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TRAVELPORT WORLDWIDE LTD - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of our results of operations and financial condition for the three and nine months ended September 30, 2014 should be read in conjunction with our consolidated condensed financial statements and accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q. The following discussion and analysis includes forward-looking statements that reflect the current view of management and involve risks and uncertainties. Our actual results may differ materially from those contained in any forward-looking statements as a result of factors discussed below and elsewhere in this Quarterly Report, particularly under the headings "Risk Factors" and "Forward-Looking Statements." Overview We are a leading travel commerce platform providing distribution, technology, payment and other solutions for the $7 trillion global travel and tourism industry. We facilitate travel commerce by connecting the world's leading travel providers, such as airlines and hotel chains, with online and offline travel agencies and other travel buyers in our proprietary business-to-business ("B2B") travel commerce platform. We processed over $85 billion of travel spending in 2013. Since 2012, we have strategically invested in products with a focus on redefining our Travel Commerce Platform to address the trends, inefficiencies and unmet needs of all components of the travel value chain. We have one reporting segment, and we further classify revenue according to its source as either Travel Commerce Platform revenue (comprised of Air and Beyond Air) or Technology Services revenue. For the year ended December 31, 2013, Air, Beyond Air and Technology Services represented 76%, 18% and 6%, respectively, of our net revenue. Travel Commerce Platform Our Travel Commerce Platform combines state-of-the-art technology with features, functionality and innovative solutions to address the high-volume and growing transaction processing requirements for the evolving needs of the travel industry. Air We provide comprehensive real-time search, pricing, booking, change, payment and integrated itinerary creation for travelers who use the services of online and offline travel agencies for both leisure and business travel. We provide such services to approximately 400 airlines globally, including approximately 85 Low Cost Carriers ("LCCs"). Our access to business travelers, merchandising capabilities and ability to process complex itineraries have attracted and allowed for the full integration of several fast-growing LCCs such as Air Asia, easyJet, Ryanair and Spirit Airlines into our Travel Commerce Platform. Beyond Air We have expanded our Travel Commerce Platform with a fast growing portfolio of Beyond Air initiatives. Our Beyond Air portfolio includes hospitality, payment solutions, advertising and other platform services. For the hospitality sector of the travel industry, we provide innovative distribution and merchandising solutions for hotel, car rental, rail, cruise-line and tour operators. Based on our estimates we offer the largest inventory of hotel properties on any travel platform in the world via our innovative distribution and merchandising solutions for both chain and independent hotels. We are an early adopter in automated B2B payments, which we believe are redefining payments between travel agencies to travel providers. eNett's core offering is a Virtual Account Number ("VAN") payment solution that automatically generates unique MasterCard numbers used to process payments globally. eNett's operations currently focus on Asia Pacific and Europe, and we believe the model is highly scalable. We have expanded 26-------------------------------------------------------------------------------- Table of Contents beyond the core hospitality sector into air travel, including LCCs, with further opportunities for growth in other sectors of the travel industry. eNett was formed in 2009 and its net revenue has grown from $2 million in 2011 to $19 million in 2012 to $45 million in 2013. As of September 30, 2014, eNett had 439 customers, which represents a 135% increase since January 1, 2014. In addition to hospitality and payments, we utilize the broad connections and extensive data managed by our Travel Commerce Platform to provide advertising solutions that allow our travel providers to easily and cost-effectively promote upgrades, ancillary products or services, package deals and other offers. We also offer other platform services, including subscription services, processing services, business intelligence data services and marketing-oriented analytical tools, to travel agencies, travel providers and other travel data users. Technology Services We provide critical hosting solutions to airlines, such as pricing, shopping, ticketing, ground handling and other services, enabling them to focus on their core business competencies and reduce costs. We also host and manage reservations, inventory management and other related critical systems for Delta Air Lines Inc. ("Delta"), and in May 2014, we signed a new long-term agreement to continue to run the system infrastructure for the Delta platform in our Atlanta data center. In addition, we own 51% of IGT Solutions Private Ltd, an application development services provider based in New Delhi, India that is used for both internal and external software development. Management Performance Metrics Our management team monitors the performance of our operations against our strategic objectives. We assess our performance using both financial and non-financial measures. As a Travel Commerce Platform, we measure performance primarily on the basis of changes in both Reported Segments and RevPas. Travel Commerce Platform RevPas is computed by dividing Travel Commerce Platform revenue by the total number of Reported Segments. Travel Commerce Platform revenue is generated from a wide portfolio of products and services, including traditional air bookings, ancillaries, hospitality, payment solutions, advertising and other platform services. Reported Segments means travel provider revenue generating units (net of cancellations) sold by our travel agency network, geographically presented by region based upon the point of sale location. We also use other GAAP and non-GAAP measures as performance metrics. The table below sets out our performance metrics: Three Months Nine Months (in $ millions, except share data, Reported Segments and Ended September 30, Change Ended September 30, Change RevPas) 2014 2013 % 2014 2013 % Net revenue 529 511 18 3 1,652 1,596 56 3 Operating income 21 57 (36 ) (63 ) 156 182 (26 ) (14 ) Net income (loss) 155 (27 ) 182 * 133 (154 ) 287 * Income (loss) per share - diluted (in $) 1.71 (0.45 ) 2.16 * 1.70 (3.87 ) 5.57 * Adjusted EBITDA(1) 133 128 5 4 430 408 22 5 Adjusted Net Loss(2) (3 ) (8 ) 5 63 (9 ) (23 ) 14 60 Adjusted Loss per Share - diluted(3) (in $) (0.03 ) (0.12 ) 0.09 75 (0.12 ) (0.55 ) 0.43 79 Net cash (used in) provided by operating activities (53 ) 55 (108 ) * (11 ) 67 (78 ) * Adjusted Free Cash Flow(4) (62 ) 24 86 * (80 ) 22 (102 ) * Reported Segments 88 86 2 2 275 270 5 2 Travel Commerce Platform RevPas $ 5.67 $ 5.60 $ 0.07 1 $ 5.68 $ 5.57 $ 0.11 2 * not meaningful (1) Adjusted EBITDA is defined as Adjusted Net Income (Loss) excluding depreciation and amortization of property and equipment, amortization of customer loyalty payments, interest, and income taxes. (2) Adjusted Net Income (Loss) is defined as net income (loss) from continuing operations excluding amortization of acquired intangible assets, gain (loss) on early extinguishment of debt, share of earnings (losses) in equity method investments, and items that are excluded under our debt covenants, such as gain on sale of shares of Orbitz Worldwide, non-cash equity-based compensation, certain corporate and 27 -------------------------------------------------------------------------------- Table of Contents restructuring costs, certain litigation and related costs, and other non-cash items such as foreign currency gains (losses) on euro denominated debt, and earnings hedges along with any income tax related to these exclusions. (3) Adjusted Income (Loss) per Share - diluted is defined as Adjusted Net Income (Loss) for the period divided by the weighted average number of dilutive common shares. (4) Adjusted Free Cash Flow is defined as net cash provided by (used in) operating activities of continuing operations, adjusted to remove the impact cash paid for other adjusting items which we believe are unrelated to our ongoing operations and to deduct capital expenditures on property and equipment additions including capital lease repayments ("Capital Expenditure"). Adjusted Net Income (Loss) and Adjusted EBITDA are supplemental measures of operating performance that do not represent and should not be considered as alternatives to net income (loss), as determined under US GAAP. In addition, Adjusted Net Income (Loss) and Adjusted EBITDA may not be comparable to similarly named measures used by other companies. The presentation of Adjusted Net Income (Loss) and Adjusted EBITDA have limitations as analytical tools, and these measures should not be considered in isolation or as a substitute for analysis of Travelport's results as reported under US GAAP. We have included Adjusted Net Income (Loss) and Adjusted EBITDA as they are primary metrics used by management to evaluate and understand the underlying operations and business trends, forecast future results and determine future capital investment allocations. They are also used by the Board of Directors to determine incentive compensation for future periods. The following table provides a reconciliation of net income (loss) to Adjusted Net Loss and to Adjusted EBITDA: Three Months Ended Nine Months Ended September 30, September 30, (in $ millions) 2014 2013 2014 2013 Net income (loss) $ 155 $ (27 ) $ 133 $ (154 ) Adjustments: Amortization of intangible assets(1) 19 21 58 61 Loss on early extinguishment of debt 94 - 108 49 Share of (earnings) losses in equity method investments (2 ) (6 ) 1 (8 ) Gain on sale of shares of Orbitz Worldwide (304 ) - (356 ) - Equity-based compensation and related taxes 24 2 33 4 Corporate and restructuring costs(2) 4 - 10 4 Litigation and related costs(3) - - - 12 Other-non cash(4) 7 2 4 9 Adjusted Net Loss (3 ) (8 ) (9 ) (23 ) Adjustments: Depreciation and amortization of property and equipment 39 30 113 91 Amortization of customer loyalty payments 19 16 56 45 Interest expense, net 67 83 237 271 Provision for income taxes 11 7 33 24 Adjusted EBITDA $ 133 $ 128 $ 430 $ 408 (1) Relates primarily to intangible assets acquired in the sale of Travelport to Blackstone in 2006 and from the acquisition of Worldspan in 2007. (2) Relates to costs associated with corporate development transactions and costs incurred to enhance our organization's efficiency. (3) Litigation and related costs relate to the American Airlines and bondholders litigation costs, each of which were settled in 2013. (4) Other-non cash primarily includes unrealized losses on foreign currency exchange derivatives and revaluation losses of our euro denominated debt of $7 and $2 million for the three months ended September 30, 2014 and 2013, respectively, and $6 million and $8 million for the nine months ended September 30, 2014 and 2013, respectively. 28 -------------------------------------------------------------------------------- Table of Contents We have included Adjusted Income (Loss) per Share as we believe it is a useful measure for our investors as it represents, on a per share basis, our consolidated results, taking into account depreciation and amortization on property and equipment and amortization of customer loyalty payments, which we believe are ongoing cost of doing business, as well as other items which are not allocated to the operating businesses such as interest expense and related taxes but excluding the effects of certain expenses not directly tied to the core operations of our businesses. Adjusted Income (Loss) per Share has similar limitations as Adjusted EBITDA and Adjusted Net Income (Loss) and may not be comparable to similarly named measures used by other companies. In addition, Adjusted Net Income (Loss) does not include all items that affect our net income / (loss) and net income / (loss) per share for the period. Therefore, we think it is important to evaluate these measures along with our consolidated statements of operations. For a discussion of Adjusted Free Cash Flow please see "Liquidity and Capital Resources - Cash Flows". Factors Affecting Results of Operations Geographic Mix: Our geographically dispersed footprint helps insulate us from particular country or regional instability, allows for optimal information technology efficiency and enhances our value proposition to travel providers. We are well positioned to capture higher value business from travel providers operating in away markets, which results in higher per transaction revenue for both us and the travel providers we serve. The table below sets forth revenue by region percentages for our Travel Commerce Platform for the nine months ended September 30, 2014 and 2013: Nine Months Ended September 30, (in $ millions) 2014 2013 Asia Pacific 19 % 19 % Europe 31 % 31 % Latin America and Canada 4 % 4 % Middle East and Africa 14 % 14 % International 68 % 68 % United States 32 % 32 % Travel Commerce Platform 100 % 100 % We expect some of the regions in which we currently operate, such as Asia Pacific, Latin America and the Middle East, to experience growth in travel that is greater than the global average due to factors such as economic growth and a growing middle class, while more mature regions, such as the United States, remain stable. As these emerging travel regions may grow at a higher rate than mature regions, the geographic distribution of our revenue may similarly shift. Customer Mix: We believe our customer mix is broadly diversified, supporting our stable and recurring business model with high revenue visibility. We provide air distribution services to approximately 400 airlines globally, including approximately 85 LCCs. In addition, we serve numerous Beyond Air travel providers, including over 600,000 hotel properties (of which over 500,000 are independent hotel properties), approximately 35,000 car rental locations and 55 cruise-line and tour operators. We aggregate travel content across approximately 67,000 travel agency locations representing 234,000 online and offline travel agency terminals worldwide, which in turn serves millions of end customers globally. None of our travel buyers or travel providers accounted for more than 10% of our revenue for the nine months ended September 30, 2014. Renegotiated Legacy Contracts: Orbitz Worldwide is currently the largest travel agency on our Travel Commerce Platform and accounted for 7% of our net revenue for the nine months ended September 30, 2014. In February 2014, we entered into a new long-term agreement under which Orbitz Worldwide will use our services in the United States and other countries. Under the new agreement, which replaced our existing agreement with Orbitz Worldwide, we will pay incremental benefits in 2014 and further increased fees in later years for each air, 29-------------------------------------------------------------------------------- Table of Contents car and hotel segment. In addition, Orbitz Worldwide will receive wider flexibility to use traditional GDS providers for services beginning in 2015. In exchange for the enhanced payments, Orbitz Worldwide agreed to generate a minimum specified book of business through our Travel Commerce Platform and pay a shortfall payment if the minimum volume is not met. Due to the increase in payments payable to Orbitz Worldwide under the new agreement, we expect a negative impact on our 2014 cash flow and no impact to our 2014 Adjusted EBITDA. From 2015 onwards, the combination of increased payments and greater flexibility for Orbitz Worldwide will likely have a greater negative effect on both our earnings and cash flow. In May 2014, we restructured and extended our Technology Services relationship with Delta. Delta reacquired the data and intellectual property rights central to its passenger service and flight operations systems. We continue to run the systems infrastructure and hosting for the Delta platform in our Atlanta data center on our hardware and with our systems monitoring and support. Effective July 1, 2014, we transitioned approximately 178 employees to Delta, and we estimate there will be a minor impact to our revenue, costs and Adjusted EBITDA in future. Seasonality: Our revenue can experience seasonal fluctuations, reflecting seasonal demand trends for the products and services we offer. These trends generally cause our revenue to be higher in the first and second quarters as compared to the third and fourth quarters of the calendar year. Revenue typically peaks during these times as travelers plan and purchase their upcoming spring and summer travel. Foreign Exchange Fluctuations: We are exposed to movements in currency exchange rates that impact our operating results. While substantially all of our revenue is denominated in US dollars, a portion of our operating cost base, primarily commissions, is transacted in non-US dollar currencies (principally, the British pound, Euro and Australian dollar). Litigation and Related Costs: We are involved in various claims, legal proceedings and governmental inquiries related to contract disputes, business practices, intellectual property and other commercial, employment and tax matters. We believe we have adequately accrued for such matters, and for costs of defending against such matters. However, litigation is inherently unpredictable and although we believe that our accruals are adequate and we have valid defenses in these matters, unfavorable resolutions could occur, which could have a material adverse effect on our results of operations or cash flows in a particular reporting period. Results of Operations Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013 Three Months Ended September 30, Change (in $ millions) 2014 2013 $ % Net revenue $ 529 $ 511 $ 18 3 Costs and expenses Cost of revenue 320 313 7 2 Selling, general and administrative 130 90 40 42 Depreciation and amortization 58 51 7 13 Total costs and expenses 508 454 54 11 Operating income 21 57 (36 ) (63 ) Interest expense, net (67 ) (83 ) 16 19 Loss on early extinguishment of debt (94 ) - (94 ) * Gain on sale of shares of Orbitz Worldwide 304 - 304 * Income (loss) before income taxes and share of earnings in equity method investments 164 (26 ) 190 * Provision for income taxes (11 ) (7 ) (4 ) (80 ) Share of earnings in equity method investments 2 6 (4 ) (67 ) Net income (loss) $ 155 $ (27 ) $ 182 * * Not meaningful 30 -------------------------------------------------------------------------------- Table of Contents Net Revenue Net revenue is comprised of: Three Months Ended September 30, Change (in $ millions) 2014 2013 $ % Air $ 390 $ 387 $ 3 1 Beyond Air 111 96 15 14 Travel Commerce Platform 501 483 18 4 Technology Services 28 28 - (2 ) Net Revenue $ 529 $ 511 $ 18 3 During the three months ended September 30, 2014, Net revenue increased by $18 million, or 3%, compared to the three months ended September 30, 2013. This increase was primarily driven by an increase in Travel Commerce Platform revenue of $18 million, or 4%. Travel Commerce Platform The table below sets forth Travel Commerce Platform RevPas and Reported Segments: Three Months Ended September 30, Change 2014 2013 % Travel Commerce Platform RevPas (in $) $ 5.67 $ 5.60 $ 0.07 1 Reported Segments (in millions) 88 86 2 2 The increase in Travel Commerce Platform revenue of $18 million, or 4%, was due to a $3 million, or 1%, increase in Air revenue and a $15 million, or 14%, increase in Beyond Air revenue. Overall, there was a 1% increase in Travel Commerce Platform RevPas and a 2% increase in Reported Segments. Our Travel Commerce Platform continues to benefit from growth in Air revenue and Beyond Air revenue. The value of transactions processed on the Travel Commerce Platform increased to $22.8 billion for the three months ended September 30, 2014 from $21.7 billion for the three months ended September 30, 2013. Our airline tickets sold remained flat at 30 million, and our percentage of Air segment revenue from away bookings remained flat at 61%. We increased our hospitality segments per 100 airline tickets issued to 45 from 42, our car rental days sold to 23 million from 21 million and our hotel room nights sold remained flat at 16 million. The table below sets forth Travel Commerce Platform revenue by region: Three Months Ended September 30, Change (in $ millions) 2014 2013 $ % Asia Pacific $ 103 $ 94 $ 9 9 Europe 143 140 3 2 Latin America and Canada 23 22 1 3 Middle East and Africa 69 69 - - International 338 325 13 4 United States 163 158 5 4 Travel Commerce Platform $ 501 $ 483 $ 18 4 31 -------------------------------------------------------------------------------- Table of Contents The table below sets forth Reported Segments and RevPas by region: Segments (in millions) RevPas (in $) Three Months Three Months Ended September 30, Change Ended September, 30 Change 2014 2013 % 2014 2013 $ % Asia Pacific 14 14 - 5 $ 6.87 $ 6.62 $ 0.25 4 Europe 20 19 1 - 7.20 7.02 0.18 3 Latin America and Canada 4 4 - 8 5.71 6.02 (0.31 ) (5 ) Middle East and Africa 10 10 - (1 ) 7.27 7.18 0.09 1 International 48 47 1 2 6.99 6.86 0.13 2 United States 40 39 1 3 4.08 4.06 0.02 - Travel Commerce Platform 88 86 2 2 $ 5.67 $ 5.60 $ 0.07 1 International Our International Travel Commerce Platform revenue increased $13 million, or 4%, due to a 2% increase in RevPas and 2% increase in Reported Segments. The RevPas increase across the regions was a result of growth in our Beyond Air offerings including growth in payment solutions, hospitality and advertising. Our International Travel Commerce Platform revenue as a percentage of Total Commerce Platform revenue remained flat at 67% for both of the three months ended September 30, 2014 and 2013. Asia Pacific Revenue in Asia Pacific increased $9 million, or 9%, due to a 4% increase in RevPas and a 5% increase in Reported Segments. RevPas increased due to growth in Air revenue and Beyond Air, including increased revenue from other platform services. Europe Revenue in Europe increased $3 million, or 2%, primarily due to a 3% increase in RevPas. RevPas increased due to Beyond Air growth, including increased revenue from eNett. Latin America and Canada Revenue in Latin America and Canada increased by $1 million, or 3%, due to an 8% increase in Reported Segments offset by a 5% decrease in RevPas. Reported Segments increased primarily due to strong growth in Canada. Middle East and Africa Revenue in the Middle East and Africa remained flat with a 1% increase in RevPas offset by a 1% decrease in Reported Segments. United States Revenue in the United States increased $5 million, or 4%, primarily due to a 3% increase in Reported Segments. Technology Services Technology Services revenue remained flat. 32-------------------------------------------------------------------------------- Table of Contents Cost of Revenue Cost of revenue is comprised of: Three Months Ended September 30, Change (in $ millions) 2014 2013 $ % Commissions $ 249 $ 243 $ 6 3 Technology costs 71 70 1 4 Cost of revenue $ 320 $ 313 $ 7 2 Cost of revenue increased by $7 million, or 2%, primarily as a result of a $6 million, or 3%, increase in commission costs. Commissions paid to travel agencies increased due to a 2% increase in Reported Segments and incremental commission costs from our payment processing business, offset by a 1% decrease in travel distribution cost per segment. Commissions included amortization of customer loyalty payments of $19 million and $16 million for the three months ended September 30, 2014 and 2013, respectively. Technology costs across the shared infrastructure that runs our Travel Commerce Platform and Technology Services increased by $1 million, or 4%. Selling, General and Administrative (SG&A) SG&A is comprised of: Three Months Ended September 30, Change (in $ millions) 2014 2013 $ % Workforce $ 76 $ 72 $ 4 6 Non-workforce 19 14 5 36 Sub-total 95 86 9 9 Non-core corporate costs 35 4 31 * SG&A $ 130 $ 90 $ 40 42 * Not meaningful SG&A expenses increased by $40 million, or 42%, during the three months ended September 30, 2014 compared to September 30, 2013. SG&A expenses include $35 million and $4 million of charges for the three months ended September 30, 2014 and 2013, respectively, for non-core corporate costs that are removed from Adjusted EBITDA. Excluding these items, our SG&A expenses for the three months ended September 30, 2014 compared to the three months ended September 30, 2013 increased by $9 million, or 9%. Workforce expenses, which include the wages and benefits of our selling, marketing, advertising, finance and legal personnel increased by $4 million, or 6%, primarily as a result of increased headcount and merit increases awarded to staff in 2014. Non-workforce expenses, which include costs of finance and legal professional fees, communications and marketing and foreign exchange related costs, increased $5 million, or 36%, primarily due to unfavorable foreign exchange movements and incremental marketing and administration costs incurred in growing our Beyond Air business. Non-core corporate costs of $35 million and $4 million for the three months ended September 30, 2014 and 2013, respectively, represent costs related to strategic transactions and restructurings, equity-based compensation, certain legal and related costs and foreign currency gains and losses related to euro denominated debt and derivatives. The increase of $31 million is primarily due to a $22 million increase in our equity-based compensation and related costs on account of RSUs granted in the second quarter of 2014 and accelerated vesting of our time-based RSUs, $5 million higher unrealized foreign exchange losses on euro denominated debt and derivatives and $4 million of higher corporate and restructuring costs. 33 -------------------------------------------------------------------------------- Table of Contents Depreciation and Amortization Depreciation and amortization is comprised of: Three Months Ended September 30, Change (in $ millions) 2014 2013 $ % Depreciation on property and equipment $ 39 $ 30 $ 9 24 Amortization of acquired intangible assets 19 21 (2 ) (4 ) Total depreciation and amortization $ 58 $ 51 $ 7 13 Total depreciation and amortization increased by $7 million, or 13%. Depreciation on property and equipment increased $9 million, or 24%, primarily due to a higher capitalized cost of internally developed software as we continue to develop our systems to enhance our Travel Commerce Platform. Amortization of acquired intangible assets decreased by $2 million, or 4%, as the useful lives expired on a portion of the assets acquired on the sale of Travelport to Blackstone in 2006 and the acquisition of Worldspan in 2007. Interest Expense, Net Interest expense, net, decreased by $16 million, or 19%, due to (i) a decrease in debt during 2014 as a result of debt-for-equity exchanges in each of the fiscal quarters of 2014 and (ii) debt repayments and debt refinancing during the three months ended September 30, 2014. Loss on Early Extinguishment of Debt During the three months ended September 30, 2014, we (i) exchanged $107 million of our senior notes, $57 million of our senior subordinated notes and $91 million of term loans under our credit agreements for our common shares, (ii) repaid $312 million of term loans with the proceeds of the sale of shares of Orbitz Worldwide and (iii) refinanced all of our remaining term loans and notes with a new senior secured credit agreement, repaying all of our then existing indebtedness, excluding capital leases. These transactions were accounted for as an extinguishment of debt resulting in loss on early extinguishment of $94 million. Gain on Sale of Shares of Orbitz Worldwide During the three months ended September 30, 2014, we sold 39 million shares of common stock of Orbitz Worldwide in an underwritten public offering for net proceeds of $312 million and recognized a gain of $304 million. Following this sale, we own less than 1% of the outstanding shares of common stock of Orbitz Worldwide and no longer account our investment in Orbitz Worldwide as equity method investment. Provision for Income Taxes Our tax provision differs significantly from the US Federal statutory rate primarily as a result of (i) being subject to income tax in numerous non-US jurisdictions with varying income tax rates, (ii) a valuation allowance established in the US due to the historical losses in that jurisdiction, (iii) certain expenses that are not deductible for tax or do not secure an effective tax deduction under the relevant jurisdictions and (iv) certain income or gains which are not subject to tax. Share of Earnings in Equity Method Investments Our share of earnings in equity method investments was primarily from Orbitz Worldwide and was $2 million and $6 million for the three months ended September 30, 2014 and 2013, respectively. In July 2014, we sold substantially all of our remaining shares of Orbitz Worldwide for approximately $312 million and used the proceeds to repay a portion of our outstanding first lien term loans. Consequently, we discontinued equity method of accounting for our investment in Orbitz Worldwide. For the three months ended September 30, 2013, these earnings reflect approximately 45% of our ownership interest in Orbitz Worldwide. 34 -------------------------------------------------------------------------------- Table of Contents Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013 Nine Months Ended September 30, Change (in $ millions) 2014 2013 $ % Net revenue $ 1,652 $ 1,596 $ 56 3 Costs and expenses Cost of revenue 1,010 972 38 4 Selling, general and administrative 315 290 25 9 Depreciation and amortization 171 152 19 12 Total costs and expenses 1,496 1,414 82 6 Operating income 156 182 (26 ) (14 ) Interest expense, net (237 ) (271 ) 34 13 Loss on early extinguishment of debt (108 ) (49 ) (59 ) * Gain on sale of shares of Orbitz Worldwide 356 - 356 * Income (loss) before income taxes and share of (losses) earnings in equity method investments 167 (138 ) 305 * Provision for income taxes (33 ) (24 ) (9 ) (41 ) Share of (losses) earnings in equity method investments (1 ) 8 (9 ) * Net income (loss) $ 133 $ (154 ) $ 287 * * Not meaningful Net Revenue Net revenue is comprised of: Nine Months Ended September 30, Change (in $ millions) 2014 2013 $ % Air $ 1,245 $ 1,225 $ 20 2 Beyond Air 316 282 34 12 Travel Commerce Platform 1,561 1,507 54 4 Technology Services 91 89 2 1 Net Revenue $ 1,652 $ 1,596 $ 56 3 During the nine months ended September 30, 2014, Net revenue increased by $56 million, or 3%, compared to the nine months ended September 30, 2013. This increase was primarily driven by an increase in Travel Commerce Platform revenue of $54 million, or 4%. Travel Commerce Platform The table below sets forth Travel Commerce Platform RevPas and Reported Segments: Nine Months Ended September 30, Change 2014 2013 $ % Travel Commerce Platform RevPas (in $) $ 5.68 $ 5.57 $ 0.11 2 Reported Segments (in millions) 275 270 5 2 35 -------------------------------------------------------------------------------- Table of Contents The increase in Travel Commerce Platform revenue of $54 million, or 4%, was due to a $20 million, or 2%, increase in our Air revenue and a $34 million, or 12%, increase in our Beyond Air revenue. Overall, there was a 2% increase in Travel Commerce Platform RevPas and a 2% increase in Reported Segments. Our Travel Commerce Platform continues to benefit from growth in Air revenue and Beyond Air revenue. The value of transactions processed on the Travel Commerce Platform increased to $69.4 billion for the nine months ended September 30, 2014 from $67.2 billion for the nine months ended September 30, 2013. We increased our airline tickets sold to 94 million from 93 million and our percentage of Air segment revenue from away bookings increased to 63% from 62%. We increased our hospitality segments per 100 airline tickets issued to 42 from 40, our hotel room nights sold to 47 million from 46 million, and our car rental days sold to 64 million from 58 million. The table below sets forth Travel Commerce Platform revenue by region: Nine Months Ended September 30, Change (in $ millions) 2014 2013 $ % Asia Pacific $ 304 $ 284 $ 20 7 Europe 476 454 22 5 Latin America and Canada 68 66 2 2 Middle East and Africa 216 213 3 1 International 1,064 1,017 47 5 United States 497 490 7 1 Travel Commerce Platform $ 1,561 $ 1,507 $ 54 4 The table below sets forth Reported Segments and RevPas by region: Segments (in millions) RevPas (in $) Nine Months Ended Nine Months Ended September 30, Change September, 30 Change 2014 2013 % 2014 2013 $ %Asia Pacific 44 43 1 2 $ 6.88 $ 6.57 $ 0.31 5 Europe 67 65 2 2 7.09 6.92 0.17 3 Latin America and Canada 12 11 1 3 5.80 5.87 (0.07 ) (1 ) Middle East and Africa 30 30 - - 7.23 7.14 0.09 1 International 153 149 4 2 6.96 6.78 0.18 3 United States 122 121 1 1 4.07 4.06 0.01 - Travel Commerce Platform 275 270 5 2 $ 5.68 $ 5.57 $ 0.11 2 International Our International Travel Commerce Platform revenue increased $47 million, or 5%, due to a 3% increase in RevPas and 2% increase in Reported Segments. The RevPas increase across the regions was a result of growing our Beyond Air offerings including growth in payment solutions, hospitality and advertising. Our International Travel commerce Platform revenue as a percentage of Total Commerce Platform revenue was 68% for both of the nine months ended September 30, 2013 and 2014. Asia Pacific Revenue in Asia Pacific increased $20 million, or 7%, due to a 5% increase in RevPas and a 2% increase in Reported Segments. RevPas increased due to growth in Air and Beyond Air revenue, including increased revenue from other platform services. 36 -------------------------------------------------------------------------------- Table of Contents Europe Revenue in Europe increased $22 million, or 5%, due to a 3% increase in RevPas and a 2% increase in Reported Segments. Reported Segments increased primarily due to strong growth in Russia, the United Kingdom, Italy and Greece offset by a decline in France. RevPas increased due to Beyond Air growth, including increased revenue from eNett. Latin America and Canada Revenue in Latin America and Canada increased $2 million, or 2%, due to a 3% increase in Reported Segments offset by a 1% decrease in RevPas. Reported Segment growth was due to strong growth in Canada. Middle East and Africa Revenue in the Middle East and Africa increased $3 million, or 1%, due to a 1% increase in RevPas as a result of increase in Air revenue. United States Revenue in the United States increased $7 million, or 1% primarily due to a 1% increase in Reported Segments. Technology Services Technology Services revenue increased by $2 million, or 1%, primarily due to increase hosting revenue. Cost of Revenue Cost of revenue is comprised of: Nine Months Ended September 30, Change (in $ millions) 2014 2013 $ % Commissions $ 784 $ 750 $ 34 4 Technology costs 226 222 4 2 Cost of revenue $ 1,010 $ 972 $ 38 4 Cost of revenue increased by $38 million, or 4%, primarily as a result of a $34 million, or 4%, increase in commission costs. Commissions paid to travel agencies increased due to a 2% increase in travel distribution cost per segment, a 2% increase in Reported Segments and incremental commission costs from our payment processing business. Commissions included amortization of customer loyalty payments of $56 million and $45 million for the nine months ended September 30, 2014 and 2013, respectively. Technology costs across the shared infrastructure that runs our Travel Commerce Platform and Technology Services increased by $4 million, or 2%. Selling, General and Administrative (SG&A) SG&A is comprised of: Nine Months Ended September 30, Change (in $ millions) 2014 2013 $ % Workforce $ 224 $ 215 $ 9 4 Non-workforce 44 46 (2 ) (3 ) Sub-total 268 261 7 3 Non-core corporate costs 47 29 18 61 SG&A $ 315 $ 290 $ 25 9 37 -------------------------------------------------------------------------------- Table of Contents SG&A expenses increased by $25 million, or 9%, during the nine months ended September 30, 2014 compared to September 30, 2013. SG&A expenses include $47 million and $29 million of charges for the nine months ended September 30, 2014 and 2013, respectively, for non-core corporate costs that are removed from Adjusted EBITDA. Excluding these items, our SG&A expenses for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 increased by $7 million, or 3%. Workforce expenses, which include the wages and benefits of our selling, marketing, advertising, finance and legal personnel increased by $9 million, or 4%, primarily as a result of increased headcount and merit increases awarded to staff in 2013. Non-workforce expenses, which include costs of finance and legal professional fees, communications and marketing and foreign exchange related costs, decreased $2 million, or 3%, primarily due to favorable foreign exchange movement. Non-core corporate costs of $47 million and $29 million for the nine months ended September 30, 2014 and 2013, respectively, represent costs related to strategic transactions and restructurings, equity-based compensation, certain legal and related costs and foreign currency gains and losses related to euro denominated debt and derivatives. The increase of $18 million is primarily due to a $29 million increase in our equity-based compensation and related costs on account of RSUs granted in the second quarter of 2014 and accelerated vesting of our time-based RSUs and a $6 million increase in corporate and restructuring costs, partially offset by $12 million reduction in legal and related costs. Depreciation and Amortization Depreciation and amortization is comprised of: Nine Months Ended September 30, Change (in $ millions) 2014 2013 $ % Depreciation on property and equipment $ 113 $ 91 $ 22 23 Amortization of acquired intangible assets 58 61 (3 ) (5 ) Total depreciation and amortization $ 171 $ 152 $ 19 12 Total depreciation and amortization increased by $19 million, or 12%. Depreciation on property and equipment increased $22 million, or 23%, primarily due to a higher capitalized cost of internally developed software as we continue to develop our systems to enhance our Travel Commerce Platform. Amortization of acquired intangible assets decreased by $3 million, or 5%, as the useful lives expired on a portion of the assets acquired on the sale of Travelport to Blackstone in 2006 and the acquisition of Worldspan in 2007. Interest Expense, Net Interest expense, net, decreased by $34 million, or 13%, due to (i) a decrease in debt during 2014 on account of debt-for-equity exchanges in each of the fiscal quarters of 2014 and (ii) debt repayments and debt refinancing during the three months ended September 30, 2014. Loss on Early Extinguishment of Debt During the nine months ended September 30, 2014, we (i) exchanged $167 million of our senior notes, $313 million of our senior subordinated notes and $91 million of our term loans under our credit agreements for our common shares, (ii) repaid $312 million of term loans from the proceeds of the sale of shares of Orbitz Worldwide and (iii) refinanced all of our remaining term loans and notes under a new senior secured credit agreement, repaying all of our then existing indebtedness, excluding capital leases. These transactions were accounted for as an extinguishment of debt resulting in a loss on early extinguishment of $108 million. During the nine months ended September 30, 2013, we amended our senior secured credit agreement, repaid dollar denominated term loans under senior secured credit agreement and refinanced senior notes resulting in $49 million loss on early extinguishment of debt, which was comprised of $39 million of unamortized debt 38 -------------------------------------------------------------------------------- Table of Contents finance costs written-off, $5 million of unamortized debt discount written-off and $5 million of early repayment penalty. Gain on Sale of Shares of Orbitz Worldwide During the nine months ended September 30, 2014, we sold 48 million shares of common stock of Orbitz Worldwide in underwritten public offerings for net proceeds of $366 million and recognized a gain of $356 million. We own less than 1% of the outstanding shares of common stock of Orbitz Worldwide from July 2014 and no longer account our investment in Orbitz Worldwide as equity method investment. Provision for Income Taxes Our tax provision differs significantly from the US Federal statutory rate primarily as a result of (i) being subject to income tax in numerous non-US jurisdictions with varying income tax rates, (ii) a valuation allowance established in the US due to the historical losses in that jurisdiction, (iii) certain expenses that are not deductible for tax or do not secure an effective tax deduction under the relevant jurisdictions and (iv) certain income or gains which are not subject to tax. Share of (Losses) Earnings in Equity Method Investments Our share of losses in equity method investments was primarily from Orbitz Worldwide and was $1 million for the period from January 1, 2014 to July 22, 2014 compared to earnings of $8 million for the nine months ended September 30, 2013. During the period ended July 22, 2014, these earnings reflect approximately 44% of ownership interest until May 2014 (following our sale of 8.6 million shares of Orbitz Worldwide's common stock) and approximately 36% of ownership interest from May 2014 until July 22, 2014 when we sold substantially all of the remaining shares of Orbitz Worldwide for approximately $312 million and used the proceeds to repay a portion of our outstanding first lien term loans. Consequently, we discontinued equity method of accounting since July 22, 2014. For the nine months ended September 30, 2013, these earnings reflect approximately 45% of our ownership interest in Orbitz Worldwide. Liquidity and Capital Resources Our principal sources of liquidity are (i) cash and cash equivalents, (ii) cash flows generated from operations and (iii) borrowings under our revolving credit facility. As of September 30, 2014, our cash and cash equivalents, cash held as collateral and revolving credit facility availability were as follows: September 30, (in $ millions) 2014 Cash and cash equivalents $ 125 Cash held as collateral 50 Revolver availability 84 With the cash and cash equivalents on our consolidated condensed balance sheets, our ability to generate cash from operations and access to our revolving credit facility and other lending sources, we believe we have sufficient liquidity to meet our ongoing needs for at least the next 12 months. Working Capital Our cash flows from operations are significantly impacted by revenue derived from, and commissions paid to, travel providers and travel agencies. The end of period balance sheet items related to this activity is referred to as "Trading Working Capital" and consists of accounts receivables and deferred revenue from travel providers and travel agencies, current prepaid travel agency incentive payments and accrued liabilities for commissions. We view Trading Working Capital as a key liquidity measure to understanding our cash sources and uses from operations. 39 -------------------------------------------------------------------------------- Table of Contents The table below sets out our Trading Working Capital as of September 30, 2014 and December 31, 2013, which is then reconciled to our Working Capital: Asset (Liability) September 30, December 31, (in $ millions) 2014 2013 Change Accounts Receivable, net $ 227 $ 177 $ 50 Accrued commissions and incentives (285 ) (253 ) (32 ) Deferred revenue and prepaid incentives, net (14 ) (10 ) (4 ) Trading Working Capital (72 ) (86 ) 14 Cash and cash equivalents 125 154 (29 ) Accounts payable and employee related (150 ) (152 ) 2 Accrued interest (11 ) (73 ) 62 Current portion of long-term debt (50 ) (45 ) (5 ) Taxes (11 ) (8 ) (3 ) Other assets (liabilities), net 8 (5 ) 13 Working Capital $ (161 ) $ (215 ) $ 54 Consolidated Balance Sheets: Total current assets $ 460 $ 466 Total current liabilities (621 ) (681 ) Working Capital $ (161 ) $ (215 ) As of September 30, 2014, we had a Working Capital net liability of $161 million, compared to $215 million as of December 31, 2013, a decrease of $54 million. The $54 million decrease in net liability is primarily due to a $62 million increase in accrued interest, a $14 million increase in Trading Working Capital net liability, as described below, and a $29 million decrease in cash and cash equivalents as discussed in "Cash Flows." As our business grows and our revenue and corresponding commissions and incentive expenses increase, our receivables and accruals increase. The fluctuations in these balances are the primary contributors to the changes to our Trading Working Capital. As of September 30, 2014 and December 31, 2013, our Trading Working Capital as a percentage of net revenue earned during the last twelve months was (3)% and (4)%, respectively. The table below sets out information on our accounts receivable: September 30, 2014 December 31, 2013 Change Accounts receivable, net (in $ millions) 227 177 50 Accounts receivable, net - Days Sales Outstanding ("DSO") 38 38 - Substantially all of our Air revenue within our Travel Commerce Platform is collected through the Airline Clearing House ("ACH") and other similar clearing houses. ACH requires participants to deposit certain balances into their demand deposit accounts by certain deadlines, which facilitates a timely settlement process. For the nine months ended September 30, 2014, Air revenue accounted for approximately 75% of our revenue, however, only 54% of our outstanding receivables related to customers using ACH as of September 30, 2014. The ACH receivables are collected on average in 30 days. Beyond Air revenue is generally not collected through the ACH process and takes longer to collect. Our average net collection period was 38 DSO for total accounts receivable, net, for September 30, 2014, and December 31, 2013. We pay commissions to travel agencies on varying contractual terms, including payments made on a monthly, quarterly, semi-annual and annual basis. Our revenue can experience seasonal fluctuations, reflecting seasonal trends for the products and services we offer. Our accounts receivable balance increased by $50 million from December 31, 2013 to September 30, 40-------------------------------------------------------------------------------- Table of Contents 2014, and our accrued commissions and incentives increased by $32 million from December 31, 2013 to September 30, 2014, reflecting the seasonality in our business. Seasonality trends generally cause our revenue to be higher in the first and second quarters as compared to the third and fourth quarters of the calendar year. Revenue and related cost of revenue typically peaks during the first half of the year as travelers plan and book their upcoming spring and summer travel. Cash Flows The following table summarizes the changes to our cash flows (used in) provided by operating, investing and financing activities for the nine months ended September 30, 2014 and 2013: Nine Months Ended September 30, Change (in $ millions) 2014 2013 $ Cash (used in) provided by: Operating activities $ (11 ) $ 67 $ (78 ) Investing activities 263 (82 ) 345 Financing activities (280 ) 65 (345 ) Effect of exchange rate changes (1 ) - (1 ) Net (decrease) increase in cash and cash equivalents $ (29 ) $ 50 $ (79 ) We believe our important measures of liquidity are Adjusted Free Cash Flow and Unlevered Adjusted Free Cash Flow. These measures are useful indicators of our ability to generate cash to meet our liquidity demands. We believe these measures provide investors with an understanding of how assets are performing and measures management's effectiveness in managing cash. We define Unlevered Adjusted Free Cash Flow as Adjusted Free Cash Flow excluding the impact of interest payments. We believe these measures give management and investors a better understanding of the cash flows generated by our underlying business, as our interest payments are primarily related to the debt incurred in relation to previous business acquisitions, cash paid for other adjusting items are unrelated to the underlying business and our Capital Expenditures are primarily related to the development of our operating platforms. 41-------------------------------------------------------------------------------- Table of Contents Adjusted Free Cash Flow and Unlevered Adjusted Free Cash Flow are non-GAAP measures and may not be comparable to similarly named measures used by other companies. These measures should not be considered as measures of liquidity or cash flows from operations as determined under US GAAP. The following table provides a reconciliation of net cash provided by (used in) operating activities to Adjusted Free Cash Flow and Unlevered Adjusted Free Cash Flow. We have also supplementally provided as part of this reconciliation, a reconciliation of Adjusted EBITDA, our primary key performance measure, to net cash provided by (used in) operating activities: Nine Months Ended, September 30 (in $ millions) 2014 2013 Adjusted EBITDA $ 430 $ 408 Interest payments (263 ) (186 ) Tax payments (19 ) (20 ) Customer loyalty payments (66 ) (60 ) Changes in Trading Working Capital (34 ) (18 ) Changes in accounts payable and employee related (19 ) (5 ) Pensions liability contribution (5 ) - Changes in other assets and liabilities 2 (7 ) Other adjusting items(1) (37 ) (45 ) Net cash (used in) provided by operating activities (11 ) 67 Add: other adjusting items(1) 37 45 Less: capital expenditures on property and equipment additions (83 ) (76 ) Less: repayment of capital lease obligations (23 ) (14 ) Adjusted Free Cash Flow (80 ) 22 Add: interest payments 263 186 Unlevered Adjusted Free Cash Flow $ 183 $ 208 (1) Other adjusting items relate to payments for costs included within operating income but excluded from Adjusted EBITDA. These include (i) $26 million of payments relating to the accrued sponsor monitoring fee for the nine months ended September 30, 2014, (ii) $11 million and $22 million of corporate cost payments during the nine months ended September 30, 2014 and 2013, respectively, and (iii) $23 million of legal and related costs payments for the nine months ended September 30, 2013. As of September 30, 2014, we had $125 million of cash and cash equivalents, a decrease of $29 million compared to December 31, 2013. The following discussion summarizes changes to our cash flows from operating, investing and financing activities for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. Operating activities: For the nine months ended September 30, 2014, cash (used in) provided by operating activities was $(11) million compared to $67 million for the nine months ended September 30, 2013. The decrease of $78 million is primarily a result of $77 million of higher interest payments in respect of refinancing of our debt during the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. Investing activities: The cash provided by (used in) investing activities for the nine months ended September 30, 2014 was $263 million compared to $(82) million for the nine months ended September 30, 2013. The increase of $345 million primarily relates to (i) $366 million proceeds from the sales of shares of Orbitz Worldwide, offset by (ii) the purchase of an equity method investment of $10 million, (iii) a business acquired for $10 million, net of cash, and (iv) a $7 million increase in additions to property and equipment. 42-------------------------------------------------------------------------------- Table of Contents Our investing activities for the nine months ended September 30, 2014 and 2013 include: Nine Months Ended September 30, (in $ millions) 2014 2013 Cash additions to software developed for internal use $ 63 $ 61 Cash additions to computer equipment 20 15 Total $ 83 $ 76 Cash additions to software developed for internal use represent the continuing development of our systems to enhance our Travel Commerce Platform. Our expenditures have been focused on key areas, including investing in our data center by implementing zTPF software on our mainframes, the development of our uAPI that underpins our new and existing applications, the development of Smartpoint, our innovative booking solution delivering multisource content and pricing, and the development of our Travelport Merchandising Platform to allow airlines to showcase their content in travel agency workflows. Cash additions to computer equipment are primarily for our continuing investment in our data center. We view our Capital Expenditure for the period to include cash additions to our property and equipment and capital lease repayments and was $106 million and $90 million for the nine months ended September 30, 2014 and 2013, respectively. For the nine months ended September 30, 2014 Adjusted EBITDA less Capital Expenditures improved 2% to $324 million. Financing activities: Cash used in financing activities for the nine months ended September 30, 2014 was $280 million. This primarily comprised of (i) $445 million cash inflows from the issuance of our common shares in an initial public offering in September 2014, (ii) $2,345 million borrowed under our new senior secured credit agreement, (iii) $29 million from the release of cash provided as collateral, offset by (iv) $1,477 million repayment of our term loans under old senior secured credit agreement (v) $863 million repayment of our term loans under second lien credit agreement, (vi) $588 million repayment of senior notes and senior subordinated notes, (vii) $83 million of payments related to early extinguishment of debt and debt finance costs, (viii) a $65 million purchase of additional equity in eNett during second quarter of 2014, and (ix) $23 million of capital lease payments. Cash provided by financing activities for the nine months ended September 30, 2013 was $65 million. This primarily comprised of (i) $2,169 million of proceeds from term loans, (ii) $73 million net release of cash collateralized offset by (iii) $1,663 million repayments of term loans, (iv) $413 million repayment of senior notes, (v) $20 million net repayment of revolver borrowings, (vi) $55 million of debt finance costs and (vii) $25 million of capital lease repayments, costs related to the exchange of common shares for payment-in-kind debt and settlement of derivative contracts. 43-------------------------------------------------------------------------------- Table of Contents Financing Arrangements As of September 30, 2014, our financing arrangements include our new senior secured credit facilities and obligations under our capital leases. The following table summarizes our net debt position as of September 30, 2014 and December 31, 2013: Interest September 30, December 31, (in $ millions) rate Maturity 2014 2013 Secured debt Senior Secured Credit Agreement Term loans Dollar denominated L+5% September 2021 $ 2,346 $ - Dollar denominated (repaid and/or exchanged in 2014) L+5% - 1,525 Revolver borrowings Dollar denominated L+5% September 2019 - - Dollar denominated (terminated in September 2014) L+5% - - Second Lien Credit Agreement Tranche 1 dollar denominated term loan (repaid and/or exchanged in 2014) L+8% - 644 Tranche 2 dollar denominated term loan (repaid in September 2014) 8 3/8% - 234 Unsecured debt Senior Notes Dollar denominated notes (repaid and/or exchanged in 2014) 13 7/8% - 411 Dollar denominated floating rate notes (repaid and/or exchanged in 2014) L+8 5/8% - 188 Senior Subordinated Notes Dollar denominated notes (repaid and/or exchanged in 2014) 11 7/8% - 272 Euro denominated notes (repaid and/or exchanged in 2014) 10 7/8% - 192 Capital leases 98 107 Total debt 2,444 3,573 Less: cash and cash equivalents (125 ) (154 ) Less: cash held as collateral (50 ) (79 ) Net debt $ 2,269 $ 3,340 Debt-for-Equity Exchanges: During the nine months ended September 30, 2014, we effectuated several debt-for-equity exchange transactions, pursuant to which we exchanged $571 million of its indebtedness, comprising (i) $154 million of dollar denominated senior subordinated notes, (ii) $159 million (€117 million) of euro denominated senior subordinated notes, (iii) $84 million of dollar denominated fixed rate senior notes, (iv) $83 million of dollar denominated floating rate senior notes, (v) $70 million of dollar denominated term loans under senior secured credit agreement and (vi) $21 million of dollar denominated Tranche 1 term loans under second lien credit agreement, in exchange for 29 million of our common shares. We recorded these transactions as extinguishment of debt and recognized a loss of $28 million in our consolidated condensed statements of operations for the nine months ended September 30, 2014. 44-------------------------------------------------------------------------------- Table of Contents Debt Repayment from Proceeds of Sale of Shares of Orbitz Worldwide: In July 2014, we repaid $312 million of term loans outstanding under our old senior secured credit agreement from the proceeds received from the sale of shares of Orbitz Worldwide. We recorded a loss of $5 million for early extinguishment of debt in our consolidated condensed statements of operations for the nine months ended September 30, 2014. Debt Refinancing: In September 2014, we consummated a refinancing of our remaining debt. As a result of this refinancing, we entered into: (i) a new senior secured credit facility comprised of (a) a single tranche of first lien term loans in an aggregate principal amount of $2,375 million, issued at a discount of 1.25%, maturing in September 2021 and (b) a revolving credit facility of $100 million (which may be increased in accordance with certain incremental facility provisions set forth therein) maturing in September 2019; and (ii) a senior unsecured bridge loan agreement in an aggregate principal amount of $425 million which was subsequently repaid with proceeds from the IPO. We used the net proceeds from these borrowings to repay all of the balance remaining under the term loans (under the old senior secured credit agreement and second lien credit agreement), senior notes and senior subordinated notes. On September 2, 2014, we issued an irrevocable notice for the redemption of our outstanding notes and also discharged each of the indentures governing such notes. We recorded the debt refinancing transaction as the issuance of new debt and extinguishment of old debt and recognized a loss of $75 million in our consolidated condensed statements of operations for the nine months ended September 30, 2014. The interest rate per annum applicable to the term loans is based on, at our election, (i) LIBOR, plus 5.00% or base rate (as defined in the agreement), plus 4.00%. The term loans are subject to a LIBOR floor of 1.00% and 2.00% in the case of base rates. We expect to pay interest based on LIBOR. The interest rate per annum applicable to the bridge loan is LIBOR, plus 5.75%, subject to a LIBOR floor of 1.00%. Borrowings under our senior secured credit agreement are subject to amortization and prepayment requirements, and our senior secured credit agreement contains various covenants, including leverage ratios, events of defaults and other provisions. During the nine months ended September 30, 2014, we (i) repaid $12 million as our quarterly repayment of term loans, (ii) accreted $9 million as interest expense towards the repayment fee on the second lien Tranche 1 loans, (iii) amortized $21 million as discount on term loans, (iv) capitalized $13 million related to payment-in-kind interest into the senior notes and second lien Tranche 2 dollar denominated term loans and (v) repaid $23 million under our capital lease obligations and entered into $14 million of new capital leases for information technology assets. Foreign exchange fluctuations resulted in a $3 million decrease in the principal amount of euro denominated loans during the nine months ended September 30, 2014. Revolving Credit Facility and Letters of Credit facility: Upon debt refinancing on September 2, 2014, our $120 million revolving credit facility and $137 million cash collateralized letters of credit facility under the old senior secured credit agreement were terminated. Under the new senior secured credit agreement, we have a $100 million revolving credit facility with a consortium of banks, which contains a letter of credit sub-limit of $50 million. The revolving credit facility further permits the issuance of certain cash collateralized letters of credit in addition to such sub-limit, whereby 103% of cash collateral has to be maintained for outstanding letters of credit. The new senior secured credit agreement also includes customary uncommitted incremental facility provisions, including the ability to increase the revolving credit facility by $50 million. During the nine months ended September 30, 2014, we borrowed $75 million under our revolving credit facility and repaid $75 million. We also utilized $16 million of our revolving credit facility for the issuance of 45-------------------------------------------------------------------------------- Table of Contents letters of credit. As of September 30, 2014, we had no outstanding balance due under our revolving credit facility, $16 million of letters of credit issued and $84 million of remaining credit capacity under the new revolving credit facility. Further, as of September 30, 2014, we also had $48 million of cash collateralized letters of credit issued and outstanding, against which we have provided $50 million as cash collateral. Subsequent to our refinancing in September 2014, substantially all of our debt is now scheduled for repayment in September 2021. Foreign Currency and Interest Rate Risk Subsequent to our refinancing of debt in September 2014, our debt is exposed to interest rate risks only, although prior to this refinancing our euro denominated debt was also exposed to risks associated with foreign currency exchange rate movements. We use hedging strategies and derivative financial instruments to create an appropriate mix of fixed and floating rate debt and to manage our exposure to changes in foreign currency exchange rates associated with our euro denominated debt. The primary interest rate exposure during the nine months ended September 30, 2014 and 2013 was due to interest rate fluctuations in the United States and Europe, specifically USLIBOR and EURIBOR interest rates. In the past, we have used foreign currency forward contracts, interest rate caps and interest rate swaps for hedging purposes. We also use foreign currency forward contracts to manage our exposure to changes in foreign currency exchange rates associated with our foreign currency denominated receivables and payables and forecasted earnings of our foreign subsidiaries. We primarily enter into foreign currency forward contracts to manage our foreign currency exposure to the British pound, Euro and Australian dollar. During the nine months ended September 30, 2014 and 2013, none of the derivative financial instruments used to manage our interest rate and foreign currency exposures were designated as accounting hedges except for interest rate cap derivative instruments which were designated as accounting hedges until June 2014. The fluctuations in the fair value of interest rate derivative financial instruments not designated as hedges for accounting purposes are recorded as a component of interest expense, net, in our consolidated condensed statements of operations. Losses on these interest rate derivative financial instruments amounted to $1 million and $3 million for the nine months ended September 30, 2014 and 2013, respectively. The fluctuations in the fair value of foreign currency derivative financial instruments not designated as hedges for accounting purposes are recorded as a component of selling, general and administrative expenses in our consolidated condensed statements of operations. Losses on these foreign currency derivative financial instruments amounted to $7 million and $4 million for the nine months ended September 30, 2014 and 2013, respectively. The fluctuations in the fair values of our derivative financial instruments partially offset the impact of the changes in the value of the underlying risks they are intended to economically hedge. 46-------------------------------------------------------------------------------- Table of Contents In 2013, we entered into interest rate cap derivative contracts to cap the USLIBOR rate at 1.5%. The purpose of these contracts was to hedge the risk of increase in interest costs on our floating rate debt due to an increase in USLIBOR rates. We had designated these interest rate cap derivative contracts as accounting cash flow hedges and recorded the effective portion of changes in fair value of these derivative contracts, amounting to a loss of $4 million during the nine months ended September 30, 2014, as a component of other comprehensive loss. In June 2014, we ceased hedge accounting for our interest rate cap derivative instruments. The exchange of our common shares for our term loans in July 2014 reduced the principal amount of debt being hedged to under 100% of the notional amount of interest rate cap contracts. Following our announcement of the proposed refinancing of our capital structure in August 2014, we determined that the underlying future hedge accounted interest cashflows were not probable of occurring, and that the hedge effectiveness could no longer be achieved. Losses of $8 million, previously accumulated within other comprehensive income (loss) were then recognized within our consolidated condensed statements of operations. As of September 30, 2014, our foreign exchange derivative contracts cover transactions for periods that do not exceed two years. As of September 30, 2014, we had a net liability position of $9 million related to derivative instruments associated with our foreign currency denominated receivables and payables, and forecasted earnings of our foreign subsidiaries. Contractual Obligations As of September 30, 2014, we had term loans under our new senior secured credit agreement of $2,375 million maturing in September 2021, which were issued at a discount of 1.25% and which require quarterly installments payable of 0.25% of the principal amount of $2,375 million commencing February 2015. Other than this, our future contractual obligations have not changed significantly from the amounts included in the Company's prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, on September 26, 2014. Other Off-Balance Sheet Arrangements We had no other off balance sheet arrangements during the nine months ended September 30, 2014. |