ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our results of operations and financial condition for the three months ended March 31, 2019 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 technology company that operates a travel commerce platform providing distribution, technology, payment, mobile and other solutions for the global travel and tourism industry. We facilitate travel commerce by connecting the world’s leading travel providers, such as airlines, hotel chains and car rental companies, with online and offline travel buyers in our proprietary business-to-business (“B2B”) travel commerce platform. In 2018, we processed approximately $89 billion of travel spending. We continue to strategically invest 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.
Our operations are organized into two operating segments: (i) Travel Solutions and (ii) Payment Solutions. Travel Solutions comprise our Air, Beyond Air (excluding our B2B travel payment solutions) and Technology Services. Payment Solutions comprise our B2B travel payment solutions that operates through eNett International (Jersey) Limited (“eNett”). In the first quarter of 2018, we reported our Payment Solutions business together with Travel Solutions as one reportable segment as Payment Solutions was not considered material to be disclosed separately as a reportable segment. For the three months ended March 31, 2019, Travel Solutions and Payment Solutions represented approximately 87% and 13%, respectively, of our net revenue. We also monitor our revenue and related metrics based on performance, including geographical performance, of our Travel Commerce Platform. Within Travel Commerce Platform, Air and Beyond Air (inclusive of Payment Solutions) represented approximately 72% and 28%, respectively, of our Travel Commerce Platform revenue for the three months ended March 31, 2019.
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 480 airlines globally, including approximately 120 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 easyJet, IndiGo and Ryanair 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, digital services, 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.
The core offering of our Payment Solutions business is a Virtual Account Number 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 also provide a mobile travel platform and digital product set that allows airlines, hotels, corporate travel management companies and travel agencies to engage with their customers through mobile services, including apps, mobile web and mobile messaging.
In addition to hospitality and digital services, we utilize the broad connections and extensive data to provide advertising solutions to approximately 3,500 advertisers 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 IT services to airlines, such as shopping, ticketing, departure control, business intelligence and other solutions, enabling them to focus on their core business competencies and reduce costs. We also host reservations, inventory management and other related critical systems for Delta Air Lines Inc.
Recent Developments
On December 9, 2018, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Toro Private Holdings III, Ltd. (“Parent”), and following the execution of the joinder agreement, dated December 11, 2018, Toro Private Holdings IV, Ltd. (“Merger Sub”), pursuant to which Merger Sub will merge with and into Travelport, with Travelport continuing as the surviving company and a wholly owned subsidiary of Parent (the “Merger”). Parent and Merger Sub are each affiliated with Siris Partners IV (Cayman) Main, L.P. and Siris Partners IV (Cayman) Parallel, L.P. (collectively, “Siris Cayman Fund IV”). Parent, Merger Sub and Siris Cayman Fund IV are each affiliated with Siris Capital Group, LLC (“Siris”). Siris is a private equity firm headquartered in New York, New York. Elliott Associates, L.P. and Elliott International, L.P. (collectively, the “Elliott Funds”) have agreed to invest alongside Siris Cayman Fund IV in the transactions contemplated by the Merger Agreement and are each affiliated with Evergreen Coast Capital Corp. (“Evergreen”). Evergreen is an affiliate of Elliott Management Corporation (“Elliott”) that is specifically focused on private equity investments.
If the Merger is completed, our shareholders will be entitled to receive $15.75 in cash, less any applicable withholding taxes, for each common share of Travelport owned by them. Further, our common shares will no longer be publicly traded and will be delisted from the New York Stock Exchange. In addition, our common shares will be deregistered under the Securities Exchange Act of 1934, as amended, and we will no longer file periodic reports with the SEC.
Our shareholders approved the Merger on March 15, 2019. However, the consummation of the Merger is subject to additional closing conditions, including approval under the competition laws of Russia. The Merger, if completed, will be accounted for as an acquisition of Travelport by Parent under the acquisition method of accounting in accordance with U.S. GAAP. Parent will be treated as the acquirer for accounting purposes.
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. 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, digital services, advertising and other platform services. Reported Segments is defined as 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 forth our key performance metrics:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
Ended March 31,
|
|
Change
|
(in $ thousands, except share data, Reported Segments and RevPas)
|
|
2019
|
|
|
2018
|
|
|
%
|
Net revenue
|
$
|
656,539
|
|
$
|
677,838
|
|
(21,299)
|
(3)
|
Operating income
|
|
87,287
|
|
|
77,664
|
|
9,623
|
12
|
Net income
|
|
22,392
|
|
|
59,231
|
|
(36,839)
|
(62)
|
Income per share – diluted (in $)
|
|
0.16
|
|
|
0.47
|
|
(0.31)
|
(66)
|
Adjusted EBITDA
(1)
|
|
160,445
|
|
|
154,177
|
|
6,268
|
4
|
Adjusted Operating Income
(2)
|
|
100,230
|
|
|
93,436
|
|
6,794
|
7
|
Adjusted Net Income
(3)
|
|
52,621
|
|
|
54,938
|
|
(2,317)
|
(4)
|
Adjusted Income per Share – diluted
(4)
(in $)
|
|
0.41
|
|
|
0.44
|
|
(0.03)
|
(7)
|
Net cash provided by operating activities
|
|
83,489
|
|
|
83,097
|
|
392
|
—
|
Free Cash Flow
(5)
|
|
49,392
|
|
|
46,434
|
|
2,958
|
6
|
Reported Segments (in thousands)
|
|
85,705
|
|
|
92,321
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|
(6,616)
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(7)
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Travel Commerce Platform RevPas (in $)
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|
7.39
|
|
|
7.07
|
|
0.32
|
4
|
|
(1)
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|
Adjusted EBITDA is defined as Adjusted Net Income (Loss) excluding depreciation and amortization of property and equipment, amortization of customer loyalty payments, interest expense, net (excluding unrealized gains (losses) on interest rate derivative instruments), components of net periodic pension and post-retirement benefit costs other than service costs and related income taxes.
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(2)
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|
Adjusted Operating Income (Loss) is defined as Adjusted EBITDA less depreciation and amortization of property and equipment and amortization of customer loyalty payments.
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(3)
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|
Adjusted Net Income (Loss) is defined as net income (loss) excluding amortization of acquired intangible assets, gain (loss) on early extinguishment of debt, and items that are excluded under our debt covenants, such as income (loss) from discontinued operations, non-cash equity-based compensation, certain corporate and restructuring costs, non-cash impairment of long-lived assets, certain litigation and related costs and other non-cash items such as unrealized foreign currency gains (losses) on earnings hedges, and unrealized gains (losses) on interest rate derivative instruments, along with any income tax related to these exclusions. Tax impacts not related to core operations have also been excluded (see Note 4 —
Income Taxes
to our consolidated condensed financial statements included in this Quarterly Report on Form 10‑Q).
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(4)
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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.
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(5)
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|
Free Cash Flow is defined as net cash provided by (used in) operating activities, less cash used for additions to property and equipment.
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We utilize non-GAAP (or adjusted) financial measures, including Adjusted EBITDA, Adjusted Operating Income (Loss), Adjusted Net Income (Loss) and Adjusted Income (Loss) per Share — diluted, to provide useful supplemental information to assist investors in understanding and assessing our performance and financial results on the same basis that management uses internally. These adjusted financial measures provide investors greater transparency with respect to key metrics used by management to evaluate our core operations, forecast future results, determine future capital investment allocations and understand business trends within the industry. Adjusted EBITDA, Adjusted Operating Income (Loss) and Adjusted Income (Loss) per Share — diluted metrics are also used by our Board of Directors to determine incentive compensation for future periods. Management believes the adjusted financial measures assist investors in the comparison of financial results between periods as such measures exclude certain items that management believes are not reflective of our core operating performance consistent with how management reviews the business.
Adjusted Net Income (Loss), Adjusted Income (Loss) per Share — diluted, Adjusted Operating Income and Adjusted EBITDA are supplemental measures of operating performance that do not represent, and should not be considered as, alternatives to net income (loss) or net income (loss) per share — diluted, as determined under U.S. GAAP. In addition, these measures may not be comparable to similarly named measures used by other companies. The presentation of these
measures has limitations as analytical tools, and should not be considered in isolation or as a substitute for analysis of our results as reported under U.S. GAAP.
The following table provides a reconciliation of net income to Adjusted Net Income, to Adjusted Operating Income and to Adjusted EBITDA:
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|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
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(in $ thousands)
|
|
2019
|
|
|
2018
|
Net income
|
$
|
22,392
|
|
$
|
59,231
|
Adjustments:
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|
|
|
|
|
Amortization of acquired intangible assets
(1)
|
|
10,165
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|
|
10,166
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Loss on early extinguishment of debt
|
|
17
|
|
|
27,661
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Equity-based compensation and related taxes
|
|
3,887
|
|
|
4,833
|
Corporate and restructuring costs
(2)
|
|
4,393
|
|
|
1,215
|
Impairment of long-lived assets
(3)
|
|
3,968
|
|
|
491
|
Income from discontinued operations
|
|
—
|
|
|
(27,747)
|
Other – non-cash
(4)
|
|
(1,743)
|
|
|
(11,363)
|
Tax adjustments
(5)
|
|
9,542
|
|
|
(9,549)
|
Adjusted Net Income
|
|
52,621
|
|
|
54,938
|
Adjustments:
|
|
|
|
|
|
Interest expense, net
(6)
|
|
27,046
|
|
|
25,365
|
Other expense
(7)
|
|
2,055
|
|
|
93
|
Remaining provision for income taxes
|
|
18,508
|
|
|
13,040
|
Adjusted Operating Income
|
|
100,230
|
|
|
93,436
|
Adjustments:
|
|
|
|
|
|
Depreciation and amortization of property and equipment
|
|
43,761
|
|
|
38,398
|
Amortization of customer loyalty payments
|
|
16,454
|
|
|
22,343
|
Adjusted EBITDA
|
$
|
160,445
|
|
$
|
154,177
|
|
(1)
|
|
Relates primarily to intangible assets acquired in the sale of Travelport to The Blackstone Group in 2006 and from the acquisition of Worldspan in 2007.
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|
(2)
|
|
Relates to costs associated with corporate development transactions and costs incurred to enhance our organization’s efficiency, including restructuring activities (see Note 9 —
Accrued Expenses and Other Current Liabilities
to our consolidated condensed financial statements included in this Quarterly Report on Form 10‑Q).
|
|
(3)
|
|
Relates to the impairment of customer loyalty payments and property and equipment.
|
|
(4)
|
|
Includes (i) unrealized gains on foreign currency derivatives contracts of $6 million and $1 million for the three months ended March 31, 2019 and 2018, respectively, (ii) unrealized losses (gains) on interest rate derivative contracts of $8 million and $(10) million for the three months ended March 31, 2019 and 2018, respectively, and (iii) other income of $3 million for the three months ended March 31, 2019.
|
|
(5)
|
|
Includes the tax impact of the loss on early extinguishment of debt, equity-based compensation, corporate and restructuring costs, impairment of long-lived assets and unrealized gains on foreign currency derivative contracts that are excluded from net income to determine Adjusted Net Income. Tax adjustments are calculated at the rate applicable for the jurisdiction in which the adjusting item arose.
The adjustments for the three months ended March 31, 2019 also include a charge of $10 million for uncertain tax position relating to the realizability of U.K. net operating losses carry forwards. The adjustments for the three months ended March 31, 2018 include $10 million of net benefit realized following the release of a portion of the valuation allowance on deferred tax assets associated with U.K. net operating losses carry forwards (see Note 4 —
Income Taxes
to our consolidated condensed financial statements included in this Quarterly Report on Form 10‑Q).
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|
(6)
|
|
Excludes the impact of unrealized losses (gains) on interest rate derivative contracts of $8 million and $(10) million for the three months ended March 31, 2019 and 2018, respectively, which is included within “Other — non-cash.”
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|
(7)
|
|
Relates to interest costs, expected return on plan assets and amortization of actuarial gain or loss components of net periodic
pension and post-retirement benefit costs.
|
The following table provides a reconciliation of income per share — diluted to Adjusted Income per Share — diluted:
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|
|
|
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|
|
Three Months Ended
|
|
|
March 31,
|
(in $)
|
|
2019
|
|
|
2018
|
Income per share – diluted
|
$
|
0.16
|
|
$
|
0.47
|
Per share adjustments to net income to determine Adjusted Income per Share – diluted
|
|
0.25
|
|
|
(0.03)
|
Adjusted Income per Share – diluted
|
$
|
0.41
|
|
$
|
0.44
|
We have included Adjusted Income (Loss) per Share — diluted 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, as well as other items which are not allocated to the operating businesses such as interest expense (excluding unrealized gains (losses) on interest rate derivative instruments), and related income taxes but excluding the effects of certain expenses not directly tied to the core operations of our businesses. Adjusted Income (Loss) per Share — diluted has similar limitations as Adjusted Net Income (Loss), Adjusted Operating Income (Loss) and Adjusted EBITDA 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, it is important to evaluate these measures along with our consolidated condensed statements of operations.
For a discussion of 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 a 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 three months ended March 31, 2019 and 2018:
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|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
(in percentages)
|
|
|
2019
|
|
2018
|
Asia Pacific
|
|
|
25
|
|
22
|
Europe
|
|
|
35
|
|
37
|
Latin America and Canada
|
|
|
5
|
|
5
|
Middle East and Africa
|
|
|
13
|
|
12
|
International
|
|
|
78
|
|
76
|
United States
|
|
|
22
|
|
24
|
Travel Commerce Platform
|
|
|
100
|
|
100
|
We expect some of the regions in which we currently operate, such as Asia Pacific, the Middle East and Africa, 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.
Travel Provider and Travel Agency 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 480 airlines globally, including approximately 120 LCCs. In addition, we serve numerous Beyond Air travel providers,
including approximately 650,000 hotel properties (of which over 500,000 are independent hotel properties), over 40,000 car rental locations, approximately 40 cruise-line and tour operators and over 20 rail networks worldwide. We aggregate travel content across approximately 65,000 travel agency locations representing approximately 220,000 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 three months ended March 31, 2019.
In general, our business is characterized by multi-year travel provider and travel agency contracts, with a portion of our contracts up for renewal each year. Our ability to obtain inventory from travel providers, such as airlines, hotels, car rental companies, cruise-lines and other travel providers, and our ability to maintain existing relationships with travel agencies and enter into new relationships on acceptable financial and other terms impact our financial results. Our relationships with travel agencies typically are non-exclusive, meaning the travel agencies subscribe to, and have the ability to use, more than one global distribution system (“GDS”). As a result, travel agency strategies, including consolidation or changes in allocation of travel agency bookings among the GDSs, have impacted, and will continue to impact, our revenue and travel distribution costs. In addition, a travel agency’s business may be materially impacted for any reason and generate less than the anticipated volume of bookings, which, in turn, will affect our results of operations. Our results of operations may be adversely impacted in the event of the termination, non-renewal or reduction in volume of bookings from customers or travel agencies should we be unable to offset any such losses with new business and/or volume increases in bookings from existing customers and travel agencies.
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 the first two quarters of the year 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 U.S. dollars, a portion of our operating cost base, primarily commissions, is transacted in non-U.S. 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.
Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018
We adopted new accounting guidance on recognition of leases from January 1, 2019, which had no impact on our consolidated condensed statement of operations for the three months ended March 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
Change
|
(in $ thousands)
|
2019
|
|
2018
|
|
|
$
|
|
%
|
Net revenue
|
$
|
656,539
|
|
$
|
677,838
|
|
$
|
(21,299)
|
|
(3)
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
402,032
|
|
|
426,397
|
|
|
(24,365)
|
|
(6)
|
Selling, general and administrative
|
|
113,194
|
|
|
125,200
|
|
|
(12,006)
|
|
(10)
|
Depreciation and amortization
|
|
54,026
|
|
|
48,577
|
|
|
5,449
|
|
11
|
Total costs and expenses
|
|
569,252
|
|
|
600,174
|
|
|
(30,922)
|
|
(5)
|
Operating income
|
|
87,287
|
|
|
77,664
|
|
|
9,623
|
|
12
|
Interest expense, net
|
|
(34,773)
|
|
|
(14,935)
|
|
|
(19,838)
|
|
(133)
|
Loss on early extinguishment of debt
|
|
(17)
|
|
|
(27,661)
|
|
|
27,644
|
|
100
|
Other expense
|
|
(2,055)
|
|
|
(93)
|
|
|
(1,962)
|
|
*
|
Income before income taxes
|
|
50,442
|
|
|
34,975
|
|
|
15,467
|
|
44
|
Provision for income taxes
|
|
(28,050)
|
|
|
(3,491)
|
|
|
(24,559)
|
|
*
|
Net income from continuing operations
|
|
22,392
|
|
|
31,484
|
|
|
(9,092)
|
|
(29)
|
Income from discontinued operations, net of tax
|
|
—
|
|
|
27,747
|
|
|
(27,747)
|
|
(100)
|
Net income
|
$
|
22,392
|
|
$
|
59,231
|
|
$
|
(36,839)
|
|
(62)
|
*
Percentage calculated not meaningful
Net Revenue
Net revenue is comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
Change
|
(in $ thousands)
|
2019
|
|
2018
|
|
$
|
|
%
|
Air
|
$
|
452,687
|
|
$
|
472,935
|
|
$
|
(20,248)
|
|
(4)
|
Beyond Air
|
|
180,412
|
|
|
179,751
|
|
|
661
|
|
—
|
Travel Commerce Platform
|
|
633,099
|
|
|
652,686
|
|
|
(19,587)
|
|
(3)
|
Technology Services
|
|
23,440
|
|
|
25,152
|
|
|
(1,712)
|
|
(7)
|
Net revenue
|
$
|
656,539
|
|
$
|
677,838
|
|
$
|
(21,299)
|
|
(3)
|
During the three months ended March 31, 2019, net revenue decreased by $21 million, or 3%, compared to the three months ended March 31, 2018. This decrease was driven by a decrease in Travel Commerce Platform revenue of $20 million, or 3%, and a decrease in Technology Services revenue of $2 million, or 7%.
Travel Commerce Platform
The table below sets forth Travel Commerce Platform RevPas and Reported Segments:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
Change
|
|
|
2019
|
|
|
2018
|
|
|
|
|
%
|
Travel Commerce Platform RevPas (in $)
|
$
|
7.39
|
|
$
|
7.07
|
|
$
|
0.32
|
|
4
|
Reported Segments (in thousands)
|
|
85,705
|
|
|
92,321
|
|
|
(6,616)
|
|
(7)
|
The decrease in Travel Commerce Platform revenue of $20 million, or 3%, was due to a decrease in Air revenue with Beyond Air revenue remaining stable. Overall, there was a 7% decrease in Reported Segments, offset by a 4% increase in Travel Commerce Platform RevPas.
The value of transactions processed on our Travel Commerce Platform decreased to $21.4 billion for the three months ended March 31, 2019 from $23.3 billion for the three months ended March 31, 2018 primarily due to a 7% decrease in Reported Segments, offset by an increase in the value and volume of transactions in Payment Solutions. Our percentage of Air segment revenue from away bookings remained stable at 69%. Our hospitality segments per 100 airline tickets issued decreased to 38 from 41. Our hotel room nights and car rental days sold decreased 12% and 4%, respectively, and were 15 million and 24 million, respectively, for the three months ended March 31, 2019.
The table below sets forth Travel Commerce Platform revenue by region:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
Change
|
(in $ thousands)
|
|
2019
|
|
|
2018
|
|
|
$
|
|
%
|
Asia Pacific
|
$
|
158,664
|
|
$
|
141,551
|
|
$
|
17,113
|
|
12
|
Europe
|
|
218,947
|
|
|
244,442
|
|
|
(25,495)
|
|
(10)
|
Latin America and Canada
|
|
33,125
|
|
|
29,859
|
|
|
3,266
|
|
11
|
Middle East and Africa
|
|
84,747
|
|
|
79,106
|
|
|
5,641
|
|
7
|
International
|
|
495,483
|
|
|
494,958
|
|
|
525
|
|
—
|
United States
|
|
137,616
|
|
|
157,728
|
|
|
(20,112)
|
|
(13)
|
Travel Commerce Platform
|
$
|
633,099
|
|
$
|
652,686
|
|
$
|
(19,587)
|
|
(3)
|
The table below sets forth Reported Segments and RevPas by region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segments
(in thousands)
|
|
|
RevPas
(in $)
|
|
Three Months Ended
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
Change
|
|
|
March 31,
|
|
|
Change
|
|
|
2019
|
|
|
2018
|
|
|
|
|
%
|
|
|
|
2019
|
|
|
2018
|
|
|
$
|
|
%
|
Asia Pacific
|
|
18,743
|
|
|
16,168
|
|
|
2,575
|
|
16
|
|
|
$
|
8.47
|
|
$
|
8.76
|
|
|
(0.29)
|
|
(3)
|
Europe
|
|
21,390
|
|
|
25,647
|
|
|
(4,257)
|
|
(17)
|
|
|
$
|
10.24
|
|
$
|
9.53
|
|
|
0.71
|
|
7
|
Latin America and Canada
|
|
4,800
|
|
|
4,710
|
|
|
90
|
|
2
|
|
|
$
|
6.90
|
|
$
|
6.34
|
|
|
0.56
|
|
9
|
Middle East and Africa
|
|
10,330
|
|
|
9,628
|
|
|
702
|
|
7
|
|
|
$
|
8.20
|
|
$
|
8.22
|
|
|
(0.02)
|
|
—
|
International
|
|
55,263
|
|
|
56,153
|
|
|
(890)
|
|
(2)
|
|
|
$
|
8.97
|
|
$
|
8.81
|
|
|
0.16
|
|
2
|
United States
|
|
30,442
|
|
|
36,168
|
|
|
(5,726)
|
|
(16)
|
|
|
$
|
4.52
|
|
$
|
4.36
|
|
|
0.16
|
|
4
|
Travel Commerce Platform
|
|
85,705
|
|
|
92,321
|
|
|
(6,616)
|
|
(7)
|
|
|
$
|
7.39
|
|
$
|
7.07
|
|
|
0.32
|
|
4
|
International
Our International Travel Commerce Platform revenue increased marginally by $1 million. The increase in RevPas of 2% was offset by a 2% decrease in Reported Segments. The increase in RevPas was a result of revenue growth in Beyond Air, driven by an increase in Payment Solutions, partially offset by a decline in the remainder of the Beyond Air portfolio. Our International Travel Commerce Platform revenue as a percentage of Travel Commerce Platform revenue was 78% for the three months ended March 31, 2019 compared to 76% for the three months ended March 31, 2018.
Asia Pacific
Revenue in Asia Pacific increased $17 million, or 12%, mainly due to a 16% increase in Reported Segments, offset by a 3% decrease in RevPas. Reported Segments increased primarily due to growth in India and Hong Kong. RevPas decreased, despite increases in Air revenue and Payment Solutions in Beyond Air revenue, primarily due to airline provider mix.
Europe
Revenue in Europe decreased $25 million, or 10%, primarily due to a 17% decrease in Reported Segments offset by a 7% increase in RevPas. Reported Segments decreased due to the termination of our agreement with a European online travel agent due to their contract breach in the second quarter of 2018 and the reduction in activity with certain other travel agencies. RevPas increased due to revenue growth in Beyond Air, driven by an increase in Payment Solutions.
Latin America and Canada
Revenue in Latin America and Canada increased by $3 million, or 11%, due to a 9% increase in RevPas and a 2% increase in Reported Segments, both mainly driven by growth in Air.
Middle East and Africa
Revenue in the Middle East and Africa increased by $6 million, or 7%,
due to a 7% increase in Reported Segments with RevPas remaining stable. The increase in Reported Segments was mainly driven by growth in Pakistan and Turkey.
United States
Revenue in the United States decreased by $20 million, or 13%, primarily due to a 16% decrease in Reported Segments, offset by a 4% increase in RevPas. Reported Segments decreased due to the reduction in activity with certain travel agencies. RevPas increased, despite declines in Air and Beyond Air revenue, primarily due to mix of revenue.
Technology Services
Technology Services revenue decreased $2 million, or 7%, primarily due to a decline in hosting fees.
Cost of Revenue
Cost of revenue is comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
March 31,
|
|
Change
|
(in $ thousands)
|
|
2019
|
|
2018
|
|
|
$
|
|
%
|
Commissions
|
|
$
|
329,726
|
|
$
|
349,951
|
|
$
|
(20,225)
|
|
(6)
|
Technology costs
|
|
|
72,306
|
|
|
76,446
|
|
|
(4,140)
|
|
(5)
|
Cost of revenue
|
|
$
|
402,032
|
|
$
|
426,397
|
|
$
|
(24,365)
|
|
(6)
|
Cost of revenue decreased by $24 million, or 6%, as a result of a $20 million, or 6%, decrease in commission costs and a $4 million, or 5%, decrease in technology costs. Commissions decreased primarily due to a 7% decrease in Reported Segments and a 3% decrease in travel distribution costs per segment driven by pricing, lower amortization of customer loyalty payments and favorable foreign exchange movements, offset by incremental commission costs from our payment solutions business. Commissions included amortization of customer loyalty payments of $14 million and $20 million for the three months ended March 31, 2019 and 2018, respectively. Technology costs across the shared infrastructure that runs our Travel Commerce Platform and Technology Services decreased by $4 million, or 5%, due to a decrease in employee cost resulting from reduced headcount and higher capitalization of technology investments.
Selling, General and Administrative (SG&A)
SG&A is comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
March 31,
|
|
Change
|
(in $ thousands)
|
|
2019
|
|
2018
|
|
$
|
|
%
|
Workforce
|
|
$
|
84,287
|
|
$
|
103,333
|
|
$
|
(19,046)
|
|
(18)
|
Non-workforce
|
|
|
26,935
|
|
|
16,510
|
|
|
10,425
|
|
63
|
Sub-total
|
|
|
111,222
|
|
|
119,843
|
|
|
(8,621)
|
|
(7)
|
Non-core corporate costs
|
|
|
1,972
|
|
|
5,357
|
|
|
(3,385)
|
|
(63)
|
SG&A
|
|
$
|
113,194
|
|
$
|
125,200
|
|
$
|
(12,006)
|
|
(10)
|
SG&A expenses decreased by $12 million, or 10%, during the three months ended March 31, 2019 compared to March 31, 2018. SG&A expenses include $2 million and $5 million of charges for the three months ended March 31, 2019 and 2018, respectively, for non-core corporate costs that are removed from Adjusted EBITDA. Excluding these items, our
SG&A expenses for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 decreased by $9 million, or 7%. Workforce expenses, which include the wages and benefits of our selling, marketing, advertising, finance and legal personnel, decreased by $19 million, or 18%, primarily due to a decrease in employee and related costs resulting from reduced headcount and favorable foreign exchange movements, partially offset by merit increases. Non-workforce expenses, which include the costs of finance and legal professional fees, communications and marketing and foreign exchange related costs, increased by $10 million, or 63%, primarily due to realized foreign exchange losses on foreign currency derivative contracts.
Non-core corporate costs of $2 million and $5 million for the three months ended March 31, 2019 and 2018, respectively, represent costs related to strategic transactions and restructurings, equity-based compensation, impairment of long-lived assets, certain legal and related costs and unrealized foreign currency gains and losses related to derivatives. The decrease of $3 million, or 63%, is due to $5 million of favorable movements in the fair value of unrealized foreign currency derivative contracts and $1 million of lower equity-based compensation and related taxes, offset by a $3 million increase in corporate and restructuring costs.
Depreciation and Amortization
Depreciation and amortization is comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
March 31,
|
|
Change
|
(in $ thousands)
|
|
2019
|
|
2018
|
|
$
|
|
%
|
Depreciation on property and equipment
|
|
$
|
43,861
|
|
$
|
38,411
|
|
$
|
5,450
|
|
14
|
Amortization of acquired intangible assets
|
|
|
10,165
|
|
|
10,166
|
|
|
(1)
|
|
—
|
Total depreciation and amortization
|
|
$
|
54,026
|
|
$
|
48,577
|
|
$
|
5,449
|
|
11
|
Total depreciation and amortization increased by $5 million, or 11%, due to a higher level of depreciable property and equipment resulting from their transfer from construction in progress when brought in use. Amortization of acquired intangible assets remained stable.
Interest Expense, Net
Interest expense, net, increased by $20 million, or 133%, due to (i) an $18 million unfavorable impact of fair value changes on our interest rate swap derivative contracts and (ii) a $3 million increase due to higher interest rates, offset by (iii) a $1 million decrease in amortization of debt finance costs and debt discount.
Loss on Early Extinguishment of Debt
In March 2018, we issued senior secured notes and entered into a new senior secured credit agreement. The proceeds from the issuance of the senior secured notes and term loan borrowings under the new senior secured credit agreement, along with cash on our balance sheet, were used to fully repay our borrowings under the senior secured credit agreement of September 2014. This transaction was accounted for as the issuance of new debt and an extinguishment of existing debt resulting in a $28 million loss on early extinguishment of debt.
Provision for Income Taxes
Our tax provision differs significantly from the expected provision amount calculated at the U.S. federal statutory rate primarily as a result of (i) being subject to income tax in numerous non-U.S. jurisdictions with varying income tax rates, (ii) valuation allowances maintained in various jurisdictions, including the U.S. and the U.K., due to historical losses in such jurisdictions, (iii) certain expenses that are not deductible for tax or do not secure an effective tax deduction under the relevant jurisdictions, including limitation to the tax deductibility of interest expense in the U.K., (iv) certain income or gains that are not subject to tax and (v) items identified as discrete during the interim periods.
As of December 31, 2018, our deferred tax assets in respect of U.S. and non–U.S. NOL carry forwards and U.S. tax credits was $208 million. We believe it is more likely than not that the benefit from such deferred tax assets will not be
realized. Consequently, we have recorded valuation allowances of $186 million against such deferred tax assets as of December 31, 2018.
We regularly assess our ability to realize deferred tax assets. As of March 31, 2019, our estimate of our annual effective tax rate includes the impact of releasing a portion of the valuation allowance associated with the U.S. NOL carry forwards. However, we maintain a valuation allowance on the remaining deferred tax assets. Future realized earnings performance and changes in future earnings projections, among other factors, may cause an adjustment to the conclusion as to whether it is more likely than not that we will realize the benefit of the deferred tax assets. This would impact the income tax expense in the period for which it is determined that these factors have changed.
For the three months ended March 31, 2019, we recognized a $10 million charge for uncertain tax position related to the realizability of U.K. NOL carry forwards. In the first quarter of 2018, we expected there would be future taxable income in the U.K. other than the reversal of deferred tax liabilities. Consequently, we realized a net benefit of $10 million following the release of the valuation allowance on the deferred tax assets associated with its U.K. NOL carry forwards (see Note 4 –
Income Taxes
to our consolidated condensed financial statements included in this Quarterly Report on Form 10‑Q).
Segment Analysis
Segment Net Revenue
The table below sets forth our net revenue by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
March 31,
|
|
Change
|
(in $ thousands)
|
|
2019
|
|
2018
|
|
$
|
|
|
%
|
Travel Solutions
|
|
$
|
573,158
|
|
$
|
604,059
|
|
$
|
(30,901)
|
|
|
(5)
|
Payment Solutions
|
|
|
83,381
|
|
|
73,779
|
|
|
9,602
|
|
|
13
|
Net revenue
|
|
$
|
656,539
|
|
$
|
677,838
|
|
$
|
(21,299)
|
|
|
(3)
|
For the three months ended March 31, 2019, Travel Solutions net revenue decreased $31 million, or 5%, due to a decline in both Air and Beyond Air (excluding Payment Solutions) revenue of $20 million, or 4%, and $9 million, or 8%, respectively, and a decline in Technology Services revenue of $2 million, or 7%. The decline in Air and Beyond Air (excluding Payment Solutions) revenue was primarily due to a 7% decrease in Reported Segments and decreases in hospitality and digital services revenue driven by the reduction in activity with certain travel agencies. The decline in Technology Services revenue was primarily due to lower hosting fees.
Payment Solutions net revenue increased by $10 million, or 13%, primarily due to improved pricing and an increase in the volume of payments settled with existing customers.
Segment Adjusted EBITDA
The table below sets forth our Segment Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
March 31,
|
|
Change
|
(in $ thousands)
|
|
2019
|
|
2018
|
|
$
|
|
|
%
|
Travel Solutions
|
|
$
|
150,856
|
|
$
|
146,506
|
|
$
|
4,350
|
|
|
3
|
Payment Solutions
|
|
|
9,589
|
|
|
7,671
|
|
|
1,918
|
|
|
25
|
Segment Adjusted EBITDA
|
|
$
|
160,445
|
|
$
|
154,177
|
|
$
|
6,268
|
|
|
4
|
Travel Solutions Segment Adjusted EBITDA increased by $4 million, or 3%, primarily due to the decrease in cost of revenue (excluding amortization and impairment of customer loyalty payments) and SG&A expenses (excluding non-core corporate costs), which was partially offset by a reduction in Travel Solutions net revenue.
Payment Solutions Segment Adjusted EBITDA increased by $2 million, or 25%, primarily due to workforce cost efficiencies.
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 March 31, 2019, our cash and cash equivalents and revolving credit facility availability were as follows:
|
|
|
|
March 31,
|
(in $ thousands)
|
2019
|
Cash and cash equivalents
|
$
|
247,725
|
Revolving credit facility availability
|
|
146,400
|
With the cash and cash equivalents on our consolidated condensed balance sheet, 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 and consist of accounts receivable and deferred revenue from travel providers and travel agencies, current prepaid travel agency incentive payments and accrued liabilities for commissions. The movement within these account balances are included within working capital.
The table below sets out our working capital as of March 31, 2019 and December 31, 2018, as monitored by management, which is then reconciled to our working capital as presented in our consolidated condensed balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
Asset (Liability)
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
|
(in $ thousands)
|
|
2019
|
|
2018
|
|
Change
|
Accounts receivable, net
|
|
$
|
259,769
|
|
$
|
209,834
|
|
$
|
49,935
|
Accrued commissions and incentives
|
|
|
(323,893)
|
|
|
(282,444)
|
|
|
(41,449)
|
Deferred revenue, rebate obligations and prepaid incentives, net
|
|
|
(38,513)
|
|
|
(40,905)
|
|
|
2,392
|
Cash and cash equivalents
|
|
|
247,725
|
|
|
213,001
|
|
|
34,724
|
Accounts payable and employee related
|
|
|
(140,925)
|
|
|
(145,591)
|
|
|
4,666
|
Accrued interest expense
|
|
|
(10,526)
|
|
|
(20,528)
|
|
|
10,002
|
Current portion of long-term debt
|
|
|
(59,238)
|
|
|
(57,497)
|
|
|
(1,741)
|
Current portion of operating lease liabilities
|
|
|
(12,664)
|
|
|
—
|
|
|
(12,664)
|
Taxes
|
|
|
4,168
|
|
|
10,772
|
|
|
(6,604)
|
Other assets, net
|
|
|
14,097
|
|
|
20,099
|
|
|
(6,002)
|
Working Capital
|
|
$
|
(60,000)
|
|
$
|
(93,259)
|
|
$
|
33,259
|
Consolidated Condensed Balance Sheets:
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
622,569
|
|
$
|
536,440
|
|
$
|
86,129
|
Total current liabilities
|
|
|
(682,569)
|
|
|
(629,699)
|
|
|
(52,870)
|
Working Capital
|
|
$
|
(60,000)
|
|
$
|
(93,259)
|
|
$
|
33,259
|
As of March 31, 2019, we had a working capital net liability of $60 million compared to $93 million as of December 31, 2018. The improvement in working capital of $33 million is primarily due to a $50 million increase in accounts receivable, net, a $35 million increase in cash and cash equivalents (as discussed in “Cash Flows” below), a $10 million decrease in accrued interest and a $5 million decrease in accounts payable and employee related, partially offset by a $41 million increase in accrued commissions and incentives, a $13 million increase in operating lease liabilities (see Note 12 –
Leases
to our consolidated condensed financial statements included in this Quarterly Report on Form 10-Q), a $7 million decrease in taxes and a $6 million decrease in other assets, net.
The table below sets out information on our accounts receivable:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
Change
|
Accounts receivable, net
(in $ thousands)
|
|
$
|
259,769
|
|
$
|
209,834
|
|
$
|
49,935
|
Accounts receivable, net – Days Sales Outstanding (“DSO”)
|
|
|
36
|
|
|
36
|
|
|
—
|
Substantially all of our Air revenue within our Travel Commerce Platform is collected through the International Air Transport Association (“IATA”), Airline Clearing House (“ACH”) and other similar clearing houses. Both, IATA and ACH, require participants to deposit certain balances into their demand deposit accounts by certain deadlines, which facilitates a timely settlement process. For the three months ended March 31, 2019, Air revenue accounted for approximately 69% of our net revenue; however, only 51% of our outstanding receivables related to customers using the IATA or the ACH as of March 31, 2019. The IATA and the ACH receivables are collected on average in 30 days. Beyond Air revenue is generally not collected through the IATA or the ACH process and takes longer to collect. Our average net collection period for total accounts receivable, net, was 36 DSO as of both March 31, 2019 and December 31, 2018. The growth in Air revenue in March 2019 compared to December 2018 primarily contributed to the increase in our accounts receivable, net, balance.
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, 2018 to March 31, 2019, and our accrued commissions and incentives increased by $41 million from December 31, 2018 to March 31, 2019, 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 provided by (used in) operating, investing and financing activities for the three months ended March 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
March 31,
|
|
|
(in $ thousands)
|
|
2019
|
|
2018
|
|
Change
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
83,489
|
|
$
|
83,097
|
|
$
|
392
|
Investing activities
|
|
|
(34,097)
|
|
|
(36,663)
|
|
|
2,566
|
Financing activities
|
|
|
(14,839)
|
|
|
(41,705)
|
|
|
26,866
|
Effect of exchange rate changes
|
|
|
202
|
|
|
397
|
|
|
(195)
|
Net increase in cash, cash equivalents and restricted cash
|
|
$
|
34,755
|
|
$
|
5,126
|
|
$
|
29,629
|
As of March 31, 2019, we had $251 million of cash, cash equivalents and restricted cash, an increase of $35 million compared to December 31, 2018. The following discussion summarizes the changes to our cash flows from operating, investing and financing activities for the three months ended March 31, 2019 compared to the three months ended March 31, 2018.
Operating activities.
For the three months ended March 31, 2019, cash provided by operating activities remained stable at $83 million. The benefit resulting from lower customer loyalty and income tax payments was offset by higher payments related to interest and restructuring liabilities.
Investing activities.
During the three months ended March 31, 2019 and 2018, cash used in investing activities of $34 million and $37 million, respectively, was for the purchase of property and equipment.
Our investing activities for the three months ended March 31, 2019 and 2018 include:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
March 31,
|
|
|
(in $ thousands)
|
|
2019
|
|
2018
|
|
Change
|
Cash additions to software developed for internal use
|
|
$
|
31,264
|
|
$
|
31,352
|
|
$
|
(88)
|
Cash additions to computer equipment and other
|
|
|
2,833
|
|
|
5,311
|
|
|
(2,478)
|
Property and equipment additions
|
|
$
|
34,097
|
|
$
|
36,663
|
|
$
|
(2,566)
|
Our Capital Expenditures, substantially all of which relate to our Travel Commerce Platform, include cash additions for software developed for internal use and computer equipment, as well as cash used for the repayment of finance lease and other indebtedness obligations. We repaid finance lease and other indebtedness obligations of $10 million and $8 million for the three months ended March 31, 2019 and 2018, respectively, which are primarily related to assets within our data center. Our total Capital Expenditures were $44 million and $45 million for the three months ended March 31, 2019 and 2018, respectively.
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 and hybrid cloud capabilities, increasing connectivity for customers, including enabling airline New Distribution Capabilities content and enhancing our search technology and capabilities, developing mobile customer engagement solutions, the development of content for hotels and car rental providers, further 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.
Financing activities.
Cash used in financing activities for the three months ended March 31, 2019 was $15 million, which primarily consisted of (i) $10 million of finance lease and other indebtedness repayments and (ii) $6 million of repayments of term loans under our senior secured credit agreement. The cash used in financing activities for the three months ended March 31, 2018 was $42 million, which primarily consisted of (i) $1,400 million of gross proceeds from term loans borrowed under our March 2018 senior secured credit agreement, (ii) $745 million of gross proceeds from the issuance of senior secured notes, offset by (iii) $2,154 million of repayments of term loans under the September 2014 senior secured credit agreement, (iv) $17 million of payments towards debt finance costs and lender fees, (v) $9 million of dividend payments to our shareholders and (vi) $8 million of finance lease and other indebtedness repayments.
We believe our important measure of liquidity is Free Cash Flow. This measure is a useful indicator of our ability to generate cash to meet our liquidity demands. We use this measure to conduct and evaluate our operating liquidity. We believe it typically presents an alternate measure of cash flows since purchases of property and equipment are a necessary component of our ongoing operations and provides useful information regarding how cash provided by operating activities compares to the property and equipment investments required to maintain and grow our platform. We believe it provides investors with an understanding of how assets are performing and measures management’s effectiveness in managing cash.
Free Cash Flow is a non
—
GAAP measure and may not be comparable to similarly named measures used by other companies. This measure has limitations in that it does not represent the total increase or decrease in the cash balance for the period, nor does it represent cash flow for discretionary expenditures. This measure should not be considered as a measure of liquidity or cash flows from operations as determined under U.S. GAAP. This measure is not measurement of our financial performance under U.S. GAAP and should not be considered in isolation or as alternative to net income (loss) or any other performance measures derived in accordance with U.S. GAAP or as an alternative to cash flows from operating activities as a measure of liquidity.
We use Capital Expenditures to determine our total cash spent on acquisition of property and equipment and cash repayment of finance lease liabilities and other indebtedness. We believe this measure provides management and investors an understanding of total capital invested in the development of our platform. Capital Expenditures is a non-GAAP measure and may not be comparable to similarly named measures used by other entities. This measure has limitation in that it aggregates cash flows from investing and financing activities as determined under U.S. GAAP.
The following table provides a reconciliation of net cash provided by operating activities to Free Cash Flow:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
March 31,
|
|
|
|
(in $ thousands)
|
|
2019
|
|
2018
|
|
Change
|
Net cash provided by operating activities
|
|
$
|
83,489
|
|
$
|
83,097
|
|
$
|
392
|
Less: capital expenditures on property and equipment additions
|
|
|
(34,097)
|
|
|
(36,663)
|
|
|
2,566
|
Free Cash Flow
|
|
$
|
49,392
|
|
$
|
46,434
|
|
$
|
2,958
|
Financing Arrangements
As of March 31, 2019, our financing arrangements include our senior secured credit facilities, our senior secured notes and obligations under our finance lease and other indebtedness. The following table summarizes our Net Debt position as of March 31, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
March 31,
|
|
December 31,
|
(in $ thousands)
|
|
rate
|
|
Maturity
|
|
2019
|
|
2018
|
Senior Secured Credit Agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loans
(1)
|
|
|
L+2.50%
|
|
|
March 2025
|
|
$
|
1,367,688
|
|
$
|
1,372,666
|
Revolver borrowings
|
|
|
L+2.25%
|
|
|
September 2022
|
|
|
—
|
|
|
—
|
Senior Secured Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior secured notes
(2)
|
|
|
6.00%
|
|
|
March 2026
|
|
|
738,504
|
|
|
738,274
|
Finance lease liabilities
|
|
|
|
|
|
|
|
|
129,306
|
|
|
136,729
|
Other indebtedness
|
|
|
|
|
|
|
|
|
4,024
|
|
|
4,365
|
Total debt
|
|
|
|
|
|
|
|
|
2,239,522
|
|
|
2,252,034
|
Less: cash, cash equivalents and restricted cash
|
|
|
|
|
|
|
|
|
(251,135)
|
|
|
(216,380)
|
Net Debt
(3
)
|
|
|
|
|
|
|
|
$
|
1,988,387
|
|
$
|
2,035,654
|
|
(1)
|
|
As of March 31, 2019 and December 31, 2018, the principal amount of term loans outstanding under the senior secured credit agreement was $1,380 million and $1,385 million, respectively, which is netted for unamortized debt discount of $6 million as of both March 31, 2019 and December 31, 2018 and unamortized debt finance costs of $6 million as of both March 31, 2019 and December 31, 2018.
|
|
(2)
|
|
As of both March 31, 2019 and December 31, 2018, the principal amount of senior secured notes outstanding was $745 million, which is netted for unamortized debt finance costs of $6 million and $7 million as of March 31, 2019 and December 31, 2018, respectively.
|
|
(3)
|
|
Net Debt is defined as total debt comprised of current and non-current portion of long-term debt minus cash, cash equivalents and restricted cash. Net Debt
is a non — GAAP measure and
is not a measurement of our indebtedness under U.S. GAAP and should not be considered in isolation or as alternative to assess our total debt or any other measures derived in accordance with U.S. GAAP. The management uses Net Debt to review our overall liquidity, financial flexibility, capital structure and leverage. Further, we believe, certain debt rating agencies, creditors and credit analysts monitor our Net Debt as part of their assessment of our business.
|
Senior Secured Credit Agreement
During the three months ended March 31, 2019, we (i) repaid $6 million principal amount of term loans outstanding under our
senior secured credit agreement
and (ii) amortized $1 million of debt finance costs and debt discount.
The interest rate per annum applicable to (a) the term loans is based on, at our election, LIBOR plus 2.50% or base rate (as defined in the senior secured credit agreement) plus 1.50% and (b) the borrowings under revolving credit facility, at our election, LIBOR plus 2.25% or base rate (as defined in the senior secured credit agreement) plus 1.25%. LIBOR rates and base rates have a floor of 0.00%. We expect to pay interest based on LIBOR.
We are not contractually required to repay quarterly installments of the term loans until the fourth quarter of 2019. However, we have classified a portion of our term loans (along with the contractual quarterly installments) as current portion of long-term debt as we intend, and are able, to make additional voluntary prepayments of the term loans from cash flow from operations, which we expect to occur within the next twelve months. The amount of any such prepayments may vary based on our actual cash flow generation and needs, as well as general economic conditions.
Under the senior secured credit agreement, we have a $150 million revolving credit facility, which contains a letter of credit sub-limit up to a maximum of $100 million. As of March 31, 2019, there were no outstanding borrowings under the revolving credit facility under the senior secured credit agreement, and $4 million was utilized for the issuance of letters of credit, with a balance of $146 million remaining.
Change of Control
The Merger (as discussed in Note 1 —
Basis of Presentation and the Merger
to our consolidated condensed financial statements included in this Quarterly Report on Form 10-Q), if completed, will be considered an “Event of Default” under the terms of senior secured credit agreement, and, as a result, the Administrative Agent (as defined in the senior secured credit agreement) may and, at the request of the majority of lenders, shall (i) declare the unpaid principal amount of the outstanding term loans and revolving credit loans and the amount of all outstanding payments made by a lender pursuant to a letter of credit, along with the interest accrued and unpaid thereon, to be immediately due and payable, (ii) require us to provide cash as collateral in an amount equal to 103% of the aggregate amount available to be drawn under all outstanding letters of credit plus any unreimbursed drawings and (iii) terminate all the commitments of the lenders provided to us. In order to avoid triggering such an “Event of Default,” we expect to repay amounts outstanding, including accrued and unpaid interest, under the senior secured credit agreement concurrently with, and conditional upon, the consummation of the Merger and pursuant to the terms of the senior secured credit agreement.
Senior Secured Notes
As of March 31, 2019, we had a principal amount of $745 million in senior secured notes due in March 2026 with a stated interest rate of 6.00% per annum.
Change of Control
If the Merger is completed and the “Ratings Event” as defined in the Indenture governing our senior secured notes occurs, it will constitute a “Change of Control Triggering Event” under the Indenture and, subject to certain conditions, we will be required to make an offer to purchase all of the senior secured notes pursuant to the “Change of Control Offer” (as defined in the Indenture), at a price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, to but excluding the date of repurchase, unless we have previously or substantially concurrently therewith delivered a redemption notice with respect to all of the outstanding senior secured notes as described in the Indenture. Subject to and conditional upon the closing of the Merger, the issuer of the senior secured notes, our wholly owned subsidiary, has given notice to the trustee under the Indenture and the holders of the senior secured notes of its intention to optionally redeem the notes, in whole at a redemption price equal to 100% of the principal amount plus the Applicable Premium (as defined in the Indenture) and accrued and unpaid interest, if any, to but excluding the redemption date.
Finance Lease Obligations
During the three months ended March 31, 2019, we repaid $9 million of our finance lease obligations and entered into $2 million of new finance leases for information technology assets.
Debt Covenants and Guarantees
Travelport Finance (Luxembourg) S.a.r.l., our indirect 100% owned subsidiary, is the obligor (the “Obligor”) under the
senior secured credit agreement
. All obligations under the
senior secured credit agreement
are unconditionally guaranteed by certain of our wholly owned foreign subsidiaries, and, subject to certain exceptions, each of our existing and future domestic wholly owned subsidiaries. All obligations under our secured debt, and the guarantees of those
obligations, are secured by substantially all the following assets of the Obligor and each guarantor, subject to certain exceptions: (i) a pledge of 100% of the capital stock and intercompany indebtedness of the Obligor and each guarantor; (ii) a pledge of 100% of the capital stock and intercompany indebtedness of certain other subsidiaries directly owned by the Obligor or any other guarantor subject to certain exceptions and limitations; and (iii) a security interest in, and mortgages on, substantially all tangible and intangible assets of the Obligor and each U.S. guarantor subject to additional collateral and guarantee obligations.
Borrowings under the
senior secured credit agreement
are subject to amortization and prepayment requirements. In addition, our senior secured credit agreement and the Indenture governing the senior secured notes contain various covenants, events of default and other provisions, including, under certain circumstances, a leverage ratio requirement under the
senior secured credit agreement
.
Our
senior secured credit agreement
and the Indenture governing the senior secured notes limit certain of our subsidiaries’ ability to:
|
·
|
|
incur additional indebtedness;
|
|
·
|
|
pay dividends on, repurchase or make distributions in respect of equity interests or make other restricted payments;
|
|
·
|
|
make certain investments;
|
|
·
|
|
create liens on certain assets to secure debt;
|
|
·
|
|
consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
|
|
·
|
|
enter into certain transactions with affiliates; and
|
|
·
|
|
designate our subsidiaries as unrestricted subsidiaries.
|
As of March 31, 2019, our consolidated first lien net leverage ratio, as determined under our
senior secured credit agreement
, was 3.69 compared to the maximum allowable of 6.00. In addition, we were in compliance with the other covenants under the
senior secured credit agreement
and Indenture.
We re-evaluate our capital structure from time to time including, but not limited to, refinancing our current indebtedness with other indebtedness which may have different interest rates, maturities and covenants.
Interest Rate Risk
We are exposed to interest rate risk relating to our floating rate debt under our senior secured credit agreement. We use derivative financial instruments as part of our overall strategy to manage our exposure to interest rate risk. We do not use derivatives for trading or speculative purposes.
Our primary interest rate exposure as of March 31, 2019 was to interest rate fluctuations in the United States, specifically the impact of LIBOR interest rates on our dollar denominated floating rate debt. Interest on the $1,380 million principal amount of term loans under our senior secured credit agreement is currently charged at LIBOR plus 2.50%. In order to protect against potential higher interest costs resulting from increases in LIBOR, as of March 31, 2019, we have outstanding interest rate swap contracts that fix the LIBOR rate payable as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
Notional Amount
|
|
|
|
|
|
|
|
Interest
|
($ in thousands)
|
|
Period
|
|
|
Rate
|
1,200,000
|
|
February 2019 to February 2020
|
|
|
2.1906%
|
400,000
|
|
February 2020 to February 2021
|
|
|
2.1925%
|
320,000
|
|
February 2021 to February 2022
|
|
|
3.0178%
|
During the three months ended March 31, 2019, none of the derivative financial instruments used to manage our interest rate exposure were designated as accounting hedges. 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) gains on these interest rate derivative financial instruments were $(5) million and $11 million for the three months ended March 31, 2019 and 2018, respectively.
Foreign Currency Risk
We are exposed to foreign currency exchange rate risk that arises from certain intercompany transactions, earnings denominated in non-U.S. dollar currencies and from non-functional currency denominated assets and liabilities. We use derivative financial instruments as part of our overall strategy to manage our exposure to foreign currency exchange rate risk. We do not use derivatives for trading or speculative purposes.
During 2019, we used foreign currency derivative contracts (i.e. forward contracts) to manage our exposure to foreign currency exchange rate risk. As of March 31, 2019, we had $405 million net notional amount of foreign currency forward contracts.
During the three months ended March 31, 2019 and 2018, none of the derivative financial instruments used to manage our foreign currency exposures were designated as accounting hedges. 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) gains on these foreign currency derivative financial instruments amounted to $(3) million and $5 million for the three months ended March 31, 2019 and 2018, respectively. The fluctuations in the fair values of our foreign currency derivative financial instruments partially offset the impact of the changes in the value of the underlying risks they are intended to economically hedge.
As of March 31, 2019, our derivative contracts that hedge our interest rate and foreign currency exposure had a net liability position of $9 million and cover transactions for a period that does not exceed three years.
Contractual Obligations
As of March 31, 2019, our future contractual obligations have not changed significantly from the amounts included within our Annual Report on Form 10‑K for the year ended December 31, 2018 filed with the SEC on February 22, 2019.
Other Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements during the three months ended March 31, 2019.