivatives in Cash Flow Hedging Relationships
|
|
Income Statement Location
|
|
2017
|
|
2016
|
|
2015
|
Foreign exchange contracts
|
|
Cost of revenue
|
|
$
|
(3,001
|
)
|
|
$
|
1,991
|
|
|
$
|
10,646
|
|
Interest rate swaps
|
|
Interest Expense, net
|
|
5,083
|
|
|
2,336
|
|
|
—
|
|
Total
|
|
|
|
$
|
2,082
|
|
|
$
|
4,327
|
|
|
$
|
10,646
|
|
10. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market for that asset or liability. Guidance on fair value measurements and disclosures establishes a valuation hierarchy for disclosure of inputs used in measuring fair value defined as follows:
Level 1—Inputs are unadjusted quoted prices that are available in active markets for identical assets or liabilities.
Level 2—Inputs include quoted prices for similar assets and liabilities in active markets and quoted prices in non-active markets, inputs other than quoted prices that are observable, and inputs that are not directly observable, but are corroborated by observable market data.
Level 3—Inputs that are unobservable and are supported by little or no market activity and reflect the use of significant management judgment.
The classification of a financial asset or liability within the hierarchy is determined based on the least reliable level of input that is significant to the fair value measurement. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. We also consider the counterparty and our own non-performance risk in our assessment of fair value.
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
Foreign Currency Forward Contracts
—The fair value of the foreign currency forward contracts was estimated based upon pricing models that utilize Level 2 inputs derived from or corroborated by observable market data such as currency spot and forward rates.
Interest Rate Swaps—
The fair value of our interest rate swaps are estimated using a combined income and market-based valuation methodology based upon Level 2 inputs, including credit ratings and forward interest rate yield curves obtained from independent pricing services reflecting broker market quotes.
Pension Plan Assets
—See Note
14. Pension and Other Postretirement Benefit Plans
, for fair value information on our pension plan assets.
The following tables present the fair value of our assets (liabilities) that are required to be measured at fair value on a recurring basis as of
December 31, 2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at Reporting Date Using
|
|
December 31, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Derivatives:
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
$
|
6,213
|
|
|
$
|
—
|
|
|
$
|
6,213
|
|
|
$
|
—
|
|
Interest rate swap contracts
|
(3,170
|
)
|
|
—
|
|
|
(3,170
|
)
|
|
—
|
|
Total
|
$
|
3,043
|
|
|
$
|
—
|
|
|
$
|
3,043
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at Reporting Date Using
|
|
December 31, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Derivatives:
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
(7,360
|
)
|
|
—
|
|
|
(7,360
|
)
|
|
—
|
|
Interest rate swap contracts
|
(15,684
|
)
|
|
—
|
|
|
(15,684
|
)
|
|
—
|
|
Total
|
$
|
(23,044
|
)
|
|
$
|
—
|
|
|
$
|
(23,044
|
)
|
|
$
|
—
|
|
There were no transfers between Levels 1 and 2 within the fair value hierarchy for the years ended
December 31, 2017
and
2016
.
Assets that are Measured at Fair Value on a Nonrecurring Basis
As described in Note
1. Summary of Business and Significant Accounting Policies
, our impairment review of goodwill is performed annually, as of October 1 of each year. In addition, goodwill, property and equipment and intangible assets are reviewed for impairment if events and circumstances indicate that their carrying amounts may not be recoverable.
We perform our annual assessment of possible impairment of goodwill as of October 1 of each year. We begin with the qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying value before applying the quantitative goodwill impairment model. If it is determined through the evaluation of events or circumstances that a reporting unit’s fair value is more likely than not greater than its carrying value, the remaining impairment steps are unnecessary. If it is determined that a reporting unit’s fair value is less than its carrying value, the fair values used in our goodwill impairment analysis are estimated using a combined approach based upon discounted future cash flow projections and observed market multiples for comparable businesses. The cash flow projections are based upon Level 3 inputs, including risk adjusted discount rates, future booking and transaction volume levels, future price levels, rates of increase in operating expenses, cost of revenue and taxes. Additionally, in accordance with authoritative guidance on fair value measurements, we make a number of assumptions, including market participants, the principal markets and highest and best use of the reporting units.
Other Financial Instruments
The carrying value of our financial instruments including cash and cash equivalents, and accounts receivable approximates their fair values. The fair values of our senior secured notes due 2023 and term loans under our Amended and Restated Credit Agreement are determined based on quoted market prices for a similar liability when traded as an asset in an active market, a Level 2 input. The outstanding principal balance of
$80 million
on our mortgage facility was paid on March 31, 2017 and approximated its fair value as of December 31,
2016
. The fair values of the mortgage facility were determined based on estimates of current interest rates for similar debt, a Level 2 input.
The following table presents the fair value and carrying value of all our notes and term loans under our Amended and Restated Credit Agreement as of
December 31, 2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at December 31,
|
|
Carrying Value
(4)
at December 31,
|
Financial Instrument
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Term Loan A
|
|
$
|
559,223
|
|
|
$
|
—
|
|
|
$
|
553,444
|
|
|
$
|
—
|
|
Term Loan B
|
|
$
|
1,890,453
|
|
|
—
|
|
|
1,873,993
|
|
|
—
|
|
2016 Term Loan A
(1)
|
|
—
|
|
|
583,538
|
|
|
—
|
|
|
582,595
|
|
2013 Term Loan B
(2)
|
|
—
|
|
|
1,435,993
|
|
|
—
|
|
|
1,417,616
|
|
2013 Incremental Term Loan Facility
(2)
|
|
—
|
|
|
283,413
|
|
|
—
|
|
|
282,354
|
|
2013 Term Loan C
(2)
|
|
—
|
|
|
49,436
|
|
|
—
|
|
|
49,237
|
|
Revolver, $400 million
(3)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
5.375 % Senior Secured Notes Due 2023
|
|
546,563
|
|
|
542,919
|
|
|
530,000
|
|
|
530,000
|
|
5.25% Senior Secured Notes Due 2023
|
|
512,500
|
|
|
515,000
|
|
|
500,000
|
|
|
500,000
|
|
|
|
(1)
|
Refinanced on August 23, 2017 by the Term Loan A.
|
|
|
(2)
|
Refinanced on February 22, 2017 by the 2017 Term Loan B.
|
|
|
(3)
|
Pursuant to the August 23, 2017 refinancing, the interest rate on the Revolver was reduced from L+
2.50%
to L+
2.25%
and the maturity was extended from July 2021 to July 2022.
|
|
|
(4)
|
Excludes net unamortized debt issuance costs.
|
11. Stock and Stockholders’ Equity
Initial and Secondary Public Offerings
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.
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. 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.
During the years ended December 31, 2016 and 2015, certain of our stockholders sold an aggregate of
20,000,000
and
103,970,000
shares, respectively, of our common stock through secondary public offerings. In connection with one of these offerings, we repurchased
3,400,000
shares totaling
$99 million
from the underwriter of the offering during the year ended December 31, 2015. We did not receive any proceeds from the secondary public offerings.
We repurchased
5,779,769
shares, totaling
$109 million
, and
3,980,672
shares, totaling
$100 million
, of our common stock during the years ended
December 31, 2017
and
2016
, respectively.
Common Stock Dividends
We paid a quarterly cash dividend on our common stock of
$0.14
per share, totaling
$155 million
,
$0.13
per share, totaling
$144 million
, and
$0.09
per share, totaling
$99 million
, during the years ended
December 31, 2017
,
2016
and
2015
, respectively.
Our board of directors has declared a cash dividend of
$0.14
per share of our common stock, which will be paid on
March 30, 2018
to stockholders of record as of
March 21, 2018
.
12. Equity-Based Awards
As of
December 31, 2017
, our outstanding equity-based compensation plans and agreements include the Sovereign Holdings, Inc. Management Equity Incentive Plan (“Sovereign MEIP”), the Sovereign Holdings, Inc. 2012 Management Equity Incentive Plan (“Sovereign 2012 MEIP”), the Sabre Corporation 2014 Omnibus Incentive Compensation Plan (the “2014 Omnibus Plan”), and the Sabre Corporation 2016 Omnibus Incentive Compensation Plan (the “2016 Omnibus Plan”). Our 2016 Omnibus Plan serves as successor to the 2014 Omnibus Plan, the Sovereign MEIP and Sovereign 2012 MEIP and provide for the issuance of stock options, restricted shares, restricted stock units (“RSUs”), performance-based RSU awards (“PSUs”), cash incentive compensation and other stock-based awards. Outstanding awards under the 2014 Omnibus Plan, the Sovereign MEIP and Sovereign 2012 MEIP continue to be subject to the terms and conditions of their respective plan.
We initially reserved
10,000,000
shares and
13,500,000
shares of our common stock for issuance under our 2016 and 2014 Omnibus Plans, respectively. In addition, we added
2,956,465
shares that were reserved but not issued under the Sovereign MEIP and Sovereign 2012 MEIP plans to the 2014 Omnibus Plan reserves, for a total of
16,456,465
authorized shares of common stock for issuance. Time-based options granted under the 2016 and 2014 Omnibus Plans generally vest over a
four
year period with
25%
vesting at the end of year one and the remaining vest quarterly thereafter. RSUs generally vest over a
four
year period with
25%
vesting annually. PSUs generally vest over a
four
year period with
25%
vesting annually dependent upon the achievement of certain company-based performance measures. Each reporting period, we assess the probability of achieving the performance measure and, if there is an adjustment, record the cumulative effect of the adjustment in the current reporting period. Options granted are exercisable for up to
10
years. Stock-based compensation expense totaled
$45 million
,
$49 million
and
$30 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
Long-term cash incentive compensation is provided through the Long-Term Stretch Program (“LTSP”), which was initially adopted under the 2014 Omnibus Plan, for certain senior executives and key employees. The LTSP provides for cash incentive compensation if certain company-based performance measures are achieved over the
three
-year period ending December 31, 2017. If these performance measures had been achieved, the cash incentive to be received by the participants would have been determined in part by the average closing price of our common stock in January 2018. As of
December 31, 2017
, the performance measures were not achieved and no amounts were payable under the LTSP.
The fair value of the stock options granted was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Exercise price
|
$
|
21.33
|
|
|
$
|
27.12
|
|
|
$
|
22.64
|
|
Average risk-free interest rate
|
2.10
|
%
|
|
1.81
|
%
|
|
1.75
|
%
|
Expected life (in years)
|
6.11
|
|
|
6.11
|
|
|
6.11
|
|
Implied volatility
|
22.02
|
%
|
|
23.44
|
%
|
|
27.29
|
%
|
Dividend yield
|
2.64
|
%
|
|
1.92
|
%
|
|
1.60
|
%
|
The following table summarizes the stock option award activities under our outstanding equity based compensation plans and agreements for the year ended
December 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Quantity
|
|
Exercise Price
|
|
Remaining
Contractual
Term (years)
|
|
Aggregate
Intrinsic Value
(in thousands)
(1)
|
Outstanding at December 31, 2016
|
5,815,879
|
|
|
$
|
17.18
|
|
|
7.3
|
|
$
|
45,199
|
|
Granted
|
1,721,767
|
|
|
21.33
|
|
|
|
|
|
|
Exercised
|
(1,945,187
|
)
|
|
12.44
|
|
|
|
|
|
|
Cancelled
|
(1,460,624
|
)
|
|
22.64
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
4,131,835
|
|
|
$
|
19.50
|
|
|
7.6
|
|
$
|
4,136
|
|
Vested and exercisable at December 31, 2017
|
1,995,650
|
|
|
$
|
16.18
|
|
|
6.1
|
|
$
|
8,616
|
|
______________________
|
|
(1)
|
Aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock options awards and the closing price of our common stock of
$20.50
on
December 31, 2017
.
|
For the years ended
December 31, 2017
,
2016
and
2015
, the total intrinsic value of stock options exercised totaled
$19 million
,
$97 million
and
$199 million
, respectively. The weighted-average fair values of options granted were
$3.67
,
$5.45
, and
$5.50
during the years ended
December 31, 2017
,
2016
and
2015
, respectively. As of
December 31, 2017
,
$8 million
in unrecognized compensation expense associated with stock options will be recognized over a weighted-average period of
2.6 years
.
The following table summarizes the activities for our RSUs for the year ended
December 31, 2017
.
|
|
|
|
|
|
|
|
|
Quantity
|
|
Weighted-Average
Grant Date
Fair Value
|
Unvested at December 31, 2016
|
3,846,331
|
|
|
$
|
25.05
|
|
Granted
|
2,729,412
|
|
|
19.35
|
|
Vested
|
(1,085,948
|
)
|
|
23.50
|
|
Cancelled
|
(780,010
|
)
|
|
24.33
|
|
Unvested at December 31, 2017
|
4,709,785
|
|
|
$
|
23.77
|
|
The total fair value of RSUs vested, as of their respective vesting dates, was
$23 million
,
$17 million
, and
$10 million
during the years ended
December 31, 2017
,
2016
and
2015
, respectively. As of
December 31, 2017
, approximately
$82 million
in unrecognized compensation expense associated with RSUs will be recognized over a weighted average period of
2.6 years
.
The following table summarizes the activities for our PSUs for the year ended
December 31, 2017
.
|
|
|
|
|
|
|
|
|
Quantity
|
|
Weighted-Average
Grant Date
Fair Value
|
Unvested at December 31, 2016
|
2,092,155
|
|
|
$
|
21.94
|
|
Granted
|
1,230,357
|
|
|
21.99
|
|
Vested
|
(646,208
|
)
|
|
18.71
|
|
Cancelled
|
(1,262,083
|
)
|
|
22.39
|
|
Unvested at December 31, 2017
|
1,414,221
|
|
|
$
|
23.06
|
|
The total fair value of PSUs vested, as of their respective vesting dates, was
$14 million
,
$20 million
and
$11 million
during the years ended
December 31, 2017
,
2016
and
2015
, respectively. The recognition of compensation expense associated with PSUs is contingent upon the achievement of annual company-based performance measures. As of
December 31, 2017
, unrecognized compensation expense associated with PSUs totaled
$10 million
,
$8 million
and
$5 million
for the annual measurement periods ending December 31, 2018, 2019 and 2020, respectively.
13. Earnings Per Share
The following table reconciles the numerators and denominators used in the computations of basic and diluted earnings per share from continuing operations (in thousands, expect per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Numerator:
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
$
|
249,576
|
|
|
$
|
241,390
|
|
|
$
|
234,555
|
|
Net income attributable to noncontrolling interests
|
5,113
|
|
|
4,377
|
|
|
3,481
|
|
Net income from continuing operations available to common stockholders, basic and diluted
|
$
|
244,463
|
|
|
$
|
237,013
|
|
|
$
|
231,074
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
276,893
|
|
|
277,546
|
|
|
273,139
|
|
Dilutive effect of stock options and restricted stock awards
|
1,427
|
|
|
5,206
|
|
|
6,928
|
|
Diluted weighted-average common shares outstanding
|
278,320
|
|
|
282,752
|
|
|
280,067
|
|
Basic earnings per share
|
$
|
0.88
|
|
|
$
|
0.85
|
|
|
$
|
0.85
|
|
Diluted earnings per share
|
$
|
0.88
|
|
|
$
|
0.84
|
|
|
$
|
0.83
|
|
Basic earnings per share are based on the weighted-average number of common shares outstanding during each period. Diluted earnings per share are based on the weighted-average number of common shares outstanding plus the effect of all dilutive common stock equivalents during each period. The calculation of diluted weighted-average shares excludes the impact of
5 million
of anti-dilutive common stock equivalents for the year ended
December 31, 2017
and
1 million
for the years ended December 31
,
2016
and
2015
.
14. Pension and Other Postretirement Benefit Plans
We sponsor the Sabre Inc. 401(k) Savings Plan (“401(k) Plan”), which is a tax qualified defined contribution plan that allows tax deferred savings by eligible employees to provide funds for their retirement. We make a matching contribution equal to
100%
of each pre-tax dollar contributed by the participant on the first
6%
of eligible compensation. We recognized expenses related to the 401(k) Plan of
$25 million
,
$23 million
and
$20 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
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, and as a result, no additional pension benefits have been accrued since that date. In April 2008, we amended the LPP to add a lump sum optional form of payment which participants may elect when their plan benefits commence. The effect of the amendment was to decrease the projected benefit obligation by
$34 million
, which is being amortized over
23.5
years, representing the weighted average of the lump sum benefit period and the life expectancy of all plan participants. We also sponsor postretirement benefit plans for certain employees in Canada and Hong Kong.
The following tables provide a reconciliation of the changes in the LPP’s benefit obligations and fair value of assets during the years ended
December 31, 2017
and
2016
, and the unfunded status as of
December 31, 2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
Change in benefit obligation:
|
|
|
|
|
|
Benefit obligation at January 1
|
$
|
(444,662
|
)
|
|
$
|
(420,516
|
)
|
Service cost
|
—
|
|
|
—
|
|
Interest cost
|
(18,731
|
)
|
|
(20,041
|
)
|
Actuarial losses, net
|
(26,169
|
)
|
|
(28,350
|
)
|
Benefits paid
|
30,123
|
|
|
24,245
|
|
Benefit obligation at December 31
|
$
|
(459,439
|
)
|
|
$
|
(444,662
|
)
|
Change in plan assets:
|
|
|
|
|
|
Fair value of assets at January 1
|
$
|
324,471
|
|
|
$
|
326,586
|
|
Actual return on plan assets
|
46,425
|
|
|
22,130
|
|
Employer contributions
|
7,000
|
|
|
—
|
|
Benefits paid
|
(30,123
|
)
|
|
(24,245
|
)
|
Fair value of assets at December 31
|
$
|
347,773
|
|
|
$
|
324,471
|
|
Unfunded status at December 31
|
$
|
(111,666
|
)
|
|
$
|
(120,191
|
)
|
The net benefit obligation of
$112 million
and
$120 million
as of
December 31, 2017
and
2016
, respectively, is included in other noncurrent liabilities in our consolidated balance sheets.
The amounts recognized in accumulated other comprehensive income (loss), net of deferred taxes, associated with the LPP as of
December 31, 2017
and
2016
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Net actuarial loss
|
$
|
(115,701
|
)
|
|
$
|
(118,739
|
)
|
Prior service credit
|
12,433
|
|
|
13,348
|
|
Accumulated other comprehensive loss
|
$
|
(103,268
|
)
|
|
$
|
(105,391
|
)
|
The following table provides the components of net periodic benefit costs associated with the LPP and the principal assumptions used in the measurement of the LPP benefit obligations and net benefit costs for the three years ended
December 31, 2017
,
2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Interest cost
|
$
|
18,731
|
|
|
$
|
20,041
|
|
|
$
|
19,097
|
|
Expected return on plan assets
|
(20,934
|
)
|
|
(20,803
|
)
|
|
(21,117
|
)
|
Amortization of prior service credit
|
(1,432
|
)
|
|
(1,432
|
)
|
|
(1,432
|
)
|
Amortization of actuarial loss
|
6,517
|
|
|
5,871
|
|
|
7,045
|
|
Net cost
|
$
|
2,882
|
|
|
$
|
3,677
|
|
|
$
|
3,593
|
|
Weighted-average discount rate used to measure benefit obligations
|
3.81
|
%
|
|
4.36
|
%
|
|
4.86
|
%
|
Weighted average assumptions used to determine net benefit cost:
|
|
|
|
|
|
Discount rate
|
4.36
|
%
|
|
4.86
|
%
|
|
4.36
|
%
|
Expected return on plan assets
|
6.50
|
%
|
|
6.50
|
%
|
|
6.50
|
%
|
The following table provides the pre-tax amounts recognized in OCI, including the amortization of the actuarial loss and prior service credit, associated with the LPP for the years ended
December 31, 2017
,
2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations Recognized in
|
Year Ended December 31,
|
Other Comprehensive Income
|
2017
|
|
2016
|
|
2015
|
Net actuarial loss
|
$
|
679
|
|
|
$
|
27,023
|
|
|
$
|
6,472
|
|
Amortization of actuarial loss
|
(6,517
|
)
|
|
(5,871
|
)
|
|
(7,045
|
)
|
Amortization of prior service credit
|
1,432
|
|
|
1,432
|
|
|
1,432
|
|
Total (income) loss recognized in other comprehensive income
|
$
|
(4,406
|
)
|
|
$
|
22,584
|
|
|
$
|
859
|
|
Total recognized in net periodic benefit cost and other comprehensive income
|
$
|
(1,524
|
)
|
|
$
|
26,261
|
|
|
$
|
4,452
|
|
For the LPP, we estimate that
$6 million
of actuarial loss, net of amortization of prior service credit, will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost in
2018
.
Our overall investment strategy for the LPP is to provide and maintain sufficient assets to meet pension obligations both as an ongoing business, as well as in the event of termination, at the lowest cost consistent with prudent investment management, actuarial circumstances and economic risk, while minimizing the earnings impact. Diversification is provided by using an asset allocation primarily between equity and debt securities in proportions expected to provide opportunities for reasonable long term returns with acceptable levels of investment risk. Fair values of the applicable assets are determined as follows:
Mutual Fund
—The fair value of our mutual funds are estimated by using market quotes as of the last day of the period.
Common Collective Trusts
—The fair value of our common collective trusts are estimated by using market quotes as of the last day of the period, quoted prices for similar securities and quoted prices in non-active markets.
Real Estate
—The fair value of our real estate funds are derived from the fair value of the underlying real estate assets held by the funds. These assets are initially valued at cost and are reviewed periodically utilizing available market data to determine if the assets held should be adjusted.
The basis for the selected target asset allocation included consideration of the demographic profile of plan participants, expected future benefit obligations and payments, projected funded status of the plan and other factors. The target allocations for LPP assets are
38%
global equities,
58%
long duration fixed income and
4%
real estate. It is recognized that the investment management of the LPP assets has a direct effect on the achievement of its goal. As defined in Note
10. Fair Value Measurements
, the following tables present the fair value of the LPP assets as of
December 31, 2017
, and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2017
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
Common collective trusts:
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
$
|
—
|
|
|
$
|
191,125
|
|
|
$
|
—
|
|
|
$
|
191,125
|
|
Global equity securities
|
—
|
|
|
134,378
|
|
|
—
|
|
|
134,378
|
|
Money market mutual fund
|
2,815
|
|
|
—
|
|
|
—
|
|
|
2,815
|
|
Real estate
|
—
|
|
|
—
|
|
|
19,455
|
|
|
19,455
|
|
Total assets at fair value
|
$
|
2,815
|
|
|
$
|
325,503
|
|
|
$
|
19,455
|
|
|
$
|
347,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2016
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
Common collective trusts:
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
$
|
—
|
|
|
$
|
174,899
|
|
|
$
|
—
|
|
|
$
|
174,899
|
|
Global equity securities
|
—
|
|
|
127,321
|
|
|
—
|
|
|
127,321
|
|
Money market mutual fund
|
3,732
|
|
|
—
|
|
|
—
|
|
|
3,732
|
|
Real estate
|
—
|
|
|
—
|
|
|
18,519
|
|
|
18,519
|
|
Total assets at fair value
|
$
|
3,732
|
|
|
$
|
302,220
|
|
|
$
|
18,519
|
|
|
$
|
324,471
|
|
The following table provides a rollforward of plan assets valued using significant unobservable inputs (level 3), in thousands:
|
|
|
|
|
|
Real Estate
|
Ending balance at December 31, 2015
|
$
|
17,308
|
|
Contributions
|
246
|
|
Net distributions
|
(246
|
)
|
Advisory fee
|
(194
|
)
|
Net investment income
|
813
|
|
Unrealized gain
|
593
|
|
Net realized loss
|
(1
|
)
|
Ending balance at December 31, 2016
|
18,519
|
|
Contributions
|
279
|
|
Net distributions
|
(279
|
)
|
Advisory fee
|
(200
|
)
|
Net investment income
|
820
|
|
Unrealized gain
|
253
|
|
Net realized gain
|
63
|
|
Ending balance at December 31, 2017
|
$
|
19,455
|
|
We contributed
$7 million
to fund the LPP during the year ended
December 31, 2017
.
No
contributions were made during the years ended
December 31, 2016
and
2015
. Annual contributions to our defined benefit pension plans in the United States, Canada and Hong Kong are based on several factors that may vary from year to year. Our funding practice with respect to the LPP is to contribute the minimum required contribution as defined by law while also maintaining an
80%
funded status as defined by the Pension Protection Act of 2006. Thus, past contributions are not always indicative of future contributions. Based on current assumptions, we expect to contribute
$10 million
to our defined benefit pension plans in
2018
.
The expected long term rate of return on plan assets for each measurement date was selected after giving consideration to historical returns on plan assets, assessments of expected long term inflation and market returns for each asset class and the target asset allocation strategy. We do not anticipate the return of any plan assets to us in
2018
.
We expect the LPP to make the following estimated future benefit payments (in thousands):
|
|
|
|
|
|
Amount
|
2018
|
$
|
33,559
|
|
2019
|
32,589
|
|
2020
|
31,963
|
|
2021
|
30,080
|
|
2022
|
31,151
|
|
2023-2027
|
155,024
|
|
15. Commitments and Contingencies
Lease Commitments
We lease certain facilities under long term operating leases. Certain of our lease agreements contain renewal options, early termination options and/or payment escalations based on fixed annual increases, local consumer price index changes or market rental reviews. We recognize rent expense with fixed rate increases and/or fixed rent reductions on a straight line basis over the term of the lease. We lease approximately 1.5 million square feet of office space in
117
locations in
54
countries. For the years ended
December 31, 2017
,
2016
and
2015
, we recognized rent expense of
$32 million
,
$26 million
and
$28 million
, respectively. Future minimum lease payments under non-cancelable operating leases are as follows (in thousands):
|
|
|
|
|
|
Amount
|
2018
|
$
|
24,467
|
|
2019
|
20,872
|
|
2020
|
17,733
|
|
2021
|
14,189
|
|
2022
|
11,156
|
|
Thereafter
|
29,884
|
|
Total
|
$
|
118,301
|
|
Legal Proceedings
While certain legal proceedings and related indemnification obligations to which we are a party specify the amounts claimed, these claims may not represent reasonably possible losses. Given the inherent uncertainties of litigation, the ultimate outcome of these matters cannot be predicted at this time, nor can the amount of possible loss or range of loss, if any, be reasonably estimated, except in circumstances where an aggregate litigation accrual has been recorded for probable and reasonably estimable loss contingencies. A determination of the amount of accrual required, if any, for these contingencies is made after careful analysis of each matter. The required accrual may change in the future due to new information or developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters.
Antitrust Litigation and DOJ Investigation
US Airways Antitrust Litigation
In April 2011, US Airways filed suit against us in federal court in the Southern District of New York, alleging violations of the Sherman Act Section 1 (anticompetitive agreements) and Section 2 (monopolization). The complaint was filed fewer than two months after we entered into a new distribution agreement with US Airways. In September 2011, the court dismissed all claims relating to Section 2. The claims that were not dismissed are claims brought under Section 1 of the Sherman Act, relating to our contracts with US Airways, which US Airways claims contain anticompetitive provisions, and an alleged conspiracy with the other GDSs, allegedly to maintain the industry structure and not to compete for content. We strongly deny all of the allegations made by US Airways.
Sabre filed summary judgment motions in April 2014. In January 2015, the court issued an order granting Sabre's summary judgment motions in part, eliminating a majority of US Airways' alleged damages and rejecting its request for injunctive relief by which US Airways sought to bar Sabre from enforcing certain provisions in our contracts. In September 2015, the court also dismissed US Airways' claim for declaratory relief. In February 2017, US Airways sought reconsideration of the court's opinion dismissing the claim for declaratory relief, which the court denied in March 2017.
The trial on the remaining claims commenced in October 2016. In December 2016, the jury issued a verdict in favor of US Airways with respect to its claim under Section 1 of the Sherman Act regarding Sabre's contract with US Airways and awarded it
$5 million
in single damages. The jury rejected US Airways' claim alleging a conspiracy with the other GDSs. We continue to believe that our business practices and contract terms are lawful. In January 2017, we filed a motion seeking judgment as a matter of law in favor of Sabre on the one claim on which the jury found for US Airways, which the court denied in March 2017.
Based on the jury’s verdict, in March 2017 the court entered final judgment in favor of US Airways in the amount of
$15 million
, which is three times the jury’s award of
$5 million
as required by the Sherman Act.
In April 2017, we filed an appeal with the United States Court of Appeals for the Second Circuit seeking a reversal of the judgment. US Airways also filed a counter-appeal challenging earlier court orders, including the above-referenced orders dismissing and/or issuing summary judgment as to portions of its claims and damages. In connection with this appeal, we posted an appellate bond equal to the aggregate amount of the
$15 million
judgment entered plus interest, which stayed the judgment pending the appeal.
As a result of the jury's verdict, US Airways is also entitled to receive reasonable attorneys’ fees and costs under the Sherman Act. As such, it filed a motion seeking approximately
$125 million
in attorneys’ fees and costs, the amount of which we strongly dispute. In January 2018, the court denied US Airways' motion seeking attorneys' fees and costs, based on the fact that the appeal of the underlying judgment remains pending, as discussed above. The court's denial of the motion was without prejudice, and US Airways may refile the motion if it prevails on the appeal.
We have accrued a loss of
$32 million
, which represents the court's final judgment of
$15 million
, plus our estimate of
$17 million
for US Airways' reasonable attorneys’ fees, expenses and costs. We are unable to estimate the exact amount of the loss associated with the verdict, but we estimate that there is a range of outcomes between
$32 million
and
$65 million
, inclusive of the trebled damage award of approximately
$15 million
. No amount within the range is considered a better estimate than any other amount within the range and therefore, the minimum within the range was recorded in selling, general and administrative expense for the fourth quarter of 2016. As noted above, the amount of attorneys' fees and costs to be awarded is subject to conclusion of the appellate process and, if US Airways ultimately prevails on the appeal, final decision by the trial court, which may itself be appealed. The ultimate resolution of this matter may be greater or less than the amount recorded and, if greater, could adversely affect our results of operations. We have and will incur significant fees, costs and expenses for as long as the lawsuit, including any appeal, is ongoing. In addition, litigation by its nature is highly uncertain and fraught with risk, and it is therefore difficult to predict the outcome of any particular matter, including any appeal or changes to our business that may be required as a result of the litigation. Depending on the outcome of the litigation, any of these consequences could have a material adverse effect on our business, financial condition and results of operations.
Putative Class Action Lawsuit on Antitrust Claims
In July 2015, a putative class action lawsuit was filed against us and two other GDSs, in the United States District Court for the Southern District of New York. The plaintiffs, who are asserting claims on behalf of a putative class of consumers in various states, are generally alleging that the GDSs conspired to negotiate for full content from the airlines, resulting in higher ticket prices for consumers, in violation of various federal and state laws. The plaintiffs sought an unspecified amount of damages in connection with their state law claims, and they requested injunctive relief in connection with their federal claim. In July 2016, the court granted, in part, our motion to dismiss the lawsuit, finding that plaintiffs’ state law claims are preempted by federal law, thereby precluding their claims for damages. The court declined to dismiss plaintiffs’ claim seeking an injunction under federal antitrust law. The plaintiffs may appeal the court’s dismissal of their state law claims upon a final judgment. We believe that the losses associated with this case are neither probable nor estimable and therefore have not accrued any losses as of December 31, 2017. We may incur significant fees, costs and expenses for as long as this litigation is ongoing. We intend to vigorously defend against the remaining claims.
Putative Class Action Lawsuit on Cybersecurity Incident
In July 2017, a putative class action lawsuit was filed against us in the United States District Court for the Central District of California. The plaintiffs are asserting various claims under state law, including tort, contract and statutory claims, on behalf of a putative class of individuals residing in the United States and whose personally identifiable information allegedly was disclosed, in connection with the cybersecurity incident involving unauthorized access to payment information contained in a subset of hotel reservations process through the HS Central Reservation System. The plaintiffs are seeking equitable relief and an unspecified amount of damages in connection with their claims. In December 2017, we filed a motion to dismiss the lawsuit with prejudice. On January 25, 2018, the court granted our motion and dismissed the plaintiffs' claims in their entirety, with prejudice. The plaintiffs may appeal with court's decision, but must file the appeal within 30 days of the ruling. We believe that the losses associated with this case are neither probable nor estimable and therefore have not accrued any losses as of December 31, 2017. We may incur significant fees, costs and expenses for as long as this litigation is ongoing. We intend to vigorously defend against this matter. See “—Other” below for more information
.
Department of Justice Investigation
On May 19, 2011, we received a civil investigative demand (“CID”) from the U.S. Department of Justice (“DOJ”) investigating alleged anticompetitive acts related to the airline distribution component of our business. We are fully cooperating with the DOJ investigation and are unable to make any prediction regarding its outcome. The DOJ is also investigating other companies that own GDSs, and has sent CIDs to other companies in the travel industry. Based on its findings in the investigation, the DOJ may (i) close the file, (ii) seek a consent decree to remedy issues it believes violate the antitrust laws, or (iii) file suit against us for violating the antitrust laws, seeking injunctive relief. If injunctive relief were granted, depending on its scope, it could affect the manner in which our airline distribution business is operated and potentially force changes to the existing airline distribution business model. Any of these consequences would have a material adverse effect on our business, financial condition and results of operations. We have not received any communications from the DOJ regarding this matter for several years; however, we have not been notified that this matter is closed.
Indian Income Tax Litigation
We are currently a defendant in income tax litigation brought by the Indian Director of Income Tax (“DIT”) in the Supreme Court of India. The dispute arose in 1999 when the DIT asserted that we have a permanent establishment within the meaning of the Income Tax Treaty between the United States and the Republic of India and accordingly issued tax assessments for assessment years ending March 1998 and March 1999, and later issued further tax assessments for assessment years ending March 2000 through March 2006. The DIT has continued to issue further tax assessments on a similar basis for subsequent years; however, the tax assessments for assessment years ending March 2007 and later are no longer material. We appealed the tax assessments for assessment years ending March 1998 through March 2006 and the Indian Commissioner of Income Tax Appeals returned a mixed verdict. We filed further appeals with the Income Tax Appellate Tribunal (“ITAT”). The ITAT ruled in our favor on June 19, 2009 and July 10, 2009, stating that no income would be chargeable to tax for assessment years ending March 1998 and March 1999, and from March 2000 through March 2006. The DIT appealed those decisions to the Delhi High Court, which found in our favor on July 19, 2010. The DIT has appealed the decision to the Supreme Court of India. The initial Supreme Court hearing has now been scheduled. We have appealed the tax assessments for the assessment years ended March 2013 and March 2015 with the ITAT and no trial date has been set for these subsequent years.
In addition, SAPPL is currently a defendant in similar income tax litigation brought by the DIT. The dispute arose when the DIT asserted that SAPPL has a permanent establishment within the meaning of the Income Tax Treaty between Singapore and India and accordingly issued tax assessments for assessment years ending March 2000 through March 2005. SAPPL appealed the tax assessments, and the Indian Commissioner of Income Tax (Appeals) returned a mixed verdict. SAPPL filed further appeals with the ITAT. The ITAT ruled in SAPPL’s favor, finding that no income would be chargeable to tax for assessment years ending March 2000 through March 2005. The DIT appealed those decisions to the Delhi High Court. No hearing date has been set. The DIT also assessed taxes on a similar basis for assessment years ending March 2006 through March 2014 and appeals for assessment years ending March 2006 through 2014 are pending before the ITAT.
If the DIT were to fully prevail on every claim against us, including SAPPL, we could be subject to taxes, interest and penalties of approximately
$47 million
as of
December 31, 2017
. We intend to continue to aggressively defend against each of the foregoing claims. Although we do not believe that the outcome of the proceedings will result in a material impact on our business or financial condition, litigation is by its nature uncertain. We do not believe this outcome is more likely than not and therefore have not made any provisions or recorded any liability for the potential resolution of any of these claims.
Indian Service Tax Litigation
SAPPL's Indian subsidiary is also subject to litigation by the India Director General (Service Tax) ("DGST"), which has assessed the subsidiary for multiple years related to its alleged failure to pay service tax on marketing fees and reimbursements of expenses. Indian courts have returned verdicts favorable to the Indian subsidiary. The DGST has appealed the verdict to the Indian Supreme Court. We do not believe that an adverse outcome is probable and therefore have not made any provisions or recorded any liability for the potential resolution of any of these claims.
Litigation and Administrative Audit Proceedings Relating to Hotel Occupancy Taxes
On January 23, 2015, we sold Travelocity.com to Expedia. Pursuant to the Travelocity Purchase Agreement, we will continue to be liable for pre-closing liabilities of Travelocity, including fees, charges, costs and settlements relating to litigation arising from hotels booked on the Travelocity platform prior to our previous long-term strategic marketing agreement with Expedia (the “Expedia SMA”). Fees, charges, costs and settlements relating to litigation from hotels booked on Travelocity.com subsequent to the Expedia SMA and prior to the date of the sale of Travelocity.com will be shared with Expedia in accordance with the terms set forth in the Expedia SMA. We are jointly and severally liable for certain indemnification obligations under the Travelocity Purchase Agreement for liabilities that may arise out of these litigation matters, which could adversely affect our cash flow.
Beginning in 2004, various state and local governments in the United States have filed more than
80
lawsuits against us and other OTAs pertaining primarily to whether our discontinued Travelocity segment and other OTAs owe sales or occupancy taxes on the revenues they earned from facilitating hotel reservations, where the customer paid us an amount at the time of booking that included (i) service fees, which we collected and retained, and (ii) the price of the hotel room and amounts for occupancy or other local taxes, which we passed along to the hotel supplier. The complaints generally allege, among other things, that the defendants failed to pay to the relevant taxing authority hotel occupancy taxes on the service fees. Several lawsuits also allege that the OTAs owe state or local taxes on their fees for facilitating car rental reservations. Courts have dismissed many of these lawsuits, some for failure to exhaust administrative remedies and some on the basis that we are not subject to sales or occupancy tax. The remaining lawsuits are in various stages of litigation. We have also settled some cases individually, most for amounts not material to our results of operations, and with respect to these settlements, have generally reserved our rights to challenge any effort by the applicable tax authority to impose occupancy taxes in the future.
Although we have prevailed in the majority of these lawsuits and proceedings, there have been several adverse judgments or decisions on the merits, some of which are subject to appeal. As of
December 31, 2017
and
2016
, our reserve was not material for the potential resolution of issues identified related to litigation involving hotel and car sales, occupancy or excise taxes. We did not record material charges associated with these cases during the years ended
December 31, 2017
and
2016
. Because we do not have a material reserve for these matters, and we have not recorded any material charges during the years ended December 31, 2017 and 2016, we did not consider these matters to be material as of December 31, 2017. Our estimated liability is based on our current best estimate but the ultimate resolution of these issues may be greater or less than the amount recorded and, if greater, could adversely affect our results of operations.
In addition to the actions by the tax authorities,
two
consumer class action lawsuits have been filed against us in which the plaintiffs allege that we made misrepresentations concerning the description of the fees received in relation to facilitating hotel reservations. Generally, the consumer claims relate to whether Travelocity provided adequate notice to consumers regarding the nature of our fees and the amount of taxes charged or collected. One of these lawsuits is pending in Texas state court, where the court is currently considering the plaintiffs’ motion to certify a class action; and the other is pending in federal court, but has been stayed pending the outcome of the Texas state court action. We believe the notice we provided was appropriate and therefore have not accrued any losses related to these cases.
Furthermore, a number of state and local governments have initiated inquiries, audits and other administrative proceedings that could result in an assessment of sales or occupancy taxes on fees. If we do not prevail at the administrative level, those cases could lead to formal litigation proceedings.
Litigation Relating to Routine Proceedings
We are also engaged from time to time in other routine legal and tax proceedings incidental to our business. We do not believe that any of these routine proceedings will have a material impact on the business or our financial condition.
Other
In November 2017, in connection with Air Berlin’s insolvency proceedings, we requested that Air Berlin make an election under the German Insolvency Act on whether to perform or terminate its contract with us. In January 2018, Air Berlin notified us by letter that it was exercising its right under the German Insolvency Act to terminate its contract with us. In addition, Air Berlin’s letter alleged various breaches by us of the contract and asserted that it had suffered a significant amount of damages associated with its claims. Air Berlin has not commenced any formal action with respect to its claims. We believe that losses associated with these claims are neither probable nor estimable and therefore have not accrued any losses as of December 31, 2017. We may incur significant fees, costs and expenses for as long as this matter is ongoing. We intend to vigorously defend against these claims.
As previously disclosed, we became aware of an incident involving unauthorized access to payment information contained in a subset of hotel reservations processed through the HS Central Reservation System. Our investigation was supported by third party experts, including a leading cybersecurity firm. Our investigation determined that an unauthorized party: obtained access to account credentials that permitted access to a subset of hotel reservations processed through the HS Central Reservation System; used the account credentials to view a credit card summary page on the HS Central Reservation System and access payment card information (although we use encryption, this credential had the right to see unencrypted card data); and first obtained access to payment card information and some other reservation information on August 10, 2016. The last access to payment card information was on March 9, 2017. The unauthorized party was able to access information for certain hotel reservations, including cardholder name; payment card number; card expiration date; and, for a subset of reservations, card security code. The unauthorized party was also able, in some cases, to access certain information such as guest name(s), email, phone number, address, and other information if provided to the HS Central Reservation System. Information such as Social Security, passport, or driver’s license number was not accessed. The investigation did not uncover forensic evidence that the unauthorized party removed any information from the system, but it is a possibility. We took successful measures to ensure this unauthorized access to the HS Central Reservation System was stopped and is no longer possible. There is no indication that any of our systems beyond the HS Central Reservation System, such as Sabre’s Airline Solutions and Travel Network platforms, were affected or accessed by the unauthorized party. We notified law enforcement and the payment card brands, who engaged a PCI forensic investigator to investigate this incident. We have notified customers and other companies that use or interact with, directly or indirectly, the HS Central Reservation System about the incident. We are also cooperating with various governmental authorities that are investigating this incident. See “—Putative Class Action Lawsuit on Cybersecurity Incident” above for a discussion of a lawsuit filed in connection with this incident. Separately, in November 2017, Sabre Hospitality Solutions observed a pattern of activity that, after further investigation, led it to believe that an unauthorized party improperly obtained access to certain hotel user credentials for purposes of accessing the HS Central Reservation System. We deactivated the compromised accounts and notified law enforcement of this activity. We also notified the payment card brands, and at their request, we have engaged a PCI forensic investigator to investigate this incident. We have not found any evidence of a breach of the network security of the HS Central Reservation System, and we believe that the number of affected reservations represents only a fraction of 1% of the bookings in the HS Central Reservation System. Although the costs related to these incidents, including any associated penalties assessed by any governmental authority or payment card brand, as well as any other impacts or remediation related to this incident, may be material, it is not possible at this time to determine whether we will incur, or to reasonably estimate the amount of, any liabilities in connection with them. We maintain insurance that covers certain aspects of cyber risks, and we continue to work with our insurance carriers in these matters.
16. Segment Information
Our reportable segments are based upon our internal organizational structure; the manner in which our operations are managed; the criteria used by our Chief Executive Officer, who is our Chief Operating Decision Maker ("CODM"), to evaluate segment performance; the availability of separate financial information; and overall materiality considerations.
Our business has
two
reportable segments: (i) Travel Network and (ii) Airline and Hospitality Solutions, which aggregates the Airline Solutions and Hospitality Solutions operating segments as these operating segments have similar economic characteristics, generate revenues on transaction-based fees, incur the same types of expenses and use our software-as-a-service (“SaaS”) based and hosted applications and platforms to market to the travel industry. Beginning the first quarter of 2018, we plan to change our reporting segments and report our results as
three
segments: (i) Travel Network, (ii) Airline Solutions and (iii) Hospitality Solutions. See Note 18. Subsequent Event for additional information.
In January 2016 and April 2016, we completed the acquisitions of the Trust Group and Airpas Aviation, respectively, which are integrated and managed as part of our Airline and Hospitality Solutions segment. In July 2015, we acquired Abacus, which is managed as the APAC region of our Travel Network segment.
Our CODM utilizes Adjusted Gross Profit, Adjusted Operating Income and Adjusted EBITDA as the measures of profitability to evaluate performance of our segments and allocate resources. Corporate includes a technology organization that provides development and support activities to our segments. The majority of costs associated with our technology organization are allocated to the segments primarily based on the segments' usage of resources. Benefit expenses, facility costs and depreciation expense on the corporate headquarters building are allocated to the segments based on headcount. Unallocated corporate costs include certain shared expenses such as accounting, human resources, legal, corporate systems, other shared technology costs, amortization of intangible assets, impairment and related charges, stock-based compensation, restructuring charges, legal reserves, and other items not identifiable with one of our segments.
We account for significant intersegment transactions as if the transactions were with third parties, that is, at estimated current market prices. The majority of the intersegment revenues and cost of revenues are fees charged by Travel Network to Airline and Hospitality Solutions for airline trips booked through our GDS.
Our CODM does not review total assets by segment as operating evaluations and resource allocation decisions are not made on the basis of total assets by segment. Our CODM uses Adjusted Capital Expenditures in making product investment decisions and determining development resource requirements.
The performance of our segments is evaluated primarily on Adjusted Gross Profit, Adjusted Operating Income and Adjusted EBITDA which are not recognized terms under GAAP. Our uses of Adjusted Gross Profit, Adjusted Operating Income and Adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP.
We define Adjusted Gross Profit as operating income adjusted for selling, general and administrative expenses, impairment and related charges, amortization of upfront incentive consideration, the cost of revenue portion of depreciation and amortization, restructuring and other costs, and stock-based compensation included in cost of revenue.
We define Adjusted Operating Income as operating income adjusted for joint venture equity income, impairment and related charges, acquisition-related amortization, restructuring and other costs, acquisition-related costs, litigation (reimbursements) costs and stock-based compensation.
We define Adjusted EBITDA as income from continuing operations adjusted for depreciation and amortization of property and equipment, amortization of capitalized implementation costs, acquisition-related amortization, amortization of upfront incentive consideration, impairment and related charges, interest expense, net, other, net, restructuring and other costs, acquisition-related costs, litigation costs (reimbursements), net, stock-based compensation, loss on extinguishment of debt and provision for income taxes.
We define Adjusted Capital Expenditures as additions to property and equipment and capitalized implementation costs during the periods presented.
We define Adjusted Capital Expenditures as additions to property and equipment and capitalized implementation costs during the periods presented. Segment information for the years ended
December 31, 2017
,
2016
and
2015
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Revenue
|
|
|
|
|
|
Travel Network
|
$
|
2,550,470
|
|
|
$
|
2,374,849
|
|
|
$
|
2,102,792
|
|
Airline and Hospitality Solutions
|
1,074,360
|
|
|
1,019,306
|
|
|
872,086
|
|
Eliminations
|
(26,346
|
)
|
|
(20,768
|
)
|
|
(13,982
|
)
|
Total revenue
|
$
|
3,598,484
|
|
|
$
|
3,373,387
|
|
|
$
|
2,960,896
|
|
Adjusted Gross Profit
(a)
|
|
|
|
|
|
|
|
|
Travel Network
|
$
|
1,127,227
|
|
|
$
|
1,095,619
|
|
|
$
|
973,915
|
|
Airline and Hospitality Solutions
|
492,339
|
|
|
442,520
|
|
|
384,804
|
|
Corporate
|
(119,380
|
)
|
|
(77,464
|
)
|
|
(41,899
|
)
|
Total
|
$
|
1,500,186
|
|
|
$
|
1,460,675
|
|
|
$
|
1,316,820
|
|
Adjusted Operating Income
(b)
|
|
|
|
|
|
Travel Network
|
$
|
850,916
|
|
|
$
|
838,028
|
|
|
$
|
766,388
|
|
Airline and Hospitality Solutions
|
246,833
|
|
|
217,631
|
|
|
180,448
|
|
Corporate
|
(391,600
|
)
|
|
(335,298
|
)
|
|
(293,731
|
)
|
Total
|
$
|
706,149
|
|
|
$
|
720,361
|
|
|
$
|
653,105
|
|
Adjusted EBITDA
(c)
|
|
|
|
|
|
|
|
|
Travel Network
|
$
|
1,004,412
|
|
|
$
|
970,688
|
|
|
$
|
877,276
|
|
Airline and Hospitality Solutions
|
415,809
|
|
|
372,063
|
|
|
323,461
|
|
Total segments
|
1,420,221
|
|
|
1,342,751
|
|
|
1,200,737
|
|
Corporate
|
(341,650
|
)
|
|
(296,105
|
)
|
|
(259,150
|
)
|
Total
|
$
|
1,078,571
|
|
|
$
|
1,046,646
|
|
|
$
|
941,587
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
Travel Network
|
$
|
86,085
|
|
|
$
|
76,936
|
|
|
$
|
65,765
|
|
Airline and Hospitality Solutions
|
168,976
|
|
|
154,432
|
|
|
143,013
|
|
Total segments
|
255,061
|
|
|
231,368
|
|
|
208,778
|
|
Corporate
|
145,810
|
|
|
182,618
|
|
|
142,702
|
|
Total
|
$
|
400,871
|
|
|
$
|
413,986
|
|
|
$
|
351,480
|
|
Adjusted Capital Expenditures
(d)
|
|
|
|
|
|
|
|
|
Travel Network
|
$
|
90,881
|
|
|
$
|
97,798
|
|
|
$
|
73,469
|
|
Airline and Hospitality Solutions
|
221,156
|
|
|
252,367
|
|
|
226,260
|
|
Total segments
|
312,037
|
|
|
350,165
|
|
|
299,729
|
|
Corporate
|
65,165
|
|
|
60,887
|
|
|
50,350
|
|
Total
|
$
|
377,202
|
|
|
$
|
411,052
|
|
|
$
|
350,079
|
|
|
|
(a)
|
The following table sets forth the reconciliation of Adjusted Gross Profit to operating income in our statement of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Adjusted Gross Profit
|
$
|
1,500,186
|
|
|
$
|
1,460,675
|
|
|
$
|
1,316,820
|
|
Less adjustments:
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
510,075
|
|
|
626,153
|
|
|
557,077
|
|
Impairment and related charges
(7)
|
81,112
|
|
|
—
|
|
|
—
|
|
Cost of revenue adjustments:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
(1)
|
317,812
|
|
|
287,353
|
|
|
244,535
|
|
Amortization of upfront incentive consideration
(2)
|
67,411
|
|
|
55,724
|
|
|
43,521
|
|
Restructuring and other costs
(4)
|
12,604
|
|
|
12,660
|
|
|
—
|
|
Stock-based compensation
|
17,732
|
|
|
19,213
|
|
|
11,918
|
|
Operating income
|
$
|
493,440
|
|
|
$
|
459,572
|
|
|
$
|
459,769
|
|
|
|
(b)
|
The following table sets forth the reconciliation of Adjusted Operating Income to operating income in our statement of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Adjusted Operating income
|
$
|
706,149
|
|
|
$
|
720,361
|
|
|
$
|
653,105
|
|
Less adjustments:
|
|
|
|
|
|
Joint venture equity income
|
2,580
|
|
|
2,780
|
|
|
14,842
|
|
Impairment and related charges
(7)
|
81,112
|
|
|
—
|
|
|
—
|
|
Acquisition-related amortization
(1c)
|
95,860
|
|
|
143,425
|
|
|
108,121
|
|
Restructuring and other costs
(4)
|
23,975
|
|
|
18,286
|
|
|
9,256
|
|
Acquisition-related costs
(5)
|
—
|
|
|
779
|
|
|
14,437
|
|
Litigation (reimbursements) costs
(6)
|
(35,507
|
)
|
|
46,995
|
|
|
16,709
|
|
Stock-based compensation
|
44,689
|
|
|
48,524
|
|
|
29,971
|
|
Operating income
|
$
|
493,440
|
|
|
$
|
459,572
|
|
|
$
|
459,769
|
|
|
|
(c)
|
The following table sets forth the reconciliation of Adjusted EBITDA to income from continuing operations in our statement of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Adjusted EBITDA
|
$
|
1,078,571
|
|
|
$
|
1,046,646
|
|
|
$
|
941,587
|
|
Less adjustments:
|
|
|
|
|
|
|
|
|
Impairment and related charges
(7)
|
81,112
|
|
|
—
|
|
|
—
|
|
Depreciation and amortization of property and equipment
(1a)
|
264,880
|
|
|
233,303
|
|
|
213,520
|
|
Amortization of capitalized implementation costs
(1b)
|
40,131
|
|
|
37,258
|
|
|
31,441
|
|
Acquisition-related amortization
(1c)
|
95,860
|
|
|
143,425
|
|
|
108,121
|
|
Amortization of upfront incentive consideration
(2)
|
67,411
|
|
|
55,724
|
|
|
43,521
|
|
Interest expense, net
|
153,925
|
|
|
158,251
|
|
|
173,298
|
|
Loss on extinguishment of debt
|
1,012
|
|
|
3,683
|
|
|
38,783
|
|
Other, net
(3)
|
(36,530
|
)
|
|
(27,617
|
)
|
|
(91,377
|
)
|
Restructuring and other costs
(4)
|
23,975
|
|
|
18,286
|
|
|
9,256
|
|
Acquisition-related costs
(5)
|
—
|
|
|
779
|
|
|
14,437
|
|
Litigation (reimbursements) costs
(6)
|
(35,507
|
)
|
|
46,995
|
|
|
16,709
|
|
Stock-based compensation
|
44,689
|
|
|
48,524
|
|
|
29,971
|
|
Provision for income taxes
(8)
|
128,037
|
|
|
86,645
|
|
|
119,352
|
|
Income from continuing operations
|
$
|
249,576
|
|
|
$
|
241,390
|
|
|
$
|
234,555
|
|
________________________
|
|
(1)
|
Depreciation and amortization expenses (see Note
1. Summary of Business and Significant Accounting Policies
for associated asset lives):
|
|
|
a.
|
Depreciation and amortization of property and equipment includes software developed for internal use.
|
|
|
b.
|
Amortization of capitalized implementation costs represents amortization of upfront costs to implement new customer contracts under our SaaS and hosted revenue model.
|
|
|
c.
|
Acquisition-related amortization represents amortization of intangible assets from the take-private transaction in 2007 as well as intangibles associated with acquisitions since that date. Also includes amortization of the excess basis in our underlying equity interest in SAPPL's net assets prior to our acquisition of SAPPL on July 1, 2015.
|
|
|
(2)
|
Our Travel Network business at times makes upfront cash payments or other consideration to travel agency subscribers at the inception or modification of a service contract, which are capitalized and amortized over an average expected life of the service contract, generally over
three
to
five
years. This consideration is made with the objective of increasing the number of clients or to ensure or improve customer loyalty. These service contract terms are established such that the supplier and other fees generated over the life of the contract will exceed the cost of the incentive consideration provided up front. These service contracts with travel agency subscribers require that the customer commit to achieving certain economic objectives and generally have terms requiring repayment of the upfront incentive consideration if those objectives are not met.
|
|
|
(3)
|
In 2017, Other, net includes a benefit of
$60 million
due to a reduction to our liability under the TRA primarily due to a provisional adjustment resulting from the enactment of TCJA in December 2017 which reduced the U.S. corporate income tax rate (see Note
7. Income Taxes
), offset by a loss of
$15 million
related to debt modification costs associated with debt refinancing. In 2016, we recognized a gain of
$15 million
from the sale of our available-for-sale marketable securities, and a
$6 million
gain associated with the receipt of an earn-out payment from the sale of a business in 2013. Additionally, in 2015, we recognized a gain of
$78 million
associated with the remeasurement of our previously-held
35%
investment in SAPPL to its fair value and a gain of
$12 million
related to the settlement of pre-existing agreements between us and SAPPL.
|
|
|
(4)
|
Restructuring and other costs represents charges associated with business restructuring and associated changes implemented which resulted in severance benefits related to employee terminations, integration and facility opening or closing costs and other business reorganization costs. We recorded
$25 million
and
$20 million
in charges associated with an announced action to reduce our workforce in 2017 and 2016, respectively. These reductions aligned our operations with business needs and implemented an ongoing cost and organizational structure consistent with our expected growth needs and opportunities. In 2015, we recognized a restructuring charge of
$9 million
associated with the integration of Abacus, and reduced that estimate by
$4 million
in 2016, as a result of the reevaluation of our plan derived from a shift in timing and strategy of originally contemplated actions. As of December 31, 2017, our actions under this plan have been substantially completed and payments under the plan have been made.
|
|
|
(5)
|
Acquisition-related costs represent fees and expenses incurred associated with the acquisition of Abacus, the Trust Group and Airpas Aviation. See Note
2. Acquisitions
.
|
|
|
(6)
|
Litigation (reimbursements) costs, net represent charges and legal fee reimbursements associated with antitrust litigation. In 2017, we recorded a
$43 million
reimbursement, net of accrued legal and related expenses, from a settlement with our insurance carriers with respect to the American Airlines litigation. In 2016, we recorded an accrual of
$32 million
representing the trebling of the jury award plus our estimate of attorneys’ fees, expenses and costs in the US Airways litigation. See Note
15. Commitments and Contingencies
.
|
|
|
(7)
|
Impairment and related charges represents an
$81 million
impairment charge recorded in 2017 associated with net capitalized contract costs related to an Airline Solutions' customer based on our analysis of the recoverability of such amounts. See Note
4. Impairment and Related Charges
for additional information.
|
|
|
(8)
|
In 2017, provision for income taxes includes a provisional impact of
$47 million
recognized in the fourth quarter of 2017 as a result of the enactment of the TCJA in December 2017. See Note
7. Income Taxes
.
|
|
|
(d)
|
Includes capital expenditures and capitalized implementation costs as summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Additions to property and equipment
|
$
|
316,436
|
|
|
$
|
327,647
|
|
|
$
|
286,697
|
|
Capitalized implementation costs
|
60,766
|
|
|
83,405
|
|
|
63,382
|
|
Adjusted Capital Expenditures
|
$
|
377,202
|
|
|
$
|
411,052
|
|
|
$
|
350,079
|
|
A significant portion of our revenue is generated through transaction-based fees that we charge to our customers. For Travel Network, this fee is in the form of a transaction fee for bookings on our GDS; for Airline and Hospitality Solutions, this fee is a recurring usage-based fee for the use of our SaaS and hosted systems, as well as implementation fees and professional service fees. Transaction-based revenue accounted for approximately
95%
,
95%
and
92%
of our Travel Network revenue for the years ended
December 31, 2017
,
2016
and
2015
, respectively. Transaction-based revenue accounted for approximately
72%
,
73%
and
70%
for the years ended
December 31, 2017
,
2016
and
2015
, respectively, of our Airline and Hospitality Solutions revenue.
All joint venture equity income relates to Travel Network.
Our revenues and long-lived assets, excluding goodwill and intangible assets, by geographic region are summarized below. Revenue of our Travel Network business is attributed to countries based on the location of the travel supplier. For Airline and Hospitality Solutions, revenue is attributed to countries based on the location of the customer.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Revenue:
|
|
|
|
|
|
|
|
|
United States
|
$
|
1,340,893
|
|
|
$
|
1,257,685
|
|
|
$
|
1,182,056
|
|
Europe
|
777,406
|
|
|
699,168
|
|
|
581,762
|
|
APAC
|
715,740
|
|
|
657,465
|
|
|
497,518
|
|
All other
|
764,445
|
|
|
759,069
|
|
|
699,560
|
|
Total
|
$
|
3,598,484
|
|
|
$
|
3,373,387
|
|
|
$
|
2,960,896
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2017
|
|
2016
|
Long-lived assets
|
|
|
|
|
|
United States
|
$
|
776,102
|
|
|
$
|
726,021
|
|
APAC
|
11,468
|
|
|
13,330
|
|
Europe
|
3,939
|
|
|
5,922
|
|
All other
|
7,685
|
|
|
8,006
|
|
Total
|
$
|
799,194
|
|
|
$
|
753,279
|
|
17. Quarterly Financial Information (Unaudited)
A summary of our quarterly financial results for the years ended
December 31, 2017
and
2016
is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
Revenue
|
$
|
915,353
|
|
|
$
|
900,663
|
|
|
$
|
900,606
|
|
|
$
|
881,862
|
|
Operating income
|
163,326
|
|
|
18,718
|
|
|
176,796
|
|
|
134,600
|
|
Income (loss) from continuing operations
|
77,722
|
|
|
(4,152
|
)
|
|
92,825
|
|
|
83,181
|
|
(Loss) income from discontinued operations, net of tax
|
(477
|
)
|
|
(1,222
|
)
|
|
(529
|
)
|
|
296
|
|
Net income (loss)
|
77,245
|
|
|
(5,374
|
)
|
|
92,296
|
|
|
83,477
|
|
Net income (loss) attributable to common stockholders
|
75,939
|
|
|
(6,487
|
)
|
|
90,989
|
|
|
82,090
|
|
Net income (loss) per share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
0.28
|
|
|
(0.02
|
)
|
|
0.33
|
|
|
0.30
|
|
Diluted
|
0.27
|
|
|
(0.02
|
)
|
|
0.33
|
|
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
Revenue
|
$
|
859,543
|
|
|
$
|
845,242
|
|
|
$
|
838,982
|
|
|
$
|
829,620
|
|
Operating income
|
171,422
|
|
|
142,039
|
|
|
90,150
|
|
|
55,961
|
|
Income from continuing operations
|
134,343
|
|
|
106,468
|
|
|
49,464
|
|
|
31,020
|
|
Income (loss) from discontinued operations, net of tax
|
13,350
|
|
|
(2,098
|
)
|
|
(394
|
)
|
|
(5,309
|
)
|
Net income
|
106,269
|
|
|
73,097
|
|
|
41,862
|
|
|
25,711
|
|
Net income attributable to common stockholders
|
105,167
|
|
|
72,019
|
|
|
40,815
|
|
|
24,561
|
|
Net income per share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
0.38
|
|
|
0.26
|
|
|
0.15
|
|
|
0.09
|
|
Diluted
|
0.37
|
|
|
0.25
|
|
|
0.14
|
|
|
0.09
|
|
18. Subsequent Event
Effective the first quarter of 2018, we plan to disaggregate the Airline and Hospitality Solutions reportable segment, such that our business will have
three
reportable segments comprised of: (i) Travel Network, (ii) Airline Solutions and (iii) Hospitality Solutions. In conjunction with this change, we plan to modify the methodology we have historically used to allocate shared corporate technology costs. Each segment will reflect a portion of our shared corporate costs that historically were not allocated to a business unit, based on relative consumption of shared technology infrastructure costs and defined revenue metrics. These changes will have no impact on our consolidated results of operations, but will result in a decrease of segment profitability only, which will align with information that our CODM plans to utilize beginning in 2018 to evaluate segment performance and allocate resources.