Sabre Corp - FORM 10-Q - August 4, 2015

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EX-31.1 - EX-31.1 CERTIFICATION OF CEO PURSUANT TO SECTION 302 - Sabre Corp	sabrexhibit31110-q.htm
EX-31.2 - EX-31.2 CERTIFICATION OF CFO PURSUANT TO SECTION 302 - Sabre Corp	sabrexhibit31210-q.htm
EX-32.2 - EX-32.2 CERTIFICATION OF CFO PURSUANT TO SECTION 906 - Sabre Corp	sabrexhibit32210-q.htm
EX-32.1 - EX-32.1 CERTIFICATION OF CEO PURSUANT TO SECTION 906 - Sabre Corp	sabrexhibit32110-q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended June 30, 2015



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

Commission File Number: 001-36422

Sabre Corporation

(Exact name of registrant as specified in its charter)



Delaware		20-8647322
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3150 Sabre Drive

Southlake, TX 76092

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

(682) 605-1000

(Registrant’s telephone number, including area code)

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

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

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

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

As of July 30, 2015, 273,727,224 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.

SABRE CORPORATION

TABLE OF CONTENTS



		Page No.
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2015 and 2014	1
	Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2015 and 2014	2
	Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014	3
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014	4
	Notes to Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4.	Controls and Procedures	40
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	41
Item 6.	Exhibits	59

PART I. FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS

SABRE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
Revenue	$	707,091		$	646,380		$	1,417,439		$	1,312,795
Cost of revenue ^{(1) (2)}	461,126			422,647			930,124			874,617
Selling, general and administrative ⁽²⁾	123,360			127,651			245,718			238,389
Operating income	122,605			96,082			241,597			199,789
Other income (expense):
Interest expense, net	(42,609		)	(53,235		)	(89,062		)	(117,179		)
Loss on extinguishment of debt	(33,235		)	(30,558		)	(33,235		)	(33,538		)
Joint venture equity income	5,307			4,059			13,826			6,500
Other, net	197			391			(4,248		)	(1,963		)
Total other expense, net	(70,340		)	(79,343		)	(112,719		)	(146,180		)
Income from continuing operations before income taxes	52,265			16,739			128,878			53,609
Provision for income taxes	19,676			10,284			46,959			25,195
Income from continuing operations	32,589			6,455			81,919			28,414
Income (loss) from discontinued operations, net of tax	696			(16,650		)	159,607			(40,706		)
Net income (loss)	33,285			(10,195		)	241,526			(12,292		)
Net income attributable to noncontrolling interests	1,078			702			1,825			1,448
Net income (loss) attributable to Sabre Corporation	32,207			(10,897		)	239,701			(13,740		)
Preferred stock dividends	—			2,235			—			11,381
Net income (loss) attributable to common shareholders	$	32,207		$	(13,132	)	$	239,701		$	(25,121	)

Basic net income (loss) per share attributable to common shareholders:
Income from continuing operations	$	0.12		$	0.01		$	0.30		$	0.07
Income (loss) from discontinued operations	—			(0.07		)	0.59			(0.19		)
Net income (loss) per common share	$	0.12		$	(0.05	)	$	0.89		$	(0.12	)
Diluted net income (loss) per share attributable to common shareholders:
Income from continuing operations	$	0.11		$	0.01		$	0.29		$	0.07
Income (loss) from discontinued operations	—			(0.07		)	0.57			(0.19		)
Net income (loss) per common share	$	0.12		$	(0.05	)	$	0.86		$	(0.11	)
Weighted-average common shares outstanding:
Basic	271,948			243,801			270,574			211,431
Diluted	279,101			252,336			278,082			219,969

Dividends per common share	$	0.09		$	—		$	0.18		$	—

(1) Includes amortization of upfront incentive consideration	$	10,878		$	11,742		$	22,050		$	22,789
(2) Includes stock-based compensation as follows:
Cost of revenue	$	2,902		$	1,972		$	6,435		$	3,358
Selling, general and administrative	4,428			2,913			9,689			5,126

See Notes to Consolidated Financial Statements.

SABRE CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
Net income (loss)	$	33,285		$	(10,195	)	$	241,526		$	(12,292	)
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments, net of tax	(4,590		)	1,292			(1,581		)	2,188
Retirement-related benefit plans:
Amortization of prior service credits, net of taxes of $129, $129, $258 and $258	(230		)	(229		)	(459		)	(458		)
Amortization of actuarial losses, net of taxes of $(649), $(423), $(1,272) and $(844)	1,149			745			2,251			1,491
Total retirement-related benefit plans	919			516			1,792			1,033
Derivatives:
Unrealized gains (losses), net of taxes of $(463), $(263), $3,575 and $(430)	882			410			(7,794		)	618
Reclassification adjustment for realized losses, net of taxes of $(1,153), $(685), $(2,177) and $(1,552)	3,462			417			6,932			1,062
Net change in unrealized gains (losses) on derivatives, net of tax	4,344			827			(862		)	1,680
Share of other comprehensive income of joint venture	(43		)	3,420			922			3,420
Other comprehensive income	630			6,055			271			8,321
Comprehensive income (loss)	33,915			(4,140		)	241,797			(3,971		)
Less: Comprehensive income attributable to noncontrolling interests	(1,078		)	(702		)	(1,825		)	(1,448		)
Comprehensive income (loss) attributable to Sabre Corporation	$	32,837		$	(4,842	)	$	239,972		$	(5,419	)

See Notes to Consolidated Financial Statements.

SABRE CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)



	June 30, 2015			December 31, 2014
Assets
Current assets
Cash and cash equivalents	$	578,033		$	155,679
Accounts receivable, net	391,779			362,911
Prepaid expenses and other current assets	32,347			34,841
Current deferred income taxes	159,442			182,277
Other receivables, net	35,039			29,893
Assets held for sale	—			112,558
Total current assets	1,196,640			878,159
Property and equipment, net of accumulated depreciation of $895,351 and $792,161	560,440			551,276
Investments in joint ventures	130,288			145,320
Goodwill	2,153,214			2,153,499
Trademarks and brand names, net of accumulated amortization of $93,052 and $87,554	233,002			238,500
Other intangible assets, net of accumulated amortization of $1,013,513 and $975,701	203,675			241,486
Other assets, net	574,319			509,764
Total assets	$	5,051,578		$	4,718,004

Liabilities and stockholders’ equity
Current liabilities
Accounts payable	$	133,011		$	117,855
Accrued compensation and related benefits	57,486			83,828
Accrued subscriber incentives	179,162			145,581
Deferred revenues	176,554			167,827
Litigation settlement liability and related deferred revenue	55,099			73,252
Other accrued liabilities	178,178			189,612
Current portion of debt	488,930			22,435
Liabilities held for sale	—			96,544
Total current liabilities	1,268,420			896,934
Deferred income taxes	165,555			61,577
Other noncurrent liabilities	602,237			613,710
Long-term debt	2,706,273			3,061,400
Commitments and contingencies (Note 10)
Stockholders’ equity
Common Stock: $0.01 par value; 450,000,000 authorized shares; 273,493,600 and 268,237,547 shares issued, 272,777,958 and 267,800,161 shares outstanding at June 30, 2015 and December 31, 2014, respectively	2,735			2,682
Additional paid-in capital	1,972,404			1,931,796
Treasury Stock, at cost, 715,642 and 437,386 shares at June 30, 2015 and December 31, 2014, respectively	(11,462		)	(5,297		)
Retained deficit	(1,584,834		)	(1,775,616		)
Accumulated other comprehensive loss	(69,532		)	(69,803		)
Noncontrolling interest	(218		)	621
Total stockholders’ equity	309,093			84,383
Total liabilities and stockholders’ equity	$	5,051,578		$	4,718,004

See Notes to Consolidated Financial Statements.

SABRE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Six Months Ended June 30,
	2015			2014
Operating Activities
Net income (loss)	$	241,526		$	(12,292	)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization	166,617			152,337
Amortization of upfront incentive consideration	22,050			22,789
Litigation-related (credits) charges	(32,557		)	(11,615		)
Stock-based compensation expense	16,124			8,484
Allowance for doubtful accounts	5,329			3,142
Deferred income taxes	36,757			11,583
Joint venture equity income	(13,826		)	(6,500		)
Dividends received from joint venture investments	28,700			—
Amortization of debt issuance costs	3,181			3,243
Debt modification costs	—			3,290
Loss on extinguishment of debt	33,235			33,538
Other	7,505			8,046
(Income) loss from discontinued operations	(159,607		)	40,706
Changes in operating assets and liabilities:
Accounts and other receivables	(47,647		)	(25,510		)
Prepaid expenses and other current assets	(631		)	5,557
Capitalized implementation costs	(29,561		)	(17,597		)
Upfront incentive consideration	(22,994		)	(25,936		)
Other assets	(43,618		)	(11,810		)
Accrued compensation and related benefits	(22,802		)	(32,495		)
Accounts payable and other accrued liabilities	62,039			14,552
Deferred revenue including upfront solution fees	18,179			40,944
Cash provided by operating activities	267,999			204,456
Investing Activities
Additions to property and equipment	(127,963		)	(106,470		)
Other investing activities	148			235
Cash used in investing activities	(127,815		)	(106,235		)
Financing Activities
Proceeds of borrowings from lenders	600,000			148,307
Payments on borrowings from lenders	(491,215		)	(791,426		)
Debt prepayment fees and issuance costs	(40,215		)	(30,490		)
Proceeds from issuance of common stock in initial public offering, net	—			672,644
Net proceeds (payments) on the settlement of equity-based awards	18,239			(650		)
Cash dividends paid to common shareholders	(48,919		)	—
Other financing activities	(3,657		)	(1,964		)
Cash provided by (used in) financing activities	34,233			(3,579		)
Cash Flows from Discontinued Operations
Cash used in operating activities	(26,036		)	(151,423		)
Cash provided by (used in) investing activities	278,834			(240		)
Cash provided by (used in) discontinued operations	252,798			(151,663		)
Effect of exchange rate changes on cash and cash equivalents	(4,861		)	1,165
Increase (decrease) in cash and cash equivalents	422,354			(55,856		)
Cash and cash equivalents at beginning of period	155,679			308,236
Cash and cash equivalents at end of period	$	578,033		$	252,380

See Notes to Consolidated Financial Statements.

SABRE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. General Information

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

We are a leading technology solutions provider to the global travel and tourism industry. We operate through two business segments: (i) Travel Network, our global travel marketplace for travel suppliers and travel buyers, and (ii) Airline and Hospitality Solutions, an extensive suite of travel industry leading software solutions primarily for airlines and hotel properties.

In the first quarter of 2015, we completed our exit of the online travel agency business through the sale of our Travelocity business in the United States and Canada (“Travelocity.com”) and Europe (“lastminute.com”). Our Travelocity segment has no remaining operations as a result of these dispositions. The financial results of our Travelocity segment are included in net income (loss) from discontinued operations in our consolidated statements of operations for all periods presented. The assets and liabilities of Travelocity.com and lastminute.com that were disposed of are classified as held for sale in our consolidated balance sheet as of December 31, 2014.

Basis of Presentation—The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position, results of operations and cash flows for the periods indicated. Operating results for the three and six months ended June 30, 2015 are not necessarily indicative of results that may be expected for any other interim period or for the year ended December 31, 2015. The accompanying interim financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K filed with the SEC on March 3, 2015.

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

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

Use of Estimates—The preparation of these interim financial statements in conformity with GAAP requires that certain amounts be recorded based on estimates and assumptions made by management. Actual results could differ from these estimates and assumptions. Our significant estimates and assumptions relate to, among other things, the collectability of accounts receivable, future cancellations of bookings processed through the Sabre global distribution system (“GDS”), revenue recognition for software arrangements, the fair value of assets and liabilities acquired in a business combination, the fair value of derivatives, the evaluation of the recoverability of the carrying value of intangible assets and goodwill, equity-based compensation, pension and other postretirement benefit liabilities, contingent liabilities and the uncertainties surrounding the calculation of our tax assets and liabilities. Our use of estimates and the related accounting policies are discussed in the consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K filed with the SEC on March 3, 2015.

Stockholders’ Equity—During the six months ended June 30, 2015, we issued 5,256,053 shares of our common stock and received $24 million in proceeds as a result of the exercise and settlement of employee equity-based awards.

In each of the first and second quarters of 2015, we paid a quarterly cash dividend of $0.09 per share of our common stock, totaling $49 million. No dividends were declared or paid in the six months ended June 30, 2014.

During the six months ended June 30, 2015, certain of our stockholders sold an aggregate of 54,970,000 shares of our common stock, which includes 7,170,000 shares of our common stock sold as a result of the underwriters' exercise of their overallotment options. We did not offer any shares or receive any proceeds from these secondary public offerings or from the exercise of the underwriters' allotment options.

2. Discontinued Operations and Dispositions

Over the past several years, we have disposed of non-core operations of our Travelocity business and, in the first quarter of 2015, we completed the divestiture of our Travelocity business through the sale of Travelocity.com and lastminute.com. Our Travelocity segment has no remaining operations subsequent to these dispositions. The financial results of our Travelocity business are included in net income (loss) from discontinued operations in our consolidated statements of operations for all periods presented. The assets and liabilities of Travelocity.com and lastminute.com that were disposed of are classified as held for sale in our consolidated balance sheet as of December 31, 2014.

Travelocity.com—On January 23, 2015, we sold Travelocity.com to Expedia Inc. (“Expedia”), pursuant to the terms of an Asset Purchase Agreement (the “Travelocity Purchase Agreement”), dated January 23, 2015, by and among Sabre GLBL Inc. and Travelocity.com LP, and Expedia. The signing and closing of the Travelocity Purchase Agreement occurred contemporaneously. Expedia purchased Travelocity.com pursuant to the Travelocity Purchase Agreement for cash consideration of $280 million. The net assets of Travelocity.com disposed of primarily included a trade name with a carrying value of $55 million. We recognized a gain on sale of $143 million, net of tax, in the first quarter of 2015.

lastminute.com—On March 1, 2015, we sold lastminute.com to Bravofly Rumbo Group. The transaction was completed through the transfer of net liabilities as of the date of sale consisting primarily of a working capital deficit of $71 million, partially offset by assets sold including intangible assets of $26 million. We did not receive any cash proceeds or any other significant consideration in the transaction other than payments for specific services being provided to the acquirer under a transition services agreement through the end of 2015. Additionally, at the time of sale, the acquirer entered into a long-term agreement with us to continue to utilize our GDS for bookings which generates incentive consideration paid by us to the acquirer. We recognized a gain on sale of $25 million, net of tax, in the first quarter of 2015.

Travel Partner Network—In February 2014, we completed a sale of assets associated with Travelocity Partner Network (“TPN”), a business-to-business private white label website offering, for $10 million in proceeds. Pursuant to the sale agreement, we were to receive two annual earn-out payments, totaling up to $10 million, if the purchaser exceeded certain revenue thresholds during the calendar years ending December 31, 2014 and December 31, 2015. The revenue threshold was not met for the year ended December 31, 2014 and we do not expect that the revenue threshold for the year ended December 31, 2015 will be met. In connection with the sale, Travelocity entered into a Transition Services Agreement (“TSA”) with the acquirer to provide services to maintain the websites and certain technical and administrative functions for the acquirer until a complete transition occurs or the TSA terminates. Consideration received under both agreements has been allocated to the disposition and the services provided under the TSA; therefore, a significant portion of the upfront proceeds were deferred, based on the fair value of the TSA services, and are being recognized as an offset to operating expense within discontinued operations as the services are provided. In the first quarter of 2014, we recognized a loss on the disposition of $3 million, prior to considering the potential earn-out payments. We also recognized a $3 million receivable for earn-out proceeds during the first quarter of 2014, which offset the loss from disposition and resulted in no net impact to operating income for the disposition. During the third quarter of 2014, we determined that receipt of the earn-out proceeds was no longer probable and therefore fully impaired the receivable.

The following table summarizes the results of our discontinued operations (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
Revenue	$	2,112		$	80,349		$	23,254		$	174,674
Cost of revenue	1,737			24,552			14,025			67,551
Selling, general and administrative	2,267			85,812			21,508			175,434
Operating loss	(1,892		)	(30,015		)	(12,279		)	(68,311		)
Other income (expense):
Interest expense, net	—			(2,197		)	—			(3,358		)
Gain on sale of businesses	—			—			263,567			—
Other, net	2,974			(2,016		)	2,499			507
Total other income (expense), net	2,974			(4,213		)	266,066			(2,851		)
Income (loss) from discontinuing operations before income taxes	1,082			(34,228		)	253,787			(71,162		)
Provision (benefit) for income taxes	386			(17,578		)	94,180			(30,456		)
Net income (loss) from discontinued operations	$	696		$	(16,650	)	$	159,607		$	(40,706	)

Divestiture of lastminute.com

U.S. Tax Benefit

We expect to write off the remaining US tax basis in goodwill and intangible assets during the fourth quarter of 2015, the period in which we expect the wind down of lastminute.com activities to be complete. We estimate the U.S. tax benefit will range between approximately $80 million to $95 million. The tax benefit will be included in our results from discontinued operations.

Cumulative Translation Adjustments

Cumulative translation gains or losses of foreign subsidiaries related to divested businesses are reclassified into earnings once the liquidation of the respective foreign subsidiaries is substantially complete. We expect to be substantially complete with the liquidation of our lastminute.com subsidiaries in the second half of 2015. As of June 30, 2015, cumulative translation gains associated with our lastminute.com subsidiaries totaled $21 million.

3. Income Taxes

Our effective tax rates for the six months ended June 30, 2015 and 2014 were 36% and 47%, respectively. The decrease in the effective tax rate for the six months ended June 30, 2015 as compared to the same period in 2014 was primarily due to an increase in forecasted earnings in lower tax jurisdictions and a decrease in nondeductible losses and other discrete tax items relative to the amount of pre-tax income. The differences between our effective tax rates and the U.S. federal statutory income tax rate primarily result from our geographic mix of taxable income in various tax jurisdictions as well as the discrete tax items referenced above.

We recognize liabilities when we believe that an uncertain tax position may not be fully sustained upon examination by the tax authorities. This requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. When facts and circumstances change, we reassess these probabilities and record any changes in the consolidated financial statements as appropriate. Our net unrecognized tax benefits, excluding interest and penalties, included in our consolidated balance sheets, were $57 million and $59 million as of June 30, 2015 and December 31, 2014, respectively.

4. Debt

As of June 30, 2015 and December 31, 2014, our outstanding debt included in our consolidated balance sheets totaled $3,195 million and $3,084 million, respectively, net of unamortized discounts of $10 million and $13 million, respectively. The following table sets forth the face values of our outstanding debt as of June 30, 2015 and December 31, 2014 (in thousands):



	Rate	Maturity	June 30, 2015			December 31, 2014
Senior secured credit facilities:
Term B facility	L + 3.00%	February 2019	$	1,730,625		$	1,739,500
Incremental term loan facility	L + 3.50%	February 2019	343,875			345,625
Term C facility	L + 3.00%	December 2017	49,313			49,313
Revolver, $370 million	L + 2.75%	February 2019	63,951			—
Revolver, $35 million	L + 3.75%	February 2018	6,049			—
Senior unsecured notes due 2016	8.35%	March 2016	400,000			400,000
Senior secured notes due 2019	8.50%	May 2019	—			480,000
Senior secured notes due 2023	5.38%	April 2023	530,000			—
Mortgage facility	5.80%	March 2017	81,578			82,168
Face value of total debt outstanding			3,205,391			3,096,606
Less current portion of debt outstanding			(488,930		)	(22,435		)
Face value of long-term debt outstanding			$	2,716,461		$	3,074,171

Senior Secured Credit Facilities

We have a revolving credit facility totaling $405 million, of which $370 million expires in February 2019 ("Extended Revolver") and $35 million expires in February 2018 ("Unextended Revolver," collectively, the "Revolver"). As of June 30, 2015, we had $70 million outstanding under the Revolver. We had no outstanding balance under the Extended or Unextended Revolver as of December 31, 2014. We had outstanding letters of credit totaling $29 million and $47 million as of June 30, 2015 and December 31, 2014, respectively, which reduce our overall credit capacity under the Revolver.

Issuance of 2023 Notes and Extinguishment of 2019 Notes

In April 2015, we extinguished our $480 million senior secured notes due 2019 with a stated interest rate of 8.50% (“2019 Notes”) through the issuance of $530 million senior secured notes due in 2023 with a stated interest rate of 5.375% (“2023 Notes”). The 2023 Notes were issued by Sabre GLBL and are guaranteed by Sabre Holdings and each of Sabre GLBL’s existing and subsequently acquired or organized subsidiaries that are borrowers under or guarantors of our senior secured credit facilities. The 2023 Notes are secured by a first priority security interest in substantially all present and after acquired property and assets of Sabre GLBL and the guarantors of the notes, which also constitutes collateral securing indebtedness under our senior secured facilities on a first priority basis. We received proceeds of approximately $522 million, net of underwriting fees and commissions, from the 2023 Notes which were used to redeem all of the $480 million principal of the 2019 Notes, pay the 6.375% redemption premium of $31 million and the make whole premium of $2 million representing scheduled interest payable for the period between the redemption date of April 29, 2015 and the first call date of May 15, 2015. The remaining proceeds, combined with cash on hand, were used to pay accrued but unpaid interest of $19 million. We recognized a loss on extinguishment in the second quarter of 2015 of $33 million, which includes the redemption premium and the make whole premium.

Aggregate Maturities

As of June 30, 2015, aggregate maturities of our long-term debt, which excludes amounts outstanding under our Revolver, were as follows (in thousands):



	Amount
2015 (remaining)	$	11,220
2016	422,493
2017	150,303
2018	21,250
2019	2,000,125
Thereafter	530,000
Total ⁽¹⁾	$	3,135,391

________________________

(1) Excludes $70 million outstanding under our Revolver as of June 30, 2015.

5. Derivatives

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

Cash Flow Hedging Strategy—To protect against the reduction in value of forecasted foreign currency cash flows, we hedge portions of our revenues and expenses denominated in foreign currencies with forward contracts. For example, when the dollar strengthens significantly against the foreign currencies, the decline in present value of future foreign currency expense is offset by losses in the fair value of the forward contracts designated as hedges. Conversely, when the dollar weakens, the increase in the present value of future foreign currency expense is offset by gains in the fair value of the forward contracts.

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

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any (ineffective portion), and hedge components excluded from the assessment of effectiveness, are recognized in the consolidated statements of operations during the current period. Derivatives not designated as hedging instruments are carried at fair value with changes in fair value reflected in the consolidated statement of operations.

Forward Contracts—In order to hedge our operational exposure to foreign currency movements, we are a party to certain foreign currency forward contracts that extend until June 2016. We have designated these instruments as cash flow hedges. No hedging ineffectiveness was recorded in earnings relating to the forward contracts during the three and six months ended June 30, 2015 and 2014. As of June 30, 2015, we estimate that $3 million in losses will be reclassified from other comprehensive income (loss) to earnings as the outstanding contracts settle.

As of June 30, 2015 and December 31, 2014, we had the following unsettled purchased foreign currency forward contracts that were entered into to hedge our operational exposure to foreign currency movements (in thousands, except for average contract rates):



Outstanding Notional Amounts as of June 30, 2015
Buy Currency	Sell Currency	Foreign Amount	USD Amount		Average Contract Rate
US Dollar	Australian Dollar	6,270	$	4,970	0.7927
Australian Dollar	US Dollar	2,740	$	2,103	0.7675
Euro	US Dollar	14,000	17,375		1.2411
British Pound Sterling	US Dollar	20,300	31,659		1.5596
Indian Rupee	US Dollar	1,225,000	18,671		0.0152
Polish Zloty	US Dollar	186,000	51,611		0.2775



Outstanding Notional Amounts as of December 31, 2014
Buy Currency	Sell Currency	Foreign Amount	USD Amount		Average Contract Rate
US Dollar	Australian Dollar	6,750	$	5,838	0.8649
Euro	US Dollar	30,200	38,777		1.2840
British Pound Sterling	US Dollar	22,950	37,343		1.6271
Indian Rupee	US Dollar	1,205,000	18,748		0.0156
Polish Zloty	US Dollar	171,000	52,821		0.3089

Interest Rate Swap Contracts—Interest rate swaps outstanding during the six months ended June 30, 2015 and 2014 are as follows:



	Notional Amount	Interest Rate Received	Interest Rate Paid	Effective Date	Maturity Date
Outstanding:	$750 million	1 month LIBOR⁽¹⁾	1.48%	December 31, 2015	December 30, 2016
	$750 million	1 month LIBOR⁽¹⁾	2.19%	December 30, 2016	December 29, 2017
	$750 million	1 month LIBOR⁽¹⁾	2.61%	December 29, 2017	December 31, 2018

Matured:	$400 million	1 month LIBOR	2.03%	July 29, 2011	September 30, 2014
	$350 million	1 month LIBOR	2.51%	April 30, 2012	September 30, 2014

______________________


(1)	Subject to a 1% floor.

In December 2014, we entered into eight forward starting interest rate swaps to hedge interest payments associated with $750 million of floating-rate liabilities on the notional amounts of a portion of our senior secured debt. We have designated these interest rate swaps as cash flow hedges. The total notional amount outstanding is $750 million in each of 2015, 2016 and 2017. There was no material hedge ineffectiveness for the three and six months ended June 30, 2015. The effective portion of changes in the fair value of the interest rate swaps is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings.

In January 2013, our then outstanding swaps were not designated in a cash flow hedging relationship because we no longer qualified for hedge accounting treatment following the amendment and restatement of our senior secured credit facility in February 2013. These interest rate swaps matured on September 30, 2014. Derivatives not designated as hedging instruments are carried at fair value with changes in fair value recognized in the consolidated statements of operations. The adjustments to fair value of our matured interest rate swaps for the three and six months ended June 30, 2014 was not material to our results of operations. During the three and six months ended June 30, 2014, we reclassified losses, net of tax, of $2 million and $5 million, respectively, from other comprehensive income ("OCI") to interest expense related to the derivatives that no longer qualified for hedge accounting.

The estimated fair values of our derivatives designated as hedging instruments as of June 30, 2015 and December 31, 2014 are as follows (in thousands):



	Derivative Assets (Liabilities)
		Fair Value as of
Derivatives Designated as Hedging Instruments	Consolidated Balance Sheet Location	June 30, 2015			December 31, 2014
Foreign exchange contracts	Other accrued liabilities	$	(3,286	)	$	(8,475	)
Interest rate swaps	Other accrued liabilities	(1,758		)	—
	Other noncurrent liabilities	(6,897		)	(1,401		)
		$	(11,941	)	$	(9,876	)

The effects of derivative instruments, net of taxes, on OCI for the three and six months ended June 30, 2015 and 2014 are as follows (in thousands):



	Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)
	Three Months Ended June 30,					Six Months Ended June 30,
Derivatives in Cash Flow Hedging Relationships	2015			2014		2015			2014
Foreign exchange contracts	$	1,292		$	410	$	(3,045	)	$	618
Interest rate swaps	(410		)	—		(4,749		)	—
Total	$	882		$	410	$	(7,794	)	$	618



		Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
Derivatives in Cash Flow Hedging Relationships	Income Statement Location	Three Months Ended June 30,					Six Months Ended June 30,
Derivatives in Cash Flow Hedging Relationships	Income Statement Location	2015			2014		2015			2014
Foreign exchange contracts	Cost of revenue	$	(3,462	)	$	1,914	$	(6,932	)	$	3,597

6. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market for that asset or liability. Guidance on fair value measurements and disclosures establishes a valuation hierarchy for disclosure of inputs used in measuring fair value defined as follows:

Level 1—Inputs are unadjusted quoted prices that are available in active markets for identical assets or liabilities.

Level 2—Inputs include quoted prices for similar assets and liabilities in active markets and quoted prices in non-active markets, inputs other than quoted prices that are observable, and inputs that are not directly observable, but are corroborated by observable market data.

Level 3—Inputs that are unobservable and are supported by little or no market activity and reflect the use of significant management judgment.

The classification of a financial asset or liability within the hierarchy is determined based on the least reliable level of input that is significant to the fair value measurement. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. We also consider the counterparty and our own non-performance risk in our assessment of fair value.

Assets and Liabilities that are Measured at Fair Value on a Recurring Basis

Foreign Currency Forward Contracts—The fair value of the foreign currency forward contracts is estimated based upon pricing models that utilize Level 2 inputs derived from or corroborated by observable market data such as currency spot and forward rates.

Interest Rate Swaps—The fair value of our interest rate swaps is estimated using a combined income and market-based valuation methodology based upon Level 2 inputs including credit ratings and forward interest rate yield curves obtained from independent pricing services reflecting broker market quotes.

The following tables present our assets (liabilities) that are required to be measured at fair value on a recurring basis as of June 30, 2015 and December 31, 2014 (in thousands):



				Fair Value at Reporting Date Using
	June 30, 2015			Level 1		Level 2			Level 3
Derivatives
Foreign currency forward contracts	$	(3,286	)	$	—	$	(3,286	)	$	—
Interest rate swap contracts	(8,655		)	—		(8,655		)	—
Total	$	(11,941	)	$	—	$	(11,941	)	$	—



				Fair Value at Reporting Date Using
	December 31, 2014			Level 1		Level 2			Level 3
Derivatives
Foreign currency forward contracts	$	(8,475	)	$	—	$	(8,475	)	$	—
Interest rate swap contracts	(1,401		)	—		(1,401		)	—
Total	$	(9,876	)	$	—	$	(9,876	)	$	—

Other Financial Instruments

The carrying value of our financial instruments including cash and cash equivalents, and accounts receivable approximate their fair values. The fair values of our senior notes and term loans under our senior secured credit facilities are determined based on quoted market prices for the identical liability when traded as an asset in an active market, a Level 1 input. The outstanding principal balance of our mortgage facility approximated its fair value as of June 30, 2015 and December 31, 2014. The fair values of the mortgage facility and Revolver are determined based on estimates of current interest rates for similar debt, a Level 2 input.

As of June 30, 2015, we had $70 million outstanding under our Revolver which approximated fair value. The following table presents the fair value and carrying value of our senior notes and term loans under our senior secured credit facilities as of June 30, 2015 and December 31, 2014 (in thousands):



	Fair Value at				Carrying Value at
Financial Instrument	June 30, 2015		December 31, 2014		June 30, 2015		December 31, 2014
Term B facility	$	1,730,625	$	1,718,843	$	1,724,061	$	1,732,101
Incremental term loan facility	347,744		341,737		343,875		345,625
Term C facility	49,497		48,758		49,118		49,080
Senior unsecured notes due 2016	417,950		426,250		396,473		393,973
Senior secured notes due 2019	—		516,300		—		480,741
Senior secured notes due 2023	525,363		—		530,000		—

7. Accumulated Other Comprehensive Income (Loss)

As of June 30, 2015 and December 31, 2014, the components of accumulated other comprehensive income (loss), net of related deferred income taxes, are as follows (in thousands):



	June 30, 2015			December 31, 2014
Defined benefit pension and other post retirement benefit plans	$	(88,380	)	$	(90,172	)
Unrealized loss on foreign currency forward contracts and interest rate swaps	(8,257		)	(7,395		)
Unrealized foreign currency translation gain	21,263			22,843
Other ⁽¹⁾	5,842			4,921
Total accumulated other comprehensive loss, net of tax	$	(69,532	)	$	(69,803	)

________________________


(1)	Primarily relates to our share of accumulated other comprehensive income of our joint venture.

The amortization of actuarial losses and periodic service credits associated with our retirement-related benefit plans are included in selling, general and administrative expenses. See Note 5, Derivatives, for information on the income statement line items affected as the result of reclassification adjustments associated with derivatives.

8. Earnings Per Share

The following table reconciles the numerators and denominators used in the computations of basic and diluted earnings per share from continuing operations (in thousands, except per share data):



	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Numerator:
Income from continuing operations	$	32,589	$	6,455	$	81,919	$	28,414
Less: Net income attributable to noncontrolling interests	1,078		702		1,825		1,448
Less: Preferred stock dividends	—		2,235		—		11,381
Net income from continuing operations available to common shareholders, basic and diluted	$	31,511	$	3,518	$	80,094	$	15,585
Denominator:
Basic weighted-average common shares outstanding	271,948		243,801		270,574		211,431
Add: Dilutive effect of stock options and restricted stock awards	7,153		8,535		7,508		8,538
Diluted weighted-average common shares outstanding	279,101		252,336		278,082		219,969
Earning per share from continuing operations:
Basic	$	0.12	$	0.01	$	0.30	$	0.07
Diluted	$	0.11	$	0.01	$	0.29	$	0.07

Basic earnings per share are based on the weighted-average number of common shares outstanding during each period. Diluted earnings per share are based on the weighted-average number of common shares outstanding plus the effect of all dilutive common stock equivalents during each period. The calculation of diluted weighted-average shares excludes the impact of 1 million common stock equivalents for each of the three and six months ended June 30, 2015 and 2014, as the inclusion would have been antidilutive.

9. Pension and Other Postretirement Benefit Plans

We sponsor the Sabre Inc. Legacy Pension Plan which is a tax-qualified defined benefit pension plan for employees meeting certain eligibility requirements. We also provide retiree life insurance benefits to certain employees who retired prior to January 1, 2014. The following table provides the components of net periodic benefit costs associated with our pension and other postretirement benefit plans for the three and six months ended June 30, 2015 and 2014 (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
Pension and Other Postretirement Benefits:
Interest cost	$	4,799		$	4,900		$	9,549		$	9,802
Expected return on plan assets	(5,259		)	(6,025		)	(10,559		)	(12,050		)
Amortization of prior service credit	(359		)	(358		)	(717		)	(716		)
Amortization of actuarial loss, net	1,798			1,167			3,523			2,334
Net periodic cost (credit)	$	979		$	(316	)	$	1,796		$	(630	)

We are not required to make any contributions to our defined benefit pension plans during 2015 under the Employee Retirement Income Security Act of 1974, as amended. We made no contributions to fund our defined benefit pension plans during the three and six months ended June 30, 2015. We made contributions of $2 million during the six months ended June 30, 2014. We may, at our discretion, voluntarily contribute from zero to $10 million to our defined benefit pension plans during the remainder of 2015. Contributions to our defined benefit pension plans in the United States and Canada are based on several factors that may vary from year to year. Thus, past contributions are not always indicative of future contributions.

10. Contingencies

Legal Proceedings

While certain legal proceedings and related indemnification obligations to which we are a party specify the amounts claimed, these claims may not represent reasonably possible losses. Given the inherent uncertainties of litigation, the ultimate outcome of these matters cannot be predicted at this time, nor can the amount of possible loss or range of loss, if any, be reasonably estimated, except in circumstances where an aggregate litigation accrual has been recorded for probable and reasonably estimable loss contingencies. A determination of the amount of accrual required, if any, for these contingencies is made after careful analysis of each matter. The required accrual may change in the future due to new information or developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters.

Litigation and Administrative Audit Proceedings Relating to Hotel Occupancy Taxes

On January 23, 2015, we sold Travelocity.com to Expedia. Pursuant to the Travelocity Purchase Agreement entered into with Expedia, we will continue to be liable for pre-closing liabilities of Travelocity, including fees, charges, costs and settlements relating to litigation arising from hotels booked on the Travelocity platform prior to the Expedia SMA (as defined below). Fees, charges, costs and settlements relating to litigation from hotels booked on Travelocity.com subsequent to the Expedia SMA and prior to the date of the sale of Travelocity.com will be shared with Expedia in accordance with the terms that were in the Expedia SMA. We are jointly and severally liable for Travelocity’s indemnification obligations under the Travelocity Purchase Agreement for liabilities that may arise out of these litigation matters, which could adversely affect our cash flow.

Over the past ten years, various state and local governments in the United States have filed approximately 70 lawsuits against us and other online travel agencies (“OTAs”) pertaining primarily to whether our discontinued Travelocity segment and other OTAs owe sales or occupancy taxes on the revenues they earn from facilitating hotel reservations using the merchant revenue model. In the merchant revenue model, the customer pays us an amount at the time of booking that includes (i) service fees, which we collect and retain, and (ii) the price of the hotel room and amounts for occupancy or other local taxes, which we pass along to the hotel supplier. The complaints generally allege, among other things, that the defendants failed to pay to the relevant taxing authority hotel occupancy taxes on the service fees. Courts have dismissed approximately 30 of these lawsuits, some for failure to exhaust administrative remedies and some on the basis that we are not subject to sales or occupancy tax. The Fourth, Sixth and Eleventh Circuits of the United States Courts of Appeals each have ruled in our favor on the merits, as have state appellate courts in Missouri, Alabama, Texas, California, Kentucky, Florida, Colorado and Pennsylvania, and a number of state and federal trial courts. The remaining lawsuits are in various stages of litigation. We have also settled some cases individually, most for amounts not material to our results of operations, and with respect to these settlements, have generally reserved our rights to challenge any effort by the applicable tax authority to impose occupancy taxes in the future.

We have received recent favorable decisions pertaining to cases in Florida, North Carolina, California, Montana, Arizona and Colorado. In Florida, Travelocity has been named as a defendant in several proceedings and lawsuits brought by cities and counties in Florida, including the Counties of Leon, Broward, Osceola, and Volusia; and the City of Miami. The suits brought by Leon County and Broward County have been decided on the merits, and both were decided in favor of Travelocity and other OTAs. On February 28, 2013 and February 12, 2014, respectively, those decisions were affirmed by the intermediate court of appeals. On June 11, 2015, the Supreme Court of Florida affirmed the Leon County judgment in favor of Travelocity and other OTAs, ruling they are not subject to state or local taxes that apply to the renting, leasing, or letting of hotel rooms. On June 26, 2015, Leon County filed a motion for rehearing with the Florida Supreme Court, which remains pending. On August 19, 2014, the North Carolina Court of Appeals affirmed a judgment in favor of Travelocity and other OTAs after concluding they are not operators of hotels, motel or similar-type businesses and therefore are not subject to hotel occupancy tax. On May 28, 2014, an administrative hearing officer in Arizona ruled that Travelocity is not responsible for collecting or remitting local hotel taxes and set aside assessments made by twelve municipalities, including Phoenix, Scottsdale, Tempe, and Tucson. Those municipalities have appealed the decision to state court. On March 27, 2014, a California court of appeals upheld a trial court ruling that OTAs, including Travelocity, are not subject to the City of San Diego’s transient occupancy tax because they are not hotel operators or managing agents. That case is now pending before the Supreme Court of California. The California court of appeals’ decision marked the third time that a California appellate court has ruled in favor of Travelocity on the question of whether OTAs are subject to transient occupancy taxes in California, the prior two cases being brought by the City of Anaheim and City of Santa Monica. Travelocity also has prevailed at the trial court level in cases brought by San Francisco and Los Angeles, both of which are being appealed by the cities. On March 6, 2014, a Montana trial court ruled by summary judgment that Travelocity and other OTAs are not subject to the State of Montana’s lodging facility use tax or its sales tax on accommodations and vehicles. The lawsuit had been brought by the Montana Department of Revenue, which has appealed the decision. On July 3, 2014, the Colorado Court of Appeals entered judgment that Travelocity and OTAs are not liable for lodging taxes as claimed by the City of Denver. The City of Denver has petitioned the Supreme Court of Colorado to review the decision.

Although we have prevailed in the majority of these lawsuits and proceedings, there have been several adverse judgments or decisions on the merits, some of which are subject to appeal. On April 3, 2014, the Supreme Court of Wyoming affirmed a decision by the Wyoming State Board of Equalization that Travelocity and other OTAs are subject to sales tax on lodging. Similarly, on July 23, 2015 a court of appeals for the District of Columbia ruled in favor of the District on its claim that Travelocity and other OTAs are subject to the District’s hotel occupancy tax. We did not record material charges associated with these cases during the three and six months ended June 30, 2015 and 2014. As of June 30, 2015, our reserve for these cases totaled $5 million and is included in other accrued liabilities in our consolidated balance sheets.

On April 4, 2013, the United States District Court for the Western District of Texas (“W.D.T.”) entered a final judgment against Travelocity and other OTAs in a class action lawsuit filed by the City of San Antonio. The final judgment was based on a jury verdict from October 30, 2009 that the OTAs “control” hotels for purposes of city hotel occupancy taxes. Following that jury verdict, on July 1, 2011, the W.D.T. concluded that fees charged by the OTAs are subject to hotel occupancy taxes and that the OTAs have a duty to collect and remit these taxes. We disagree with the jury’s finding and with the W.D.T.’s conclusions based on the jury finding, and intend to appeal the final judgment to the United States Court of Appeals for the Fifth Circuit. The verdict against us, including penalties and interest, is $4 million which we do not believe we will ultimately pay and therefore have not accrued any loss related to this case.

We believe the Fifth Circuit’s resolution of the San Antonio appeal may be affected by a separate Texas state appellate court decision in our favor. On October 26, 2011, the Fourteenth Court of Appeals of Texas affirmed a trial court’s summary judgment ruling in favor of the OTAs in a case brought by the City of Houston and the Harris County-Houston Sports Authority on a similarly worded tax ordinance as the one at issue in the San Antonio case. The Texas Supreme Court denied the City of Houston’s petition to review the case. We believe this decision should provide persuasive authority to the Fifth Circuit in its review of the San Antonio case.

On March 17, 2015, the Supreme Court of Hawaii issued a decision affirming in part and reversing in part a final judgment entered by the Hawaii Tax Appeal Court. In that case, the Tax Appeal Court had ruled that Travelocity and other OTAs are not subject to Hawaii’s transient accommodation tax, but also had ruled in favor of the State of Hawaii on the issue of whether the state’s general excise tax, which is assessed on all business activity in the state, applies to merchant model hotel bookings for the period 2002 to 2011.

The State of Hawaii appealed the Tax Appeal Court’s decision that Travelocity is not subject to transient accommodation tax, and Travelocity appealed the decision that we are subject to general excise tax. On March 17, 2015, the Supreme Court of Hawaii issued its decision affirming that Travelocity is not subject to transient accommodation tax, affirming that Travelocity is subject to general excise tax, and reversing the Tax Appeal Court’s decision that Travelocity is liable for general excise tax on the

gross receipts collected from customers. Instead, the Hawaii Supreme Court held Travelocity is liable for general excise tax only on its own service fees. On March 27, 2015, the State of Hawaii filed a motion for reconsideration, which was denied.

The proceeding in the Hawaii Supreme Court involved all merchant model hotel bookings for the period 2002 to 2011. While that appeal was pending, the State also issued additional assessments of general excise tax, interest, and penalties for merchant model hotel reservations for 2012; merchant model car reservations for the period 2004-2012; and combined merchant model hotel and car reservations for 2013. Further, notwithstanding the Tax Appeal Court’s ruling that Travelocity is not subject to transient accommodation tax, the State issued additional transient accommodation tax assessments for 2012 and 2013. Travelocity has appealed all of the additional assessments to the Tax Appeal Court, which has stayed the assessments pending the Hawaii Supreme Court’s final decision and judgment on the original assessments.

We did not record material charges associated with our case with the State of Hawaii during the three and six months ended June 30, 2015 and 2014. As of June 30, 2015, we maintained an accrued liability of $11 million included in other accrued liabilities for this case and did not make material payments in the three and six months ended June 30, 2015. Payment of any amount is not an admission that we are subject to the taxes in question. We expect to receive a final ruling on the amounts owed by Travelocity in the third quarter of 2015. At that time, we will adjust our accrued liability to any remaining amounts due for periods and taxes not covered by the court’s rulings. We also expect to receive a refund from the State of Hawaii for a significant portion of the $35 million we previously paid to them to appeal. Any resulting gain will be recognized in our results of discontinued operations and cash flows from discontinued operations in our consolidated statements of operations and consolidated statements of cash flows, respectively.

As of June 30, 2015, we have a reserve of $18 million, included in other accrued liabilities in the consolidated balance sheet, for the potential resolution of issues identified related to litigation involving hotel and car sales, occupancy or excise taxes, which includes the $11 million reserve liability for the estimated remaining payments to the State of Hawaii. Our estimated liability is based on our current best estimate but the ultimate resolution of these issues may be greater or less than the amount recorded and, if greater, could adversely affect our results of operations.

In addition to the actions by the tax authorities, two consumer class action lawsuits have been filed against us in which the plaintiffs allege that we made misrepresentations concerning the description of the fees received in relation to facilitating hotel reservations. Generally, the consumer claims relate to whether Travelocity provided adequate notice to consumers regarding the nature of our fees and the amount of taxes charged or collected. One of these lawsuits is pending in Texas state court, where the court is currently considering the plaintiffs’ motion to certify a class action; and the other is pending in federal court, but has been stayed pending the outcome of the Texas state court action. We believe the notice we provided was appropriate.

In addition to the lawsuits, a number of state and local governments have initiated inquiries, audits and other administrative proceedings that could result in an assessment of sales or occupancy taxes on fees. If we do not prevail at the administrative level, those cases could lead to formal litigation proceedings.

US Airways Antitrust Litigation and DOJ Investigation

US Airways Antitrust Litigation

In April 2011, US Airways sued us in federal court in the Southern District of New York, alleging violations of the Sherman Act Section 1 (anticompetitive agreements) and Section 2 (monopolization). The complaint was filed two months after we entered into a new distribution agreement with US Airways. In September 2011, the court dismissed all claims relating to Section 2. The claims that were not dismissed are claims brought under Section 1 of the Sherman Act that relate to our contracts with US Airways, which US Airways says contain anticompetitive provisions, and an alleged conspiracy with the other GDSs, allegedly to maintain the industry structure and not to compete for content. We strongly deny all of the allegations made by US Airways.

Document, fact and expert witness discovery are complete. Summary judgment motions were filed in April 2014 and in January 2015, the court issued a ruling eliminating a majority of the alleged damages as well as rejecting a request for injunctive relief. The injunctive relief sought by US Airways could have resulted in the court requiring us to modify language in our customer contracts. The claims that have been dismissed to date are subject to appeal.

With respect to the remaining claims in this case, we believe that our business practices and contract terms are lawful, and we will continue to vigorously defend against the remaining claims. If our motion for entry of judgment, described below, is denied, a bench trial for this lawsuit has been set to begin in October 2015.

In June 2015, US Airways filed a Second Amended Complaint that limited its request for relief for the remaining claims to an amount not to exceed twenty dollars (post-trebling), plus reasonable costs, attorneys’ fees and pre- and post-judgment interest, as well as declaratory relief with respect to those claims, including claims that we acted anticompetitively and maintained alleged market power.

In July 2015, we made an offer of judgment to US Airways, in which we offered to pay US Airways twenty dollars plus reasonable costs and attorneys’ fees incurred to date in an amount to be determined by the court. The offer of judgment provided for the entry of a judgment against us on all remaining claims without an admission of liability. US Airways rejected our offer of judgment. We have filed a motion for entry of judgment requesting that the court enter judgment pursuant to the terms of our offer because it provides US Airways with complete relief on all remaining, available claims. US Airways has responded that entry of judgment is not appropriate because our offer does not address US Airways’ claim for declaratory relief, which we contend is moot in light of, among other things, the fact that US Airways’ remaining claims relate to only an expired contract and a past alleged conspiracy. No ruling has been made as of the date of this Quarterly Report on Form 10-Q on our motion for entry of judgment. If the court enters judgment based on the terms of our offer, we would be required to pay US Airways twenty dollars plus reasonable costs and attorneys’ fees incurred as of the date of the offer. To the extent that US Airways appeals the claims that the court previously dismissed, we would continue to defend against those claims.

We have and will incur significant fees, costs and expenses for as long as the litigation is ongoing. In addition, litigation by its nature is highly uncertain and fraught with risk, and it is therefore difficult to predict the outcome of any particular matter, including changes to our business. If favorable resolution of the matter is not reached, US Airways would be eligible to be reimbursed by us for its reasonable costs and attorneys’ fees. We have not made any provisions or recorded any liability for the potential resolution of this matter. Depending on the outcome of the litigation, any of these consequences could have a material adverse effect on our business, financial condition and results of operations.

Department of Justice Investigation

On May 19, 2011, we received a civil investigative demand (“CID”) from the U.S. Department of Justice (“DOJ”) investigating alleged anticompetitive acts related to the airline distribution component of our business. We are fully cooperating with the DOJ investigation and are unable to make any prediction regarding its outcome. The DOJ is also investigating other companies that own GDSs, and has sent CIDs to other companies in the travel industry. Based on its findings in the investigation, the DOJ may (i) close the file, (ii) seek a consent decree to remedy issues it believes violate the antitrust laws, or (iii) file suit against us for violating the antitrust laws, seeking injunctive relief. If injunctive relief were granted, depending on its scope, it could affect the manner in which our airline distribution business is operated and potentially force changes to the existing airline distribution business model. Any of these consequences would have a material adverse effect on our business, financial condition and results of operations. We have not received any communications from the DOJ regarding this matter in over two years; however, we have not been notified that this matter is closed.

Putative Class Action Lawsuits

On July 14, 2015 and July 20, 2015, two putative class action lawsuits (with virtually identical complaints) were filed against us and two other GDSs, in the Federal District Court of New York, Southern Division. The plaintiffs, who are asserting claims on behalf of a putative class of consumers in various states, are generally alleging that the GDSs conspired to, for example, negotiate for full content from the airlines, resulting in higher ticket prices for consumers, in violation of various federal and state laws. Although the amount of damages allegedly incurred by the plaintiffs has not been asserted to date, the plaintiffs are also seeking declaratory and injunctive relief. We may incur significant fees, costs and expenses for as long as these litigation matters are ongoing. We intend to vigorously defend against these claims.

Insurance Carriers

We have disputes against some of our insurance carriers for failing to reimburse defense costs incurred in the American Airlines antitrust litigation, which we settled in October 2012. Both carriers admitted there is coverage, but reserved their rights not to pay should we be found liable for certain of American Airlines’ allegations. Despite their admission of coverage, the insurers have only reimbursed us for a small portion of our significant defense costs. We filed suit against the entities in New York state court alleging breach of contract and a statutory cause of action for failure to promptly pay claims. If we prevail, we may recover some or all amounts already tendered to the insurance companies for payment within the limits of the policies and may be entitled to 18% interest on such amounts, all of which will be recorded in the period cash is received. To date, settlement discussions have been unsuccessful. We are currently in the discovery process. The court has not yet scheduled a trial date though we anticipate trial to begin in the second half of 2015.

Indian Income Tax Litigation

We are currently a defendant in income tax litigation brought by the Indian Director of Income Tax (“DIT”) in the Supreme Court of India. The dispute arose in 1999 when the DIT asserted that we have a permanent establishment within the meaning of the Income Tax Treaty between the United States and the Republic of India and accordingly issued tax assessments for assessment years ending March 1998 and March 1999, and later issued further tax assessments for assessment years ending March 2000 through March 2006. We appealed the tax assessments and the Indian Commissioner of Income Tax Appeals returned a mixed verdict. We filed further appeals with the Income Tax Appellate Tribunal, or the ITAT. The ITAT ruled in our favor on June 19, 2009 and July 10, 2009, stating that no income would be chargeable to tax for assessment years ending March 1998 and March 1999, and from March 2000 through March 2006. The DIT appealed those decisions to the Delhi High Court, which found in our favor on July 19, 2010. The DIT has appealed the decision to the Supreme Court of India and no trial date has been set.

We intend to continue to aggressively defend against these claims. Although we do not believe that the outcome of the proceedings will result in a material impact on our business or financial condition, litigation is by its nature uncertain. If the DIT were to fully prevail on every claim, we could be subject to taxes, interest and penalties of approximately $34 million as of June 30, 2015, which could have an adverse effect on our business, financial condition and results of operations. We do not believe this outcome is more likely than not and therefore have not made any provisions or recorded any liability for the potential resolution of this matter.

Litigation Relating to Routine Proceedings

We are also engaged from time to time in other routine legal and tax proceedings incidental to our business. We do not believe that any of these routine proceedings will have a material impact on the business or our financial condition.

11. Segment Information

In the first quarter of 2015, we disposed of our Travelocity segment; therefore, the financial results of Travelocity are excluded from the segment information presented below and are included in net income (loss) from discontinued operations in our consolidated financial statements.

Our reportable segments are based upon our internal organizational structure; the manner in which our operations are managed; the criteria used by our Chief Executive Officer, who is our Chief Operating Decision Maker (“CODM”), to evaluate segment performance; the availability of separate financial information; and overall materiality considerations.

Our business has two reportable segments: (i) Travel Network and (ii) Airline and Hospitality Solutions, which aggregates the Airline Solutions and Hospitality Solutions operating segments as these operating segments have similar economic characteristics, generate revenues on transaction-based fees, incur the same types of expenses and use our software-as-a-service (“SaaS”) based and hosted applications and platforms to market to the travel industry.

Our CODM utilizes Adjusted Gross Margin and Adjusted EBITDA as the measures of profitability to evaluate performance of our segments and allocate resources. Segment results do not include unallocated expenses or interest expenses which are centrally managed costs. Benefits expense, including pension expense, postretirement benefits, medical insurance and workers’ compensation are allocated to the segments based on headcount. Depreciation expense on the corporate headquarters building and related facilities costs are allocated to the segments through a facility fee based on headcount. Corporate includes certain shared expenses such as accounting, human resources, legal, corporate systems, and other shared technology costs. Corporate also includes all amortization of intangible assets and any related impairments that originate from purchase accounting, as well as stock based compensation expense, restructuring charges, legal reserves, occupancy taxes and other items not identifiable with one of our segments.

We account for significant intersegment transactions as if the transactions were with third parties, that is, at estimated current market prices. The majority of the intersegment revenues and cost of revenues are fees charged by Travel Network to Airline and Hospitality Solutions for airline trips booked through our GDS.

Our CODM does not review total assets by segment as operating evaluations and resource allocation decisions are not made on the basis of total assets by segment. Our CODM uses Adjusted Capital Expenditures in making product investment decisions and determining development resource requirements.

The performance of our segments is evaluated primarily on Adjusted Gross Margin and Adjusted EBITDA which are not recognized terms under GAAP. Our uses of Adjusted Gross Margin and Adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP.

We define Adjusted Gross Margin as operating income adjusted for selling, general and administrative expenses, amortization of upfront incentive consideration, and the cost of revenue portion of depreciation and amortization, restructuring and other costs and stock-based compensation.

We define Adjusted EBITDA as income from continuing operations adjusted for depreciation and amortization of property and equipment, amortization of capitalized implementation costs, acquisition-related amortization, amortization of upfront incentive consideration, interest expense, net, loss on extinguishment of debt, other, net, restructuring and other costs, acquisition-related costs, litigation costs, stock-based compensation, management fees and income taxes. We define Adjusted Capital Expenditures as additions to property and equipment and capitalized implementation costs during the periods presented.

Segment information for the three and six months ended June 30, 2015 and 2014 is as follows (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
Revenue
Travel Network	$	494,515		$	462,337		$	1,002,445		$	954,064
Airline and Hospitality Solutions	216,632			186,573			421,532			363,290
Eliminations	(4,056		)	(2,530		)	(6,538		)	(4,559		)
Total revenue	$	707,091		$	646,380		$	1,417,439		$	1,312,795

Adjusted Gross Margin ^(a)
Travel Network	$	225,927		$	217,161		$	470,046		$	453,809
Airline and Hospitality Solutions	95,782			75,259			184,981			140,799
Corporate	(8,885		)	(5,457		)	(21,481		)	(20,780		)
Total	$	312,824		$	286,963		$	633,546		$	573,828

Adjusted EBITDA ^(b)
Travel Network	$	205,957		$	197,971		$	438,044		$	412,814
Airline and Hospitality Solutions	80,985			62,555			152,473			116,015
Total segments	286,942			260,526			590,517			528,829
Corporate	(59,369		)	(45,978		)	(119,358		)	(103,018		)
Total	$	227,573		$	214,548		$	471,159		$	425,811

Depreciation and amortization
Travel Network	$	15,280		$	15,772		$	29,624		$	31,809
Airline and Hospitality Solutions	31,910			26,700			74,907			53,698
Total segments	47,190			42,472			104,531			85,507
Corporate	29,366			28,231			62,086			66,830
Total	$	76,556		$	70,703		$	166,617		$	152,337

Adjusted Capital Expenditures ^(c)
Travel Network	$	14,473		$	15,307		$	27,558		$	30,620
Airline and Hospitality Solutions	52,542			39,390			106,979			77,790
Total segments	67,015			54,697			134,537			108,410
Corporate	14,270			12,059			22,987			15,657
Total	$	81,285		$	66,756		$	157,524		$	124,067

______________________________


(a)	The following table sets forth the reconciliation of Adjusted Gross Margin to operating income in our statement of operations (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Adjusted Gross Margin	$	312,824	$	286,963	$	633,546	$	573,828
Less adjustments:
Selling, general and administrative	123,360		127,651		245,718		238,389
Cost of revenue adjustments:
Depreciation and amortization ⁽¹⁾	53,079		48,115		117,746		106,924
Amortization of upfront incentive consideration ⁽²⁾	10,878		11,742		22,050		22,789
Restructuring and other costs ⁽⁴⁾	—		1,401		—		2,579
Stock-based compensation	2,902		1,972		6,435		3,358
Operating income	$	122,605	$	96,082	$	241,597	$	199,789


(b)	The following table sets forth the reconciliation of Adjusted EBITDA to income from continuing operations in our statement of operations (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015		2014
Adjusted EBITDA	$	227,573		$	214,548		$	471,159	$	425,811
Less adjustments:
Depreciation and amortization of property and equipment ^(1a)	46,244			40,661			107,907		81,110
Amortization of capitalized implementation costs ^(1b)	7,902			8,890			15,426		17,987
Acquisition-related amortization ^(1c)	23,211			21,953			44,886		54,842
Amortization of upfront incentive consideration ⁽²⁾	10,878			11,742			22,050		22,789
Interest expense, net	42,609			53,235			89,062		117,179
Loss on extinguishment of debt	33,235			30,558			33,235		33,538
Other, net ⁽³⁾	(197		)	(391		)	4,248		1,963
Restructuring and other costs ⁽⁴⁾	—			2,128			—		3,684
Acquisition-related costs ⁽⁵⁾	2,053			—			3,864		—
Litigation costs ⁽⁶⁾	2,043			2,572			5,479		7,118
Stock-based compensation	7,330			4,885			16,124		8,484
Management fees ⁽⁷⁾	—			21,576			—		23,508
Provision for income taxes	19,676			10,284			46,959		25,195
Income from continuing operations	$	32,589		$	6,455		$	81,919	$	28,414

______________


(1)	Depreciation and amortization expenses:


a.	Depreciation and amortization of property and equipment includes software developed for internal use.


b.	Amortization of capitalized implementation costs represents amortization of upfront costs to implement new customer contracts under our SaaS and hosted revenue model.


c.	Acquisition-related amortization represents amortization of intangible assets from the take-private transaction in 2007 as well as intangibles associated with acquisitions since that date and amortization of the excess basis in our underlying equity in joint ventures.

(2)

Our Travel Network business at times makes upfront cash payments or other consideration to travel agency subscribers at the inception or modification of a service contract, which are capitalized and amortized over an average expected life of the service contract, generally over three years to five years. Such consideration is made with the objective of increasing the number of clients or to ensure or improve customer loyalty. Such service contract terms are established such that the supplier and other fees generated over the life of the contract will exceed the cost of the incentive consideration provided up front. Such service contracts with travel agency subscribers require that the customer commit to achieving certain economic objectives and generally have terms requiring repayment of the upfront incentive consideration if those objectives are not met.


(3)	Other, net primarily represents foreign exchange gains and losses related to the remeasurement of foreign currency denominated balances included in our consolidated balance sheets into the relevant functional currency.


(4)	Restructuring and other costs represent charges associated with business restructuring and associated changes implemented which resulted in severance benefits related to employee terminations, integration and facility opening or closing costs and other business reorganization costs.


(5)	Acquisition-related costs represent fees and expenses incurred associated with the acquisition of Abacus (see Note 12, Subsequent Events).


(6)	Litigation costs represent charges or settlements associated with airline antitrust litigation (see Note 10, Contingencies).

(7)

We paid an annual management fee, pursuant to a Management Services Agreement (“MSA”), to TPG Global, LLC (“TPG”) and Silver Lake Management Company (“Silver Lake”) in an amount between (i) $5 million and (ii) $7 million, the actual amount of which is calculated based upon 1% of Adjusted EBITDA, earned by the company in such fiscal year up to a maximum of $7 million. In addition, we paid a $21 million fee, in the aggregate, to TPG and Silver Lake at the closing of our initial public offering in April of 2014. The MSA was terminated thereafter.


(c)	Includes capital expenditures and capitalized implementation costs as summarized below (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Additions to property and equipment	$	66,051	$	56,812	$	127,963	$	106,470
Capitalized implementation costs	15,234		9,944		29,561		17,597
Adjusted Capital Expenditures	$	81,285	$	66,756	$	157,524	$	124,067

12. Subsequent Events

On July 1, 2015, we completed the acquisition of the remaining 65% interest Abacus International Pte Ltd (“AIPL”), a Singapore-based business-to-business travel e-commerce provider that serves the Asia-Pacific region. Prior to the acquisition, AIPL was 65% owned by a consortium of 11 airlines and the remaining 35% was owned by us. Also in July 2015, AIPL completed the acquisition of the remaining interest in two national marketing companies ("NMCs"), Abacus Distribution Systems (Hong Kong) and Abacus Travel Systems (Singapore) (together with AIPL, “Abacus”), in which AIPL owned minority interests. We expect to continue reviewing opportunities to acquire other NMCs in the Asia-Pacific region. Abacus will be managed as a region of our Travel Network business. Separately, we have signed new long-term agreements with the consortium of 11 airlines to continue to utilize the Abacus GDS.

The net cash consideration for Abacus was $433 million, which excludes the effect of net working capital adjustments subject to finalization. The acquisition was funded with a combination of cash on hand and a $70 million draw on our Revolver. The purchase price allocation and pro forma financial information are not yet available due to limited access to Abacus' books and records prior to the acquisition and the limited time from the completion of the acquisition through the date of this Quarterly Report on Form 10-Q.

In connection with our acquisition of Abacus, we expect to recognize a gain in the third quarter of 2015 as the result of remeasuring our previous 35% equity interest in AIPL to its fair value as of the acquisition date. We are in process of determining this amount which we expect to be significant to our results of operations.


ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements about future trends, events, uncertainties and our plans and expectations of what may happen in the future. Any statements that are not historical or current facts are forward-looking statements. In many cases, you can identify forward-looking statements by terms such as “expect,” “may,” “will,” “should,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “potential” or the negative of these terms or other comparable terminology. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Certain of these risks and uncertainties are described in the “Risk Factors” and “Forward-Looking Statements” sections included in our Annual Report on Form 10-K filed with the SEC on March 3, 2015. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance or achievements. Readers are cautioned not to place undue reliance on these forward-looking statements. Unless required by law, we undertake no obligation to publicly update or revise any forward-looking statements to reflect circumstances or events after the date they are made.

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes contained elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K filed with the SEC on March 3, 2015.

Overview

We are a leading technology solutions provider to the global travel and tourism industry. We operate through two business segments: (i) Travel Network, our global B2B travel marketplace for travel suppliers and travel buyers and (ii) Airline and Hospitality Solutions, an extensive suite of leading software solutions primarily for airlines and hotel properties. Collectively, these offerings enable travel suppliers to better serve their customers across the entire travel lifecycle, from route planning to post-trip business intelligence and analysis.

In July 2015, we completed the acquisition of the remaining 65% interest in AIPL and the acquisition of two NMCs for net cash consideration of $433 million, which excludes the effect of net working capital adjustments subject to finalization. AIPL is a Singapore-based business-to-business travel e-commerce provider that serves the Asia-Pacific region. Prior to the acquisition, AIPL was 65% owned by a consortium of 11 airlines and the remaining 35% was owned by us, and AIPL owned minority interests in the two NMCs. Abacus will be managed as a region of our Travel Network business. Separately, we have signed new long-term agreements with the consortium of 11 airlines to continue to utilize the Abacus GDS.

In the first quarter of 2015, we completed our exit of the online travel agency business through the sale of Travelocity.com and lastminute.com. Our Travelocity segment has no remaining operations as a result of these dispositions. The financial results of our Travelocity segment are included in net income (loss) from discontinued operations in our consolidated statements of operations for all periods presented. The assets and liabilities of Travelocity.com and lastminute.com that were disposed of are classified as assets held for sale and liabilities held for sale in our consolidated balance sheet as of December 31, 2014. The discussion and analysis of our results of operations refer to continuing operations unless otherwise indicated.

A significant portion of our revenue is generated through transaction based fees that we charge to our customers. For Travel Network, this fee is in the form of a transaction fee for bookings on our GDS; for Airline and Hospitality Solutions, this fee is a recurring usage-based fee for the use of our SaaS and hosted systems, as well as upfront solution fees and consulting fees. Items that are not allocated to our business segments are identified as corporate and include primarily certain shared technology costs as well as stock-based compensation expense, litigation costs and other items that are not identifiable with either of our segments.

Factors Affecting our Results

A discussion of trends that we believe are the most significant opportunities and challenges currently impacting our business and industry is included the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting our Results” included in our Annual Report on Form 10-K filed with the SEC on March 3, 2015. The discussion also includes management’s assessment of the effects these trends have had and are expected to have on our results of continuing operations. The information is not an exhaustive list of all of the factors that could affect our results and should be read in conjunction with the factors referred to in the section entitled “Risk Factors” included in our Annual Report on Form 10-

K filed with the SEC on March 3, 2015. There have been no material changes to the Factors Affecting our Results previously disclosed in our Annual Report.

Components of Revenues and Expenses

Revenues

Travel Network primarily generates revenues from Direct Billable Bookings processed on our GDS, as well as revenue from certain services we provide our joint ventures and the sale of aggregated bookings data to carriers. Airline and Hospitality Solutions primarily generates revenue through upfront solution fees and recurring usage-based fees for the use of our software solutions hosted on our own secure platforms or deployed through our SaaS. Airline and Hospitality Solutions also generates revenue through consulting services and software licensing fees.

Cost of Revenue

Cost of revenue incurred by Travel Network and Airline and Hospitality Solutions consists of expenses related to our technology infrastructure that hosts our GDS and software solutions, salaries and benefits, and allocated overhead such as facilities and other support costs. Cost of revenue for Travel Network also includes incentive consideration expense representing payments or other consideration to travel agencies for reservations made on our GDS which have accrued on a monthly basis.

Corporate cost of revenue includes certain shared technology costs as well as stock-based compensation expense, litigation costs and other items that are not identifiable with our segments.

Depreciation and amortization included in cost of revenue is associated with property and equipment; software developed for internal use that supports our revenue, businesses and systems; amortization of contract implementation costs which relates to Airline and Hospitality Solutions; and intangible assets for technology purchased through acquisitions or established with our take-private transaction. Cost of revenue also includes amortization of upfront incentive consideration representing upfront payments or other consideration provided to travel agencies for reservations made on our GDS which are capitalized and amortized over the expected life of the contract.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of personnel-related expenses for employees that sell our services to new customers and administratively support the business, information technology and communication costs, professional services fees, certain settlement charges and costs to defend legal disputes, bad debt expense, depreciation and amortization and other overhead costs.

Intersegment Transactions

We account for significant intersegment transactions as if the transactions were with third parties, that is, at estimated current market prices. Airline and Hospitality Solutions pays fees to Travel Network for airline trips booked through our GDS. In addition, Travel Network historically recognized intersegment incentive consideration expense for bookings generated by our discontinued Travelocity business. Such costs are representative of costs incurred on a consolidated basis relating to Travel Network’s revenue from airlines for bookings transacted through our GDS.

Key Metrics

“Direct Billable Bookings” and “Passengers Boarded” are the primary metrics utilized by Travel Network and Airline Solutions, respectively, to measure operating performance. Travel Network generates fees for each Direct Billable Booking which include bookings made through our GDS (e.g., air, car and hotel bookings) and through our joint venture partners in cases where we are paid directly by the travel supplier. Passengers Boarded (“PBs”) is the primary metric used by Airline Solutions to recognize SaaS and Hosted revenue from recurring usage-based fees. The following table sets forth our key metrics (in thousands):



	Three Months Ended June 30,			Six Months Ended June 30,
	2015	2014	% Change	2015	2014	% Change
Travel Network
Direct Billable Bookings - Air	88,442	81,053	9.1%	179,865	170,098	5.7%
Direct Billable Bookings - Non-Air	14,687	13,862	6.0%	28,698	27,460	4.5%
Total Direct Billable Bookings	103,129	94,915	8.7%	208,563	197,558	5.6%
Airline Solutions Passengers Boarded	139,265	131,450	5.9%	265,439	249,066	6.6%

Non-GAAP Financial Measures

We have included both financial measures compiled in accordance with GAAP and certain non-GAAP financial measures in this Quarterly Report on Form 10-Q, including Adjusted Gross Margin, Adjusted Net Income, Adjusted EBITDA, Adjusted Capital Expenditures, Free Cash Flow, Adjusted Free Cash Flow and ratios based on these financial measures.

We define Adjusted Net Income as income from continuing operations adjusted for acquisition-related amortization, loss on extinguishment of debt, other, net, restructuring and other costs, acquisition-related costs, litigation costs, stock-based compensation, management fees and the tax impact of net income adjustments.

We define Adjusted EBITDA as Adjusted Net Income adjusted for depreciation and amortization of property and equipment, amortization of capitalized implementation costs, amortization of upfront incentive consideration, interest expense, net, and remaining provision for income taxes. This Adjusted EBITDA metric differs from (i) the EBITDA metric referenced in the section entitled “—Liquidity and Capital Resources—Senior Secured Credit Facilities,” which is calculated for the purposes of compliance with our debt covenants, and (ii) the Pre-VCP EBITDA and EBITDA metrics referenced in the section entitled “Compensation Discussion and Analysis” in our 2015 Proxy Statement, which are calculated for the purposes of our annual incentive compensation program and performance-based awards, respectively.

We define Adjusted Capital Expenditures as additions to property and equipment and capitalized implementation costs during the periods presented.

We define Free Cash Flow as cash provided by operating activities less cash used in additions to property and equipment. We define Adjusted Free Cash Flow as Free Cash Flow plus the cash flow effect of restructuring and other costs, acquisition-related costs, litigation settlement, other litigation costs and management fees.

These non-GAAP financial measures are key metrics used by management and our board of directors to monitor our ongoing core operations because historical results have been significantly impacted by events that are unrelated to our core operations as a result of changes to our business and the regulatory environment. We believe that these non-GAAP financial measures are used by investors, analysts and other interested parties as measures of financial performance and to evaluate our ability to service debt obligations, fund capital expenditures and meet working capital requirements. Adjusted Capital Expenditures includes cash flows used in investing activities, for property and equipment, and cash flows used in operating activities, for capitalized implementation costs. Our management uses this combined metric in making product investment decisions and determining development resource requirements. We also believe that Adjusted Gross Margin, Adjusted Net Income, Adjusted EBITDA and Adjusted Capital Expenditures assist investors in company-to-company and period-to-period comparisons by excluding differences caused by variations in capital structures (affecting interest expense), tax positions and the impact of depreciation and amortization expense. In addition, amounts derived from Adjusted EBITDA are a primary component of certain covenants under our senior secured credit facilities.

Adjusted Gross Margin, Adjusted Net Income, Adjusted EBITDA, Adjusted Capital Expenditures, Free Cash Flow, Adjusted Free Cash Flow and ratios based on these financial measures are not recognized terms under GAAP. These non-GAAP financial measures and ratios based on them have important limitations as analytical tools, and should not be viewed in isolation and do not purport to be alternatives to net income as indicators of operating performance or cash flows from operating activities as measures of liquidity. These non-GAAP financial measures and ratios based on them exclude some, but not all, items that affect net income or cash flows from operating activities and these measures may vary among companies. Our use of these measures has limitations as an analytical tool, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are:


•	although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted Gross Margin and Adjusted EBITDA do not reflect cash requirements for such replacements;


•	Adjusted Net Income and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;


•	Adjusted EBITDA does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our indebtedness;


•	Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us;


•	Free Cash Flow and Adjusted Free Cash Flow do not reflect the cash requirements necessary to service the principal payments on our indebtedness;


•	Free Cash Flow and Adjusted Free Cash Flow do not reflect payments related to restructuring, litigation, acquisition-related and management fees;


•	Free Cash Flow and Adjusted Free Cash Flow remove the impact of accrual-basis accounting on asset accounts and non-debt liability accounts; and


•	other companies, including companies in our industry, may calculate Adjusted Gross Margin, Adjusted Net Income, Adjusted EBITDA, Adjusted Capital Expenditures, Free Cash Flow or Adjusted Free Cash Flow differently, which reduces their usefulness as comparative measures.

The following table sets forth the reconciliation of net income (loss) attributable to common shareholders to Adjusted Net Income and Adjusted EBITDA (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
Net income (loss) attributable to common shareholders	$	32,207		$	(13,132	)	$	239,701		$	(25,121	)
(Income) loss from discontinued operations, net of tax	(696		)	16,650			(159,607		)	40,706
Net income attributable to noncontrolling interests⁽¹⁾	1,078			702			1,825			1,448
Preferred stock dividends	—			2,235			—