Sabre Corp - FORM 10-Q - November 2, 2016

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Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

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EX-31.1 - EX-31.1 CERTIFICATION OF CEO PURSUANT TO SECTION 302 - Sabre Corp	sabrex311_ceo302certxq32016.htm
EX-32.2 - EX-32.2 CERTIFICATION OF CFO PURSUANT TO SECTION 906 - Sabre Corp	sabrex322_cfo906certxq32016.htm
EX-32.1 - EX-32.1 CERTIFICATION OF CEO PURSUANT TO SECTION 906 - Sabre Corp	sabrex321_ceo906certxq32016.htm
EX-31.2 - EX-31.2 CERTIFICATION OF CFO PURSUANT TO SECTION 302 - Sabre Corp	sabrex312_cfo302certxq32016.htm
EX-10.74 - EX-10.74 LETTER AGREEMENT-ALEX ALT - Sabre Corp	sabrex1074_alexaltagreemen.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 September 30, 2016



¨	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 October 27, 2016, 280,226,696 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.

SABRE CORPORATION

TABLE OF CONTENTS




PART I. FINANCIAL INFORMATION		Page No.
Item 1.	Financial Statements:
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2016 and 2015	1
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2016 and 2015	2
	Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015	3
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015	4
	Notes to Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	38
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 6.	Exhibits	56

PART I. FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS

SABRE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Revenue	$	838,982		$	785,002		$	2,543,767		$	2,202,441
Cost of revenue ^{(1) (2)}	593,650			509,906			1,704,232			1,440,030
Selling, general and administrative ⁽²⁾	155,182			166,324			435,924			412,042
Operating income	90,150			108,772			403,611			350,369
Other (expense) income:
Interest expense, net	(38,002		)	(40,581		)	(116,414		)	(129,643		)
Loss on extinguishment of debt	(3,683		)	—			(3,683		)	(33,235		)
Joint venture equity income	718			372			2,244			14,198
Other, net	281			92,568			4,517			88,320
Total other (expense) income, net	(40,686		)	52,359			(113,336		)	(60,360		)
Income from continuing operations before income taxes	49,464			161,131			290,275			290,009
Provision for income taxes	7,208			38,007			79,905			84,966
Income from continuing operations	42,256			123,124			210,370			205,043
(Loss) income from discontinued operations, net of tax	(394		)	53,892			10,858			213,499
Net income	41,862			177,016			221,228			418,542
Net income attributable to noncontrolling interests	1,047			676			3,227			2,501
Net income attributable to common stockholders	$	40,815		$	176,340		$	218,001		$	416,041

Basic net income per share attributable to common stockholders:
Income from continuing operations	$	0.15		$	0.44		$	0.75		$	0.74
Income from discontinued operations	—			0.20			0.04			0.78
Net income per common share	$	0.15		$	0.64		$	0.79		$	1.53
Diluted net income per share attributable to common stockholders:
Income from continuing operations	$	0.15		$	0.44		$	0.73		$	0.73
Income from discontinued operations	—			0.19			0.04			0.77
Net income per common share	$	0.14		$	0.63		$	0.77		$	1.49
Weighted-average common shares outstanding:
Basic	278,399			275,471			277,125			272,224
Diluted	283,462			281,395			282,919			278,848

Dividends per common share	$	0.13		$	0.09		$	0.39		$	0.27

(1) Includes amortization of upfront incentive consideration	$	17,139		$	9,525		$	43,372		$	31,575
(2) Includes stock-based compensation as follows:
Cost of revenue	$	5,113		$	2,853		$	14,259		$	9,288
Selling, general and administrative	7,800			4,351			21,753			14,040

See Notes to Consolidated Financial Statements.

SABRE CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Net income	$	41,862		$	177,016		$	221,228		$	418,542
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments, net of tax
Foreign CTA (losses) gains, net of tax	(819		)	525			720			(1,056		)
Reclassification adjustment for realized losses on foreign CTA, net of tax	—			(18,558		)	(198		)	(18,558		)
Net change in foreign CTA (losses) gains, net of tax	(819		)	(18,033		)	522			(19,614		)
Retirement-related benefit plans:
Amortization of prior service credits, net of taxes of $130, $130, $389 and $388	(229		)	(228		)	(686		)	(687		)
Amortization of actuarial losses, net of taxes of $(520), $(635), $(1,551) and $(1,909)	1,033			1,126			2,852			3,375
Total retirement-related benefit plans	804			898			2,166			2,688
Derivatives and available-for-sale securities:
Unrealized gains (losses), net of taxes of $(1,663), $3,517, $658 and $7,092	11,076			(9,589		)	11,361			(17,383		)
Reclassification adjustment for realized losses, net of taxes of $(154), $(600), $(494) and $(2,777)	227			1,970			1,240			8,902
Net change in unrealized gains (losses) on derivatives and available-for-sale securities, net of tax	11,303			(7,619		)	12,601			(8,481		)
Share of other comprehensive (loss) of joint venture	(336		)	(7,249		)	(336		)	(6,327		)
Other comprehensive income (loss)	10,952			(32,003		)	14,953			(31,734		)
Comprehensive income	52,814			145,013			236,181			386,808
Less: Comprehensive income attributable to noncontrolling interests	(1,047		)	(676		)	(3,227		)	(2,501		)
Comprehensive income attributable to Sabre Corporation	$	51,767		$	144,337		$	232,954		$	384,307

See Notes to Consolidated Financial Statements.

SABRE CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)



	September 30, 2016			December 31, 2015
Assets
Current assets
Cash and cash equivalents	$	272,004		$	321,132
Accounts receivable, net	452,494			375,789
Prepaid expenses and other current assets	158,158			81,167
Total current assets	882,656			778,088
Property and equipment, net of accumulated depreciation of $925,771 and $850,587	717,533			627,529
Investments in joint ventures	25,425			24,348
Goodwill	2,552,871			2,440,431
Acquired customer relationships, net of accumulated amortization of $625,458 and $561,876	405,597			416,887
Other intangible assets, net of accumulated amortization of $523,950 and $480,037	405,963			419,666
Deferred income taxes	93,695			44,464
Other assets, net	663,446			642,214
Total assets	$	5,747,186		$	5,393,627

Liabilities and stockholders’ equity
Current liabilities
Accounts payable	$	117,681		$	138,421
Accrued compensation and related benefits	78,251			99,382
Accrued subscriber incentives	227,652			185,270
Deferred revenues	193,010			165,124
Other accrued liabilities	203,910			221,976
Current portion of debt	115,345			190,315
Tax Receivable Agreement	100,284			—
Total current liabilities	1,036,133			1,000,488
Deferred income taxes	108,057			83,562
Other noncurrent liabilities	536,160			656,093
Long-term debt	3,313,541			3,169,344
Commitments and contingencies (Note 10)
Stockholders’ equity
Common Stock: $0.01 par value; 450,000,000 authorized shares; 283,809,002 and 279,082,473 shares issued, 279,296,316 and 274,955,830 shares outstanding at September 30, 2016 and December 31, 2015, respectively	2,838			2,790
Additional paid-in capital	2,082,172			2,016,325
Treasury Stock, at cost, 4,512,686 and 4,126,643 shares at September 30, 2016 and December 31, 2015, respectively	(121,278		)	(110,548		)
Retained deficit	(1,129,682		)	(1,328,730		)
Accumulated other comprehensive loss	(82,183		)	(97,135		)
Noncontrolling interest	1,428			1,438
Total stockholders’ equity	753,295			484,140
Total liabilities and stockholders’ equity	$	5,747,186		$	5,393,627

See Notes to Consolidated Financial Statements.

SABRE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Nine Months Ended September 30,
	2016			2015
Operating Activities
Net income	$	221,228		$	418,542
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	303,956			254,854
Amortization of upfront incentive consideration	43,372			31,575
Litigation-related credits	(25,527		)	(49,194		)
Stock-based compensation expense	36,012			23,328
Allowance for doubtful accounts	9,232			6,745
Deferred income taxes	66,676			63,402
Joint venture equity income	(2,244		)	(14,198		)
Dividends received from joint venture investments	—			28,700
Amortization of debt issuance costs	6,738			4,893
Gain on remeasurement of previously-held joint venture interest	—			(86,082		)
Loss on extinguishment of debt	3,683			33,235
Other	4,303			10,730
Income from discontinued operations	(10,858		)	(213,499		)
Changes in operating assets and liabilities:
Accounts and other receivables	(70,906		)	(64,296		)
Prepaid expenses and other current assets	(19,508		)	5,249
Capitalized implementation costs	(64,577		)	(49,642		)
Upfront incentive consideration	(55,284		)	(46,409		)
Other assets	(18,105		)	(55,439		)
Accrued compensation and related benefits	(21,540		)	10,294
Accounts payable and other accrued liabilities	8,424			60,554
Deferred revenue including upfront solution fees	17,459			16,368
Cash provided by operating activities	432,534			389,710
Investing Activities
Additions to property and equipment	(254,232		)	(203,071		)
Acquisition, net of cash acquired	(164,481		)	(441,582		)
Other investing activities	—			148
Cash used in investing activities	(418,713		)	(644,505		)
Financing Activities
Proceeds of borrowings from lenders	1,055,000			752,000
Payments on borrowings from lenders	(994,287		)	(719,507		)
Debt prepayment fees and issuance costs	(11,377		)	(40,214		)
Net proceeds on the settlement of equity-based awards	17,111			40,045
Cash dividends paid to common stockholders	(108,358		)	(73,554		)
Other financing activities	(4,736		)	1,975
Cash (used in) provided by financing activities	(46,647		)	(39,255		)
Cash Flows from Discontinued Operations
Cash used in operating activities	(15,766		)	(908		)
Cash provided by investing activities	—			278,834
Cash (used in) provided by discontinued operations	(15,766		)	277,926
Effect of exchange rate changes on cash and cash equivalents	(536		)	(6,860		)
(Decrease) increase in cash and cash equivalents	(49,128		)	(22,984		)
Cash and cash equivalents at beginning of period	321,132			155,679
Cash and cash equivalents at end of period	$	272,004		$	132,695

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.

Basis of Presentation—The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position, results of operations and cash flows for the periods indicated. Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of results that may be expected for any other interim period or for the year ending December 31, 2016. 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 February 19, 2016.

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

The consolidated financial statements include our accounts after elimination of all significant intercompany balances and transactions. All dollar amounts in the financial statements and the tables in the notes, except per share amounts, are stated in thousands of U.S. dollars unless otherwise indicated. All amounts in the notes reference results from continuing operations unless otherwise indicated.

Use of Estimates—The preparation of these interim financial statements in conformity with GAAP requires that certain amounts be recorded based on estimates and assumptions made by management. Actual results could differ from these estimates and assumptions. Our accounting policies, which consist of significant estimates and assumptions, include, among other things, the estimation of the collectability of accounts receivable, estimation of future cancellations of bookings processed through the Sabre global distribution system (“GDS”), revenue recognition for software arrangements, determination of the fair value of assets and liabilities acquired in a business combination, determination of the fair value of derivatives, the evaluation of the recoverability of the carrying value of intangible assets and goodwill, assumptions utilized in the determination of pension and other postretirement benefit liabilities, estimation of loss contingencies, and estimation of 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 February 19, 2016.

Stockholders’ Equity—During the nine months ended September 30, 2016, we issued 4,726,529 shares of our common stock as a result of the exercise and settlement of employee equity-based awards. In addition, we received $28 million in proceeds from the exercise of employee stock-option awards and paid $11 million of income tax withholdings associated with the settlement of employee restricted-stock awards. We paid a quarterly cash dividend on our common stock of $0.13 per share, totaling $108 million, and $0.09 per share, totaling $74 million, during the nine months ended September 30, 2016 and 2015, respectively.

During the nine months ended September 30, 2016, certain of our stockholders sold an aggregate of 20,000,000 shares of our common stock through a secondary public offering. We did not offer any shares or receive any proceeds from this secondary public offering.

Adoption of New Accounting Standard—In the first quarter of 2016, we adopted Accounting Standards Update ("ASU") 2016-09, Improvements to Employee Share-Based Payment Accounting. This guidance was issued by the Financial Accounting Standards Board ("FASB") under their initiative to reduce complexity in financial reporting. The amendments of the updated standard include, among other things, the requirement to recognize excess tax benefits (or deficiencies) through earnings, the election of a policy to either estimate forfeitures when determining periodic expense or recognize actual forfeitures when they occur, and an increase in the allowable income tax withholding from the minimum to the maximum statutory rate.

In recent years, we have incurred significant excess tax benefits associated with settled equity-based awards that have not been recognized due to certain accounting policy elections we made under the previous accounting standard, combined with the significant amount of our net operating loss carryforwards. As a result of the adoption of ASU 2016-09, we recorded a cumulative-effect adjustment as of January 1, 2016 to increase retained earnings by $92 million with a corresponding increase to deferred tax assets in order to recognize excess tax benefits that can be used to reduce income taxes payable in the future. Effective January 1, 2016, excess tax benefits or deficiencies are recognized in our results of operations and are included in cash flows from operating activities in our statement of cash flows.

In accordance with the updated standard, we elected to recognize actual forfeitures of equity-based awards as they occur. As we previously estimated forfeitures to determine stock-based compensation expense, this change resulted in a cumulative-effect adjustment as of January 1, 2016 to reduce retained earnings by $2 million, net of tax.

For the nine months ended, September 30, 2016, we recognized $25 million in excess tax benefits associated with employee equity-based awards, as a result of the adoption of this standard. There were no other material impacts to our consolidated financial statements as a result of adopting this updated standard.

Reclassifications—We reclassified all of our $30 million litigation settlement liability as of December 31, 2015 to other accrued liabilities in our consolidated balance sheet to conform to our current period presentation. As of September 30, 2016, our litigation settlement liability included in other accrued liabilities totaled $6 million.

2. Acquisitions

Airpas Aviation

In April 2016, we completed the acquisition of Airpas Aviation, a software provider and consultancy company which offers route profitability and cost management software solutions. We acquired all of the outstanding stock and ownership interest of Airpas Aviation for net cash consideration of $9 million, including the effect of net working capital adjustments. Assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The preliminary allocation of purchase price includes $9 million of assets acquired, primarily consisting of $4 million of goodwill, not deductible for tax purposes, and $5 million of intangible assets. The intangible assets consist mainly of $4 million of acquired customer relationships with a useful life of 10 years and $1 million of purchased technology with a useful life of 5 years. The preliminary purchase price allocation is subject to change, which is expected to be finalized in the fourth quarter of 2016. Airpas Aviation is integrated and managed as part of our Airline and Hospitality Solutions segment. The acquisition of Airpas Aviation did not have a material impact to our consolidated financial statements, and therefore pro forma information is not presented.

Trust Group

In January 2016, we completed the acquisition of the Trust Group, a central reservations, revenue management and hotel

marketing provider, expanding our presence in Europe, the Middle East, and Africa ("EMEA") and Asia Pacific ("APAC"). The net cash consideration for the Trust Group was $156 million, which includes the effect of net working capital adjustments. The acquisition was funded using proceeds from our 5.25% senior secured notes due in 2023 and cash on hand. The Trust Group is integrated and managed as part of our Airline and Hospitality Solutions segment.

Preliminary Purchase Price Allocation

The purchase price allocation presented below is preliminary and based on available information as of the filing date of this Quarterly Report on Form 10-Q. Accordingly, the purchase price allocation is subject to change when finalized. We expect to finalize the purchase price allocation during 2016. A summary of the acquisition price and estimated fair values of assets acquired and liabilities assumed as of the date of acquisition is as follows (in thousands):



Cash and cash equivalents	$	4,209
Accounts receivable	10,584
Other current assets	793
Goodwill	103,809
Intangible assets:
Customer relationships	52,292
Purchased technology	23,362
Trademarks and brand names	2,183
Property and equipment, net	1,556
Current liabilities	(11,370		)
Deferred income taxes	(27,044		)
Total acquisition price	$	160,374

The goodwill recognized reflects expected synergies from combined operations and also the acquired assembled workforce of the Trust Group in EMEA and APAC. The goodwill recognized is assigned to our Airline and Hospitality Solutions segment and is not deductible for tax purposes. The weighted-average useful lives of the intangible assets acquired are 13 years for customer relationships, 2 years for purchased technology and 2 years for trademarks and brand names.

The acquisition of the Trust Group did not have a material impact to our consolidated financial statements, and therefore pro forma information is not presented.

Abacus

On July 1, 2015, we completed the acquisition of the remaining 65% interest in Abacus International Pte Ltd, a Singapore-based business-to-business travel e-commerce provider that serves the Asia-Pacific region, which is now named Sabre Asia Pacific Pte Ltd ("SAPPL"). Prior to the acquisition, SAPPL was 65% owned by a consortium of 11 airlines and the remaining 35% was owned by us. Separately, SAPPL has signed new long-term agreements with the consortium of 11 airlines to continue to utilize the Abacus GDS. In the third and fourth quarters of 2015, SAPPL completed the acquisition of the remaining interest in three national marketing companies, Abacus Distribution Systems (Hong Kong), Abacus Travel Systems (Singapore) and Abacus Distribution Systems Sdn Bhd (Malaysia) (the “NMCs” and, together with SAPPL, “Abacus”). SAPPL previously owned noncontrolling interests in the NMCs. The net cash consideration for Abacus was $443 million, which includes the effect of net working capital adjustments. The acquisition was funded with a combination of cash on hand and a $70 million draw on our revolving credit facility.

Purchase Price Allocation

The summary of the acquisition price and estimated fair values of assets acquired and liabilities assumed as of the date of acquisition is as follows (in thousands):



Cash and cash equivalents	$	65,641
Accounts receivable	49,099
Other current assets	12,522
Goodwill	292,267
Intangible assets:
Customer relationships	319,000
Reacquired rights⁽¹⁾	113,500
Purchased technology	14,000
Supplier agreements	13,000
Trademarks and brand names	4,000
Property and equipment, net	6,402
Other assets	66,423
Current liabilities	(123,307		)
Noncurrent liabilities	(44,245		)
Noncurrent deferred income taxes	(78,054		)
	710,248
Fair value of Sabre Corporation's previously held equity investment in SAPPL	(200,000		)
Fair value of SAPPL's previously held equity investment in national marketing companies	(1,880		)
Total acquisition price	$	508,368

__________________________________

(1) In connection with the acquisition of Abacus, we reacquired certain contractual rights that provided Abacus the exclusive right, within the Asia-Pacific region, to operate and profit from the Sabre GDS.

The goodwill recognized reflects expected synergies from combined operations and also the acquired assembled workforce of Abacus. The goodwill recognized is assigned to our Travel Network business and is not deductible for tax purposes. The useful lives of the intangible assets acquired are 20 years for customer relationships, 7 years for reacquired rights, 3 years for purchased technology, 7 years for supplier agreements and 2 years for trademarks and brand names.

The purchase price allocation includes estimates for contingent liabilities of $25 million related to tax uncertainties.

As part of the integration strategy for Abacus, management evaluated actions to optimize the investment’s potential, including the implementation of a restructuring plan to align the acquired business with Travel Network. This plan includes the elimination of redundant positions, centralization of key operations and termination of particular product offerings. As of December 31, 2015, our restructuring accrual associated with this plan was $8 million, of which $1 million was paid in the nine months ended September 30, 2016. We did not recognize material restructuring charges in the nine months ended September 30, 2016. The plan is expected to be substantially complete by the first quarter of 2017, and we currently do not expect to incur significant additional charges in connection with the plan.

Unaudited Pro Forma Financial Information

The following unaudited pro forma results of operations information give effect to the acquisitions of Abacus as if it occurred on January 1, 2014. The unaudited pro forma results of operations information include adjustments to: (i) eliminate historical revenue and cost of revenue between us, SAPPL and the NMCs; (ii) remove historical amortization recognized by SAPPL associated with its upfront incentive consideration and software developed for internal use, which are replaced by acquired intangible assets; and (iii) add amortization expense associated with acquired intangible assets.

The following unaudited pro forma results of operations information is presented in thousands:



	Nine Months Ended September 30, 2015
Revenue	$	2,350,362
Income from continuing operations	126,531
Net income attributable to common stockholders	337,529

The unaudited pro forma financial information is for informational purposes only and is not necessarily indicative of what our financial performance would have been had the acquisition been completed on the date assumed nor is such unaudited pro forma combined financial information necessarily indicative of the results to be expected in any future period.

3. Discontinued Operations

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 from discontinued operations in our consolidated statements of operations for all periods presented.

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, Travelocity.com LP, and Expedia. The signing and closing of the Travelocity Purchase Agreement occurred contemporaneously. Expedia purchased Travelocity.com pursuant to the Travelocity Purchase Agreement for cash consideration of $280 million. The net assets of Travelocity.com disposed of primarily included a trade name with a carrying value of $55 million. We recognized a gain on sale of $143 million, net of tax, in the first quarter of 2015.

lastminute.com—On March 1, 2015, we sold lastminute.com to Bravofly Rumbo Group. The transaction was completed through the transfer of net liabilities as of the date of sale consisting primarily of a working capital deficit of $70 million, partially offset by assets sold including intangible assets of $27 million. We did not receive any cash proceeds or any other significant consideration in the transaction other than payments for specific services being provided to the acquirer under a transition services agreement, which concluded on March 31, 2016. Additionally, at the time of sale, the acquirer entered into a long-term agreement with us to continue to utilize our GDS for bookings, which generates incentive consideration paid by us to the acquirer. We recognized a gain on sale of $24 million, net of tax, in the first quarter of 2015.

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Revenue	$	—		$	1,038		$	—		$	24,292
Cost of revenue	—			5,254			—			19,279
Selling, general and administrative	765			(42,046		)	8,964			(20,538		)
Operating loss	(765		)	37,830			(8,964		)	25,551
Other income (expense):
Gain on sale of businesses	—			30,709			305			294,276
Other, net	702			(321		)	(1,126		)	2,178
Total other (expense) income, net	702			30,388			(821		)	296,454
(Loss) income from discontinued operations before income taxes	(63		)	68,218			(9,785		)	322,005
(Benefit) provision for income taxes⁽¹⁾	331			14,326			(20,643		)	108,506
Net (loss) income from discontinued operations	$	(394	)	$	53,892		$	10,858		$	213,499

__________________________


(1)	In the first quarter 2016, we recognized a $17 million tax benefit associated with the resolution of uncertain tax positions; see Note 4, Income Taxes.

Divestiture of lastminute.com

Cumulative Translation Adjustments

Cumulative translation adjustment ("CTA") gains or losses of foreign subsidiaries related to divested businesses are reclassified into earnings once the liquidation of the respective foreign subsidiaries is substantially complete. During the three months ended September 30, 2015, we substantially completed the liquidation of our lastminute.com subsidiaries and, therefore, reclassified $19 million, net of tax, of CTA gains from accumulated comprehensive income (loss) to our results of discontinued operations.

4. Income Taxes

Our effective tax rates for the nine months ended September 30, 2016 and 2015 were 28% and 29%, respectively. The decrease in the effective tax rate for the nine months ended September 30, 2016 as compared to the same period in 2015 was primarily driven by a relative increase in full year forecasted earnings in lower tax jurisdictions, excess tax benefits associated with employee equity-based awards (see Note 1, General Information, for additional information related to our adoption of ASU 2016-09) and U.S. federal research tax credits, partially offset by an increase in foreign withholding taxes. 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. In the first quarter of 2016, we recognized a tax benefit of $17 million associated with the effective settlement of uncertain tax positions in our discontinued Travelocity business. Our net unrecognized tax benefits, excluding interest and penalties, included in our consolidated balance sheets, were $56 million and $69 million as of September 30, 2016 and December 31, 2015, respectively.

Tax Receivable Agreement

Immediately prior to the closing of our initial public offering in April 2014, we entered into a tax receivable agreement (“TRA”) that provides stockholders and equity award holders that were our stockholders and equity award holders, respectively, immediately prior to the closing of our initial public offering (collectively, the “Pre-IPO Existing Stockholders”) the right to receive future payments from us. The future payments will equal 85% of the amount of cash savings, if any, in U.S. federal income tax that we and our subsidiaries realize as a result of the utilization of certain tax assets attributable to periods prior to our initial public offering, including federal net operating losses (“NOLs”), capital losses and the ability to realize tax amortization of certain intangible assets (collectively, the “Pre-IPO Tax Assets”). Consequently, stockholders who are not Pre-IPO Existing Stockholders will only be entitled to the economic benefit of the Pre-IPO Tax Assets to the extent of our continuing 15% interest in those assets. These payment obligations are our obligations and not obligations of any of our subsidiaries. The actual utilization of the Pre-IPO Tax Assets, as well as the timing of any payments under the TRA, will vary depending upon a number of factors, including the amount, character and timing of our and our subsidiaries’ taxable income in the future.

Based on current tax laws and assuming that we and our subsidiaries earn sufficient taxable income to realize the full tax benefits subject to the TRA, we estimate that future payments under the TRA relating to the Pre-IPO Tax Assets to total $387 million, excluding interest. The TRA payments accrue interest at a rate of LIBOR plus 1.00% beginning on the 15^th day of March subsequent to the tax year in which the tax benefits are realized through the date of the benefit payment. The estimate of future payments considers the impact of Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), which imposes an annual limit on the ability of a corporation that undergoes an ownership change to use its net operating loss carryforwards to reduce its liability. We do not anticipate any material limitations on our ability to utilize NOLs under Section 382 of the Code. We expect future payments under the TRA to be made over the next five years with no material payments occurring in 2016. As of September 30, 2016, the current portion of our Tax Receivable Agreement liability totaled $100 million, which includes accrued interest of less than $1 million. We expect to pay the current portion of the Tax Receivable Agreement liability in the first quarter of 2017. The remaining portion of $288 million is included in other noncurrent liabilities in our consolidated balance sheet as of September 30, 2016. Payments under the TRA are not conditioned upon the parties’ continuing ownership of the company.

5. Debt

As of September 30, 2016 and December 31, 2015, our outstanding debt included in our consolidated balance sheets totaled $3.429 million and $3,360 million, respectively, which are net of debt issuance costs of $29 million and $30 million, respectively, and unamortized discounts of $6 million and $6 million, respectively. The following table sets forth the face values of our outstanding debt as of September 30, 2016 and December 31, 2015 (in thousands):



	Rate	Maturity	September 30, 2016			December 31, 2015
Senior secured credit facilities:
Term A facility⁽¹⁾	L + 2.50%	November 2018	$	592,500		$	—
Term B facility	L + 3.00%	February 2019	1,420,896			1,721,750
Incremental term loan facility	L + 3.50%	February 2019	282,354			342,125
Term C facility	L + 3.00%	December 2017	49,313			49,313
New Revolver, $400 million⁽¹⁾	L + 2.50%	November 2018	—			—
Extended Revolver, $370 million⁽²⁾	L + 2.75%	February 2019	—			—
Unextended Revolver, $35 million⁽²⁾	L + 3.75%	February 2018	—			—
Senior unsecured notes due 2016	8.35%	March 2016	—			165,000
5.375% senior secured notes due 2023	5.375%	April 2023	530,000			530,000
5.25% senior secured notes due 2023	5.25%	November 2023	500,000			500,000
Mortgage facility	5.80%	April 2017	80,065			80,984
Capital lease obligations			9,529			6,502
Face value of total debt outstanding			3,464,657			3,395,674
Less current portion of debt outstanding			(115,345		)	(190,687		)
Face value of long-term debt outstanding			$	3,349,312		$	3,204,987

______________________________


(1)	The Term Loan A and the New Revolver mature in July 2021 and include an accelerated maturity of November 19, 2018 if on November 19, 2018 the Term Loan B and Incremental Term Loan Facility have not been repaid in full or refinanced with a maturity date subsequent to July 18, 2021.


(2)	Replaced on July 18, 2016 by the New Revolver.

Senior Secured Credit Facilities

On July 18, 2016, Sabre GLBL entered into a series of amendments to our Amended and Restated Credit Agreement (the “Credit Agreement Amendments”) to provide for an incremental term loan under a new class with an aggregate principal amount of $600 million (the “Term Loan A”) and to replace the Prior Revolver with a new revolving credit facility totaling $400 million (the “New Revolver”), both of which mature in July 2021. Principal payments on the Term Loan A are due on a quarterly basis equal to 1.25% of its initial aggregate principal amount during the first two years of its term and 2.50% of its initial aggregate principal amount during the next three years of its term. The applicable margins for the Term Loan A and the New Revolver are 2.50% for Eurocurrency borrowings and 1.50% for base rate borrowings, with a step down to 2.25% for Eurocurrency borrowings and 1.25% for base rate borrowings if the Senior Secured Leverage Ratio (as defined in the Amended and Restated Credit Agreement) is less than 2.50 to 1.00. The Term Loan A and the New Revolver include an accelerated maturity of November 19, 2018, if on November 19, 2018 the Term Loan B and Incremental Term Loan Facility have not been repaid in full or refinanced with a maturity date subsequent to July 18, 2021. The amount of the New Revolver commitments available as a letter of credit subfacility was set at $150 million.

The proceeds of $597 million, net of $3 million discount on Term Loan A, were used to repay $350 million of outstanding principal on our Term Loan B and Incremental Term Loan Facility, on a pro rata basis, repay the $120 million outstanding balance on our Prior Revolver immediately prior to the execution of the Credit Agreement Amendments, and to pay $11 million in associated financing fees. We intend to use the remaining proceeds for general corporate purposes. We recognized a $4 million loss on extinguishment of debt in connection with these transactions.

We had no balance outstanding under the New Revolver as of September 30, 2016 or under the Prior Revolver as of December 31, 2015. We had outstanding letters of credit totaling $36 million and $25 million as of September 30, 2016 and December 31, 2015, respectively, which reduced our overall credit capacity under the New and Prior Revolver.

Senior Unsecured Notes Due 2016

In March 2016, the remaining principal balance of $165 million of our senior unsecured notes matured. We repaid this remaining balance on the senior unsecured notes with a draw on our Prior Revolver and cash on hand.

6. 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.

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 September 2017. 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 nine months ended September 30, 2016 and 2015. As of September 30, 2016, we estimate that $0.5 million in gains will be reclassified from other comprehensive income (loss) to earnings over the next 12 months.

As of September 30, 2016 and December 31, 2015, 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 September 30, 2016
Buy Currency	Sell Currency	Foreign Amount	USD Amount	Average Contract Rate
Australian Dollar	US Dollar	19,700	14,454	0.7337
Euro	US Dollar	1,800	2,031	1.1283
British Pound Sterling	US Dollar	18,100	25,143	1.3891
Indian Rupee	US Dollar	1,195,500	17,136	0.0143
Polish Zloty	US Dollar	263,250	67,470	0.2563
Singapore Dollar	US Dollar	44,600	32,525	0.7293



Outstanding Notional Amounts as of December 31, 2015
Buy Currency	Sell Currency	Foreign Amount	USD Amount	Average Contract Rate
US Dollar	Australian Dollar	2,080	1,570	0.7548
US Dollar	Euro	2,870	3,169	1.1042
Australian Dollar	US Dollar	1,260	939	0.7452
Euro	US Dollar	2,870	3,122	1.0878
British Pound Sterling	US Dollar	18,075	27,415	1.5167
Indian Rupee	US Dollar	1,880,500	27,736	0.0147
Polish Zloty	US Dollar	226,500	59,120	0.2610

Interest Rate Swap Contracts—Interest rate swaps outstanding during the nine months ended September 30, 2016 and 2015 are as follows:



Notional Amount	Interest Rate Received	Interest Rate Paid	Effective Date	Maturity Date
$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

______________________


(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 nine months ended September 30, 2016. 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. As of September 30, 2016, we estimate that $7 million in losses will be reclassified from other comprehensive income (loss) to earnings over the next 12 months.

The estimated fair values of our derivatives designated as hedging instruments as of September 30, 2016 and December 31, 2015 are as follows (in thousands):



	Derivative Assets (Liabilities)
		Fair Value as of
Derivatives Designated as Hedging Instruments	Consolidated Balance Sheet Location	September 30, 2016			December 31, 2015
Foreign exchange contracts	Prepaid expenses and other current assets	$	1,670		$	—
Foreign exchange contracts	Other accrued liabilities	(1,184		)	(1,759		)
Interest rate swaps	Other accrued liabilities	(7,363		)	(3,912		)
Interest rate swaps	Other noncurrent liabilities	(12,073		)	(9,822		)
		$	(18,950	)	$	(15,493	)

The effects of derivative instruments, net of taxes, on OCI for the three and nine months ended September 30, 2016 and 2015 are as follows (in thousands):



	Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)
	Three Months Ended September 30,					Nine Months Ended September 30,
Derivatives in Cash Flow Hedging Relationships	2016		2015			2016			2015
Foreign exchange contracts	$	1,282	$	(1,069	)	$	724		$	(4,115	)
Interest rate swaps	759		(4,255		)	(3,637		)	(9,003		)
Total	$	2,041	$	(5,324	)	$	(2,913	)	$	(13,118	)



		Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
Derivatives in Cash Flow Hedging Relationships	Income Statement Location	Three Months Ended September 30,					Nine Months Ended September 30,
Derivatives in Cash Flow Hedging Relationships	Income Statement Location	2016		2015			2016		2015
Foreign exchange contracts	Cost of revenue	$	227	$	(1,970	)	$	1,240	$	(8,902	)

7. 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

Available-for-sale Securities—Our available-for-sale securities include securities of a publicly-traded non-U.S. entity. The fair value of these securities is obtained from market quotes as of the last day of the period. Our available-for-sale securities are included in prepaid and other current assets as of September 30, 2016 and in other assets as of December 31, 2015 in our consolidated balance sheets.

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 September 30, 2016 and December 31, 2015 (in thousands):



				Fair Value at Reporting Date Using
	September 30, 2016			Level 1		Level 2			Level 3
Available-for-sale securities	$	52,614		$	52,614	$	—		$	—
Derivatives
Foreign currency forward contracts	486			—		486			—
Interest rate swap contracts	(19,436		)	—		(19,436		)	—
Total	$	33,664		$	52,614	$	(18,950	)	$	—



				Fair Value at Reporting Date Using
	December 31, 2015			Level 1		Level 2			Level 3
Available-for-sale securities	$	36,711		$	36,711	$	—		$	—
Derivatives
Foreign currency forward contracts	(1,759		)	—		(1,759		)	—
Interest rate swap contracts	(13,734		)	—		(13,734		)	—
Total	$	21,218		$	36,711	$	(15,493	)	$	—

There were no transfers between Levels 1 and 2 within the fair value hierarchy for the nine months ended September 30, 2016.

Other Financial Instruments

The carrying value of our financial instruments including cash and cash equivalents, and accounts receivable approximates their fair values. The fair values of our senior unsecured notes due 2016, senior secured notes due 2023 and term loans under our Amended and Restated Credit Agreement are determined based on quoted market prices for the similar liability when traded as an asset in an active market, a Level 2 input. The outstanding principal balance of our mortgage facility approximated its fair value as of September 30, 2016 and December 31, 2015. The fair values of the mortgage facility were determined based on estimates of current interest rates for similar debt, a Level 2 input.

The following table presents the fair value and carrying value of our senior notes and borrowings under our senior secured credit facilities as of September 30, 2016 and December 31, 2015 (in thousands):



	Fair Value at				Carrying Value at
Financial Instrument	September 30, 2016		December 31, 2015		September 30, 2016		December 31, 2015
Term A facility	$	592,500	$	—	$	589,766	$	—
Term B facility	1,428,000		1,705,609		1,417,249		1,716,048
Incremental term loan facility	283,589		339,559		282,354		342,125
Term C facility	49,436		49,251		49,216		49,157
New Revolver, $400 million	—		—		—		—
Extended Revolver, $370 million ⁽¹⁾	—		—		—		—
Unextended Revolver, $35 million ⁽¹⁾	—		—		—		—
5.375% Senior secured notes due 2023	545,900		528,013		530,000		530,000
5.25% Senior secured notes due 2023	511,250		494,375		500,000		500,000
Senior unsecured notes due 2016	—		165,804		—		164,628

______________________________


(1)	Replaced on July 18, 2016 by the New Revolver.

8. Accumulated Other Comprehensive Income (Loss)

As of September 30, 2016 and December 31, 2015, the components of accumulated other comprehensive income (loss), net of related deferred income taxes, are as follows (in thousands):



	September 30, 2016			December 31, 2015
Defined benefit pension and other post retirement benefit plans	$	(88,481	)	$	(90,647	)
Unrealized gain (loss) on foreign currency forward contracts, interest rate swaps, and available-for-sale securities	6,216			(6,391		)
Unrealized foreign currency translation gain (loss)	82			(97		)
Total accumulated other comprehensive loss, net of tax	$	(82,183	)	$	(97,135	)

The amortization of actuarial losses and periodic service credits associated with our retirement-related benefit plans is included in selling, general and administrative expenses. See Note 6, Derivatives, for information on the income statement line items affected as the result of reclassification adjustments associated with derivatives.

9. 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 September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Numerator:
Income from continuing operations	$	42,256	$	123,124	$	210,370	$	205,043
Less: Net income attributable to noncontrolling interests	1,047		676		3,227		2,501
Net income from continuing operations available to common stockholders, basic and diluted	$	41,209	$	122,448	$	207,143	$	202,542
Denominator:
Basic weighted-average common shares outstanding	278,399		275,471		277,125		272,224
Add: Dilutive effect of stock options and restricted stock awards	5,063		5,924		5,794		6,624
Diluted weighted-average common shares outstanding	283,462		281,395		282,919		278,848
Earning per share from continuing operations:
Basic	$	0.15	$	0.44	$	0.75	$	0.74
Diluted	$	0.15	$	0.44	$	0.73	$	0.73

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 nine months ended September 30, 2016 and 2015, respectively.

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.

Antitrust Litigation and DOJ Investigation

US Airways Antitrust Litigation

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

Document, fact and expert witness discovery is complete. Sabre filed summary judgment motions in April 2014. In January 2015, the court issued an order granting Sabre's summary judgment motions in part, eliminating a majority of US Airways' alleged damages and rejecting its request for injunctive relief by which US Airways sought to bar Sabre from enforcing certain provisions in our contracts. US Airways may appeal the court's rulings upon a final judgment.

Based on the summary judgment ruling, the potential remaining range of damages has been significantly reduced. With respect to the remaining claims, US Airways seeks damages (before trebling) of either $45 million or $73 million. We believe their damage calculations are based on faulty assumptions and analysis and, therefore, are highly overstated.

We believe that our business practices and contract terms are lawful, and we will continue to vigorously defend against the remaining claims. The trial on the remaining claims commenced in October 2016 and is expected to conclude in December 2016.

We believe that the claims associated with this case are not probable and therefore have not accrued any losses as of September 30, 2016. 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 that may be required as a result of the litigation. If favorable resolution of the matter is not reached, any monetary damages are subject to trebling under the antitrust laws and US Airways would be eligible to be reimbursed by us for its reasonable costs and attorneys’ fees. Depending on the amount of any such judgment, if we do not have sufficient cash on hand, we may be required to seek private or public financing or utilize our revolving credit facility. Depending on the outcome of the litigation, any of these consequences could have a material adverse effect on our business, financial condition and results of operations.

Putative Class Action Lawsuit

In July 2015, a putative class action lawsuit was filed against us and two other GDSs, in the United States District Court for the Southern District of New York. The plaintiffs, who are asserting claims on behalf of a putative class of consumers in various states, are generally alleging that the GDSs conspired to negotiate for full content from the airlines, resulting in higher ticket prices for consumers, in violation of various federal and state laws. The plaintiffs sought an unspecified amount of damages in connection with their state law claims, and they requested injunctive relief in connection with their federal claim. In July 2016, the court granted, in part, our motion to dismiss the lawsuit, finding that plaintiffs’ state law claims are preempted by federal law, thereby precluding their claims for damages. The court declined to dismiss plaintiffs’ claim seeking an injunction under federal antitrust law. The plaintiffs may appeal the court’s dismissal of their state law claims upon a final judgment. We may incur significant fees, costs and expenses for as long as this litigation is ongoing. We intend to vigorously defend against the remaining claims.

Department of Justice Investigation

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

Insurance Carriers

We have disputes against some of our insurance carriers for failing to reimburse defense costs incurred in the American Airlines litigation, which we settled in October 2012. Both carriers admitted there is coverage and agreed to defend us, 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 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. Although the carriers never withdrew their agreement to defend us, they recently have taken the position in the lawsuit that they had no duty to defend or indemnify us. If we prevail, we may recover some or all amounts previously 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. Discovery is closed, and the parties are awaiting a ruling on summary judgment motions pending before the court.

Indian Income Tax Litigation

We are currently a defendant in income tax litigation brought by the Indian Director of Income Tax (“DIT”) in the Supreme Court of India. The dispute arose in 1999 when the DIT asserted that we have a permanent establishment within the meaning of the Income Tax Treaty between the United States and the Republic of India and accordingly issued tax assessments for assessment years ending March 1998 and March 1999, and later issued further tax assessments for assessment years ending March 2000 through March 2006. The DIT has continued to issue further tax assessments on a similar basis for subsequent years; however, the tax assessments for assessment years ending March 2007 and later are no longer material. We appealed the tax assessments for assessment years ending March 1998 through March 2006 and the Indian Commissioner of Income Tax Appeals returned a mixed verdict. We filed further appeals with the Income Tax Appellate Tribunal (“ITAT”). The ITAT ruled in our favor on June 19, 2009 and July 10, 2009, stating that no income would be chargeable to tax for assessment years ending March 1998 and March 1999, and from March 2000 through March 2006. The DIT appealed those decisions to the Delhi High Court, which found in our favor on July 19, 2010. The DIT has appealed the decision to the Supreme Court of India and no trial date has been set. We have appealed the tax assessment for the assessment year ended March 2013 with the ITAT and no trial date has been set.

In addition, SAPPL is currently a defendant in similar income tax litigation brought by the DIT. The dispute arose when the DIT asserted that SAPPL has a permanent establishment within the meaning of the Income Tax Treaty between Singapore and India and accordingly issued tax assessments for assessment years ending March 2000 through March 2005. SAPPL appealed the tax assessments, and the Indian Commissioner of Income Tax (Appeals) returned a mixed verdict. SAPPL filed further appeals with the ITAT. The ITAT ruled in SAPPL’s favor, finding that no income would be chargeable to tax for assessment years ending March 2000 through March 2005. The DIT appealed those decisions to the Delhi High Court. No hearing date has been set. The DIT also assessed taxes on a similar basis for assessment years ending March 2006 through March 2012, which are pending before the ITAT.

If the DIT were to fully prevail on every claim against us, including SAPPL, we could be subject to taxes, interest and penalties of approximately $42 million as of September 30, 2016. We intend to continue to aggressively defend against each of the foregoing claims. Although we do not believe that the outcome of the proceedings will result in a material impact on our business or financial condition, litigation is by its nature uncertain. We do not believe this outcome is probable and therefore have not made any provisions or recorded any liability for the potential resolution of any of these claims.

Indian Service Tax Litigation

SAPPL's Indian subsidiary is also subject to litigation by the India Director General (Service Tax) ("DGST"), which has assessed the subsidiary for multiple years related to its alleged failure to pay service tax on marketing fees and reimbursements of expenses. Indian courts have returned verdicts favorable to the Indian subsidiary. The DGST has appealed the verdict to the Indian Supreme Court. No provision has been recorded for this matter as we believe we will ultimately prevail.

Litigation and Administrative Audit Proceedings Relating to Hotel Occupancy Taxes

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

Beginning in 2004, various state and local governments in the United States have filed more than 80 lawsuits against us and other OTAs pertaining primarily to whether our discontinued Travelocity segment and other online travel agencies ("OTAs") owe sales or occupancy taxes on the revenues they earned from facilitating hotel reservations, where the customer paid us an amount at the time of booking that included (i) service fees, which we collected and retained, and (ii) the price of the hotel room and amounts for occupancy or other local taxes, which we passed along to the hotel supplier. The complaints generally allege, among other things, that the defendants failed to pay to the relevant taxing authority hotel occupancy taxes on the service fees. Several lawsuits also allege that the OTAs owe state or local taxes on their fees for facilitating car rental reservations. Courts have dismissed more than 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 remaining lawsuits are in various stages of litigation. We have also settled some cases individually, most for amounts not material to our results of operations, and with respect to these settlements, have generally reserved our rights to challenge any effort by the applicable tax authority to impose occupancy taxes in the future.

Although we have prevailed in the majority of these lawsuits and proceedings, there have been several adverse judgments or decisions on the merits, some of which are subject to appeal. As of September 30, 2016 and December 31, 2015, our reserve was not material for the potential resolution of issues identified related to litigation involving hotel and car sales, occupancy or excise taxes. We did not record material charges associated with these cases during the three and nine months ended September 30, 2016 and 2015. Our estimated liability is based on our current best estimate but the ultimate resolution of these issues may be greater or less than the amount recorded and, if greater, could adversely affect our results of operations.

In addition to the actions by the tax authorities, two consumer class action lawsuits have been filed against us in which the plaintiffs allege that we made misrepresentations concerning the description of the fees received in relation to facilitating hotel reservations. Generally, the consumer claims relate to whether Travelocity provided adequate notice to consumers regarding the nature of our fees and the amount of taxes charged or collected. One of these lawsuits is pending in Texas state court, where the court is currently considering the plaintiffs’ motion to certify a class action; and the other is pending in federal court, but has been stayed pending the outcome of the Texas state court action. We believe the notice we provided was appropriate and therefore have not accrued any losses related to these cases.

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

Litigation Relating to Routine Proceedings

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

11. Segment Information

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

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

In January 2016 and April 2016, we completed the acquisitions of the Trust Group and Airpas Aviation, respectively, which are integrated and managed as part of our Airline and Hospitality Solutions segment.

Our CODM utilizes Adjusted Gross Profit and Adjusted EBITDA as the measures of profitability to evaluate performance of our segments and allocate resources. Corporate includes a technology organization that provides development and support activities to our segments. The majority of costs associated with our technology organization are allocated to the segments primarily based on the segments' usage of resources. Benefit expenses, facility costs and depreciation expense on the corporate headquarters building are allocated to the segments based on headcount. Unallocated corporate costs include certain shared expenses such as accounting, human resources, legal, corporate systems, and other shared technology costs, as well as all amortization of intangible assets and any related impairments that originate from purchase accounting, stock-based compensation, restructuring charges, legal reserves, and other items not identifiable with one of our segments.

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

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

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

We define Adjusted Gross Profit as operating income (loss) adjusted for selling, general and administrative expenses, amortization of upfront incentive consideration, and the cost of revenue portion of depreciation and amortization and stock-based compensation.

We define Adjusted EBITDA as income (loss) 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 (reimbursements), net, stock-based compensation, 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 nine months ended September 30, 2016 and 2015 is as follows (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Revenue
Travel Network	$	582,364		$	569,190		$	1,805,750		$	1,571,635
Airline and Hospitality Solutions	262,391			218,978			752,940			640,510
Eliminations	(5,773		)	(3,166		)	(14,923		)	(9,704		)
Total revenue	$	838,982		$	785,002		$	2,543,767		$	2,202,441

Adjusted Gross Profit ^(a)
Travel Network	$	255,657		$	263,732		$	842,557		$	733,778
Airline and Hospitality Solutions	114,136			99,373			323,481			284,354
Corporate	(24,812		)	(16,297		)	(59,596		)	(37,778		)
Total	$	344,981		$	346,808		$	1,106,442		$	980,354

Adjusted EBITDA ^(b)
Travel Network	$	219,865		$	231,230		$	744,626		$	669,274
Airline and Hospitality Solutions	95,072			85,275			269,955			237,748
Total segments	314,937			316,505			1,014,581			907,022
Corporate	(77,080		)	(74,839		)	(217,760		)	(194,197		)
Total	$	237,857		$	241,666		$	796,821		$	712,825

Depreciation and amortization
Travel Network	$	19,519		$	15,947		$	57,725		$	45,571
Airline and Hospitality Solutions	41,732			32,363			114,080			107,270
Total segments	61,251			48,310			171,805			152,841
Corporate	47,979			39,927			132,151			102,013
Total	$	109,230		$	88,237		$	303,956		$	254,854

Adjusted Capital Expenditures ^(c)
Travel Network	$	25,763		$	18,957		$	72,918		$	46,515
Airline and Hospitality Solutions	68,990			61,370			200,455			168,349
Total segments	94,753			80,327			273,373			214,864
Corporate	16,195			14,862			45,436			37,849
Total	$	110,948		$	95,189		$	318,809		$	252,713

______________________________


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



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Adjusted Gross Profit	$	344,981	$	346,808	$	1,106,442	$	980,354
Less adjustments:
Selling, general and administrative	155,182		166,324		435,924		412,042
Cost of revenue adjustments:
Depreciation and amortization ⁽¹⁾	77,397		59,334		209,276		177,080
Amortization of upfront incentive consideration ⁽²⁾	17,139		9,525		43,372		31,575
Stock-based compensation	5,113		2,853		14,259		9,288
Operating income	$	90,150	$	108,772	$	403,611	$	350,369


(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 September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Adjusted EBITDA	$	237,857		$	241,666		$	796,821		$	712,825
Less adjustments:
Depreciation and amortization of property and equipment ^(1a)	58,271			49,247			168,150			157,154
Amortization of capitalized implementation costs ^(1b)	11,529			7,606			28,228			23,032
Acquisition-related amortization ^(1c)	39,430			31,384			107,578			76,270
Amortization of upfront incentive consideration ⁽²⁾	17,139			9,525			43,372			31,575
Interest expense, net	38,002			40,581			116,414			129,643
Loss on extinguishment of debt	3,683			—			3,683			33,235
Other, net ⁽³⁾	(281		)	(92,568		)	(4,517		)	(88,320		)
Restructuring and other costs ⁽⁴⁾	583			8,888			1,823			8,888
Acquisition-related costs ⁽⁵⁾	90			9,350			714			13,214
Litigation costs, net ⁽⁶⁾	7,034			9,318			5,089			14,797
Stock-based compensation	12,913			7,204			36,012			23,328
Provision for income taxes	7,208			38,007			79,905			84,966
Income from continuing operations	$	42,256		$	123,124		$	210,370		$	205,043

______________________________________________________


(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)

In the first quarter of 2016, we recognized a gain of $6 million associated with the receipt of an earn-out payment from the sale of a business in 2013. Additionally, in the third quarter of 2015, we recognized a gain of $86 million associated with the remeasurement of our previously-held 35% investment in SAPPL to its fair value and a gain of $12 million related to the settlement of pre-existing agreements between us and SAPPL. In addition, other, net includes 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, the Trust Group and Airpas Aviation (see Note 2, Acquisitions).


(6)	Litigation costs, net represent charges and legal fee reimbursements associated with antitrust litigation (see Note 10, Contingencies).


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



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Additions to property and equipment	$	89,639	$	75,108	$	254,232	$	203,071
Capitalized implementation costs	21,309		20,081		64,577		49,642
Adjusted Capital Expenditures	$	110,948	$	95,189	$	318,809	$	252,713


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

Forward-Looking Statements

This Quarterly Report on Form 10-Q, including this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2, contains information that may constitute forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts, such as statements regarding our future financial condition or results of operations, our prospects and strategies for future growth, the development and introduction of new products, and the implementation of our marketing and branding strategies. In many cases, you can identify forward-looking statements by terms such as "expects," "potential," "will," "estimates," "outlook," "should," "may," "intend," "believes," "anticipates," "predicts," "plans," or the negative of these terms or other comparable terminology. The forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions and are subject to risks, uncertainties and changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement. Certain of these risks, uncertainties, and changes in circumstances are described in the "Risk Factors" section of this Quarterly Report on Form 10-Q and in the “Risk Factors” and “Forward-Looking Statements” sections included in our Annual Report on Form 10-K filed with the SEC on February 19, 2016. 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. You 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 February 19, 2016.

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.

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.

In January 2016, we completed the acquisition of the Trust Group, a central reservations, revenue management and hotel marketing provider, expanding our presence in EMEA and APAC, for net cash consideration of $156 million, which includes the effect of net working capital adjustments. The Trust Group is integrated and managed as part of our Airline and Hospitality Solutions segment.

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 February 19, 2016. 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 this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K filed with the SEC on February 19, 2016.

Components of Revenues and Expenses

Revenues

Travel Network primarily generates revenues from Direct Billable Bookings processed on our GDS as well as the sale of aggregated bookings data to carriers. Prior to our acquisition of the remaining interest in SAPPL on July 1, 2015, we generated revenue from certain services we provided SAPPL. 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 accrue on a monthly basis.

Corporate cost of revenue includes a technology organization that provides development and support activities to our segments. The costs associated with our technology organization primarily include labor, data processing and technology costs, of which the majority are allocated to the segments primarily based on the segments' usage of resources. Corporate cost of revenue also includes stock-based compensation expense, professional services and other items that are not directly identifiable with our segments. Over time, we expect a substantial increase in stock-based compensation expense, as we have moved to granting broad-based equity awards annually, rather than biennially, beginning in March 2016 primarily in the form of restricted stock units. These awards generally vest over a four-year period, with 25% vesting annually. Stock compensation expense is based on the number of restricted stock units granted and the stock price on the date of grant, which is amortized over the four-year vesting period.

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, including stock-based compensation, 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. Over time, we expect a substantial increase in stock-based compensation expense as described above.

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 and hotel stays booked 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 these key metrics for the periods indicated (in thousands):



	Three Months Ended September 30,			Nine Months Ended September 30,
	2016	2015	% Change	2016	2015	% Change
Travel Network
Direct Billable Bookings - Air	110,585	107,361	3.0%	342,353	287,226	19.2%
Direct Billable Bookings - Non-Air	15,165	15,499	(2.2)%	46,078	44,197	4.3%
Total Direct Billable Bookings	125,750	122,860	2.4%	388,431	331,423	17.2%
Airline Solutions Passengers Boarded	206,332	141,994	45.3%	589,512	407,433	44.7%

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 Profit, Adjusted Net Income, Adjusted EBITDA, Adjusted Capital Expenditures, Free Cash Flow, and ratios based on these financial measures.

We define Adjusted Net Income as net income attributable to common stockholders adjusted for income (loss) from discontinued operations, net of tax, net income attributable to noncontrolling interests, acquisition-related amortization, loss on extinguishment of debt, other, net, restructuring and other costs, acquisition-related costs, litigation costs (reimbursements), net, stock-based compensation, 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 the remaining provision (benefit) 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 2016 Proxy Statement, which are calculated for the purposes of our annual incentive compensation program and performance-based awards, respectively.

We define Adjusted Net Income from continuing operations per share as Adjusted Net Income divided by the applicable share count.

We define Adjusted Capital Expenditures as additions to property and equipment and capitalized implementation costs.

We define Free Cash Flow as cash provided by operating activities less cash used in additions to property and equipment.

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 include 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 Profit, 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 Profit, Adjusted Net Income, Adjusted EBITDA, Adjusted Capital Expenditures, 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:


•	these non-GAAP financial measures exclude certain recurring, non-cash charges such as stock-based compensation expense and amortization of acquired intangible assets;


•	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 Profit 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 removes the impact of accrual-basis accounting on asset accounts and non-debt liability accounts, and does not reflect the cash requirements necessary to service the principal payments on our indebtedness; and


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

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



	Three Months Ended September 30,					Nine Months Ended September 30,
	2016		2015			2016			2015
Net income attributable to common stockholders	$	40,815	$	176,340		$	218,001		$	416,041
Loss (income) from discontinued operations, net of tax	394		(53,892		)	(10,858		)	(213,499		)
Net income attributable to noncontrolling interests⁽¹⁾	1,047		676			3,227