UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
September 30, 2009
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number
001-33599
ORBITZ WORLDWIDE,
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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20-5337455
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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500 W. Madison Street
Suite 1000
Chicago, Illinois
(Address of principal executive
offices)
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60661
(Zip Code)
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(312) 894-5000
(Registrants telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act.
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
(Do not check if a smaller
reporting company)
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Smaller reporting
company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of November 5, 2009, 83,746,497 shares of Common
Stock, par value $0.01 per share, of Orbitz Worldwide, Inc. were
outstanding.
Forward-Looking
Statements
This Quarterly Report on
Form 10-Q
and its exhibits contain forward-looking statements that are
subject to risks, uncertainties and other factors that may cause
our actual results, performance or achievements to be materially
different than the results, performance or achievements
expressed or implied by the forward-looking statements.
Forward-looking statements include statements about our
expectations, beliefs, plans, objectives, intentions,
assumptions and other statements that are not historical facts.
Forward-looking statements can generally be identified by
phrases such as believes, expects,
potential, continues, may,
should, seeks, predicts,
anticipates, intends,
projects, estimates, plans,
could, designed, should be
and other similar expressions that denote expectations of future
or conditional events rather than statements of fact.
Forward-looking statements also may relate to our operations,
financial results, financial condition, business prospects,
growth strategy and liquidity. Our actual results could differ
materially from those anticipated in forward-looking statements
for many reasons, including the factors described in the
sections entitled Risk Factors in our 2008 Annual
Report on
Form 10-K
filed with the Securities and Exchange Commission on
March 11, 2009 and Managements Discussion and
Analysis of Financial Condition and Results of Operations
in this Quarterly Report on
Form 10-Q
and in our 2008 Annual Report on
Form 10-K.
Accordingly, you should not unduly rely on these forward-looking
statements. We undertake no obligation to update any
forward-looking statements in this Quarterly Report on
Form 10-Q.
The use of the words we, us,
our and the Company in this Quarterly
Report on
Form 10-Q
refers to Orbitz Worldwide, Inc. and its subsidiaries, except
where the context otherwise requires or indicates.
3
PART I
FINANCIAL INFORMATION
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Item 1.
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Financial
Statements.
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ORBITZ
WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in millions, except share and per share data)
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2009
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2008
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2009
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2008
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Net revenue
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$
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187
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$
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240
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$
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563
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$
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690
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Cost and expenses
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Cost of revenue
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34
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41
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103
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130
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Selling, general and administrative
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65
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75
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190
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224
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Marketing
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48
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86
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166
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252
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Depreciation and amortization
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18
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17
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51
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49
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Impairment of goodwill and intangible assets
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297
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332
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297
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Total operating expenses
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165
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516
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842
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952
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Operating income (loss)
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22
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(276
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)
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(279
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)
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(262
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)
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Other income (expense)
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Interest expense, net
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(14
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)
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(16
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)
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(43
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)
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(47
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Gain on extinguishment of debt
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2
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Total other (expense)
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(14
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)
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(16
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)
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(41
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)
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(47
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Income (loss) before income taxes
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8
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(292
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)
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(320
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)
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(309
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)
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Provision (benefit) for income taxes
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1
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(5
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)
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(1
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(2
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Net income (loss)
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$
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7
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$
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(287
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)
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$
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(319
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)
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$
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(307
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)
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Net income (loss) per share basic:
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Net income (loss) per share
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$
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0.08
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$
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(3.44
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)
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$
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(3.80
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)
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$
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(3.69
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)
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Weighted average shares outstanding
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84,377,943
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83,413,369
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83,951,081
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83,273,050
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Net income (loss) per share diluted:
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Net income (loss) per share
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$
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0.08
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$
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(3.44
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)
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$
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(3.80
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)
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$
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(3.69
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)
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Weighted average shares outstanding
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86,547,214
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83,413,369
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83,951,081
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83,273,050
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See Notes to Unaudited Condensed Consolidated Financial
Statements.
4
ORBITZ
WORLDWIDE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in millions, except share data)
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September 30,
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December 31,
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2009
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2008
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Assets
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Current assets:
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Cash and cash equivalents
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$
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122
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$
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31
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Accounts receivable (net of allowance for doubtful accounts of
$1 and $1, respectively)
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63
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58
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Prepaid expenses
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15
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17
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Deferred income taxes, current
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10
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6
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Due from Travelport, net
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10
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10
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Other current assets
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8
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6
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Total current assets
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228
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128
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Property and equipment, net
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182
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190
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Goodwill
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712
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949
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Trademarks and trade names
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155
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232
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Other intangible assets, net
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23
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34
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Deferred income taxes, non-current
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13
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9
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Other non-current assets
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49
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48
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Total Assets
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$
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1,362
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$
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1,590
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Liabilities and Shareholders Equity
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Current liabilities:
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Accounts payable
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$
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32
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$
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37
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Accrued merchant payable
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242
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205
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Accrued expenses
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108
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106
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Deferred income
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38
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23
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Term loan, current
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6
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6
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Other current liabilities
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12
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9
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Total current liabilities
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438
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386
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Term loan, non-current
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572
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587
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Line of credit
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63
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21
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Tax sharing liability
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107
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109
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Unfavorable contracts
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11
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13
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Other non-current liabilities
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30
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36
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Total Liabilities
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1,221
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1,152
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Commitments and contingencies (see Note 10)
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Shareholders Equity:
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Preferred stock, $0.01 par value, 100 shares
authorized, no shares issued or outstanding
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Common stock, $0.01 par value, 140,000,000 shares
authorized, 83,740,897
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and 83,345,437 shares issued and outstanding, respectively
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1
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1
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Treasury stock, at cost, 24,197 and 18,055 shares held,
respectively
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Additional paid in capital
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919
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908
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Accumulated deficit
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(769
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)
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(450
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)
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Accumulated other comprehensive loss (net of accumulated tax
benefit of $2 and $2, respectively)
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(10
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)
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|
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(21
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)
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|
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Total Shareholders Equity
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141
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438
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Total Liabilities and Shareholders Equity
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$
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1,362
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$
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1,590
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See Notes to Unaudited Condensed Consolidated Financial
Statements.
5
ORBITZ
WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in millions)
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Nine Months Ended
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September 30,
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2009
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2008
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Operating activities:
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|
|
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Net loss
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$
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(319
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)
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$
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(307
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)
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Adjustments to reconcile net loss to net cash provided by
operating activities:
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Gain on extinguishment of debt
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(2
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)
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|
|
|
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Depreciation and amortization
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51
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|
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49
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Impairment of goodwill and intangible assets
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|
332
|
|
|
|
297
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Non-cash revenue
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|
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(2
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)
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|
|
(2
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)
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Non-cash interest expense
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|
12
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|
|
|
14
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Deferred income taxes
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|
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(5
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)
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|
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(3
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)
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Stock compensation
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11
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|
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|
12
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Changes in assets and liabilities:
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Accounts receivable
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(4
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)
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(8
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)
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Deferred income
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15
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13
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Due to/from Travelport, net
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(18
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)
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Accrued merchant payable
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27
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|
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|
54
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Accounts payable, accrued expenses and other current liabilities
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|
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(9
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)
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18
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Other
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(3
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)
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|
|
2
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|
|
|
|
|
|
|
|
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Net cash provided by operating activities
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104
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|
|
|
121
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|
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|
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Investing activities:
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|
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|
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Property and equipment additions
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(31
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)
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|
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(42
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)
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|
|
|
|
|
|
|
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Net cash (used in) investing activities
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|
|
(31
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)
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|
|
(42
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)
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|
|
|
|
|
|
|
|
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Financing activities:
|
|
|
|
|
|
|
|
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Capital lease payments and principal payments on the term loan
|
|
|
(5
|
)
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|
|
(6
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)
|
Payments to extinguish debt
|
|
|
(8
|
)
|
|
|
|
|
Payments to satisfy employee tax withholding obligations upon
vesting of equity-based awards
|
|
|
|
|
|
|
(1
|
)
|
Payments on tax sharing liability
|
|
|
(11
|
)
|
|
|
(17
|
)
|
Proceeds from line of credit
|
|
|
100
|
|
|
|
54
|
|
Payments on line of credit
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|
|
(60
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)
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|
|
(30
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)
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|
|
|
|
|
|
|
|
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Net cash provided by financing activities
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|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Effects of changes in exchange rates on cash and cash equivalents
|
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|
2
|
|
|
|
(1
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)
|
|
|
|
|
|
|
|
|
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Net increase in cash and cash equivalents
|
|
|
91
|
|
|
|
78
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|
Cash and cash equivalents at beginning of period
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|
31
|
|
|
|
25
|
|
|
|
|
|
|
|
|
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Cash and cash equivalents at end of period
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$
|
122
|
|
|
$
|
103
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|
|
|
|
|
|
|
|
|
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Supplemental disclosure of cash flow information:
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|
|
|
|
|
|
|
|
Income tax payments (refunds), net
|
|
$
|
2
|
|
|
$
|
(3
|
)
|
Cash interest payments, net of capitalized interest of almost
nil and almost nil, respectively
|
|
$
|
32
|
|
|
$
|
35
|
|
Non-cash investing activity:
|
|
|
|
|
|
|
|
|
Capital expenditures incurred not yet paid
|
|
|
|
|
|
$
|
2
|
|
See Notes to Unaudited Condensed Consolidated Financial
Statements.
6
ORBITZ
WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Net income (loss)
|
|
$
|
7
|
|
|
$
|
(287
|
)
|
|
$
|
(319
|
)
|
|
$
|
(307
|
)
|
Other comprehensive income (loss), net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment
|
|
|
7
|
|
|
|
(28
|
)
|
|
|
5
|
|
|
|
(9
|
)
|
Unrealized gains on floating to fixed interest rate swaps (net
of tax benefit of $0, almost nil, $0 and $0, respectively)
|
|
|
2
|
|
|
|
2
|
|
|
|
6
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
9
|
|
|
|
(26
|
)
|
|
|
11
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
16
|
|
|
$
|
(313
|
)
|
|
$
|
(308
|
)
|
|
$
|
(313
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Condensed Consolidated Financial
Statements.
7
ORBITZ
WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENT OF
SHAREHOLDERS EQUITY (UNAUDITED)
(in millions, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Loss
|
|
|
Equity
|
|
|
Balance at December 31, 2008
|
|
|
83,345,437
|
|
|
$
|
1
|
|
|
$
|
908
|
|
|
$
|
(450
|
)
|
|
$
|
(21
|
)
|
|
$
|
438
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(319
|
)
|
|
|
|
|
|
|
(319
|
)
|
Amortization of equity-based compensation awards granted to
employees, net of shares withheld to satisfy employee tax
withholding obligations upon vesting
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
Common shares issued upon vesting of restricted stock units
|
|
|
395,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued upon exercise of stock options
|
|
|
5,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares withheld to satisfy employee tax withholding
obligations upon vesting of restricted stock
|
|
|
(4,129
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock forfeited
|
|
|
(2,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax benefit of $0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2009
|
|
|
83,740,897
|
|
|
$
|
1
|
|
|
$
|
919
|
|
|
$
|
(769
|
)
|
|
$
|
(10
|
)
|
|
$
|
141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Condensed Consolidated Financial
Statements.
8
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Description
of the Business
Orbitz, Inc. (Orbitz) was formed in early 2000 by
American Airlines, Inc., Continental Airlines, Inc., Delta Air
Lines, Inc., Northwest Airlines, Inc. and United Air Lines, Inc.
(the Founding Airlines). In November 2004, Orbitz
was acquired by Cendant Corporation (Cendant), whose
online travel distribution businesses included the CheapTickets,
HotelClub and RatesToGo brands. In February 2005, Cendant
acquired ebookers Limited, an international online travel brand
which currently has operations in 12 countries throughout Europe
(ebookers).
On August 23, 2006, Travelport Limited
(Travelport), which consisted of Cendants
travel distribution services businesses, including the
businesses that currently comprise Orbitz Worldwide, Inc., was
acquired by affiliates of The Blackstone Group
(Blackstone) and Technology Crossover Ventures
(TCV). We refer to this acquisition as the
Blackstone Acquisition in this
Form 10-Q.
Orbitz Worldwide, Inc. was incorporated in Delaware on
June 18, 2007 and was formed to be the parent company of
the
business-to-consumer
travel businesses of Travelport, including Orbitz, ebookers and
Travel Acquisition Corporation Pty. Ltd. (HotelClub)
and the related subsidiaries and affiliates of those businesses.
We are the registrant as a result of the completion of our
initial public offering (IPO) of
34,000,000 shares of our common stock on July 25,
2007. At September 30, 2009 and December 31, 2008,
Travelport and investment funds that own
and/or
control Travelports ultimate parent company beneficially
owned approximately 57% and 58% of our outstanding common stock,
respectively.
We are a leading global online travel company that uses
innovative technology to enable leisure and business travelers
to search for and book a broad range of travel products. Our
brand portfolio includes Orbitz, CheapTickets, the Away Network,
and Orbitz for Business in the Americas; ebookers in Europe; and
HotelClub and RatesToGo based in Sydney, Australia, which have
operations globally. We provide customers with the ability to
book a comprehensive set of travel products from suppliers
worldwide, including air travel, hotels, vacation packages, car
rentals, cruises, travel insurance and destination services such
as ground transportation, event tickets and tours.
Basis of
Presentation
The accompanying unaudited condensed consolidated financial
statements present the accounts of Orbitz, ebookers and
HotelClub and the related subsidiaries and affiliates of those
businesses, collectively doing business as Orbitz Worldwide,
Inc. These entities became wholly owned subsidiaries of ours as
part of an intercompany restructuring that was completed on
July 18, 2007 (the Reorganization) in
connection with the IPO. Prior to the IPO, these entities had
operated as indirect, wholly-owned subsidiaries of Travelport.
Travelport is beneficially owned by affiliates of Blackstone,
TCV and One Equity Partners.
We have prepared the accompanying unaudited condensed
consolidated financial statements in accordance with the rules
and regulations of the Securities and Exchange Commission
(SEC). These financial statements include all
adjustments that are, in the opinion of management, necessary
for a fair presentation of our financial position and results of
operations for the interim periods presented. All such
adjustments are of a normal and recurring nature. Certain
information and footnote disclosures normally included in
financial statements prepared in accordance with accounting
principles generally accepted in the United States of America
(GAAP) have been condensed or omitted pursuant to
SEC rules and regulations for interim reporting. These condensed
consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and
accompanying notes included in our 2008 Annual Report on
Form 10-K
filed with the SEC on March 11, 2009.
9
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The preparation of our condensed consolidated financial
statements in conformity with GAAP requires us to make certain
estimates and assumptions. Our estimates and assumptions affect
the reported amounts of assets and liabilities, the disclosure
of contingent assets and liabilities as of the date of our
condensed consolidated financial statements and the reported
amounts of revenue and expense during the reporting periods.
Actual results could differ from our estimates.
|
|
2.
|
Recently
Issued Accounting Pronouncements
|
In September 2006, the Financial Accounting Standards Board
(FASB) issued guidance that defines fair value,
establishes a framework for measuring fair value and expands
disclosure about fair value measurements. This guidance, as it
applies to non-financial assets and non-financial liabilities
that are recognized at fair value on a nonrecurring basis, was
effective beginning on January 1, 2009. Our adoption of
this guidance for our non-financial assets and non-financial
liabilities did not have a material impact on our consolidated
financial position or results of operations.
In December 2007, the FASB issued updated guidance that
establishes principles and requirements for the reporting entity
in a business combination, including recognition and measurement
in the financial statements of the identifiable assets acquired,
the liabilities assumed, and any non-controlling interest in the
acquiree. This guidance also establishes disclosure requirements
to enable financial statement users to evaluate the nature and
financial effects of the business combination. We adopted this
guidance on January 1, 2009. Our adoption of this guidance
will not have an effect on our consolidated financial statements
unless we enter into a business combination or reduce our
deferred tax valuation allowance that was established in
purchase accounting. At December 31, 2008,
$272 million of our deferred income tax valuation allowance
was originally established in purchase accounting. Prior to our
adoption of this guidance, any reductions in our remaining
deferred income tax valuation allowance that was originally
established in purchase accounting were recorded through
goodwill. Beginning January 1, 2009, these reductions are
recorded through our consolidated statement of operations.
In December 2007, the FASB issued updated guidance that
establishes accounting and reporting standards for the
noncontrolling interest (previously referred to as minority
interest) in a subsidiary and for the deconsolidation of a
subsidiary. This guidance requires that noncontrolling interests
be classified as a separate component of equity in the
consolidated financial statements and requires that the amount
of net income attributable to noncontrolling interests be
included in consolidated net income. This guidance was effective
January 1, 2009 on a prospective basis, except for the
presentation and disclosure requirements, which are applied
retrospectively. Our adoption of this guidance did not have a
material impact on our consolidated financial position or
results of operations.
In March 2008, the FASB issued guidance that changes the
disclosure requirements for derivative instruments and hedging
activities previously identified. This guidance provides for
enhanced disclosures regarding (a) how and why an entity
uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for and (c) how
derivative instruments and related hedged items affect an
entitys financial position, financial performance, and
cash flows. We adopted this guidance on January 1, 2009.
Our adoption of this guidance did not have an impact on our
consolidated financial position or results of operations.
In June 2008, the FASB issued guidance that states that unvested
share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are
participating securities and shall be included in the
computation of earnings per share using the two-class method.
This guidance also requires all prior period earnings per share
data presented to be adjusted retrospectively. We adopted this
guidance on January 1, 2009, and it did not have an impact
on our consolidated financial statements or calculation of
earnings per share.
10
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In April 2009, the FASB issued guidance that requires
disclosures about the fair value of financial instruments for
interim reporting periods and in annual financial statements.
This guidance is effective for interim reporting periods ending
after June 15, 2009. Our adoption of this guidance did not
have an impact on our consolidated financial position or results
of operations. The applicable disclosures are included in
Note 16 Fair Value.
In May 2009, the FASB issued guidance that establishes general
standards of accounting for and disclosure of events that occur
after the balance sheet date but before financial statements are
issued or available to be issued. This guidance sets forth the
period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial
statements, the circumstances under which an entity should
recognize events or transactions occurring after the balance
sheet date in its financial statements, and the disclosures that
an entity should make about events or transactions that occurred
after the balance sheet date. This guidance was effective for
interim or annual periods ending after June 15, 2009. Our
adoption of this guidance did not have an impact on our
consolidated financial position or results of operations.
In June 2009, the FASB issued The FASB Accounting Standards
Codificationtm
and the Hierarchy of Generally Accepted Accounting Principles,
which identifies the sources of accounting principles and the
framework for selecting principles used in the preparation of
financial statements of nongovernmental entities that are
presented in conformity with GAAP in the United States. This
guidance replaces the old Hierarchy of Generally Accepted
Accounting Principles as the source of authoritative
accounting principles recognized by the FASB. The new
codification is effective for interim and annual periods ending
after September 15, 2009. Our adoption of the new
codification did not have an impact on our consolidated
financial position or results of operations.
In August 2009, the FASB issued guidance that addresses the
impact of transfer restrictions on the fair value of a liability
and the ability to use the fair value of a liability that is
traded as an asset as an input to the valuation of the
underlying liability. The guidance also clarifies the
application of certain valuation techniques, including when to
make adjustments to fair value. This guidance is effective in
the fourth quarter of 2009. We do not expect the adoption of
this guidance to have a material impact on our consolidated
financial position or results of operations.
In September 2009, the FASB issued guidance that allows
companies to allocate arrangement consideration in a multiple
element arrangement in a way that better reflects the
transaction economics. It provides another alternative for
establishing fair value for a deliverable when vendor specific
objective evidence or third party evidence for deliverables in
an arrangement cannot be determined. When this evidence cannot
be determined, companies will be required to develop a best
estimate of the selling price to separate deliverables and
allocate arrangement consideration using the relative selling
price method. The guidance also expands the disclosure
requirements to require that an entity provide both qualitative
and quantitative information about the significant judgments
made in applying this guidance. This guidance is effective on a
prospective basis for revenue arrangements entered into or
materially modified on or after January 1, 2011. We are
currently assessing the impact of this guidance on our financial
position and results of operations.
|
|
3.
|
Impairment
of Goodwill and Intangible Assets
|
In accordance with the FASBs guidance on goodwill and
other intangible assets, we assess the carrying value of
goodwill and other indefinite-lived intangible assets for
impairment annually, or more frequently whenever events occur
and circumstances change indicating potential impairment. Refer
to Note 2 to the Consolidated Financial Statements
contained in our 2008 Annual Report on
Form 10-K
for further information on our accounting policy for goodwill,
indefinite-lived intangible assets and finite-lived intangible
assets.
11
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the three months ended March 31, 2009, we
experienced a significant decline in our stock price, and
economic and industry conditions continued to weaken. These
factors, coupled with an increase in competitive pressures,
indicated potential impairment of our goodwill and trademarks
and trade names. As a result, in connection with the preparation
of our financial statements for the first quarter of 2009, we
performed an interim impairment test of goodwill and trademarks
and trade names.
For purposes of testing goodwill for potential impairment, we
estimated the fair value of the applicable reporting units to
which all goodwill is allocated using generally accepted
valuation methodologies, including market and income based
approaches, and relevant data available through and as of
March 31, 2009. The market approach is a valuation method
in which fair value is estimated based on observed prices in
actual transactions and on asking prices for similar assets.
Under the market approach, the valuation process is essentially
that of comparison and correlation between the subject asset and
other similar assets. The income approach is a method in which
fair value is estimated based on the cash flows that an asset
could be expected to generate over its useful life, including
residual value cash flows. These cash flows are then discounted
to their present value equivalents using a rate of return that
accounts for the relative risk of not realizing the estimated
annual cash flows and for the time value of money. Variations of
the income approach were used to estimate certain of the
intangible asset fair values.
For purposes of testing trademarks and trade names for
impairment, we used appropriate valuation techniques to
separately estimate the fair values of all of our
indefinite-lived intangible assets as of March 31, 2009 and
compared those estimates to the respective carrying values. Our
indefinite-lived intangible assets are comprised of trademarks
and trade names. We used an income valuation approach, as
described above, to estimate fair values of the relevant
trademarks and trade names. The key inputs to the discounted
cash flow model were our historical and estimated future
revenues, an assumed royalty rate, and the discount rate, among
others. While certain of these inputs are observable,
significant judgment was required to select certain inputs from
observed market data.
As part of our interim impairment test, we were required to
determine the fair values of our finite-lived intangible assets,
including our customer and vendor relationships, as of
March 31, 2009. We determined the fair values of our
finite-lived intangible assets by discounting the estimated
future cash flows of these assets.
As a result of this testing, we concluded that the goodwill and
trademarks and trade names related to both our domestic and
international subsidiaries were impaired. Accordingly, we
recorded a non-cash impairment charge of $332 million in
the first quarter of 2009, of which $250 million related to
goodwill and $82 million related to trademarks and trade
names. This charge is included in the impairment of goodwill and
intangible assets expense line item in our condensed
consolidated statement of operations for the nine months ended
September 30, 2009.
Due to the current economic uncertainty and other factors, we
cannot assure that the remaining amounts of goodwill,
indefinite-lived intangible assets and finite-lived intangible
assets will not be further impaired in future periods.
12
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
4.
|
Property
and Equipment, Net
|
Property and equipment, net, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
(in millions)
|
|
|
Capitalized software
|
|
$
|
209
|
|
|
$
|
188
|
|
Furniture, fixtures and equipment
|
|
|
65
|
|
|
|
60
|
|
Leasehold improvements
|
|
|
14
|
|
|
|
13
|
|
Construction in progress
|
|
|
17
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
Gross property and equipment
|
|
|
305
|
|
|
|
276
|
|
Less: accumulated depreciation and amortization
|
|
|
(123
|
)
|
|
|
(86
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
182
|
|
|
$
|
190
|
|
|
|
|
|
|
|
|
|
|
We recorded depreciation and amortization expense related to
property and equipment in the amount of $14 million and
$12 million for the three months ended September 30,
2009 and September 30, 2008, respectively, and
$38 million and $34 million for the nine months ended
September 30, 2009 and September 30, 2008,
respectively.
|
|
5.
|
Goodwill
and Intangible Assets
|
Goodwill and indefinite-lived intangible assets consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
(in millions)
|
|
|
Goodwill and Indefinite-Lived Intangible Assets:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
712
|
|
|
$
|
949
|
|
Trademarks and trade names
|
|
|
155
|
|
|
|
232
|
|
The changes in the carrying amount of goodwill during the nine
months ended September 30, 2009 were as follows:
|
|
|
|
|
|
|
Amount
|
|
|
|
(in millions)
|
|
|
Balance at December 31, 2008
|
|
$
|
949
|
|
Impact of foreign currency translation (a)
|
|
|
13
|
|
Impairment (b)
|
|
|
(250
|
)
|
|
|
|
|
|
Balance at September 30, 2009
|
|
$
|
712
|
|
|
|
|
|
|
|
|
|
(a) |
|
Goodwill is allocated among our subsidiaries, including certain
international subsidiaries. As a result, the carrying amount of
our goodwill is impacted by foreign currency translation each
period. |
|
(b) |
|
During the first quarter of 2009, we performed an interim
impairment test on our goodwill and indefinite-lived intangible
assets. As a result of this testing, we recorded a non-cash
impairment charge of $250 million related to goodwill and
$82 million related to trademarks and trade names (see
Note 3 Impairment of Goodwill and Intangible
Assets). |
13
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Finite-lived intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Weighted
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Weighted
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Average
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Average
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Useful Life
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Useful Life
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
(in years)
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
(in years)
|
|
|
Finite-Lived Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
66
|
|
|
$
|
(46
|
)
|
|
$
|
20
|
|
|
|
4
|
|
|
$
|
68
|
|
|
$
|
(37
|
)
|
|
$
|
31
|
|
|
|
4
|
|
Vendor relationships and other
|
|
|
5
|
|
|
|
(2
|
)
|
|
|
3
|
|
|
|
7
|
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
3
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Finite-Lived Intangible Assets
|
|
$
|
71
|
|
|
$
|
(48
|
)
|
|
$
|
23
|
|
|
|
5
|
|
|
$
|
72
|
|
|
$
|
(38
|
)
|
|
$
|
34
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recorded amortization expense related to finite-lived
intangible assets in the amount of $4 million and
$5 million for the three months ended September 30,
2009 and September 30, 2008, respectively, and
$13 million and $15 million for the nine months ended
September 30, 2009 and September 30, 2008,
respectively. These amounts are included in depreciation and
amortization expense in our condensed consolidated statements of
operations.
The table below shows estimated amortization expense related to
our finite-lived intangible assets over the next five years:
|
|
|
|
|
Year
|
|
(in millions)
|
|
|
2009 (remaining 3 months)
|
|
$
|
4
|
|
2010
|
|
|
11
|
|
2011
|
|
|
3
|
|
2012
|
|
|
2
|
|
2013
|
|
|
2
|
|
Thereafter
|
|
|
1
|
|
|
|
|
|
|
Total
|
|
$
|
23
|
|
|
|
|
|
|
Accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
(in millions)
|
|
|
Employee costs (a)
|
|
$
|
28
|
|
|
$
|
13
|
|
Advertising and marketing
|
|
|
18
|
|
|
|
29
|
|
Tax sharing liability, current
|
|
|
16
|
|
|
|
15
|
|
Rebates
|
|
|
6
|
|
|
|
6
|
|
Technology costs
|
|
|
5
|
|
|
|
7
|
|
Contract exit costs
|
|
|
5
|
|
|
|
4
|
|
Professional fees
|
|
|
4
|
|
|
|
4
|
|
Customer service costs
|
|
|
4
|
|
|
|
5
|
|
Unfavorable contracts, current
|
|
|
3
|
|
|
|
3
|
|
Facilities costs
|
|
|
2
|
|
|
|
4
|
|
Other
|
|
|
17
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses
|
|
$
|
108
|
|
|
$
|
106
|
|
|
|
|
|
|
|
|
|
|
14
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(a) |
|
At September 30, 2009, the employee costs line item
includes amounts accrued related to our Performance-Based Annual
Incentive Plan. At December 31, 2008, based on Company
performance, no such amounts were accrued. |
|
|
7.
|
Term Loan
and Revolving Credit Facility
|
On July 25, 2007, concurrent with the IPO, we entered into
a $685 million senior secured credit agreement
(Credit Agreement) consisting of a seven-year
$600 million term loan facility (Term Loan) and
a six-year $85 million revolving credit facility
(Revolver).
Term
Loan
The Term Loan bears interest at a variable rate, at our option,
of LIBOR plus a margin of 300 basis points or an
alternative base rate plus a margin of 200 basis points.
The alternative base rate is equal to the higher of the Federal
Funds Rate plus one half of 1% and the prime rate
(Alternative Base Rate). The principal amount of the
Term Loan is payable in quarterly installments of
$1.5 million, with the final installment (equal to the
remaining outstanding balance) due upon maturity in July 2014.
In addition, beginning with the first quarter of 2009, we are
required to make an annual prepayment on the Term Loan in the
first quarter of each fiscal year in an amount up to 50% of the
prior years excess cash flow, as defined in the Credit
Agreement. Prepayments from excess cash flow are applied, in
order of maturity, to the scheduled quarterly term loan
principal payments. Based on our cash flow for the year ended
December 31, 2008, we were not required to make a
prepayment in 2009. Based on our projected cash flow for the
year ending December 31, 2009, we estimate that we will be
required to make a prepayment on the Term Loan of
$2 million in the first quarter of 2010.
The changes in the Term Loan during the nine months ended
September 30, 2009 were as follows:
|
|
|
|
|
|
|
Amount
|
|
|
|
(in millions)
|
|
|
Balance at December 31, 2008
|
|
$
|
593
|
|
Scheduled principal payments
|
|
|
(5
|
)
|
Repurchases (a)
|
|
|
(10
|
)
|
|
|
|
|
|
Balance at September 30, 2009
|
|
$
|
578
|
|
|
|
|
|
|
|
|
|
(a) |
|
On June 2, 2009, we entered into an amendment (the
Amendment) to our Credit Agreement, which permits us
to purchase portions of our outstanding Term Loan on a non-pro
rata basis using cash up to $10 million and future cash
proceeds from equity issuances and in exchange for equity
interests on or prior to June 2, 2010. Any portion of the
Term Loan purchased by us will be retired and cannot be
re-borrowed. The Amendment required that we purchase at least
$10 million in principal amount of the Term Loan on or
before June 19, 2009, or we would lose our ability to
purchase any term loans pursuant to the Amendment. |
|
|
|
On June 17, 2009, we completed the purchase of
$10 million in principal amount of the Term Loan. The
principal amount of the Term Loan purchased (net of associated
unamortized debt issuance costs of almost nil) exceeded the
amount we paid to purchase the debt (inclusive of miscellaneous
fees incurred) by $2 million. Accordingly, we recorded a
$2 million gain on extinguishment of a portion of the Term
Loan, which is included in gain on extinguishment of debt in our
condensed consolidated statements of operations for the nine
months ended September 30, 2009. |
At September 30, 2009, we had interest rate swaps
outstanding that effectively convert $400 million of the
Term Loan to a fixed interest rate (see Note 13
Derivative Financial Instruments). At September 30, 2009,
$200 million of the Term Loan effectively bears interest at
a fixed rate of 8.21%, $100 million of the
15
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Term Loan effectively bears interest at a fixed rate of 6.39%
and an additional $100 million of the Term Loan effectively
bears interest at a fixed rate of 5.98%, through these interest
rate swaps. The remaining $178 million of the Term Loan
bears interest at a variable rate of LIBOR plus 300 basis
points, or 3.25%, as of September 30, 2009, which is based
on the one-month LIBOR.
Revolver
The Revolver provides for borrowings and letters of credit of up
to $85 million ($50 million in U.S. dollars and
the equivalent of $35 million denominated in Euros and
Pounds Sterling) and bears interest at a variable rate, at our
option, of LIBOR plus a margin of 225 basis points or an
Alternative Base Rate plus a margin of 125 basis points.
The margin is subject to change based on our total leverage
ratio, as defined in the Credit Agreement, with a maximum margin
of 250 basis points on LIBOR-based loans and 150 basis
points on Alternative Base Rate loans. We also incur a
commitment fee of 50 basis points on any unused amounts
under the Revolver. The Revolver matures in July 2013.
Lehman Commercial Paper Inc., which filed for bankruptcy
protection under Chapter 11 of the United States
Bankruptcy Code on October 5, 2008, holds a
$12.5 million commitment, or 14.7% percent, of the
$85 million available under the Revolver. As a result,
total availability under the Revolver has effectively been
reduced from $85 million to $72.5 million.
At September 30, 2009, $63 million of borrowings were
outstanding under the Revolver, of which $42 million were
denominated in U.S. dollars and the equivalent of
$21 million was denominated in Pounds Sterling. At
December 31, 2008, $21 million of borrowings were
outstanding under the Revolver, all of which were denominated in
U.S. dollars. In addition, at September 30, 2009,
there was the equivalent of $4 million of outstanding
letters of credit issued under the Revolver, which were
denominated in Pounds Sterling. There were no outstanding
letters of credit issued under the Revolver at December 31,
2008. The amount of letters of credit issued under the Revolver
reduces the amount available to us for borrowings. We had
$6 million and $52 million of availability under the
Revolver at September 30, 2009 and December 31, 2008,
respectively.
At September 30, 2009, $42 million of the outstanding
borrowings bear interest at a variable rate equal to the
U.S.-dollar
LIBOR rate plus 225 basis points, or 2.50%, and
$21 million bears interest at a variable rate equal to the
Pound Sterling LIBOR rate plus 225 basis points, or 2.78%.
Commitment fees on unused amounts under the Revolver were almost
nil for each of the three months ended September 30, 2009
and September 30, 2008, respectively, and almost nil for
each of the nine months ended September 30, 2009 and
September 30, 2008, respectively.
We have a liability included in our condensed consolidated
balance sheets that relates to a tax sharing agreement between
Orbitz and the Founding Airlines. As of September 30, 2009,
the estimated remaining payments that may be due under this
agreement were approximately $215 million. We estimate that
the net present value of our obligation to pay tax benefits to
the Founding Airlines was $123 million and
$124 million at September 30, 2009 and
December 31, 2008, respectively. The table below shows the
changes in the tax sharing liability during the nine months
ended September 30, 2009:
|
|
|
|
|
|
|
Amount
|
|
|
|
(in millions)
|
|
|
Balance at December 31, 2008
|
|
$
|
124
|
|
Accretion of interest expense (a)
|
|
|
10
|
|
Cash payments
|
|
|
(11
|
)
|
|
|
|
|
|
Balance at September 30, 2009
|
|
$
|
123
|
|
|
|
|
|
|
16
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(a) |
|
We accreted interest expense related to the tax sharing
liability of $3 million and $4 million for the three
months ended September 30, 2009 and September 30,
2008, respectively, and $10 million and $12 million
for the nine months ended September 30, 2009 and
September 30, 2008, respectively. |
Based upon the future payments we expect to make, the current
portion of the tax sharing liability of $16 million and
$15 million is included in accrued expenses in our
condensed consolidated balance sheets at September 30, 2009
and December 31, 2008, respectively. The long-term portion
of the tax sharing liability of $107 million and
$109 million is reflected as the tax sharing liability in
our condensed consolidated balance sheets at September 30,
2009 and December 31, 2008, respectively. At the time of
the Blackstone Acquisition, Cendant indemnified Travelport and
us for a portion of the amounts due under the tax sharing
agreement. As a result, we recorded a receivable of
$37 million which is included in other non-current assets
in our condensed consolidated balance sheets at
September 30, 2009 and December 31, 2008, respectively.
The table below shows the estimated payments under our tax
sharing liability over the next five years:
|
|
|
|
|
Year
|
|
(in millions)
|
|
|
2009 (remaining 3 months)
|
|
$
|
4
|
|
2010
|
|
|
18
|
|
2011
|
|
|
21
|
|
2012
|
|
|
17
|
|
2013
|
|
|
18
|
|
Thereafter
|
|
|
137
|
|
|
|
|
|
|
Total
|
|
$
|
215
|
|
|
|
|
|
|
In December 2003, we entered into amended and restated airline
charter associate agreements, or Charter Associate
Agreements, with the Founding Airlines as well as US
Airways (Charter Associate Airlines). These
agreements pertain to our Orbitz business, which was owned by
the Founding Airlines at the time we entered into the
agreements. Under the Charter Associate Agreements, we must pay
a portion of the global distribution system (GDS)
incentive revenue we earn from Worldspan back to the Charter
Associate Airlines in the form of a rebate. The rebate payments
are required when airline tickets for travel on a Charter
Associate Airline are booked through the Orbitz.com website
utilizing Worldspan. The rebate structure under the Charter
Associate Agreements was considered unfavorable when compared to
market conditions at the time of the Blackstone Acquisition. As
a result, an unfavorable contract liability was recorded at its
fair value at the acquisition date.
At September 30, 2009 and December 31, 2008, the net
present value of the unfavorable contract liability was
$14 million and $16 million, respectively. The current
portion of the liability of $3 million was included in
accrued expenses in our condensed consolidated balance sheets at
September 30, 2009 and December 31, 2008,
respectively. The long-term portion of the liability of
$11 million and $13 million is included in unfavorable
contracts in our condensed consolidated balance sheets at
September 30, 2009 and December 31, 2008, respectively.
This liability is being amortized to revenue in our condensed
consolidated statements of operations on a straight-line basis
over the remaining contractual term. We recognized revenue for
the unfavorable portion of the Charter Associate Agreements in
the amount of almost nil for each of the three months ended
September 30, 2009 and September 30, 2008,
respectively, and $2 million for each of the nine months
ended September 30, 2009 and September 30, 2008,
respectively.
17
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
10.
|
Commitments
and Contingencies
|
Our commitments as of September 30, 2009 did not materially
change from the amounts set forth in our 2008 Annual Report on
Form 10-K.
Company
Litigation
We are involved in various claims, legal proceedings and
governmental inquiries related to contract disputes, business
practices, intellectual property and other commercial,
employment and tax matters.
We are party to various cases brought by consumers and
municipalities and other U.S. governmental entities
involving hotel occupancy taxes and our merchant hotel business.
Some of the cases are purported class actions and most of the
cases were brought simultaneously against other Internet travel
companies, including Expedia, Travelocity and Priceline. The
cases allege, among other things, that we violated the
jurisdictions hotel occupancy tax ordinance with respect
to the charges and remittance of amounts to cover taxes under
the ordinance. While not identical in their allegations, the
cases generally assert similar claims, including violations of
local or state occupancy tax ordinances, violations of consumer
protection ordinances, conversion, unjust enrichment, imposition
of a constructive trust, demand for a legal or equitable
accounting, injunctive relief, declaratory judgment, and in some
cases, civil conspiracy. The plaintiffs seek relief in a variety
of forms, including: declaratory judgment, full accounting of
monies owed, imposition of a constructive trust, compensatory
and punitive damages, disgorgement, restitution, interest,
penalties and costs, attorneys fees, and where a class
action has been claimed, an order certifying the action as a
class action. An adverse ruling in one or more of these cases
could require us to pay tax retroactively and prospectively and
possibly pay penalties, interest and fines. The proliferation of
additional cases could result in substantial additional defense
costs.
We have also been contacted by several municipalities or other
taxing bodies concerning our possible obligations with respect
to state or local hotel occupancy or related taxes. The cities
of Chicago, Illinois, Phoenix, Arizona, North Little Rock and
Pine Bluff, Arkansas, Colorado Springs, Colorado, 35 cities
in California, an entity representing 84 cities and 14
counties in Alabama, the counties of Jefferson, Arkansas;
Brunswick and Stanly, North Carolina; Duval County, Florida;
Summit, Salt Lake and Weber, Utah; the Hawaii Department of
Taxation and the South Carolina Department of Taxation issued
audit notices against the Company. These municipalities have not
issued assessments, but have requested information to conduct an
audit and/or
have requested that the Company register to pay local hotel
occupancy taxes. Additional taxing authorities have begun audit
proceedings and some have issued assessments against the
Company, ranging from almost nil to approximately
$2 million, and totaling approximately $10 million.
Assessments that are administratively final and subject to
judicial review have been issued by Anaheim, California; Broward
County, Florida; the Indiana Department of Revenue; and the
Wisconsin Department of Revenue. In addition, the following
taxing authorities have issued assessments which are subject to
further review by the taxing authorities: the cities of Los
Angeles, San Diego and San Francisco, California, the
county of Miami-Dade, Florida, the cities of Alpharetta,
Cartersville, Cedartown, College Park, Dalton, East Point,
Hartwell, Macon, Rockmart, Rome, Tybee Island and Warner Robins,
Georgia, the counties of Augusta, Clayton, Cobb, DeKalb, Fulton,
Gwinnett, Hart and Richmond, Georgia and the city of
Philadelphia, Pennsylvania. The Company disputes that any hotel
occupancy or related tax is owed under these ordinances and is
challenging the assessments made against the Company. If the
Company is found to be subject to the hotel occupancy tax
ordinance by a taxing authority and appeals the decision in
court, certain jurisdictions may attempt to require us to
provide financial security or pay the assessment to the
municipality in order to challenge the tax assessment in court.
We believe that we have meritorious defenses, and we are
vigorously defending against these claims, proceedings and
inquiries. We have not recorded any reserves related to these
hotel occupancy tax matters. Litigation is inherently
unpredictable and, although we believe we have valid defenses in
these matters based
18
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
upon advice of counsel, unfavorable resolutions could occur.
While we cannot estimate our range of loss and believe it is
unlikely that an adverse outcome will result from these
proceedings, an adverse outcome could be material to us with
respect to earnings or cash flows in any given reporting period.
We are currently seeking to recover insurance reimbursement for
costs incurred to defend the hotel occupancy tax cases. We
recorded a reduction to selling, general and administrative
expense in our condensed consolidated statements of operations
for reimbursements received of $1 million for each of the
three months ended September 30, 2009 and
September 30, 2008, respectively, and $4 million and
$6 million for the nine months ended September 30,
2009 and September 30, 2008, respectively. The recovery of
additional amounts, if any, by us and the timing of receipt of
these recoveries is unclear. As such, as of September 30,
2009, we have not recognized a reduction to selling, general and
administrative expense in our condensed consolidated statements
of operations for the outstanding contingent claims for which we
have not yet received reimbursement.
Surety
Bonds and Bank Guarantees
In the ordinary course of business, we obtain surety bonds and
bank guarantees, issued for the benefit of a third party, to
secure performance of certain of our obligations to third
parties. At September 30, 2009 and December 31, 2008,
there were $3 million of surety bonds outstanding. At
September 30, 2009 and December 31, 2008, there were
$1 million and $2 million of bank guarantees
outstanding, respectively.
Financing
Arrangements
We are required to issue letters of credit to certain suppliers
and
non-U.S. regulatory
and government agencies. The majority of these letters of credit
were issued by Travelport on our behalf under the terms of the
Separation Agreement (as amended) entered into in connection
with the IPO. The letter of credit fees were $1 million for
each of the three months ended September 30, 2009 and
September 30, 2008, respectively, and $3 million and
$2 million for the nine months ended September 30,
2009 and September 30, 2008, respectively. At
September 30, 2009 and December 31, 2008, there were
$66 million and $67 million of outstanding letters of
credit issued by Travelport on our behalf, respectively (see
Note 15 Related Party Transactions). In
addition, at September 30, 2009, there was the equivalent
of $4 million of outstanding letters of credit issued under
the Revolver, which were denominated in Pounds Sterling. There
were no outstanding letters of credit issued under the Revolver
at December 31, 2008.
We have established a liability for unrecognized tax benefits
that management believes to be adequate. The table below shows
the changes in this liability during the nine months ended
September 30, 2009:
|
|
|
|
|
|
|
Amount
|
|
|
|
(in millions)
|
|
|
Balance as of December 31, 2008
|
|
$
|
6
|
|
Decrease in unrecognized tax benefits as a result of tax
positions taken during the prior year
|
|
|
(1
|
)
|
|
|
|
|
|
Balance as of September 30, 2009
|
|
$
|
5
|
|
|
|
|
|
|
The total amount of unrecognized tax benefits that, if
recognized, would affect our effective tax rate was
$1 million at September 30, 2009. We do not expect to
make any cash tax payments nor do we expect any statutes of
limitations to lapse related to this liability within the next
twelve months.
We recognize interest and penalties related to unrecognized tax
benefits in income tax expense. We recognized interest and
penalties of almost nil for the three months ended
September 30, 2009 and
19
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
September 30, 2008, respectively, and almost nil for the
nine months ended September 30, 2009 and September 30,
2008, respectively. Accrued interest and penalties were
$1 million and almost nil as of September 30, 2009 and
December 31, 2008, respectively.
In computing the tax provision for the nine months ended
September 30, 2009, we recognized an income tax provision
in tax jurisdictions which had pre-tax income for the nine
months ended September 30, 2009 and are expected to
generate pre-tax book income during the remainder of fiscal year
2009. We recognized an income tax benefit in tax jurisdictions
which incurred pre-tax losses for the nine months ended
September 30, 2009 if the tax jurisdictions are expected to
be able to realize these losses during the remainder of fiscal
year 2009 or are expected to recognize a deferred tax asset
related to such losses at December 31, 2009.
The amount of the tax benefit recorded during the nine months
ended September 30, 2009 is disproportionate to the amount
of pre-tax net loss incurred during the period primarily because
we are not able to realize any tax benefit on the goodwill
impairment charge and only a limited amount of tax benefit on
the trademarks and trade names impairment charge, which were
recorded during the nine months ended September 30, 2009.
|
|
12.
|
Equity-Based
Compensation
|
We currently issue share-based awards under the Orbitz
Worldwide, Inc. 2007 Equity and Incentive Plan, as amended (the
Plan). The Plan provides for the grant of
equity-based awards, including restricted stock, restricted
stock units, stock options, stock appreciation rights and other
equity-based awards to our directors, officers and other
employees, advisors and consultants who are selected by the
Compensation Committee of the Board of Directors for
participation in the Plan. As of September 30, 2009,
3,206,061 shares were available for future issuance under
the Plan.
Stock
Options
The table below summarizes the option activity under the Plan
during the nine months ended September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Weighted Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Value(a)
|
|
|
|
Shares
|
|
|
(per share)
|
|
|
(in years)
|
|
|
(in millions)
|
|
|
Outstanding at December 31, 2008
|
|
|
4,216,805
|
|
|
$
|
10.88
|
|
|
|
7.6
|
|
|
|
|
|
Granted
|
|
|
1,000,000
|
|
|
$
|
4.15
|
|
|
|
6.3
|
|
|
|
|
|
Exercised
|
|
|
(5,650
|
)
|
|
$
|
6.28
|
|
|
|
5.7
|
|
|
|
|
|
Forfeited
|
|
|
(881,721
|
)
|
|
$
|
10.50
|
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2009
|
|
|
4,329,434
|
|
|
$
|
9.41
|
|
|
|
6.7
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2009
|
|
|
1,611,710
|
|
|
$
|
12.58
|
|
|
|
7.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The aggregate intrinsic value for stock options exercisable at
September 30, 2009 was almost nil. |
The exercise price of stock options granted under the Plan is
equal to the fair market value of the underlying stock on the
date of grant. Stock options generally expire seven to ten years
from the grant date. The stock options granted at the time of
the IPO as additional compensation to our employees who
previously held equity awards under Travelports long-term
incentive plan vest quarterly over a three-year period. The
stock options granted in the nine months ended
September 30, 2009 vest over a four-year period, with 25%
of the awards vesting after one year and the remaining awards
vesting on a monthly basis thereafter. All other stock options
granted vest annually over a four-year period. The fair value of
stock options on the date of grant is amortized on a
straight-line basis over the requisite service period.
20
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of stock options granted under the Plan is
estimated on the date of grant using the Black-Scholes
option-pricing model. The weighted average assumptions for stock
options granted during the nine months ended September 30,
2009 are outlined in the following table. Expected volatility is
based on implied volatilities for publicly traded options and
historical volatility for comparable companies over the
estimated expected life of the stock options. The expected life
represents the period of time the stock options are expected to
be outstanding and is based on the simplified
method. We use the simplified method due to
the lack of sufficient historical exercise data to provide a
reasonable basis upon which to otherwise estimate the expected
life of the stock options. The risk-free interest rate is based
on yields on U.S. Treasury strips with a maturity similar
to the estimated expected life of the stock options. We use
historical turnover to estimate employee forfeitures.
|
|
|
|
|
Assumptions:
|
|
|
|
|
Dividend yield
|
|
|
|
|
Expected volatility
|
|
|
49
|
%
|
Expected life (in years)
|
|
|
4.58
|
|
Risk-free interest rate
|
|
|
1.47
|
%
|
Based on the above assumptions, the weighted average grant-date
fair value of stock options granted during the nine months ended
September 30, 2009 was $1.73.
Restricted
Stock Units
The table below summarizes activity regarding unvested
restricted stock units under the Plan for the nine months ended
September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Restricted Stock
|
|
|
Fair Value
|
|
|
|
Units
|
|
|
(per share)
|
|
|
Unvested at December 31, 2008
|
|
|
2,724,356
|
|
|
$
|
9.83
|
|
Granted
|
|
|
3,936,642
|
|
|
$
|
1.85
|
|
Vested (a)
|
|
|
(547,858
|
)
|
|
$
|
8.82
|
|
Forfeited
|
|
|
(435,493
|
)
|
|
$
|
9.53
|
|
|
|
|
|
|
|
|
|
|
Unvested at September 30, 2009
|
|
|
5,677,647
|
|
|
$
|
4.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
We issued 395,952 shares of common stock in connection with
the vesting of restricted stock units during the nine months
ended September 30, 2009, which is net of the number of
shares retained (but not issued) by us in satisfaction of
minimum tax withholding obligations associated with the vesting. |
The restricted stock units granted at the time of the IPO upon
conversion of unvested equity-based awards previously held by
our employees under Travelports long-term incentive plan
vest quarterly over a three-year period. All other restricted
stock units cliff vest at the end of either a two-year or
three-year period, or vest annually over a three-year or
four-year period. The fair value of restricted stock units on
the date of grant is amortized on a straight-line basis over the
requisite service period.
The total number of restricted stock units that vested during
the nine months ended September 30, 2009 and the total fair
value thereof was 547,858 restricted stock units and
$5 million, respectively.
21
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Non-Employee
Directors Deferred Compensation Plan
The table below summarizes the deferred stock unit activity
under the Plan for the nine months ended September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Deferred Stock
|
|
|
Fair Value
|
|
|
|
Units
|
|
|
(per share)
|
|
|
Outstanding at December 31, 2008
|
|
|
252,816
|
|
|
$
|
7.06
|
|
Granted
|
|
|
426,206
|
|
|
$
|
2.30
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2009
|
|
|
679,022
|
|
|
$
|
4.07
|
|
|
|
|
|
|
|
|
|
|
The deferred stock units are issued as restricted stock units
under the Plan and are immediately vested and non-forfeitable.
The deferred stock units entitle the non-employee director to
receive one share of our common stock for each deferred stock
unit on the date that is 200 days immediately following the
non-employee directors retirement or termination of
service from the board of directors, for any reason. The entire
grant date fair value of deferred stock units is expensed on the
date of grant.
There was no significant activity related to performance-based
restricted stock units (PSUs) or restricted stock
during the nine months ended September 30, 2009. As of
September 30, 2009, the Company expects that none of the
PSUs will vest.
We recognized total equity-based compensation expense of
$3 million and $4 million during the three months
ended September 30, 2009 and September 30, 2008,
respectively, and $11 million and $12 million during
the nine months ended September 30, 2009 and
September 30, 2008, respectively, none of which has
provided us a tax benefit. Of the total equity-based
compensation expense recorded in the nine months ended
September 30, 2009, $2 million related to the
accelerated vesting of certain equity-based awards held by our
former President and Chief Executive Officer who resigned in
January 2009. These awards vested on his last day of employment
with the Company, or April 6, 2009, as provided for in the
agreements related to these equity-based awards (see
Note 17 Severance).
As of September 30, 2009, a total of $19 million of
unrecognized compensation costs related to unvested stock
options, unvested restricted stock units, unvested PSUs and
unvested restricted stock are expected to be recognized over the
remaining weighted-average period of 2 years.
|
|
13.
|
Derivative
Financial Instruments
|
Interest
Rate Hedges
At September 30, 2009, we had the following interest rate
swaps that effectively converted $400 million of the Term
Loan from a variable to a fixed interest rate. We pay a fixed
interest rate on the swaps and in exchange receive a variable
interest rate based on either the three-month or the one-month
LIBOR.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Interest
|
|
Variable Interest
|
Notional Amount
|
|
Effective Date
|
|
Maturity Date
|
|
Rate Paid
|
|
Rate Received
|
|
$200 million
|
|
July 25, 2007
|
|
December 31, 2009
|
|
|
5.21
|
%
|
|
Three-month LIBOR
|
$100 million
|
|
May 30, 2008
|
|
May 31, 2011
|
|
|
3.39
|
%
|
|
Three-month LIBOR
|
$100 million
|
|
September 30, 2008
|
|
September 30, 2010
|
|
|
2.98
|
%
|
|
One-month LIBOR
|
The objective of entering into our interest rate swaps is to
protect against volatility of future cash flows and effectively
hedge the variable interest payments on the Term Loan. We
determined that these designated hedging instruments qualify for
cash flow hedge accounting treatment. Our interest rate swaps
are the only derivative financial instruments that we have
designated as hedging instruments.
22
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The interest rate swaps are reflected in our condensed
consolidated balance sheets at market value. The corresponding
market adjustment is recorded to accumulated other comprehensive
income. The following table shows the fair value of our interest
rate swaps at September 30, 2009 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of
|
|
|
Balance Sheet Location
|
|
September 30, 2009
|
|
December 31, 2008
|
|
|
|
|
(in millions)
|
|
Liability Derivatives:
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Other current liabilities
|
|
$
|
5
|
|
|
$
|
8
|
|
Interest rate swaps
|
|
Other non-current liabilities
|
|
|
4
|
|
|
|
7
|
|
The following tables show the market adjustments recorded during
the three and nine months ended September 30, 2009 and
September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
|
|
|
|
|
(Loss) Reclassified
|
|
Recognized in Income
|
|
|
|
|
|
|
From Accumulated
|
|
(Ineffective Portion and
|
|
|
Gain in Other
|
|
OCI into
|
|
the Amount Excluded
|
|
|
Comprehensive Income
|
|
Interest Expense
|
|
from Effectiveness
|
|
|
(OCI)
|
|
(Effective Portion)
|
|
Testing)
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
September 30,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
(in millions)
|
|
Interest rate swaps
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
(4
|
)
|
|
$
|
(2
|
)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
|
|
|
|
|
(Loss) Reclassified
|
|
Recognized in Income
|
|
|
|
|
|
|
From Accumulated
|
|
(Ineffective Portion and
|
|
|
Gain in Other
|
|
OCI into
|
|
the Amount Excluded
|
|
|
Comprehensive Income
|
|
Interest Expense
|
|
from Effectiveness
|
|
|
(OCI)
|
|
(Effective Portion)
|
|
Testing)
|
|
|
Nine Months Ended
|
|
Nine Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
September 30,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
(in millions)
|
|
Interest rate swaps
|
|
$
|
6
|
|
|
$
|
3
|
|
|
$
|
(10
|
)
|
|
$
|
(4
|
)
|
|
$
|
|
|
|
$
|
|
|
The amount of loss recorded in accumulated other comprehensive
loss at September 30, 2009 that is expected to be
reclassified to interest expense in the next twelve months if
interest rates remain unchanged is approximately $8 million
after-tax.
Foreign
Currency Hedges
We enter into foreign currency forward contracts (forward
contracts) to manage exposure to changes in the foreign
currency associated with foreign currency receivables, payables,
intercompany transactions and borrowings under the Revolver. We
primarily hedge our foreign currency exposure to the Pound
Sterling, Euro and Australian dollar. As of September 30,
2009, we had forward contracts outstanding with a total net
notional amount of $104 million, which matured in October
2009. The forward contracts do not qualify for hedge accounting
treatment. Accordingly, changes in the fair value of the forward
contracts are recorded in net income, as a component of selling,
general and administrative expense in our condensed consolidated
statements of operations.
23
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table shows the fair value of our foreign currency
hedges at September 30, 2009 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
|
As of December 31, 2008
|
|
|
|
|
|
Fair Value
|
|
|
|
|
Fair Value
|
|
|
|
Balance Sheet Location
|
|
Measurements
|
|
|
Balance Sheet Location
|
|
Measurements
|
|
|
|
(in millions)
|
|
|
Liability Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency hedges (a)
|
|
Other current liabilities
|
|
|
|
|
|
Other current liabilities
|
|
$
|
1
|
|
|
|
|
(a) |
|
At September 30, 2009, the total market value of our
foreign currency hedges represented a liability of almost nil. |
The following table shows the changes in the fair value of our
forward contracts recorded in net income during the three and
nine months ended September 30, 2009 and September 30,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) in
|
|
|
Selling, General &
|
|
|
Administrative Expense
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
(in millions)
|
|
Foreign currency hedges (b)
|
|
$
|
1
|
|
|
$
|
3
|
|
|
$
|
(6
|
)
|
|
$
|
2
|
|
|
|
|
(b) |
|
We recorded transaction (losses) gains associated with the
re-measurement of our foreign denominated assets and liabilities
of $(2) million and $(6) million in the three months
ended September 30, 2009 and September 30, 2008,
respectively, and $5 million and $(7) million in the
nine months ended September 30, 2009 and September 30,
2008, respectively. Transaction (losses) gains are included in
selling, general and administrative expense in our condensed
consolidated statements of operations. The net impact of these
transaction (losses) gains and our foreign currency hedges was a
net loss of $(1) million and $(3) million in the three
months ended September 30, 2009 and September 30,
2008, respectively, and a net loss of $(1) million and
$(5) million in the nine months ended September 30,
2009 and September 30, 2008, respectively. |
|
|
14.
|
Net
Income (Loss) per Share
|
The following table presents the calculation of basic and
diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions, except share and per share data)
|
|
|
Net income (loss)
|
|
|
$7
|
|
|
|
$(287
|
)
|
|
|
$(319
|
)
|
|
|
$(307
|
)
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
$0.08
|
|
|
|
$(3.44
|
)
|
|
|
$(3.80
|
)
|
|
|
$(3.69
|
)
|
Diluted
|
|
|
$0.08
|
|
|
|
$(3.44
|
)
|
|
|
$(3.80
|
)
|
|
|
$(3.69
|
)
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
84,377,943
|
|
|
|
83,413,369
|
|
|
|
83,951,081
|
|
|
|
83,273,050
|
|
Dilutive effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units
|
|
|
2,168,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock
|
|
|
323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (a)
|
|
|
86,547,214
|
|
|
|
83,413,369
|
|
|
|
83,951,081
|
|
|
|
83,273,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(a) |
|
Stock options, restricted stock, restricted stock units and PSUs
are not included in the calculation of diluted net loss per
share for the nine months ended September 30, 2009 and the
three and nine months ended September 30, 2008 because we
had a net loss for each period. Accordingly, the inclusion of
these equity awards would have had an antidilutive effect on
diluted net loss per share. |
The following equity awards are not included in the diluted net
income (loss) per share calculation above because they would
have had an antidilutive effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
Antidilutive Equity Awards
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Stock options
|
|
|
4,322,735
|
|
|
|
4,431,583
|
|
|
|
4,329,434
|
|
|
|
4,431,583
|
|
Restricted stock units
|
|
|
1,672,802
|
|
|
|
3,015,677
|
|
|
|
5,677,647
|
|
|
|
3,015,677
|
|
Restricted stock
|
|
|
3,293
|
|
|
|
21,772
|
|
|
|
3,293
|
|
|
|
21,772
|
|
Performance-based restricted stock units
|
|
|
227,679
|
|
|
|
249,108
|
|
|
|
227,679
|
|
|
|
249,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,226,509
|
|
|
|
7,718,140
|
|
|
|
10,238,053
|
|
|
|
7,718,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.
|
Related
Party Transactions
|
Related
Party Transactions with Travelport and its
Subsidiaries
The following table summarizes the related party balances with
Travelport and its subsidiaries as of September 30, 2009
and December 31, 2008, reflected in our condensed
consolidated balance sheets. We net settle amounts due to and
from Travelport.
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
December 31, 2008
|
|
|
(in millions)
|
|
Due from Travelport, net
|
|
$
|
10
|
|
|
$
|
10
|
|
The following table summarizes the related party transactions
with Travelport and its subsidiaries for the three and nine
months ended September 30, 2009 and September 30,
2008, reflected in our condensed consolidated statements of
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
(in millions)
|
|
Net revenue (a)
|
|
$
|
31
|
|
|
$
|
36
|
|
|
$
|
94
|
|
|
$
|
118
|
|
Cost of revenue
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
3
|
|
Interest expense
|
|
|
1
|
|
|
|
1
|
|
|
|
3
|
|
|
|
2
|
|
|
|
|
(a) |
|
These amounts include net revenue related to our GDS services
agreement and bookings sourced through Donvand Limited and
OctopusTravel Group Limited (doing business as Gullivers
Travel Associates, GTA) for the periods presented. |
The tables above reflect amounts resulting from agreements with
Travelport and its subsidiaries, including our transition
services agreement, master license agreement, equipment,
services and use agreements, GDS service agreement, hotel
sourcing and franchise agreement and corporate travel agreement.
Travelport is also obligated to issue letters of credit on our
behalf through at least March 31, 2010 and thereafter so
long as Travelport and its affiliates (as defined in the
Separation Agreement, as amended) own at least 50% of our voting
stock, in an aggregate amount not to exceed $75 million
(denominated in U.S. dollars).
25
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At September 30, 2009 and December 31, 2008, there
were $66 million and $67 million of outstanding
letters of credit issued by Travelport on our behalf,
respectively (see Note 10 Commitments and
Contingencies).
Related
Party Transactions with Affiliates of Blackstone and
TCV
The following table summarizes the related party balances with
affiliates of Blackstone and TCV as of September 30, 2009
and December 31, 2008, reflected in our condensed
consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
December 31, 2008
|
|
|
(in millions)
|
|
Accounts payable
|
|
$
|
6
|
|
|
$
|
5
|
|
Accrued expenses
|
|
|
2
|
|
|
|
1
|
|
Accrued merchant payable
|
|
|
5
|
|
|
|
|
|
The following table summarizes the related party transactions
with affiliates of Blackstone and TCV for the three and nine
months ended September 30, 2009 and September 30,
2008, reflected in our condensed consolidated statements of
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
(in millions)
|
|
Net revenue
|
|
$
|
4
|
|
|
$
|
5
|
|
|
$
|
12
|
|
|
$
|
11
|
|
Cost of revenue
|
|
|
9
|
|
|
|
2
|
|
|
|
20
|
|
|
|
7
|
|
Selling, general and administrative expense
|
|
|
1
|
|
|
|
1
|
|
|
|
3
|
|
|
|
4
|
|
The tables above reflect amounts resulting from agreements
entered into in the normal course of conducting business with
these affiliates. We believe that these agreements have been
executed on terms comparable to those of unrelated third
parties. For example, we have agreements with certain hotel
management companies that are affiliates of Blackstone and that
provide us with access to their inventory. We also purchase
services from certain Blackstone and TCV affiliates such as
telecommunications and advertising. An affiliate of Blackstone
also provides us with call center and telesales, back office
administrative, information technology and financial processing
services. In addition, various Blackstone and TCV affiliates
utilize our partner marketing programs and corporate travel
services.
Fair
Value Measurements
We adopted the FASBs new fair value guidance for our
financial assets and financial liabilities on January 1,
2008 and for our non-financial assets and non-financial
liabilities on January 1, 2009 (see Note 2
Recently Issued Accounting Pronouncements). Under this guidance,
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
(an exit price). This guidance outlines a valuation framework
and creates a fair value hierarchy in order to increase the
consistency and comparability of fair value measurements and the
related disclosures.
We have derivative financial instruments that must be measured
under this guidance. We currently do not have non-financial
assets and non-financial liabilities that are required to be
measured at fair value on a recurring basis. The guidance
establishes a valuation hierarchy for disclosure of the inputs
used to measure fair value. In accordance with this hierarchy,
the following table shows the fair value of our financial assets
and financial liabilities that are required to be measured at
fair value on a recurring basis as of September 30,
26
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2009 and December 31, 2008, which are classified as other
current liabilities and other non-current liabilities in our
condensed consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Quoted
|
|
|
Significant
|
|
|
|
|
|
|
|
|
Quoted
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
prices in
|
|
|
other
|
|
|
Significant
|
|
|
|
|
|
prices in
|
|
|
other
|
|
|
Significant
|
|
|
|
Balance at
|
|
|
active
|
|
|
observable
|
|
|
unobservable
|
|
|
Balance at
|
|
|
active
|
|
|
observable
|
|
|
unobservable
|
|
|
|
September 30,
|
|
|
markets
|
|
|
inputs
|
|
|
inputs
|
|
|
December 31,
|
|
|
markets
|
|
|
inputs
|
|
|
inputs
|
|
|
|
2009
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
(in millions)
|
|
|
Foreign currency hedge liability (see Note 13
Derivative Financial Instruments) (a)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap liabilities (see Note 13
Derivative Financial Instruments)
|
|
$
|
9
|
|
|
$
|
|
|
|
$
|
9
|
|
|
$
|
|
|
|
$
|
15
|
|
|
$
|
|
|
|
$
|
15
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
At September 30, 2009, almost nil of our foreign currency
hedges represented a liability. The fair value of our foreign
currency hedges is determined based on Level 1 inputs. |
The following table shows the fair value of our non-financial
assets that were required to be measured at fair value on a
non-recurring basis during the nine months ended
September 30, 2009. These non-financial assets, which
included our goodwill and trademarks and trade names, were
required to be measured at fair value as of March 31, 2009
in connection with the interim impairment test we performed on
our goodwill and trademarks and trade names in the first quarter
of 2009 (See Note 3 Impairment of Goodwill and
Intangible Assets).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
|
|
|
Quoted
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
prices in
|
|
|
other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
active
|
|
|
observable
|
|
|
unobservable
|
|
|
|
|
|
|
Balance at
|
|
|
markets
|
|
|
inputs
|
|
|
inputs
|
|
|
Total
|
|
|
|
March 31, 2009
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
(Losses)
|
|
|
|
(in millions)
|
|
|
Goodwill
|
|
$
|
698
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
698
|
|
|
$
|
(250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and trade names
|
|
$
|
150
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
150
|
|
|
$
|
(82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value of Financial Instruments
We adopted the FASBs new disclosure requirements for
financial instruments during the interim reporting period ending
June 30, 2009. Under this guidance, we are required to
disclose the fair value of financial instruments for both
interim and annual reporting periods.
For certain of our financial instruments, including cash and
cash equivalents, accounts receivable, accounts payable, accrued
merchant payable and accrued expenses, the carrying value
approximates or equals fair value due to their short-term
nature. Our Term Loan and Revolver bear interest at a variable
rate based on current interest rates, thus the carrying value
approximates fair value.
On January 6, 2009, our former President and Chief
Executive Officer resigned. In connection with his resignation
and pursuant to the terms of his employment agreement with the
Company, we incurred total expenses of $2 million in the
first quarter of 2009 relating to severance benefits and other
termination-related costs, which are included in selling,
general and administrative expense in our condensed consolidated
statements of operations. The majority of these cash payments
will be made in equal amounts over a twenty-
27
ORBITZ
WORLDWIDE, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
four month period from his resignation date, but were delayed
until July 7, 2009, as required by applicable tax law. In
addition, we recorded $2 million of additional equity-based
compensation expense in the first quarter of 2009 related to the
accelerated vesting of certain equity-based awards held by him
(see Note 12 Equity-Based Compensation).
During the nine months ended September 30, 2009, we also
reduced our workforce by approximately 100 domestic and
international employees, primarily in response to weakening
demand in the travel industry and deteriorating economic
conditions. In connection with this workforce reduction, we
incurred total expenses of $3 million during the nine
months ended September 30, 2009 related to severance
benefits and other termination-related costs, which are included
in selling, general and administrative expense in our condensed
consolidated statements of operations. The majority of these
costs had been paid as of September 30, 2009. The remainder
are expected to be paid by the end of the first half of 2010.
|
|
18.
|
Global
Access Agreement Amendment
|
On July 28, 2009, ebookers and Amadeus IT Group S.A.
(Amadeus) entered into an amendment to the Global
Access Agreement, dated January 1, 2004, extending the term
of the agreement to December 31, 2012. Under this
agreement, as amended, Amadeus provides certain of our ebookers
websites with access to travel supplier content, including air,
hotel and car reservation information. We receive incentive
payments based on the number of reservation segments we process
annually through Amadeus.
We have evaluated subsequent events through November 9,
2009, the date of issuance of our condensed consolidated
financial statements.
On November 4, 2009, the Company entered into an Exchange
Agreement (the Exchange Agreement) with
PAR Investment Partners, L.P. (PAR) pursuant to
which PAR agreed to exchange $49.68 million aggregate
principal amount of term loans outstanding under the
Companys senior secured credit agreement for
8,160,433 shares of the Companys common stock.
Concurrently with the entry into the Exchange Agreement, the
Company also entered into a Stock Purchase Agreement (the
Purchase Agreement) with Travelport pursuant to
which Travelport agreed to purchase 9,025,271 shares of the
Companys common stock for approximately $50.0 million
in cash.
The equity investments contemplated by the Exchange Agreement
and the Purchase Agreement are subject to customary closing
conditions, including a condition that both transactions must
close simultaneously, and will be subject to stockholder
approval under the New York Stock Exchange rules. However,
because both Travelport and PAR (which collectively hold
approximately 67% of the Companys outstanding common
stock) have agreed to vote in favor of the transactions (subject
to certain exceptions), it is expected that the requisite
stockholder approval will be obtained. The transactions are
expected to close in January 2010.
In connection with the Exchange Agreement and the Purchase
Agreement, the Company entered into a Shareholders
Agreement with PAR and Travelport pursuant to which, contingent
upon the closing of the equity investments under the Exchange
Agreement and the Purchase Agreement, PAR will have the right to
designate one director and Travelport will have the right to
designate an additional director. As a result, if the
transactions are consummated, the size of the Companys
board will be increased from eight to ten directors.
28
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
The following discussion should be read in conjunction with
our condensed consolidated financial statements included
elsewhere in this report and our 2008 Annual Report on
Form 10-K
filed with the Securities and Exchange Commission on
March 11, 2009.
OVERVIEW
We are a leading global online travel company that uses
innovative technology to enable leisure and business travelers
to search for and book a broad range of travel products. Our
brand portfolio includes Orbitz, CheapTickets, the Away Network,
and Orbitz for Business in the Americas; ebookers in Europe; and
HotelClub and RatesToGo based in Sydney, Australia, which have
operations globally. We provide customers with the ability to
book a comprehensive set of travel products from suppliers
worldwide, including air travel, hotels, vacation packages, car
rentals, cruises, travel insurance and destination services such
as ground transportation, event tickets and tours.
We generate revenue primarily from the booking of travel
products and services on our websites. We provide customers the
ability to book travel products and services on both a
standalone basis and as part of a dynamic vacation package,
primarily through our merchant and retail business models. Under
our merchant model, we generate revenue for our services based
on the difference between the total amount the customer pays for
the travel product and the negotiated net rate plus estimated
taxes that the supplier charges us for that product. Under our
retail model, we earn commissions from suppliers for airline
tickets, hotel rooms, car rentals and other travel products and
services booked on our websites. Historically, under both the
merchant and retail business models, we have also earned revenue
by charging customers a service fee for booking airline tickets,
hotel rooms and certain other travel products on our websites
(See Industry Trends below for further discussion
regarding changes surrounding our booking fees). In addition, we
receive incentive payments for each segment of travel that is
processed through a global distribution system (GDS).
We also generate advertising revenue through our partner
marketing programs. These programs provide direct access to our
customers through a combination of display advertising,
performance-based advertising and other marketing programs. In
addition, we generate revenue from our white label and hosting
businesses. We earn revenue from our white label business
through revenue sharing arrangements for travel booked on
third-party websites. We earn revenue from our hosting business
through license or fee arrangements.
We are a leader in air travel, the largest online travel
segment. This leadership position has historically enabled us to
drive growth in complimentary travel products, such as hotels,
car rentals, cruises and dynamic vacation packages. Our non-air
travel products generally generate higher net revenue per
transaction than our air travel product. We believe these
non-air travel products represent significant long-term growth
opportunities, despite the softness in demand we are currently
experiencing as a result of weak economic and industry
conditions (See Industry Trends below). Our primary
focus for the remainder of 2009 and 2010 is on driving global
hotel transaction growth, on a standalone basis and as part of a
dynamic vacation package. Specifically, we are focused on the
following seven key initiatives:
|
|
|
|
|
Hotel connectivity, infrastructure and
content: We will continue to explore new hotel
connectivity opportunities and expect to make additional
investments in our hotel infrastructure. We also intend to
improve the richness of the hotel content available on our
websites. For example, we are focused on improving the quality
and structure of editorial descriptions and photographs on our
websites, building flexibility and automation as it relates to
promotional capabilities, and providing additional
user-generated content.
|
|
|
|
Supply expansion: We intend to utilize our
SmartRetail program to expand into new markets where online
penetration is low or where hotels are not accustomed to working
with the merchant model. Similar to our retail business model,
under our SmartRetail program, we earn commissions from
suppliers for travel products booked on our websites. However,
under SmartRetail, we receive this commission at the time of
booking. We believe this program will enable us to increase the
number of
|
29
|
|
|
|
|
hotels available for booking on our websites, while at the same
time eliminating the collection issues that are inherent in the
traditional retail model.
|
|
|
|
|
|
Intelligent marketplace: We plan to improve
hotel conversion rates through the development of systems and
technology that will allow us to use historical data to provide
customers with a personalized shopping experience and more
relevant search results.
|
|
|
|
Retailing: We continue to focus on enhancing
the customer experience across all of our brands to improve
conversion rates. We intend to use multivariate testing to
optimize our user interfaces and landing pages, the customer
shopping experience and our cross sell efforts.
|
|
|
|
Telesales: We intend to build upon our
existing telesales capabilities to drive volume for higher
margin travel products.
|
|
|
|
Organic traffic: We are actively pursuing
strategies to increase the amount of non-paid traffic coming to
our websites through search engine optimization
(SEO) and customer relationship management
(CRM).
|
|
|
|
Distribution: We intend to drive transaction
growth by leveraging the customer base of our third-party
partners through further expansion of our white label business.
|
We have already taken significant steps in 2009 to drive global
hotel transaction growth by launching Total Price hotel search
results and Orbitz Hotel Price Assurance, both of which are
industry-leading innovations, by removing change and
cancellation fees on hotels booked through Orbitz.com and
CheapTickets.com and by reducing booking fees on hotels around
the world. We believe these improvements to our global hotel
offering deliver value to our customers and should improve our
competitiveness over time.
In light of current economic and industry conditions, we are
also focused on improving our operating and marketing
efficiency, simplifying the way we do business, and continuing
to innovate. In late 2008 and in 2009, we lowered our cost
structure by reducing our global workforce, our use of contract
labor and various other operating and capital costs. We also
completed the implementation of a common technology platform for
all of our ebookers websites in Europe. We will continue to
focus on opportunities to further streamline our cost structure.
We are also actively pursuing strategies to improve the
efficiency of our marketing efforts. We believe these strategies
will position us to more effectively manage through this
challenging environment.
Industry
Trends
The current recession has significantly impacted the travel
industry. As demand for air travel continues to be weak, certain
domestic and international airlines have reduced capacity and
have reduced ticket prices to levels significantly below last
year to drive volume. Further capacity reductions could
negatively impact demand for air travel and could adversely
impact the net revenue that online travel companies
(OTCs) generate from the booking of airline tickets,
hotels and car rentals. Bankruptcies and consolidation in the
airline industry could result in further capacity reductions,
which would reduce the number of airline tickets available for
booking on OTCs websites.
In 2009, certain OTCs who historically charged booking fees,
including us, eliminated booking fees on most flights and
reduced booking fees on hotels. The elimination of booking fees
on OTCs websites has significantly reduced the net revenue
that OTCs generate from airline tickets. We believe the
combination of our cost reductions, new media monetization
initiatives, our improved marketing efficiency and the increase
in air transactions we have experienced since removing fees
should enable us to offset most, if not all, of the impact of
the fee reductions.
Fundamentals in the U.S. hotel industry continue to be
weak. Hotel occupancy rates and average daily rates
(ADRs) continue to decline in 2009. We believe that
hotel suppliers will maintain ADRs at levels significantly below
last year through the remainder of 2009 and into 2010 to improve
hotel occupancy. Fundamentals in the European and Asia Pacific
hotel industries have also deteriorated. Lower ADRs reduce the
net revenue that OTCs earn on hotel bookings.
30
The current economic environment has also significantly impacted
the car rental industry. As a result of lower demand for air
travel, demand for car rentals has also declined. We expect this
trend to continue through the remainder of 2009. Lower demand
for car rentals could reduce the net revenue that OTCs generate
from the booking of cars. In addition, car rental companies
currently have limited access to financing and have reduced
their fleets. The overall reduction in rental car fleets has
resulted in a significant increase in ADRs for domestic car
rentals. This increase in ADRs has partially offset the negative
impact of reduced demand for car rentals. Also, the financial
condition of certain car rental companies has deteriorated,
which may result in bankruptcies and industry consolidation,
which in turn could cause further increases in ADRs for car
rentals and a reduction in the number of cars available for
booking on OTCs websites.
We believe that our gross bookings and net revenue for the nine
months ended September 30, 2009 were significantly
negatively impacted by the economic and industry conditions
described above. We expect these trends and their impact on our
gross bookings and net revenue to continue at least through the
remainder of 2009. In response, in late 2008 and in 2009, we
lowered our cost structure by reducing our global workforce, our
use of contract labor and various other operating and capital
costs. We expect to realize approximately $40 to
$45 million of annualized cash savings from these actions.
In 2009, we also significantly restructured our approach to
marketing, placing greater emphasis on attracting more non-paid
traffic to our websites and eliminating unprofitable search
engine marketing (SEM) and travel publisher
marketing spending. This emphasis on improving our marketing
efficiency was the primary driver of the $86 million
decline in our total marketing expense in the nine months ended
September 30, 2009 compared with the nine months ended
September 30, 2008. We expect that our marketing expense for the
remainder of 2009 will continue to be lower than the prior year,
as a result of these ongoing efforts to increase marketing
efficiency.
The growth rate of online travel bookings in the domestic market
has slowed due to both the maturity of this market and the
current recession. Much of the initial rapid growth experienced
in the online travel industry was driven by consumers shifting
from purchasing travel through traditional offline channels to
purchasing travel through online channels. Going forward, we
believe that growth rates in the domestic online travel market
will more closely follow the growth rates of the overall travel
industry.
Internationally, the online travel industry continues to benefit
from rapidly increasing Internet usage and growing acceptance of
online booking. We expect international growth rates for the
online travel industry to continue to outpace growth rates of
the overall travel industry.
We believe that OTCs will continue to focus on differentiating
themselves from supplier websites in a variety of ways,
including offering customers the ability to selectively combine
travel products such as air, car, hotel and destination services
into dynamic vacation packages. Through dynamic vacation
packages, we make certain products available to our customers at
prices that are generally lower than booking each travel product
separately. We foresee significant growth potential for OTCs for
these types of services, particularly since travelers are
increasingly price-sensitive. Our net revenue per transaction is
generally higher for dynamic vacation packages than for
stand-alone travel products.
OTCs make significant investments in marketing through both
online and traditional offline channels. Key areas of online
marketing include SEM, travel publisher marketing, display
advertising, affiliate programs and email marketing. Search
engine marketing costs have been rising in the U.S. over
time, although to a lesser extent in the current economic
environment, and competition for search-engine key words
continues to be intense. If these trends continue, we could
experience lower margins or declines in transaction growth
rates. We are actively pursuing strategies to improve the
efficiency of our marketing efforts. These strategies include
increasing the amount of
non-paid
traffic coming to our websites through SEO and CRM and
eliminating unprofitable SEM and travel publisher marketing
spending. Our retailing efforts are designed to improve
conversion and ultimately reclaim previously unprofitable SEM
and travel publisher marketing transactions on a profitable
basis.
31
RESULTS
OF OPERATIONS
Key
Operating Metrics
Our operating results are affected by certain key metrics that
represent overall transaction activity. Gross bookings and net
revenue are key metrics that drive our business. Gross bookings
is defined as the total amount paid by a consumer for travel
products booked under both the retail and merchant models. Net
revenue includes: commissions earned from suppliers under our
retail model; the difference between the total amount the
customer pays us for a travel product and the negotiated net
rate plus estimated taxes that the supplier charges us for that
travel product under our merchant model; service fees earned
from customers under both our retail and merchant models;
advertising revenue and certain other fees and commissions.
Gross bookings provide insight into changes in overall travel
demand, both industry-wide and on our websites. We track net
revenue trends for our various brands, geographies and product
categories to gain insight into the performance of our business
across these categories.
The table below shows our gross bookings and net revenue for the
three and nine months ended September 30, 2009 and
September 30, 2008. Air gross bookings are comprised of
stand-alone air gross bookings, while non-air gross bookings are
comprised of gross bookings from hotels, car rentals, dynamic
vacation packages (which include a combination of travel
products, such as air, hotel and car reservations), cruises,
destination services and travel insurance. Air net revenue is
comprised of net revenue from stand-alone air bookings, while
non-air net revenue is comprised of net revenue from hotel
bookings, dynamic vacation packages, advertising and media and
other sources.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
$
|
|
|
%
|
|
|
September 30,
|
|
|
$
|
|
|
%
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Change(a)
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Change(a)
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Gross bookings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Air
|
|
$
|
1,616
|
|
|
$
|
1,703
|
|
|
$
|
(87
|
)
|
|
|
(5
|
)%
|
|
$
|
4,792
|
|
|
$
|
5,397
|
|
|
$
|
(605
|
)
|
|
|
(11
|
)%
|
Non-air
|
|
|
583
|
|
|
|
610
|
|
|
|
(27
|
)
|
|
|
(4
|
)%
|
|
|
1,808
|
|
|
|
1,870
|
|
|
|
(62
|
)
|
|
|
(3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total domestic gross bookings
|
|
|
2,199
|
|
|
|
2,313
|
|
|
|
(114
|
)
|
|
|
(5
|
)%
|
|
|
6,600
|
|
|
|
7,267
|
|
|
|
(667
|
)
|
|
|
(9
|
)%
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Air
|
|
|
218
|
|
|
|
264
|
|
|
|
(46
|
)
|
|
|
(18
|
)%
|
|
|
664
|
|
|
|
893
|
|
|
|
(229
|
)
|
|
|
(26
|
)%
|
Non-air
|
|
|
148
|
|
|
|
157
|
|
|
|
(9
|
)
|
|
|
(6
|
)%
|
|
|
362
|
|
|
|
492
|
|
|
|
(130
|
)
|
|
|
(26
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total international gross bookings
|
|
|
366
|
|
|
|
421
|
|
|
|
(55
|
)
|
|
|
(13
|
)%
|
|
|
1,026
|
|
|
|
1,385
|
|
|
|
(359
|
)
|
|
|
(26
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross bookings
|
|
$
|
2,565
|
|
|
$
|
2,734
|
|
|
$
|
(169
|
)
|
|
|
(6
|
)%
|
|
$
|
7,626
|
|
|
$
|
8,652
|
|
|
$
|
(1,026
|
)
|
|
|
(12
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Air
|
|
$
|
48
|
|
|
$
|
70
|
|
|
$
|
(22
|
)
|
|
|
(32
|
)%
|
|
$
|
168
|
|
|
$
|
218
|
|
|
$
|
(50
|
)
|
|
|
(23
|
)%
|
Non-air
|
|
|
96
|
|
|
|
117
|
|
|
|
(21
|
)
|
|
|
(18
|
)%
|
|
|
282
|
|
|
|
315
|
|
|
|
(33
|
)
|
|
|
(10
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total domestic net revenue
|
|
|
144
|
|
|
|
187
|
|
|
|
(43
|
)
|
|
|
(23
|
)%
|
|
|
450
|
|
|
|
533
|
|
|
|
(83
|
)
|
|
|
(16
|
)%
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Air
|
|
|
12
|
|
|
|
17
|
|
|
|
(5
|
)
|
|
|
(29
|
)%
|
|
|
42
|
|
|
|
54
|
|
|
|
(12
|
)
|
|
|
(21
|
)%
|
Non-air
|
|
|
31
|
|
|
|
36
|
|
|
|
(5
|
)
|
|
|
(15
|
)%
|
|
|
71
|
|
|
|
103
|
|
|
|
(32
|
)
|
|
|
(32
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total international net revenue
|
|
|
43
|
|
|
|
53
|
|
|
|
(10
|
)
|
|
|
(19
|
)%
|
|
|
113
|
|
|
|
157
|
|
|
|
(44
|
)
|
|
|
(28
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue (b)
|
|
$
|
187
|
|
|
$
|
240
|
|
|
$
|
(53
|
)
|
|
|
(22
|
)%
|
|
$
|
563
|
|
|
$
|
690
|
|
|
$
|
(127
|
)
|
|
|
(18
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Percentages are calculated on unrounded numbers. |
|
(b) |
|
For the three months ended September 30, 2009 and
September 30, 2008, $32 million and $29 million
of our total net revenue, respectively, was attributed to
incentive payments earned for air, car and hotel |
32
|
|
|
|
|
segments processed through GDSs. For the nine months ended
September 30, 2009 and September 30, 2008,
$92 million and $93 million of our total net revenue,
respectively, was attributed to incentive payments earned for
air, car and hotel segments processed through GDSs. |
Comparison
of the three months ended September 30, 2009 to the three
months ended September 30, 2008
Gross
Bookings
For our domestic business, which is comprised principally of
Orbitz, CheapTickets and Orbitz for Business, total gross
bookings decreased $114 million, or 5%, during the three
months ended September 30, 2009 from the three months ended
September 30, 2008. Of this decrease, $87 million was
due to a decrease in domestic air gross bookings, which was
driven by a lower average price per airline ticket, partially
offset by higher transaction volume. The lower average price per
airline ticket was primarily due to lower fuel prices and softer
demand for air travel. Transaction volume increased primarily
due to the removal of booking fees in April 2009 on most flights
booked through our Orbitz.com and CheapTickets.com websites and
lower air fares.
Non-air gross bookings decreased $27 million, or 4%, during
the three months ended September 30, 2009 from the three
months ended September 30, 2008. This decrease was
primarily driven by lower gross bookings for hotels and car
rentals, partially offset by higher gross bookings for dynamic
packages. Gross bookings for hotels decreased primarily due to a
significant decline in ADRs for hotel rooms as hotel suppliers
try to increase occupancy rates in a period of weak demand.
Gross bookings for car rentals decreased due to lower
transaction volume, partially offset by a higher average price
per transaction. The average price per transaction increased
primarily due to a reduction in rental car fleets, which was
partially the result of limited access to financing by car
rental companies. Gross bookings for dynamic packages increased
due to higher transaction volume, which was partially offset by
a lower average price per transaction. Volume for dynamic
packaging increased due to a general shift in traveler
preference towards dynamic packaging, from stand-alone travel
products, because of the value offered through packaging. The
lower average price per transaction is mainly due to a decline
in hotel ADRs and a decline in airline ticket prices.
For our international business, which is comprised principally
of ebookers, HotelClub and RatesToGo, total gross bookings
decreased $55 million, or 13%, during the three months
ended September 30, 2009 from the three months ended
September 30, 2008. Of this decrease, $31 million was
due to foreign currency fluctuations. The remaining
$24 million decrease was due to a $25 million decrease
in air gross bookings, partially offset by a $1 million
increase in non-air gross bookings. The decrease in air gross
bookings was primarily due to a lower average price per airline
ticket, partially offset by higher transaction volume. The
decrease in average price per airline ticket is primarily due to
lower demand for air travel and a shift in customer preference
towards low cost carriers and short-haul flights.
The decline in non-air gross bookings was primarily driven by a
significant decline in hotel gross bookings for our HotelClub
brand, largely offset by an increase in gross bookings for
dynamic packaging and car rentals for our ebookers brand. For
our HotelClub brand, lower transaction volume in Europe and
lower average price per transaction, due to lower ADRs for hotel
rooms, drove the decrease in hotel gross bookings. The increase
in gross bookings for dynamic packaging was due to higher
transaction volume, partially offset by lower average price per
transaction. Gross bookings for car rentals increased due to an
increase in average price per transaction.
Net Revenue See discussion of net revenue in
the Results of Operations section below.
Comparison
of the nine months ended September 30, 2009 to the nine
months ended September 30, 2008
Gross
Bookings
For our domestic business, total gross bookings decreased
$667 million, or 9%, during the nine months ended
September 30, 2009 from the nine months ended
September 30, 2008. Of this decrease, $605 million was
due to a decrease in domestic air gross bookings, which was
driven by a lower average price per airline ticket, partially
offset by higher transaction volume. The lower average price per
airline ticket was primarily
33
due to lower fuel prices and softer demand for air travel.
Transaction volume increased primarily due to the removal of
booking fees in April 2009 on most flights booked through our
Orbitz.com and CheapTickets.com websites and lower air fares.
Non-air gross bookings decreased $62 million, or 3%, during
the nine months ended September 30, 2009 from the nine
months ended September 30, 2008. This decrease was
primarily driven by lower gross bookings for hotels and car
rentals, partially offset by higher gross bookings for dynamic
packages. Gross bookings for hotels decreased due to a
significant decline in ADRs for hotel rooms and to a lesser
extent, lower transaction volume. During this period of weak
travel demand, most hotel suppliers have tried to stimulate
occupancy by reducing hotel room rates. Gross bookings for car
rentals decreased due to lower transaction volume, partially
offset by a higher average price per transaction. The average
price per transaction increased primarily due to a reduction in
rental car fleets, which was partially the result of limited
access to financing by car rental companies. Gross bookings for
dynamic packages increased due to higher transaction volume,
which was partially offset by a lower average price per
transaction. Volume for dynamic packaging increased due to a
general shift in traveler preference towards dynamic packaging,
from stand-alone travel products, because of the value offered
through packaging. The lower average price per transaction is
mainly due to a decline in hotel ADRs and a decline in airline
ticket prices.
For our international business, total gross bookings decreased
$359 million, or 26%, during the nine months ended
September 30, 2009 from the nine months ended
September 30, 2008. Of this decrease, $207 million was
due to foreign currency fluctuations. The remaining
$152 million decrease was due to a $100 million
decrease in air gross bookings and a $52 million decrease
in non-air gross bookings. The decrease in air gross bookings
was due to a lower average price per airline ticket driven by
lower demand for air travel and a shift in customer preference
towards low cost carriers and short-haul flights.
The decline in non-air gross bookings was primarily driven by a
significant decline in hotel gross bookings for our HotelClub
brand, and to a much lesser extent, a decline in gross bookings
for car rentals for our ebookers brand. For our HotelClub brand,
lower transaction volume in Europe and lower average price per
transaction, due to lower ADRs for hotel rooms, drove the
decrease in hotel gross bookings. The decrease in gross bookings
for car rentals was due to lower transaction volume and a lower
average price per transaction, as car rental companies
discounted prices heavily to drive volume. An increase in gross
bookings for dynamic packaging for our ebookers brand partially
offset the decline in gross bookings for hotels and car rentals.
The increase in gross bookings for dynamic packaging was due to
higher volume, partially offset by a lower average price per
transaction.
Net Revenue See discussion of net revenue in
the Results of Operations section below.
34
Results
of Operations
Comparison
of the three months ended September 30, 2009 to the three
months ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
$
|
|
|
%
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Change(a)
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Air
|
|
$
|
60
|
|
|
$
|
87
|
|
|
$
|
(27
|
)
|
|
|
(31
|
)%
|
Hotel
|
|
|
52
|
|
|
|
71
|
|
|
|
(19
|
)
|
|
|
(27
|
)%
|
Dynamic packaging
|
|
|
30
|
|
|
|
32
|
|
|
|
(2
|
)
|
|
|
(5
|
)%
|
Advertising and media
|
|
|
15
|
|
|
|
17
|
|
|
|
(2
|
)
|
|
|
(10
|
)%
|
Other
|
|
|
30
|
|
|
|
33
|
|
|
|
(3
|
)
|
|
|
(11
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
187
|
|
|
|
240
|
|
|
|
(53
|
)
|
|
|
(22
|
)%
|
Cost and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
34
|
|
|
|
41
|
|
|
|
(7
|
)
|
|
|
(17
|
)%
|
Selling, general and administrative
|
|
|
65
|
|
|
|
75
|
|
|
|
(10
|
)
|
|
|
(15
|
)%
|
Marketing
|
|
|
48
|
|
|
|
86
|
|
|
|
(38
|
)
|
|
|
(44
|
)%
|
Depreciation and amortization
|
|
|
18
|
|
|
|
17
|
|
|
|
1
|
|
|
|
8
|
%
|
Impairment of goodwill and intangible assets
|
|
|
|
|
|
|
297
|
|
|
|
(297
|
)
|
|
|
(100
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
165
|
|
|
|
516
|
|
|
|
(351
|
)
|
|
|
(68
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
22
|
|
|
|
(276
|
)
|
|
|
298
|
|
|
|
(108
|
)%
|
Other (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(14
|
)
|
|
|
(16
|
)
|
|
|
2
|
|
|
|
(6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense)
|
|
|
(14
|
)
|
|
|
(16
|
)
|
|
|
2
|
|
|
|
(6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
8
|
|
|
|
(292
|
)
|
|
|
300
|
|
|
|
(103
|
)%
|
Provision (benefit) for income taxes
|
|
|
1
|
|
|
|
(5
|
)
|
|
|
6
|
|
|
|
(128
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
7
|
|
|
$
|
(287
|
)
|
|
$
|
294
|
|
|
|
(102
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of net revenue (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
18
|
%
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
34
|
%
|
|
|
31
|
%
|
|
|
|
|
|
|
|
|
Marketing expense
|
|
|
26
|
%
|
|
|
36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Percentages are calculated on unrounded numbers. |
Net
Revenue
Net revenue decreased $53 million, or 22%, to
$187 million for the three months ended September 30,
2009 from $240 million for the three months ended
September 30, 2008.
Air. Net revenue from air bookings decreased
$27 million, or 31%, to $60 million for the three
months ended September 30, 2009 from $87 million for
the three months ended September 30, 2008. Foreign currency
fluctuations drove $1 million of this decrease. The
decrease in net revenue from air bookings, excluding the impact
of foreign currency fluctuations, was $26 million.
Domestic air net revenue declined $29 million due to lower
average net revenue per airline ticket. Net revenue per airline
ticket declined primarily due to the elimination of booking fees
in April 2009 on most flights booked through our Orbitz.com and
CheapTickets.com websites and to a much lesser extent, due to a
reduction in paper tickets. This decrease was partially offset
by a $7 million increase in domestic air net
35
revenue due to higher transaction volume, which resulted
primarily from the removal of booking fees and lower air fares.
International air net revenue declined $4 million
(excluding the impact of foreign currency fluctuations) due
primarily to lower net revenue per airline ticket. The decrease
in net revenue per airline ticket was primarily due to lower
average air fares, which impact the net revenue per ticket for
our merchant air transactions, and a shift in customer
preference towards low cost carriers and short-haul flights.
Hotel. Net revenue from hotel bookings
decreased $19 million, or 27%, to $52 million for the
three months ended September 30, 2009 from $71 million
for the three months ended September 30, 2008. Foreign
currency fluctuations drove $2 million of this decrease.
The decrease in net revenue from hotel bookings, excluding the
impact of foreign currency fluctuations, was $17 million.
A decrease in average net revenue per transaction drove the
$12 million decrease in domestic hotel net revenue. This
decrease was primarily due to lower ADRs, a significant
reduction in hotel booking fees charged on our websites, and a
reduction in hotel breakage revenue as a result of more
aggressive collection efforts by hotel suppliers in response to
the current economic environment. Hotel breakage revenue
represents revenue recorded by us due to the reversal of
previously accrued hotel supplier liabilities. We reverse these
liabilities once it becomes no longer probable that we will be
required to pay the hotel supplier due to the time elapsed since
the check-in date.
The decrease in international hotel net revenue of
$5 million (excluding the impact of foreign currency
fluctuations) was driven by lower average net revenue per
transaction and lower volume. Lower net revenue per transaction,
which resulted from lower ADRs and a reduction in margins for
hotel rooms sourced through GTA, drove $3 million of the
decrease in international hotel net revenue. Lower volume,
largely due to the weak economic conditions in Europe and more
intense competition in the industry, drove the remaining
$2 million decrease in international hotel net revenue.
Dynamic packaging. Net revenue from dynamic
packaging bookings decreased $2 million, or 5%, to
$30 million for the three months ended September 30,
2009 from $32 million for the three months ended
September 30, 2008. Foreign currency fluctuations had a
nominal impact on dynamic packaging net revenue.
Lower average net revenue per transaction drove a
$9 million decrease in domestic net revenue from dynamic
packaging, which was partially offset by a $4 million
increase due to higher volume. Net revenue per transaction
decreased mainly due to lower ADRs and to our initial
recognition of breakage revenue in the third quarter of 2008 for
merchant car transactions booked as part of a package. Volume
for dynamic packaging increased due to a shift in traveler
preference from stand-alone travel products towards dynamic
packaging.
International net revenue from dynamic packaging (excluding the
impact of foreign currency fluctuations) increased
$3 million due to higher transaction volume and to a lesser
extent, higher average net revenue per transaction.
Advertising and media. Advertising and media
net revenue decreased $2 million, or 10%, to
$15 million for the three months ended September 30,
2009 from $17 million for the three months ended
September 30, 2008. Foreign currency fluctuations decreased
advertising and media net revenue by $1 million. The
decrease in advertising and media net revenue, excluding the
impact of foreign currency fluctuations, was $1 million.
Advertising and media net revenue decreased primarily due to a
general reduction in online display advertising spending by
companies in response to the current economic conditions.
Other. Other net revenue is comprised
primarily of net revenue from car bookings, cruise bookings,
destination services, travel insurance and our hosting business.
Other net revenue decreased $3 million, or 11%, to
$30 million for the three months ended September 30,
2009 from $33 million for the three months ended
September 30, 2008. Foreign currency fluctuations had a
nominal impact on other net revenue.
36
A decline in global car net revenue primarily drove the decrease
in other net revenue. The decline in car net revenue was driven
by lower volume, partially offset by higher net revenue per car
booking.
Cost of
Revenue
Our cost of revenue is primarily comprised of costs to operate
our customer service call centers, credit card processing fees,
and other costs such as ticketing and fulfillment, customer
refunds and charge-backs, affiliate commissions and connectivity
and other processing costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
$
|
|
|
%
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Change(a)
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer service costs
|
|
$
|
13
|
|
|
$
|
15
|
|
|
$
|
(2
|
)
|
|
|
(17
|
)%
|
Credit card processing fees
|
|
|
10
|
|
|
|
11
|
|
|
|
(1
|
)
|
|
|
(8
|
)%
|
Other
|
|
|
11
|
|
|
|
15
|
|
|
|
(4
|
)
|
|
|
(25
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
$
|
34
|
|
|
$
|
41
|
|
|
$
|
(7
|
)
|
|
|
(17
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Percentages are calculated on unrounded numbers. |
The decrease in cost of revenue was primarily driven by a
$2 million decrease in customer service costs, a
$1 million decrease in credit card processing costs, a
$2 million decrease in customer refunds and charge-backs
and a $1 million decrease in ticketing and fulfillment
costs.
Customer service costs decreased due to cost savings driven by
reductions in headcount and contract labor and increased
automation of the handling of customer service calls. In the
third quarter of 2009, we started to increase our customer
service staffing levels in order to better support the higher
volume of air transactions we have generated since the
elimination of booking fees in April 2009 on most flights booked
through our Orbitz.com and CheapTickets.com websites.
The decrease in credit card processing costs was primarily due
to a decline in our merchant gross bookings and air booking
fees. Customer refunds decreased primarily due to our efforts to
improve the customer experience, which have reduced the number
of incidents in which customer refunds were required. Ticketing
and fulfillment costs decreased as the industry continues to
move towards electronic ticketing to meet the International Air
Transport Association mandate to eliminate paper tickets.
Selling,
General and Administrative
Our selling, general and administrative expense is primarily
comprised of wages and benefits, contract labor costs, and
network communications, systems maintenance and equipment costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
$
|
|
|
%
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Change(a)
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages and benefits (b)
|
|
$
|
39
|
|
|
$
|
41
|
|
|
$
|
(2
|
)
|
|
|
(7
|
)%
|
Contract labor (b)
|
|
|
5
|
|
|
|
7
|
|
|
|
(2
|
)
|
|
|
(32
|
)%
|
Network communications, systems maintenance and equipment
|
|
|
6
|
|
|
|
9
|
|
|
|
(3
|
)
|
|
|
(29
|
)%
|
Other
|
|
|
15
|
|
|
|
18
|
|
|
|
(3
|
)
|
|
|
(19
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general, and administrative
|
|
$
|
65
|
|
|
$
|
75
|
|
|
$
|
(10
|
)
|
|
|
(15
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
(a) |
|
Percentages are calculated on unrounded numbers. |
|
(b) |
|
The amounts presented above for wages and benefits and contract
labor are net of amounts capitalized. |
The decrease in selling, general and administrative expense was
primarily driven by a $2 million decrease in wages and
benefits, a $2 million decrease in contract labor costs, a
$3 million decrease in network communications, system
maintenance and equipment costs and a $2 million decrease
in foreign currency losses.
Wages and benefits expense decreased primarily as a result of
the global work force reductions that occurred during the fourth
quarter of 2008 and throughout 2009, partially offset by an
increase in the amount of employee bonus expense accrued. Our
use of contract labor and our network communications, system
maintenance and equipment costs decreased in the third quarter
of 2009 as a result of expense reductions we undertook to manage
through the current economic recession and industry downturn.
Marketing
Our marketing expense is primarily comprised of online marketing
costs, such as search and banner advertising, and offline
marketing costs, such as television, radio and print
advertising. Our investment in online marketing is significantly
greater than our investment in offline marketing. Marketing
expense decreased $38 million, or 44%, to $48 million
for the three months ended September 30, 2009 from
$86 million for the three months ended September 30,
2008.
Marketing expense for our domestic brands decreased
$32 million, to $33 million for the three months ended
September 30, 2009 from $65 million for the three
months ended September 30, 2008. Marketing expense for our
international brands decreased $6 million, to
$15 million for the three months ended September 30,
2009 from $21 million for the three months
September 30, 2008. The decrease in marketing expense for
both our domestic and international brands was due to lower
offline and online marketing costs. The decrease in offline
marketing costs was mainly due to cost reductions taken by us in
order to manage through the current economic recession and
industry downturn. The decrease in online marketing costs was
primarily driven by a change in our approach to online
marketing, placing greater emphasis on attracting more non-paid
traffic to our websites and eliminating unprofitable SEM and
travel publisher marketing spending.
Depreciation
and Amortization
Depreciation and amortization increased $1 million, or 8%,
to $18 million for the three months ended
September 30, 2009 from $17 million for the three
months ended September 30, 2008. The increase in
depreciation and amortization is primarily due to the
acceleration of depreciation on certain assets whose useful
lives were shortened during 2009 and additional assets placed in
service during the period.
Impairment
of Goodwill and Intangible Assets
During the third quarter of 2008, in connection with our annual
planning process, we lowered our long-term earnings forecast in
response to changes in the economic environment. These factors,
coupled with a prolonged decline in our market capitalization,
indicated potential impairment of our goodwill, trademarks and
trade names. Additionally, given the economic environment, our
distribution partners are under increased pressure to reduce
their overall costs and could attempt to terminate or
renegotiate their agreements with us on more favorable terms to
them. These factors indicated that the carrying value of certain
of our finite-lived intangible assets, specifically customer
relationships, may not be recoverable. As a result, in
connection with the preparation of our financial statements for
the third quarter of 2008, we performed an interim impairment
test of our goodwill, indefinite-lived intangible assets and
finite-lived intangible assets. Based on the testing performed,
we recorded a non-cash impairment charge of $297 million,
of which $210 million related to goodwill, $74 million
related to trademarks and trade names and $13 million
related to customer relationships.
There was no impairment charge recorded during the third quarter
of 2009. Due to the current economic uncertainty and other
factors, we cannot assure that the remaining amounts of
goodwill, indefinite-lived intangible assets and finite-lived
intangible assets will not be further impaired in future periods.
38
Interest
Expense, Net
Interest expense, net decreased by $2 million, or 6%, to
$14 million for the three months ended September 30,
2009 from $16 million for the three months ended
September 30, 2008. The decrease in interest expense, net
is primarily due to lower interest expense incurred on the
$600 million term loan facility (Term Loan),
which was primarily driven by lower interest rates. This
decrease is partially offset by a decline in interest income
earned. During the three months ended September 30, 2009
and September 30, 2008, $4 million and $5 million
of the total interest expense recorded was non-cash,
respectively.
Provision
(Benefit) for Income Taxes
We recorded a tax provision of $1 million for the three
months ended September 30, 2009 and a tax benefit of
$5 million for the three months ended September 30,
2008. The tax benefit recorded for the three months ended
September 30, 2008 related to certain of our international
subsidiaries. The amount of the tax benefit recorded during the
third quarter of 2008 is disproportionate to the amount of
pre-tax net loss incurred during that period primarily because
we were not able to realize any tax benefits on the goodwill
impairment charge and only a limited amount of tax benefit on
the trademarks and trade names impairment charge, which were
recorded during the third quarter of 2008. The provision for
income taxes for the three months ended September 30, 2009
is the result of the tax effect of the income of certain
international subsidiaries that have not established valuation
allowances.
Comparison
of the nine months ended September 30, 2009 to the nine
months ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
$
|
|
|
%
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Change(a)
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Air
|
|
$
|
210
|
|
|
$
|
272
|
|
|
$
|
(62
|
)
|
|
|
(23
|
)%
|
Hotel
|
|
|
138
|
|
|
|
195
|
|
|
|
(57
|
)
|
|
|
(29
|
)%
|
Dynamic packaging
|
|
|
90
|
|
|
|
88
|
|
|
|
2
|
|
|
|
3
|
%
|
Advertising and media
|
|
|
43
|
|
|
|
42
|
|
|
|
1
|
|
|
|
3
|
%
|
Other
|
|
|
82
|
|
|
|
93
|
|
|
|
(11
|
)
|
|
|
(12
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
563
|
|
|
|
690
|
|
|
|
(127
|
)
|
|
|
(18
|
)%
|
Cost and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
103
|
|
|
|
130
|
|
|
|
(27
|
)
|
|
|
(21
|
)%
|
Selling, general and administrative
|
|
|
190
|
|
|
|
224
|
|
|
|
(34
|
)
|
|
|
(15
|
)%
|
Marketing
|
|
|
166
|
|
|
|
252
|
|
|
|
(86
|
)
|
|
|
(34
|
)%
|
Depreciation and amortization
|
|
|
51
|
|
|
|
49
|
|
|
|
2
|
|
|
|
4
|
%
|
Impairment of goodwill and intangible assets
|
|
|
332
|
|
|
|
297
|
|
|
|
35
|
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
842
|
|
|
|
952
|
|
|
|
(110
|
)
|
|
|
(12
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss)
|
|
|
(279
|
)
|
|
|
(262
|
)
|
|
|
(17
|
)
|
|
|
6
|
%
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(43
|
)
|
|
|
(47
|
)
|
|
|
4
|
|
|
|
(7
|
)%
|
Gain on extinguishment of debt
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
|
|
**
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense)
|
|
|
(41
|
)
|
|
|
(47
|
)
|
|
|
6
|
|
|
|
(11
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(320
|
)
|
|
|
(309
|
)
|
|
|
(11
|
)
|
|
|
4
|
%
|
(Benefit) for income taxes
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
(37
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(319
|
)
|
|
$
|
(307
|
)
|
|
$
|
(12
|
)
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of net revenue(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
18
|
%
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
34
|
%
|
|
|
32
|
%
|
|
|
|
|
|
|
|
|
Marketing expense
|
|
|
29
|
%
|
|
|
37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Percentages are calculated on unrounded numbers. |
39
Net
Revenue
Net revenue decreased $127 million, or 18%, to
$563 million for the nine months ended September 30,
2009 from $690 million for the nine months ended
September 30, 2008.
Air. Net revenue from air bookings decreased
$62 million, or 23%, to $210 million for the nine
months ended September 30, 2009 from $272 million for
the nine months ended September 30, 2008. Foreign currency
fluctuations drove $7 million of this decrease. The
decrease in net revenue from air bookings, excluding the impact
of foreign currency fluctuations, was $55 million.
Domestic air net revenue declined $51 million due to lower
average net revenue per airline ticket. Net revenue per airline
ticket declined primarily due to the elimination of booking fees
in April 2009 on most flights booked through our Orbitz.com and
CheapTickets.com websites and to a much lesser extent, due to a
reduction in paper tickets and the impact of Orbitz Price
Assurancesm.
This decrease was partially offset by a $1 million increase
in domestic air net revenue due to higher transaction volume,
which resulted primarily from the removal of booking fees and
lower air fares.
International air net revenue declined $5 million
(excluding the impact of foreign currency fluctuations)
primarily due to lower net revenue per airline ticket. The
decrease in net revenue per airline ticket is primarily due to
lower average air fares, which impact the net revenue per ticket
for our merchant air transactions, and a shift in customer
preference towards low cost carriers and short-haul flights.
Hotel. Net revenue from hotel bookings
decreased $57 million, or 29%, to $138 million for the
nine months ended September 30, 2009 from $195 million
for the nine months ended September 30, 2008. Foreign
currency fluctuations drove $12 million of this decrease.
The decrease in net revenue from hotel bookings, excluding the
impact of foreign currency fluctuations, was $45 million.
A decrease in average net revenue per transaction resulted in a
$24 million decrease in domestic hotel net revenue. Average
net revenue per transaction decreased primarily due to lower
ADRs, a significant reduction in hotel booking fees charged on
our websites, and a reduction in hotel breakage revenue as a
result of more aggressive collection efforts by hotel suppliers
in response to the current economic recession. A decline in
transaction volume, due in part to more intense competition
within the industry, the impact of weak economic conditions on
traveler demand and the shift in traveler preference from
stand-alone travel products towards dynamic packaging, drove the
remaining $3 million decrease in domestic hotel net revenue.
The decrease in international hotel net revenue of
$18 million (excluding the impact of foreign currency
fluctuations) was driven by lower volume and lower average net
revenue per transaction. Lower volume drove $10 million of
the decrease in international hotel net revenue. The decline in
volume was largely due to the weak economic conditions in Europe
and more intense competition in the industry. Lower net revenue
per transaction, which resulted from lower ADRs and a reduction
in margins for hotel rooms sourced through GTA, drove
$8 million of the decrease in international hotel net
revenue.
Dynamic packaging. Net revenue from dynamic
packaging bookings increased $2 million, or 3%, to
$90 million for the nine months ended September 30,
2009 from $88 million for the nine months ended
September 30, 2008. Foreign currency fluctuations decreased
dynamic packaging net revenue by $1 million. The increase
in net revenue from dynamic packaging bookings, excluding the
impact of foreign currency fluctuations, was $3 million.
Lower average net revenue per transaction drove an
$18 million decrease in domestic net revenue from dynamic
packaging, which was partially offset by a $17 million
increase in volume. Net revenue per transaction decreased mainly
due to lower ADRs. Volume for dynamic packaging increased due to
a shift in traveler preference from stand-alone travel products
towards dynamic packaging.
40
The increase in international net revenue from dynamic packaging
(excluding the impact of foreign currency fluctuations) was
$4 million. Net revenue from dynamic packaging increased
due to higher transaction volume, which was partially offset by
lower average net revenue per transaction.
Advertising and media. Advertising and media
net revenue increased $1 million, or 3%, to
$43 million for the nine months ended September 30,
2009 from $42 million for the nine months ended
September 30, 2008. Foreign currency fluctuations decreased
advertising and media net revenue by $1 million. The
increase in advertising and media net revenue, excluding the
impact of foreign currency fluctuations, was $2 million.
The overall increase in advertising and media net revenue was
primarily a result of our continued efforts to seek out new
opportunities to further monetize traffic on our websites,
partially offset by a general reduction in online display
advertising spending by companies in response to the current
economic conditions.
Other. Other net revenue decreased
$11 million, or 12%, to $82 million for the nine
months ended September 30, 2009 from $93 million for
the nine months ended September 30, 2008. Foreign currency
fluctuations decreased other net revenue by $2 million. The
decrease in other net revenue, excluding the impact of foreign
currency fluctuations, was $9 million.
A decline in global car net revenue and travel insurance net
revenue primarily drove the decrease in other net revenue. The
decline in car net revenue was driven by lower volume, partially
offset by higher net revenue per car booking. More favorable
agreements with certain car rental suppliers, which became
effective in January 2009, drove the higher net revenue per car
booking. The decrease in travel insurance revenue was primarily
due to lower air fares and the timing of certain commissions and
bonuses we earned in 2009 compared with 2008, partially offset
by an increase in air and dynamic packaging transaction volume.
Cost of
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
$
|
|
|
%
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Change(a)
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer service costs
|
|
$
|
39
|
|
|
$
|
48
|
|
|
$
|
(9
|
)
|
|
|
(19
|
)%
|
Credit card processing fees
|
|
|
30
|
|
|
|
34
|
|
|
|
(4
|
)
|
|
|
(12
|
)%
|
Other
|
|
|
34
|
|
|
|
48
|
|
|
|
(14
|
)
|
|
|
(29
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
$
|
103
|
|
|
$
|
130
|
|
|
$
|
(27
|
)
|
|
|
(21
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Percentages are calculated on unrounded numbers. |
The decrease in cost of revenue was primarily driven by a
$9 million decrease in customer service costs, a
$4 million decrease in credit card processing costs, an
$11 million decrease in customer refunds and charge-backs
and a $2 million decrease in ticketing and fulfillment
costs.
Customer service costs decreased primarily due to cost savings
driven by reductions in headcount and contract labor and
increased automation of the handling of customer service calls.
In the third quarter of 2009, we started to increase our
customer service staffing levels in order to better support the
higher volume of air transactions we have generated since the
elimination of booking fees in April 2009 on most flights booked
through our Orbitz.com and CheapTickets.com websites. The
decrease in credit card processing costs was primarily due to a
decline in our merchant gross bookings and air booking fees.
During the nine months ended September 30, 2008, we had a
higher level of charge-backs primarily due to sharply higher
fraudulent credit card usage at one of our international
locations. To address this issue, we installed new revenue
protection software and instituted tighter security measures
during the second quarter of 2008. As a result, we have
experienced a significant decline in charge-backs since that
time. Customer refunds also decreased, primarily due to our
efforts to improve the customer experience, which have reduced
the number of incidents in which customer refunds were required.
41
Ticketing and fulfillment costs decreased as the industry
continues to move towards electronic ticketing to meet the
International Air Transport Association mandate to eliminate
paper tickets.
Selling,
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
$
|
|
|
%
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Change(a)
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages and benefits (b)
|
|
$
|
119
|
|
|
$
|
127
|
|
|
$
|
(8
|
)
|
|
|
(6
|
)%
|
Contract labor (b)
|
|
|
16
|
|
|
|
25
|
|
|
|
(9
|
)
|
|
|
(37
|
)%
|
Network communications, systems maintenance and equipment
|
|
|
20
|
|
|
|
26
|
|
|
|
(6
|
)
|
|
|
(22
|
)%
|
Other
|
|
|
35
|
|
|
|
46
|
|
|
|
(11
|
)
|
|
|
(24
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general, and administrative
|
|
$
|
190
|
|
|
$
|
224
|
|
|
$
|
(34
|
)
|
|
|
(15
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Percentages are calculated on unrounded numbers. |
|
(b) |
|
The amounts presented above for wages and benefits and contract
labor are net of amounts capitalized. |
The decrease in selling, general and administrative expense was
primarily driven by an $8 million decrease in wages and
benefits, a $9 million decrease in contract labor costs, a
$6 million decrease in network communications, systems
maintenance and equipment costs, a $3 million decrease in
travel-related expenses and a $4 million decrease in
foreign currency losses.
Wages and benefits expense decreased primarily as a result of
the global work force reductions that occurred during the fourth
quarter of 2008 and throughout 2009, partially offset by the
associated severance expense of $3 million that we incurred
in connection with these work force reductions. The decrease in
wages and benefits expense was also offset in part by an
increase in the amount of employee bonus expense accrued and by
severance and additional equity-based compensation expense of
$4 million incurred in connection with the resignation of
the Companys former Chief Executive Officer in January
2009 (See Note 17 Severance of the Notes to
Condensed Consolidated Financial Statements).
Our network communications, systems maintenance and equipment
costs, our use of contract labor and our travel-related expenses
decreased as a result of expense reductions we undertook to
manage through the current economic recession and industry
downturn.
Marketing
Marketing expense decreased $86 million, or 34%, to
$166 million for the nine months ended September 30,
2009 from $252 million for the nine months ended
September 30, 2008. Marketing expense for our domestic
brands decreased $60 million, to $123 million for the
nine months ended September 30, 2009 from $183 million
for the nine months ended September 30, 2008. Marketing
expense for our international brands decreased $26 million,
to $43 million for the nine months ended September 30,
2009 from $69 million for the nine months ended
September 30, 2008. The decrease in marketing expense for
both our domestic and international brands was due to lower
offline and online marketing costs. The decrease in offline
marketing costs was mainly due to cost reductions taken by us in
order to manage through the current economic recession and
industry downturn. The decrease in online marketing costs was
primarily driven by a change in our approach to online
marketing, placing greater emphasis on attracting more non-paid
traffic to our websites and eliminating unprofitable SEM and
travel publisher marketing spending.
Depreciation
and Amortization
Depreciation and amortization increased $2 million, or 4%,
to $51 million for the nine months ended September 30,
2009 from $49 million for the nine months ended
September 30, 2008. The increase in depreciation and
amortization is primarily due to the acceleration of
depreciation on certain assets whose
42
useful lives were shortened during the nine months ended
September 30, 2009 and additional assets placed in service
during the period.
Impairment
of Goodwill and Intangible Assets
During the three months ended March 31, 2009, we
experienced a significant decline in our stock price, and
economic and industry conditions continued to weaken. These
factors, coupled with an increase in competitive pressures,
indicated potential impairment of our goodwill and trademarks
and trade names. As a result, in connection with the preparation
of our financial statements for the first quarter of 2009, we
performed an interim impairment test of our goodwill and
trademarks and trade names. Based on the testing performed, we
recorded a non-cash impairment charge of $332 million, of
which $250 million related to goodwill and $82 million
related to trademarks and trade names (see
Note 3 Impairment of Goodwill and Intangible
Assets of the Notes to the Condensed Consolidated Financial
Statements).
During the nine months ended September 30, 2008, in
connection with our annual planning process, we lowered our
long-term earnings forecast in response to changes in the
economic environment. These factors, coupled with a prolonged
decline in our market capitalization, indicated potential
impairment of our goodwill and trademarks and trade names.
Additionally, given the economic environment, our distribution
partners are under increased pressure to reduce their overall
costs and could attempt to terminate or renegotiate their
agreements with us on more favorable terms to them. These
factors indicated that the carrying value of certain of our
finite-lived intangible assets, specifically customer
relationships, may not be recoverable. As a result, in
connection with the preparation of our financial statements for
the third quarter of 2008, we performed an interim impairment
test of our goodwill, indefinite-lived intangible assets and
finite-lived intangible assets. Based on the testing performed,
we recorded a non-cash impairment charge of $297 million,
of which $210 million related to goodwill, $74 million
related to trademarks and trade names and $13 million
related to customer relationships.
Due to the current economic uncertainty and other factors, we
cannot assure that the remaining amounts of goodwill,
indefinite-lived intangible assets and finite-lived intangible
assets will not be further impaired in future periods.
Interest
Expense, Net
Interest expense, net decreased by $4 million, or 7%, to
$43 million for the nine months ended September 30,
2009 from $47 million for the nine months ended
September 30, 2008. The decrease in interest expense, net
is primarily due to lower interest expense incurred on the Term
Loan, which was primarily driven by lower interest rates. This
decrease is partially offset by a decline in interest income
earned. During the nine months ended September 30, 2009 and
September 30, 2008, $12 million and $14 million
of the total interest expense recorded was non-cash,
respectively.
Gain on
Extinguishment of Debt
During the nine months ended September 30, 2009, we
purchased and retired $10 million in principal amount of
the Term Loan. The principal amount of the Term Loan purchased
(net of associated unamortized debt issuance costs of almost
nil) exceeded the amount we paid to purchase the debt (inclusive
of miscellaneous fees incurred) by $2 million. Accordingly,
we recorded a $2 million gain on extinguishment of a
portion of the Term Loan during the nine months ended
September 30, 2009. There was no gain on extinguishment of
debt recorded during the nine months ended September 30,
2008 (See Note 7 Term Loan and Revolving Credit
Facility of the Notes to Condensed Consolidated Financial
Statements).
(Benefit)
for Income Taxes
We recorded a tax benefit of $1 million and $2 million
for the nine months ended September 30, 2009 and
September 30, 2008, respectively. The tax benefit recorded
for the nine months ended September 30, 2008 related to
certain of our international subsidiaries. The amount of the tax
benefit recorded during the nine months ended September 30,
2008 is disproportionate to the amount of pre-tax net loss
incurred during that
43
period primarily because we were not able to realize any tax
benefits on the goodwill impairment charge and only a limited
amount of tax benefit on the trademarks and trade names
impairment charge, which were recorded during the third quarter
of 2008.
The benefit for income taxes for the nine months ended
September 30, 2009 is the result of the tax effect of the
losses of certain international subsidiaries that have not
established valuation allowances. The amount of the tax benefit
recorded during the nine months ended September 30, 2009 is
disproportionate to the amount of pre-tax net loss incurred
during the period primarily because we are not able to realize
any tax benefit on the goodwill impairment charge and only a
limited amount of tax benefit on the trademarks and trade names
impairment charge, which were recorded during the first quarter
of 2009.
Related
Party Transactions
For a discussion of certain relationships and related party
transactions, see Note 15 Related Party
Transactions of the Notes to Condensed Consolidated Financial
Statements.
Seasonality
Our businesses experience seasonal fluctuations in the demand
for the products and services we offer. The majority of our
customers book travel for leisure purposes rather than for
business. Gross bookings for leisure travel are generally
highest in the first and second calendar quarters as customers
plan and book their spring and summer vacations. However, net
revenue generated under the merchant model is generally
recognized when the travel takes place and typically lags
bookings by several weeks or longer. As a result, our cash
receipts are generally highest in the first half of the year and
our net revenue is typically highest in the second and third
calendar quarters. Our seasonality may also be affected by
fluctuations in the travel products our suppliers make available
to us for booking, the future growth of our international
operations or a change in our product mix.
LIQUIDITY
AND CAPITAL RESOURCES
Liquidity
Our principal sources of liquidity are our cash flows from
operations, cash and cash equivalents, and borrowings under our
$85 million revolving credit facility. At
September 30, 2009 and December 31, 2008, our cash and
cash equivalents balances were $122 million and
$31 million, respectively. We had $6 million and
$52 million of availability under our revolving credit
facility at September 30, 2009 and December 31, 2008,
respectively. This availability reflects the effective reduction
in total availability under our revolving credit facility in
2008 as described in Financing Arrangements below.
Total available liquidity from cash and cash equivalents and our
revolving credit facility was $128 million and
$83 million at September 30, 2009 and
December 31, 2008, respectively.
We require letters of credit to support certain commercial
agreements, leases and regulatory agreements. The majority of
these letters of credit have been issued by Travelport on our
behalf. At September 30, 2009 and December 31, 2008,
there were $66 million and $67 million of outstanding
letters of credit issued by Travelport on our behalf,
respectively, pursuant to the Separation Agreement, as amended,
that we entered into with Travelport in connection with our
initial public offering (the Separation Agreement).
In addition, at September 30, 2009, there was the
equivalent of $4 million of outstanding letters of credit
issued under our revolving credit facility, which were
denominated in Pounds Sterling. There were no outstanding
letters of credit issued under our revolving credit facility at
December 31, 2008. The amount of letters of credit issued
under our revolving credit facility reduces the amount available
to us for borrowings.
In light of concerns about the financial industry and in order
to ensure availability of liquidity, we have borrowed
$63 million under our revolving credit facility, which has
increased our cash position. We anticipate that a portion of
these funds may be used to fund our working capital needs later
in 2009.
Under our merchant model, customers generally pay us for
reservations at the time of booking, and we pay our suppliers at
a later date, which is generally after the customer uses the
reservation. Initially, we record
44
these customer receipts as deferred income and accrued merchant
payables. We recognize net revenue when customers use the
reservation, and we pay our suppliers once we have received an
invoice, which generally ranges from one to sixty days after
customers use the reservation. The timing difference between
when cash is collected from our customers and when payments are
made to our suppliers impacts our operating cash flows and
represents a source of liquidity for us. If our merchant model
gross bookings grow, we would expect our operating cash flows to
increase. Conversely, if our merchant model gross bookings
decline or there are changes to the model which reduce the time
between the receipt of cash from our customers and payments to
suppliers, our operating cash flows would decline. Due to
various factors, including the weak economy, a decline in our
merchant gross bookings and the shortening of certain vendor
payment terms, the liquidity provided by our merchant model
decreased during the nine months ended September 30, 2009
as compared with the nine months ended September 30, 2008.
Historically, under both our retail and merchant models, we
charged customers a service fee for booking airline tickets,
hotel rooms and certain other travel products on our websites,
and revenue from these booking fees has represented a
significant portion of our operating cash flow and a source of
liquidity for us. In 2009, we removed booking fees on most
flights booked through Orbitz.com and CheapTickets.com, and we
significantly reduced booking fees on all hotel rooms booked
through Orbitz.com and CheapTickets.com. We believe the
combination of our cost reductions, new media monetization
initiatives, our improved marketing efficiency and the increase
in air transactions we have experienced since removing fees
should enable us to offset most, if not all, of the expected
decrease in our operating cash flow and liquidity due to lower
booking fees. However, if we are unable to effectively continue
to offset the impact of the booking fee reductions, our cash
flow and liquidity could be materially reduced.
Seasonal fluctuations in our business also affect the timing of
our cash flows. Gross bookings are generally highest in the
first and second calendar quarters as customers plan and
purchase their spring and summer vacations. As a result, our
cash receipts are generally highest in the first half of the
year. We generally use cash during the second half of the year
to pay our suppliers. While we expect this seasonal cash flow
pattern to continue, changes in our business model could affect
the seasonal nature of our cash flows.
As of September 30, 2009, we had a working capital deficit
of $210 million as compared with a deficit of
$258 million as of December 31, 2008. Over time, we
expect to decrease this deficit through continued growth in our
business and the generation of positive cash flow from
operations, which we expect to achieve by continuing to offer
new and innovative functionality on our websites, improving our
operating efficiency and simplifying the way we do business.
We generated positive cash flow from operations for the years
ended December 31, 2006 through 2008 and the nine months
ended September 30, 2009, despite experiencing net losses.
We generally use this cash flow to fund our operations, make
principal and interest payments on our debt, finance capital
expenditures and meet our other cash operating needs. We invest
cash flow from operations into our business. Historically, this
cash flow has primarily financed the development and expansion
of our new technology platform. We do not intend to declare or
pay any cash dividends on our common stock in the foreseeable
future.
We expect annual cash flow from operations to remain positive in
the foreseeable future. We intend to continue to use this cash
flow to fund capital expenditures as well as to fund other
investing and financing activities, such as debt repayments. For
the year ending December 31, 2009, we expect our capital
expenditures to be between $40 million and $45 million.
We currently believe that cash flow generated from operations,
cash on hand and cash available under our revolving credit
facility will provide sufficient liquidity to fund our operating
activities, capital expenditures and other obligations for the
foreseeable future. However, in the future, our liquidity could
be negatively impacted as a result of changes to our business
model, including changes to payment terms or other requirements
imposed by suppliers or regulatory agencies, lower than
anticipated operating cash flows, or other unanticipated events,
such as unfavorable outcomes in our legal proceedings, including
if we are found to be subject to the hotel occupancy tax
ordinance by a taxing authority and appeal the decision in
court, which may require us in certain jurisdictions to provide
financial security or pay the assessment to the municipality in
order to challenge the assessment in court. For example, the
liquidity provided by cash flows
45
from our merchant model bookings could be negatively impacted if
our merchant model gross bookings continue to decline as a
result of current economic conditions or other factors, or if
our suppliers, including credit card processors and hotels,
changed their payment terms or suppliers or regulatory agencies
imposed other requirements on us, such as requiring us to
provide letters of credit or to establish cash reserves. In the
fourth quarter of 2009, we expect that we will be subject to
regulatory requirements that will require us to provide
additional letters of credit or to establish cash reserves. The
additional amounts required, if any, are uncertain at this time.
If as a result of these requirements, we require letters of
credit which exceed the availability under the facility provided
by Travelport, we would be required to issue these letters of
credit under our revolving credit facility or to establish cash
reserves which could negatively impact our available liquidity.
If, in the future, we require more liquidity than is available
to us under our revolving credit facility, we may need to raise
additional funds through debt or equity offerings. In the event
additional financing is required, our ability to raise
third-party debt may be limited by the covenants and
restrictions under our senior secured credit agreement and may
require the consent of Travelport pursuant to the terms of our
certificate of incorporation. In addition, financing may not be
available to us at all or may not be available to us at
favorable terms, particularly in the current economic
environment. We may raise additional funds through the issuance
of equity securities, which could result in potential dilution
of our stockholders equity. However, any such issuance may
require the consent of Travelport and our other shareholders.
Furthermore, if we require letters of credit in excess of the
$75 million available under the facility provided by
Travelport or if we require letters of credit denominated in
foreign currencies and are unable to obtain these letters of
credit, we would be required to issue such letters of credit
under our revolving credit facility, which would reduce
available liquidity.
Cash
Flows
Our net cash flows from operating, investing and financing
activities for the nine months ended September 30, 2009 and
September 30, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Beginning cash and cash equivalents
|
|
$
|
31
|
|
|
$
|
25
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
104
|
|
|
|
121
|
|
Investing activities
|
|
|
(31
|
)
|
|
|
(42
|
)
|
Financing activities
|
|
|
16
|
|
|
|
|
|
Effects of changes in exchange rates on cash and cash equivalents
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
91
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
Ending cash and cash equivalents
|
|
$
|
122
|
|
|
$
|
103
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities
Cash provided by operating activities consists of net loss,
adjusted for non-cash items such as depreciation, amortization,
impairment of goodwill and intangible assets, and stock based
compensation and changes in various working capital items,
principally accounts receivable, accrued expenses, accrued
merchant payables, deferred income and accounts payable.
We generated cash flow from operations of $104 million for
the nine months ended September 30, 2009 compared with
$121 million for the nine months ended September 30,
2008. The decrease in operating cash flow was primarily due to
lower merchant hotel gross bookings in the nine months ended
September 30, 2009 compared with the nine months ended
September 30, 2008, as a result of lower global ADRs. The
elimination of most air booking fees, the reduction of hotel
booking fees and the shortening of our payment terms with a
46
key vendor during 2009 also negatively impacted our operating
cash flow. These operating cash flow decreases were partially
offset by an increase in operating cash flow due to cost
reductions taken by us in 2009 and improvements in our overall
marketing efficiency.
The changes in our working capital accounts, which are partially
due to the factors mentioned above and to the general timing of
payments, also contributed to the decrease in our operating cash
flow.
Investing
Activities
Cash flow used in investing activities decreased
$11 million, to $31 million for the nine months ended
September 30, 2009 from $42 million for the nine
months ended September 30, 2008. The decrease in cash flow
used in investing activities was due to lower capital spending
during the nine months ended September 30, 2009 resulting
from cost reduction efforts taken in late 2008 and 2009.
Financing
Activities
Cash flow provided by financing activities increased
$16 million, to $16 million for the nine months ended
September 30, 2009 from almost nil for the nine months
ended September 30, 2008 primarily due to a
$16 million increase in net borrowings made under our
revolving credit facility during the nine months ended
September 30, 2009. These borrowings were made to ensure
availability of liquidity, particularly in response to continued
uncertainty in the credit and financial markets. The increase is
also due to a decrease in payments made under the tax sharing
agreement with the Founding Airlines, a decrease in capital
lease payments and a decrease in payments made to satisfy tax
withholding obligations upon the vesting of equity-based awards.
The increase in cash flow provided by financing activities is
partially offset by $8 million of payments made by us in
June 2009 to purchase $10 million in principal amount of
the Term Loan (see Note 7 Term Loan and
Revolving Credit Facility of the Notes to Condensed Consolidated
Financial Statements for additional information).
Financing
Arrangements
On July 25, 2007, concurrent with our initial public
offering (IPO), we entered into a $685 million
senior secured credit agreement (Credit Agreement)
consisting of a seven-year $600 million term loan facility
(Term Loan) and a six-year $85 million
revolving credit facility (Revolver). The Term Loan
and the Revolver bear interest at variable rates, at our option,
of LIBOR or an alternative base rate plus a margin. At
September 30, 2009 and December 31, 2008,
$578 million and $593 million was outstanding on the
Term Loan, respectively, and $63 million and
$21 million of borrowings were outstanding under the
Revolver, respectively. Of the borrowings outstanding under the
Revolver at September 30, 2009, $42 million were
denominated in U.S. dollars and the equivalent of
$21 million was denominated in Pounds Sterling. All of the
borrowings outstanding under the Revolver at December 31,
2008 were denominated in U.S. dollars.
In addition, at September 30, 2009, there was the
equivalent of $4 million of outstanding letters of credit
issued under the Revolver, which were denominated in Pounds
Sterling. There were no outstanding letters of credit issued
under the Revolver at December 31, 2008. The amount of
letters of credit issued under the Revolver reduces the amount
available to us for borrowings.
On June 2, 2009, we entered into an amendment (the
Amendment) to our Credit Agreement, which permits us
to purchase portions of our outstanding Term Loan on a non-pro
rata basis using cash up to $10 million and future cash
proceeds from equity issuances and in exchange for equity
interests on or prior to June 2, 2010. Any portion of the
Term Loan purchased by us will be retired and cannot be
re-borrowed. The Amendment required that we purchase at least
$10 million in principal amount of the Term Loan on or
before June 19, 2009, or we would lose our ability to
purchase any term loans pursuant to the Amendment. On
June 17, 2009, we completed the purchase of
$10 million in principal amount of the Term Loan, and as a
result, we will be permitted to make additional non-pro rata
purchases of the Term Loan pursuant to the Amendment through
June 2, 2010 (see Note 7 Term Loan and
Revolving Credit Facility of the Notes to Condensed Consolidated
Financial Statements for additional information).
47
Lehman Commercial Paper Inc., which filed for bankruptcy
protection under Chapter 11 of the United States
Bankruptcy Code on October 5, 2008, holds a
$12.5 million commitment, or 14.7% percent, of the
$85 million available under the Revolver. As a result,
total availability under the Revolver has effectively been
reduced from $85 million to $72.5 million.
The Credit Agreement requires us not to exceed a maximum total
leverage ratio, which declines over the term of the agreement,
and to maintain a minimum fixed charge coverage ratio, each as
defined in the Credit Agreement. As of September 30, 2009,
we were in compliance with all covenants and conditions of the
Credit Agreement.
In addition, we are required to make an annual prepayment on the
Term Loan in the first quarter of each fiscal year in an amount
up to 50% of the prior years excess cash flow, as defined
in the Credit Agreement. These prepayments are applied, in order
of maturity, to the scheduled quarterly term loan principal
payments. Based on our cash flow for the year ended
December 31, 2008, we were not required to make a
prepayment in 2009. Based on our projected cash flow for the
year ending December 31, 2009, we estimate that we will be
required to make a prepayment on the Term Loan of
$2 million in the first quarter of 2010. The potential
amount of any such prepayments that will be required beyond the
first quarter of 2010 is not reasonably estimable as of
September 30, 2009.
As a wholly owned subsidiary of Travelport, Travelport provided
guarantees, letters of credit and surety bonds on our behalf
under our commercial agreements and leases and for the benefit
of certain regulatory agencies. Under the Separation Agreement,
we are required to use commercially reasonable efforts to have
Travelport released from any then outstanding guarantees and
surety bonds. Travelport no longer provides surety bonds on our
behalf or guarantees in connection with commercial agreements or
leases entered into or replaced by us subsequent to the IPO. At
September 30, 2009 and December 31, 2008, there were
$66 million and $67 million of letters of credit
issued by Travelport on our behalf, respectively. Under the
Separation Agreement, Travelport has agreed to issue
U.S. Dollar denominated letters of credit on our behalf in
an aggregate amount not to exceed $75 million through at
least March 31, 2010 and thereafter so long as Travelport
and its affiliates (as defined in the Separation Agreement) own
at least 50% of our voting stock.
Financial
Obligations
Commitments
and Contingencies
We and certain of our affiliates are parties to cases brought by
consumers and municipalities and other U.S. governmental
entities involving hotel occupancy taxes. We believe that we
have meritorious defenses, and we are vigorously defending
against these claims, proceedings and inquiries (see
Note 10 Commitments and Contingencies of the
Notes to Condensed Consolidated Financial Statements for
additional information).
Litigation is inherently unpredictable and, although we believe
we have valid defenses in these matters based upon advice of
counsel, unfavorable resolutions could occur. While we cannot
estimate our range of loss and believe it is unlikely that an
adverse outcome will result from these proceedings, an adverse
outcome could be material to us with respect to earnings or cash
flows in any given reporting period.
We are currently seeking to recover insurance reimbursement for
costs incurred to defend the hotel occupancy tax cases. We
recorded a reduction to selling, general and administrative
expense in our condensed consolidated statements of operations
for reimbursements received of $1 million for each of the
three months ended September 30, 2009 and
September 30, 2008, respectively, and $4 million and
$6 million for the nine months ended September 30,
2009 and September 30, 2008, respectively. The recovery of
additional amounts, if any, by us and the timing of receipt of
these recoveries is unclear. As such, as of September 30,
2009, we have not recognized a reduction to selling, general and
administrative expense in our condensed consolidated statements
of operations for the outstanding contingent claims for which we
have not yet received reimbursement.
48
Contractual
Obligations
Our contractual obligations as of September 30, 2009 did
not materially change from the amounts set forth in our 2008
Annual Report on
Form 10-K.
Other
Commercial Commitments and Off-Balance Sheet
Arrangements
In the ordinary course of business, we obtain surety bonds and
bank guarantees, issued for the benefit of a third party, to
secure performance of certain of our obligations to third
parties. At September 30, 2009 and December 31, 2008,
there were $3 million of surety bonds outstanding. At
September 30, 2009 and December 31, 2008, there were
$1 million and $2 million of bank guarantees
outstanding, respectively.
We are also required to issue letters of credit to certain
suppliers and
non-U.S. regulatory
and government agencies. Refer to Financing
Arrangements above for further discussion of our
outstanding letters of credit.
CRITICAL
ACCOUNTING POLICIES
The preparation of our condensed consolidated financial
statements and related notes in conformity with generally
accepted accounting principles in the U.S. requires us to
make judgments, estimates and assumptions that affect the
amounts reported therein. See Item 7
Managements Discussion and Analysis of Financial
Condition and Results of Operations Critical
Accounting Policies in our 2008 Annual Report on
Form 10-K
for a discussion of these judgments, estimates and assumptions.
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
Foreign
Currency Risk
Our international operations are subject to risks typical of
international operations, including, but not limited to,
differing economic conditions, changes in political climate,
differing tax structures and foreign exchange rate volatility.
Accordingly, our future results could be materially adversely
impacted by changes in these or other factors.
Transaction
Exposure
We use foreign currency forward contracts to manage our exposure
to changes in foreign currency exchange rates associated with
our foreign currency denominated receivables, payables,
intercompany transactions and borrowings under our revolving
credit facility. We primarily hedge our foreign currency
exposure to the Pound Sterling, Euro and Australian dollar. We
do not engage in trading, market making or speculative
activities in the derivatives markets. Substantially all of the
forward contracts utilized by us do not qualify for hedge
accounting treatment, and as a result, any fluctuations in the
value of these forward contracts are recognized in our condensed
consolidated statements of operations as incurred. The
fluctuations in the value of these forward contracts do,
however, largely offset the impact of changes in the value of
the underlying risk that they are intended to economically
hedge. As of September 30, 2009 and December 31, 2008,
we had outstanding foreign currency forward contracts with net
notional values equivalent to approximately $104 million
and $61 million, respectively.
Translation
Exposure
Foreign exchange rate fluctuations may adversely impact our
financial position as the assets and liabilities of our foreign
operations are translated into U.S. dollars in preparing
our condensed consolidated balance sheets. The effect of foreign
exchange rate fluctuations on our condensed consolidated balance
sheets at September 30, 2009 and December 31, 2008 was
a net translation loss of $4 million and $9 million,
respectively. This loss is recognized as an adjustment to
shareholders equity through accumulated other
comprehensive income.
49
Interest
Rate Risk
Our Term Loan and Revolver bear interest at a variable rate
based on LIBOR or an alternative base rate. We limit interest
rate risk associated with the Term Loan using interest rate
swaps with a combined notional amount of $400 million as of
September 30, 2009 to hedge fluctuations in LIBOR (see
Note 13 Derivative Financial Instruments of the
Notes to Condensed Consolidated Financial Statements). We do not
engage in trading, market making or speculative activities in
the derivatives markets.
Sensitivity
Analysis
We assess our market risk based on changes in foreign currency
exchange rates and interest rates utilizing a sensitivity
analysis that measures the potential impact on earnings, fair
values, and cash flows based on a hypothetical 10% change
(increase and decrease) in foreign currency rates and interest
rates. We used September 30, 2009 market rates to perform a
sensitivity analysis separately for each of our market risk
exposures. The estimates assume instantaneous, parallel shifts
in interest rate yield curves and exchange rates. We determined,
through this analysis, that the potential decrease in net
current assets from a hypothetical 10% adverse change in quoted
foreign currency exchange rates would be $9 million at
September 30, 2009 compared with $5 million at
December 31, 2008. There are inherent limitations in the
sensitivity analysis, primarily due to assumptions that foreign
exchange rate movements are linear and instantaneous. The effect
of a hypothetical 10% change in market rates of interest on
interest expense would be almost nil at September 30, 2009
and December 31, 2008, respectively.
|
|
Item 4.
|
Controls
and Procedures.
|
Evaluation
of Disclosure Controls and Procedures.
Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures (as such
term is defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended (the
Exchange Act)) as of September 30, 2009. Based
on such evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of such
period, our disclosure controls and procedures were effective.
Changes
in Internal Control over Financial Reporting.
There were no changes in our internal control over financial
reporting (as such term is defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) during the fiscal quarter ended
September 30, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
PART II
OTHER INFORMATION
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|
Item 1.
|
Legal
Proceedings.
|
During the three months ended September 30, 2009, there
were no new material pending legal proceedings, other than
routine litigation arising in the ordinary course of business,
to which we are a party or of which our property is subject, and
no material developments in the legal proceedings previously
reported in our 2008 Annual Report on
Form 10-K
or in our Quarterly Reports on
Form 10-Q
for the quarterly periods ended March 31, 2009 and
June 30, 2009, except as described below.
On July 6, 2009, St. Louis County, Missouri filed a
complaint in the Circuit Court for the County of St. Louis
against Trip Network, Inc. (d/b/a Cheaptickets.com),
Internetwork Publishing Corp. (d/b/a Lodging.com), Orbitz, LLC,
Orbitz, Inc, and various other online travel companies
(OTCs) asserting violations of the Tourism Tax
Ordinance, the Hotel Tax Ordinance, conversion and declaratory
judgment. On September 18, 2009, the County filed its first
amended complaint adding St. Louis Convention &
Visitors Commission as a plaintiff.
50
As previously reported, on July 7, 2009, the
U.S. District Court for the District of New Mexico granted
the City of Gallup, New Mexicos motion for class
certification. On July 17, 2009, the defendants, including
us, filed a Rule 23(f) petition before the U.S. Court
of Appeals for the Tenth Circuit seeking a reversal of the class
certification. On August 27, 2009, the U.S. Court of
Appeals for the Tenth Circuit denied the Rule 23(f)
petition.
On July 9, 2009, the Superior Court of Muscogee County,
Georgia partially lifted the stay in City of Columbus,
Georgia v. Orbitz, LLC.
On July 10, 2009, the U.S. District Court for the
Northern District of Georgia lifted the stay imposed in City
of Rome, Georgia v. Hotels.com, L.P., et al., ordering
that the case proceed.
On July 16, 2009, the U.S. Court of Appeals for the
Ninth Circuit affirmed the U.S. District Court for the
Northern District of Californias dismissal of City of
Oakland v. Hotels.com, L.P. et al. for lack of subject
matter jurisdiction due to the City of Oaklands failure to
exhaust administrative remedies.
On July 24, 2009, the Village of Rosemont, Illinois filed a
complaint in the Circuit Court for Cook County, Illinois against
Trip Network, Inc. (d/b/a Cheaptickets.com) and Orbitz, LLC
asserting violations of
section 12-23
of the Rosemont Code, unjust enrichment, and conversion.
On July 30, 2009, Palm Beach County and the Palm Beach
County Tax Collector filed a complaint in the Circuit Court of
the Fifteenth Judicial Circuit in and for Palm Beach County,
Florida against Trip Network, Inc.
(d/b/a
Cheaptickets.com), Internetwork Publishing Corp. (d/b/a
Lodging.com), Orbitz Travel Insurance Services, LLC (d/b/a
Orbitz, Inc.), Orbitz Travel Insurance Services, LLC (d/b/a
Orbitz, LLC) and various other OTCs seeking a declaratory
judgment that the defendants are subject to the Tourist
Development Taxes imposed by the County.
On August 11, 2009, the U.S. Court of Appeals for the
Second Circuit, without considering whether Nassau County, New
York needed to exhaust administrative processes to sustain
jurisdiction, vacated the U.S. District Court for the
Eastern District of New Yorks dismissal of County of
Nassau v. Hotels.com, L.P., et al. and remanded the
case to determine if the complaint meets the requirements for
class certification under Rule 23 of the Federal Rules of Civil
Procedure.
On August 31, 2009, the Circuit Court for the County of
Ingham, Michigan denied the defendants motion to dismiss
the complaint filed in County of Genesee, Michigan v.
Hotels.com, L.P. et al.
On September 21, 2009, pursuant to the parties
stipulated request for dismissal, the Superior Court for the
State of California, County of Los Angeles dismissed
Bush v. Cheaptickets.com, et al. with prejudice.
On September 28, 2009, in the case titled City of
San Antonio, Texas v. Hotels.com, L.P., et al.,
the U.S. District Court for the Western District of
Texas granted in part the City of San Antonios motion
for a partial summary judgment on the defendants
affirmative defenses of laches, waiver, estoppel, statute of
limitations, ITFA and constitutional infirmities. The court
denied the plaintiffs other grounds for partial summary
judgment and denied the defendants motion for summary
judgment in its entirety. The City of San Antonio filed
that class action lawsuit on behalf of itself and 172 other
Texas municipalities against various online travel companies.
The trial in the case began on October 5, 2009. On
October 30, 2009, Orbitz, LLC, Trip Network, Inc. (d/b/a
Cheaptickets.com), and Internetwork Publishing Corp. (d/b/a
Lodging.com) received a jury verdict finding that Orbitz, LLC,
Trip Network, Inc. (d/b/a Cheaptickets.com), Internetwork
Publishing Corp. (d/b/a Lodging.com) and the other online travel
companies, each named as defendants, have been or currently are
controlling hotels under the local hotel occupancy
tax ordinances. The jurys verdict further found that
Orbitz, LLC, Trip Network, Inc. (d/b/a Cheaptickets.com) and
Internetwork Publishing Corp. (d/b/a Lodging.com) did not
convert any alleged tax monies belonging to the City of
San Antonio or any other class member (that is, the jury
found that the defendants did not collect a tax and
pocket the tax dollars) and the jury therefore
rejected the City of San Antonios request for
punitive damages. The final amount of any judgment that may be
rendered in the future against Orbitz, LLC, Trip Network, Inc.
(d/b/a Cheaptickets.com) and Internetwork Publishing Corp.
(d/b/a Lodging.com) has not been determined. The jurys
verdict found that Orbitz, LLC, Trip Network, Inc. (d/b/a
Cheaptickets.com) and Internetwork Publishing Corp. (d/b/a
51
Lodging.com), combined, owed the City of San Antonio and
the other 172 class members approximately $1.9 million in
hotel occupancy taxes through May 2009. The court will conduct
further proceedings, including among other things, determining
the amount of any taxes, interest and penalties owed, which may
be substantial. At this time, the Company is unable to estimate
the final amount of any judgment that may be rendered in the
future. Orbitz, LLC, Trip Network, Inc. (d/b/a Cheaptickets.com)
and Internetwork Publishing Corp. (d/b/a Lodging.com) intend to
continue to defend themselves vigorously in this matter,
including an appeal to the United States Court of Appeals for
the Fifth Circuit if necessary.
On September 9, 2009, the County of Lawrence, Pennsylvania,
on behalf of itself and all others similarly situated
Pennsylvania Counties filed a purported class action complaint
in the U.S. District Court for the Western District of
Pennsylvania against various OTCs including Trip Network, Inc.
(d/b/a Cheaptickets.com), Internetwork Publishing Corp. (d/b/a
Lodging.com), Orbitz, Inc. and Orbitz, LLC asserting violations
of the Pennsylvania Code, conversion, equitable claims of unjust
enrichment, constructive trust and money had and received, and
seeking a declaratory judgment.
On September 25, 2009, the Pine Bluff Advertising and
Promotion Commission, Jefferson County, Arkansas and all others
similarly situated filed a purported class action complaint in
the Circuit Court of Jefferson County, Arkansas against various
OTCs including Trip Network, Inc. (d/b/a Cheaptickets.com),
Internetwork Publishing Corp. (d/b/a Lodging.com) and Orbitz,
LLC seeking a declaratory judgment that the defendants violated
accommodations tax laws and ordinances.
On September 30, 2009, the Appellate Court of Illinois
affirmed the Circuit Court of Cook County, Illinois
December 19, 2008 order that granted Orbitzs motion
for summary judgment and denied the plaintiffs motion for
class certification in the action styled In re Orbitz Taxes
and Fees Litigation.
On November 3, 2009, Floridas Attorney General, on
behalf of the State of Florida, filed a complaint in the Circuit
Court for the Second Judicial Circuit in and for Leon County,
Florida against Expedia, Inc., Orbitz, LLC and Orbitz, Inc.
asserting violations of the Florida Deceptive and Unfair Trade
Practices Act and seeking a declaratory judgment.
There have been no material changes from the risk factors
previously disclosed in our 2008 Annual Report on
Form 10-K.
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Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds.
|
The following table sets forth repurchases of our common stock
during the third quarter of 2009:
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|
|
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|
|
|
|
|
|
|
|
Total Number of
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|
|
|
|
|
|
|
|
|
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|
Shares Purchased as
|
|
|
Maximum Number of
|
|
|
|
|
|
|
|
|
|
Part of Publicly
|
|
|
Shares That May Yet be
|
|
|
|
Total Number of
|
|
|
Average Price
|
|
|
Announced Plans or
|
|
|
Purchased Under the
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|
Period
|
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Shares Purchased(a)
|
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|
Paid per Share
|
|
|
Programs(b)
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|
|
Plans or Programs(b)
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July 1, 2009 to July 31, 2009
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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August 1, 2009 to August 31, 2009
|
|
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324
|
|
|
$
|
6.63
|
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|
|
|
|
|
|
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September 1, 2009 to September 30, 2009
|
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total
|
|
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324
|
|
|
$
|
6.63
|
|
|
|
|
|
|
|
|
|
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|
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(a) |
|
Represents shares of our common stock transferred to us from
employees in satisfaction of minimum tax withholding obligations
associated with the vesting of restricted stock during the
period. These shares are held by us in treasury. |
|
(b) |
|
During the third quarter of 2009, we did not have a publicly
announced plan or program for the repurchase of our common stock. |
52
|
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Item 3.
|
Defaults
Upon Senior Securities.
|
Not applicable.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders.
|
Not applicable.
|
|
Item 5.
|
Other
Information.
|
Not applicable.
EXHIBIT INDEX
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|
|
|
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Exhibit No.
|
|
Description
|
|
|
10
|
.1
|
|
Fourth Amendment, dated as of July 8, 2009, to Subscriber
Services Agreement, dated as of July 23, 2007, between
Travelport International, L.L.C. (f/k/a Galileo International,
L.L.C.), Travelport Global Distribution System B.V. (f/k/a
Galileo Nederland B.V.) and Orbitz Worldwide, LLC.
|
|
10
|
.2
|
|
Second Amendment to the Second Amended and Restated Airline
Charter Associate Agreement, dated as of July 7, 2009,
between Orbitz, LLC and United Air Lines, Inc.
|
|
10
|
.3
|
|
Amendment to the Orbitz Supplier Link Agreement, dated as of
July 7, 2009, between Orbitz, LLC and United Air Lines, Inc.
|
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10
|
.4
|
|
Amendment to Employment Agreement, effective as of July 17,
2009, by and between Orbitz Worldwide, Inc. and Barnaby Harford.
|
|
10
|
.5
|
|
Letter Agreement, dated July 31, 2009, between Orbitz
Worldwide, Inc. and James P. Shaughnessy.
|
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10
|
.6
|
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Form of CEO Restricted Stock Unit Award Agreement.
|
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10
|
.7
|
|
Complimentary and Amendment Agreement, effective as of
July 1, 2009, between Amadeus IT Group S.A. and ebookers
Limited (incorporated by reference to Exhibit 10.1 to
Orbitz Worldwide, Inc. Current Report on
Form 8-K
filed on July 30, 2009).
|
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31
|
.1
|
|
Certification of Chief Executive Officer of Orbitz Worldwide,
Inc. pursuant to
Rule 13a-14(a)/15d-14(a)
of the Securities Exchange Act of 1934.
|
|
31
|
.2
|
|
Certification of Chief Financial Officer of Orbitz Worldwide,
Inc. pursuant to
Rule 13a-14(a)/15d-14(a)
of the Securities Exchange Act of 1934.
|
|
32
|
.1
|
|
Certification of Chief Executive Officer of Orbitz Worldwide,
Inc. pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.2
|
|
Certification of Chief Financial Officer of Orbitz Worldwide,
Inc. pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
53
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
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ORBITZ WORLDWIDE, INC.
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Date: November 9, 2009
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|
By:
/s/ Barney
Harford
Barney
Harford
President, Chief Executive Officer and Director
(Principal Executive Officer)
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|
|
|
Date: November 9, 2009
|
|
By: /s/ Marsha
C. Williams
Marsha
C. Williams
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
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|
|
Date: November 9, 2009
|
|
By:
/s/ John
W. Bosshart
John
W. Bosshart
Vice President of Global Accounting and External Reporting
(Principal Accounting Officer)
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54