10-K 1 tv483889_10k.htm 10-K

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

  

 

 

Form 10-K

(Mark One)

 

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2017

 

Or

 

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

 

For the transition period from           to         

 

Commission File No. 001-36640

 

 

 

Travelport Worldwide Limited

(Exact name of registrant as specified in its charter)

 

Bermuda   98-0505105
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification Number)

 

Axis One, Axis Park
Langley, Berkshire, SL3 8AG, United Kingdom
(Address of principal executive offices, including zip code)

 

+44-1753-288-000
(Registrant’s telephone number, including area code)

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

Title of Each Class     Name of Each Exchange on Which Registered
Common Shares, Par Value $0.0025     New York Stock Exchange

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes x  No ¨

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes ¨  No x

 

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

 

Indicate by check whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.    Yes x  No ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x

 

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

  

Large accelerated filer x     Accelerated filer ¨     Non-accelerated filer ¨     Smaller reporting company ¨  
Emerging growth company ¨     (Do not check if a smaller reporting company)      

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

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

 

As of June 30, 2017, the aggregate market value of the Registrant’s common shares held by non-affiliates was $1,691,635,080 based on the closing pricing of its common shares on the New York Stock Exchange. Solely for the purpose of the foregoing calculation only, all directors and executive officers of the Registrant are assumed to be “affiliates” of the Registrant. As of February 16, 2018, there were 125,414,115 shares of the Registrant’s common shares, par value $0.0025 per share, outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Registrant’s definitive proxy statement to be mailed to stockholders in connection with the Registrant’s annual stockholders’ meeting scheduled to be held on June 27, 2018 (the “Annual Proxy Statement”) are incorporated by reference into Part III hereof.

 

 

 

 

 

 

TABLE OF CONTENTS

 

Item   Description   Page
         
    Forward-Looking Statements   1
         
    PART I    
Item 1   Business   2
Item 1A   Risk Factors   17
Item 1B   Unresolved Staff Comments   33
Item 2   Properties   33
Item 3   Legal Proceedings   34
Item 4   Mine Safety Disclosures   34
         
    PART II    
Item 5   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   35
Item 6   Selected Financial Data   38
Item 7   Management’s Discussion and Analysis of Financial Condition and Results of Operations   41
Item 7A   Quantitative and Qualitative Disclosures about Market Risk   71
Item 8   Financial Statements and Supplementary Data   72
Item 9   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   72
Item 9A   Controls and Procedures   72
Item 9B   Other Information   74
         
    PART III    
Item 10   Directors, Executive Officers and Corporate Governance   74
Item 11   Executive Compensation   74
Item 12   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   74
Item 13   Certain Relationships and Related Transactions, and Director Independence   74
Item 14   Principal Accounting Fees and Services   74
         
    PART IV    
Item 15   Exhibits, Financial Statement Schedules   75
Item 16   Form 10-K Summary   75
    Signatures   76

 

 

 

 

FORWARD-LOOKING STATEMENTS

 

The forward-looking statements contained herein involve risks and uncertainties. Many of the statements appear, in particular, in the sections entitled “Business”, “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Forward-looking statements identify prospective information. Important factors could cause actual results to differ, possibly materially, from those in the forward-looking statements. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “potential,” “should,” “will” and “would” or other similar words. You should read statements that contain these words carefully because they discuss our future priorities, goals, strategies, actions to improve business performance, market growth assumptions and expectations, new products, product pricing, changes to our business processes, future business opportunities, capital expenditures, financing needs, financial position and other information that is not historical information. References within this Annual Report on Form 10-K to “we,” “our,” “us” or “Travelport” refer to Travelport Worldwide Limited, a Bermuda company, and its consolidated subsidiaries.

 

The following list represents some, but not necessarily all, of the factors that could cause actual results to differ from historical results of continuing operations or those anticipated or predicted by these forward-looking statements:

 

factors affecting the level of travel activity, particularly air travel volume, including security concerns, pandemics, general economic conditions, natural disasters and other disruptions;

 

our ability to obtain travel provider inventory from travel providers, such as airlines, hotels, car rental companies, cruise-lines and other travel providers;

 

our ability to maintain existing relationships with travel agencies and to enter into new relationships on acceptable financial and other terms;

 

our ability to develop and deliver products and services that are valuable to travel agencies and travel providers and generate new revenue streams;

 

the impact on travel provider capacity and inventory resulting from consolidation of the airline industry;

 

our ability to grow adjacencies, such as payment and mobile solutions;

 

general economic and business conditions in the markets in which we operate, including fluctuations in currencies, particularly in the U.S. dollar, and the economic conditions in the eurozone;

 

the impact on business conditions worldwide as a result of political decisions, including the United Kingdom’s (“U.K.”) decision to leave the European Union (“E.U.”);

 

pricing, regulatory and other trends in the travel industry;

 

the impact our outstanding indebtedness may have on the way we operate our business;

 

our ability to achieve expected cost savings from our efforts to improve operational and technological efficiency, including through our consolidation of multiple technology vendors and locations and the centralization of activities; and

 

maintenance and protection of our information technology (“IT”) and intellectual property.

 

We caution you that the foregoing list of important factors may not contain all of the factors that are important to you. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this report may not in fact occur.

 

Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved. Forward-looking information is based on information available at the time and/or management’s good faith belief with respect to future events and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. The factors listed in the section captioned “Risk Factors” in this Annual report on Form 10-K, provide examples of risks, uncertainties and events that may cause actual results to differ materially from the expectations described in the forward-looking statements. You should be aware that the occurrence of the events described in these risk factors and elsewhere in this report could have an adverse effect on our business, results of operations, financial position and cash flows.

 

Forward-looking statements speak only as of the date the statements are made. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect thereto or with respect to other forward-looking statements. For any forward-looking statements contained in any document, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

 

 1 

 

 

PART I

 

ITEM 1. BUSINESS

 

Overview

 

Travelport is the technology company that makes the experience of buying and managing travel continually better. We operate 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 a proprietary business-to-business (B2B) travel platform. Our travel buyers include travel agencies, including online travel agencies (“OTAs”), travel management companies (“TMCs”) and corporations. We have a focused strategy to enrich and broaden our content capabilities. We have a leadership position in airline merchandising with over 250 airlines fully implemented with high value-add merchandising capabilities out of a total airline roster of approximately 400 airlines. We lead in low cost carrier (“LCC”) content with approximately 125 LCCs connected to our Travel Commerce Platform. Additionally, we believe we are one of the largest third-party distributors of hotel room nights globally and complement this with a strong focus on car rental, rail, tour operators and cruise-lines. We have a strong focus on mobile commerce, providing a wide range of services that allows airlines, hotels, corporate TMCs and travel agencies to engage with their customers through digital services, including apps, corporate booking tools and mobile messaging. In addition, we leveraged our domain expertise in the travel industry to design a unique and pioneering B2B payment solution that addresses the need of travel agencies to efficiently and securely make payments to travel providers globally. Our leading B2B payments business experienced 29% annual growth in 2017. We also 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 operate at significant scale with approximately $83 billion of travel spending processed in 2017. With the rise of mobile and meta-search intermediaries, more than 2 trillion messages passed over our networks in 2017, with an average of over 7 billion air shopping requests per month. Our data center uses over 20,000 physical and virtual servers, with a current total storage capacity of approximately 16 petabytes.

 

We have a broad geographic footprint in the travel distribution industry. In 2017, we generated $2,341 million in Travel Commerce Platform revenue, of which 74% is international (with 24% from Asia Pacific, 32% from Europe, 5% from Latin America and Canada and 13% from the Middle East and Africa) and 26% is from the United States. Our geographically dispersed footprint helps insulate us from particular country or regional instability, allows for optimal IT efficiency and enhances our value proposition not only to travel providers, travel agencies and corporations, but also to end travelers. We are well positioned to capture higher value business from travel providers operating in non-domestic, or ‘away’ markets, in addition to serving their domestic, or ‘home’ markets, which results in higher per transaction revenue for both us and the travel providers we serve. We operate in approximately 180 countries and territories through our extensive global network of approximately 60 sales and marketing offices (“SMOs”) and a diverse workforce of over 4,000 full-time employees as of December 31, 2017.

 

As customer needs and technologies evolve, we continue to invest in our Travel Commerce Platform, developing new solutions to better serve the industry. We have led innovation in electronic distribution and merchandising of airline core and ancillary products and extensively diversified our offerings to address the high-volume and growing transaction processing requirements for the evolving needs of the travel industry through our Travel Commerce Platform. Comprised of Air and Beyond Air, our Travel Commerce Platform provides distribution and merchandising solutions for airline, hotel, car rental, rail, cruise-line and tour operators, B2B travel payment solutions, digital services, advertising and an array of additional platform services. We have acquired expertise in and are deploying machine learning, artificial intelligence and other leading-edge technology to support our customers. Our advanced search technology aggregates global travel content, filters it through sophisticated search algorithms and presents results via application programming interfaces (“APIs”) and in an online travel world via efficient workflow for travel agencies in the offline mobile travel world, enabling travel agencies to create and modify multi-content, modular and complex itineraries, issue travel documents, process millions of booking transactions and invoices and transfer secure, cost-effective and automated payments, all on a graphically rich, single user interface. We have invested in our infrastructure and conveyance mechanisms, including APIs and our point of sale (“POS”) interface, to make them easier to code to, lighter to use in terms of system processing for our customers and able to handle personalization. The significant growth of OTAs and the online channel, through meta-searches, the proliferation of mobile devices and consumerization has driven continued growth in the volume of searches and shopping transactions processed by our platform. Since 2015, we have seen a 4 times average increase in shopping requests coming onto our platform. We have effectively seen shopping requests double every 18 months, and we expect this trend to continue for the foreseeable future. Our focused strategy in search technology ensures we are positioned to manage the continued growth in the industry within our existing operating cost structure.

 

 2 

 

 

Our focus on enhancing our platform’s performance, including speed of search, is not just about price and speed, but also relevance and bookability of search results, including branded fares and ancillaries. By leveraging cloud, machine learning, mobile-enabled APIs and data and analytics, we can ensure insights are available and translated into personalized and smarter responses for the customer. For Air, we have transformed beyond the traditional global distribution system (“GDS”) concept, which had very limited ancillary sales capabilities, into an open platform with extensible markup language (“XML”) connectivity and a graphically rich, single user interface to enable marketing and sales of not only full air content, but also full ancillary content. We are a leader in the field of airline distribution being the first GDS supplier to acquire the International Air Transport Association’s (“IATA”) highest certification for its new distribution capability technology (“IATA NDC”). For Beyond Air, in addition to chain hotel content, we have added independent hotel inventory, previously rarely booked through the intermediary channel, to a global network of travel agencies through our meta-search technology, which combines search results from multiple sources and have given hotels the ability to display their full range of rates and packages in a one-stop booking portal. By investing in robotics and artificial intelligence, we help our customers engage in more “no touch” booking processes to address the changing needs of the traveler and drive business efficiencies automation. Our digital strategy and value propositions focus on improving the end-to-end customer experience through the provision of innovative digital travel solutions to all of our customers, including through Travelport Locomote’s corporate travel platform and our mobile travel solutions for airlines, hotels, TMCs, and travel agencies with Travelport Fusion and Travelport Trip Assist. Our Travel Commerce Platform creates synergies and network efficiencies that facilitate revenue growth across the travel value chain. The chart below demonstrates the ways in which our Travel Commerce Platform identified, addressed and redefined key elements of the travel value chain that are fully or partially unaddressed by traditional GDS providers:

 

Our Travel Commerce Platform Addresses the Evolving Needs of Our Industry

 

 

Our next generation Travel Commerce Platform focuses on the trends, inefficiencies and unmet needs of all components of the travel value, including innovative mobile engagement solutions and digital offerings.

 

 3 

 

 

We provide air distribution services to approximately 400 airlines globally, including approximately 125 LCCs. We distribute ancillaries for over 100 airlines. In addition, we secure content from numerous Beyond Air travel providers, including approximately 650,000 hotel properties (of which over 500,000 are independent hotel properties), over 38,000 car rental locations, approximately 50 cruise-line and tour operators and 14 major rail networks worldwide. We aggregate travel content across approximately 65,000 travel agency locations representing approximately 230,000 online and offline travel agency terminals worldwide, which in turn serve millions of end consumers globally. In 2017, we handled over 340 million segments sold by travel agencies and sold over 68 million hotel room nights and over 105 million car rental days. Our Travel Commerce Platform provides 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. Our access to business travelers, merchandising capabilities and ability to process complex itineraries attracted and allowed for the full integration of several fast-growing LCCs, such as AirAsia, easyJet, IndiGo and Ryanair, into our Travel Commerce Platform.

 

Through eNett International (Jersey) Limited (“eNett”), our majority-owned subsidiary and an early adopter in automated payments, we redefined how travel agencies pay travel providers. When a consumer purchases an itinerary through a travel agency, the consumer pays using a variety of mechanisms, including cash, direct debit and credit card. Generally, the consumer makes one payment for the entire itinerary of flights, hotels and ground services, such as transfers. The travel agency then remits the individual payments to each travel provider. eNett’s core offering is a payment solution that automatically generates unique Mastercard numbers used to process payments globally. Before eNett, travel payments were primarily settled in cash and exposed payers to risks of fraud, delays and costly reconciliations. The Virtual Account Number (“VAN”) solution is integrated into all of our POS systems and exclusively utilizes the Mastercard network pursuant to a long-term agreement. eNett’s operations currently focus on Asia Pacific and Europe, and we believe the model is highly scalable. We have expanded beyond the core hospitality sector into air travel, including LCCs, with further opportunities for growth in other sectors of the travel industry.

 

Through our digital solutions, we also provide innovative mobile engagement solutions for airlines, hotels, TMCs and travel agencies. Travelport Digital’s solutions are used worldwide to improve the end-to-end mobile travel experience and increase the value of customer interactions via sophisticated apps and mobile services across smartphones, tablets and wearables. In addition to industry-leading travel apps, Travelport Digital provides advanced mobile services, including real-time mobile messaging, day-of-travel solutions and ancillary upsell opportunities. Travelport Digital’s solutions also enable airlines and travel companies to create new revenue opportunities through ancillary upsell and improved conversion rates as a result of high-end design and more personalized experiences via mobile. Through Travelport Locomote, we have significantly strengthened our offering to both corporates and TMCs from an end-to-end customer experience perspective. Travelport Locomote is a corporate travel platform that empowers travel managers to drive change and achieve efficiencies. Travelport Locomote creates seamless experiences and integrated solutions from approval management to cost savings to duty of care. Customers control the entire travel program, enabling greater insight into travel expenditure. The Travelport Locomote platform uses Travelport’s Universal Profile, Universal Record, travel policy engine and our Travelport Universal API, from which it obtains real time access to our content, which includes LCCs and network carriers, airline ancillary products, car rental companies and the broad range of hotel properties and rates that we distribute. The platform has been further developed to enable easy integration of third-party, complementary applications that an individual corporation might want to add to its travel and/or authorization processes, including expense management, corporate booking tools and other add-on services, all within the same corporate user experience, workflow and data management capabilities.

 

In addition to hospitality, payment solutions and digital services, we utilize the broad connections and extensive data managed by our Travel Commerce Platform to provide advertising solutions to over 3,000 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.

 

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. (“Delta”) and run the system infrastructure for the Delta platform in our Atlanta data center under a long-term agreement. We refer to these solutions and services as “Technology Services.” In addition, until April 2017, we owned 51% of IGT Solutions Private Ltd. (“IGTS”), a technology development services provider based in Gurgaon, India that was used for both internal and external software development. We divested our 51% interest in IGTS in April 2017.

 

We have a recurring, primarily transaction-based, revenue model. We do not take airline, hotel or other inventory risk, and we are not directly exposed to fuel price volatility or labor unions like our travel providers. Our recurring, transaction-based revenue model is primarily driven by discrete travel events such as Air or Beyond Air segments booked rather than the price of the booking, meaning we benefit from an increase in total global travel without being exposed to price changes. However, our results, like others in our industry, are dependent upon various levels of travel activity, particularly air travel, as well as our ability to obtain travel provider inventories, our ability to maintain existing relationships with travel agencies and our ability to deliver desired products and services.

 

Our ability to offer broad, high-quality and multi-product content on a single user interface encourages those booking travel to purchase additional products and services beyond the original Air or Beyond segment. For example, for every 100 air tickets sold in 2017, 46 hospitality segments were sold. The merchandising of additional products and services increases our revenue per transaction, and, consequently, we measure performance primarily on the basis of increases in both Reported Segments and RevPas (including Air and Beyond Air segments). Our recurring, transaction-based revenue model combined with high-quality content availability (which encourages incremental services booked with each transaction), our investment in our distribution and payment solutions technology and digital services and our multi-year contracts with travel providers and travel agents enabled us to grow our RevPas in each of the last 20 quarters on a year-over-year basis. We increased our RevPas from $5.19 in the first quarter of 2012 to $7.08 in the fourth quarter of 2017.

 

 4 

 

 

Company History

 

On September 30, 2014, we completed our initial public offering, and our common shares are traded on the New York Stock Exchange (“NYSE”) under the symbol “TVPT.”

 

We were incorporated in 2006 in Bermuda. Our principal executive offices are located at Axis One, Axis Park, Langley, Berkshire SL3 8AG, United Kingdom and our telephone number is +44-1753-288-000.

 

We continually explore, prepare for and evaluate possible transactions, including capital markets and debt transactions, acquisitions, divestitures, joint ventures and other arrangements, to ensure we have the most efficient and effective capital structure and/or to maximize the value of the enterprise. No assurance can be given with respect to the timing, likelihood or effect of any possible transactions.

 

Our Competitive Strengths

 

We believe that several aspects of our strategy fundamentally differentiate us from our competitors, including our focus on redefining travel distribution and commerce instead of investing in more capital and labor intensive airline and hospitality related IT solutions, our fast growing Beyond Air portfolio, including our automated B2B payments solution and digital services with large addressable markets, and our emphasis on a value-based partnership approach with travel providers that allows us to increase revenue and profitability per Reported Segment. The following attributes describe in further detail how we differentiate ourselves from our competitors.

 

Large and Structurally Growing Travel Market with Significant Exposure to Fast Growing Regions

 

The travel and tourism industry has shown continued strength as one of the world’s largest industries, contributing $7.6 trillion, or 10.2%, of the global GDP in 2016, according to The World Travel & Tourism Council (the “WTTC”). The industry is comprised of travel suppliers and buyers around the world, including airlines, hotels, car rental companies, rail carriers, cruise-lines, tour operators, online and offline travel agencies, travel management companies and corporate travel departments.

 

The travel and tourism industry is forecast to grow by 3.9% per annum over the next 10 years to reach $11.5 trillion contributing 11.4% of the global GDP by 2027, according to the WTTC. Global air passengers carried, one of the key underlying indicators for the wider travel and tourism industry, has been consistently growing from 1.7 billion passengers in 2000 to 3.7 billion in 2016 with a compound annual growth rate of 5.1%, according to the World Bank, demonstrating very low volatility and high resilience to unpredictable shocks from terrorist attacks, political instability health pandemics and natural disasters. IATA has forecasted air passenger demand to almost double over the next 20 years. Expected growth in air passenger demand is largely driven by increasing demand in the Asia Pacific, Latin America, Middle East and Africa regions, with total traffic expected to grow at compounded annual growth rates of 5.6%, 4.1%, 6.7% and 5.3%, respectively, from 2017 to 2036, according to Airbus.

 

Structural trends are largely driving, and are expected to continue to drive, growth in the travel and tourism industry. Emerging markets have contributed to a significant amount of the population growth around the globe and are forecasted to grow at a rate higher than developed nations through 2050, according to the Population Reference Bureau. Simultaneously, the middle class has expanded and increased consumption in emerging regions, with the gross national income per capita  having grown at compound annual growth rates of between 5 – 9% from 2000 to 2016, according to the World Bank. These trends, combined with airlines increasing their capacity in away markets and growing business travel driven by globalization, support continued air market growth.

 

Coupled with these structural tailwinds, increased demand for digitalization and technological differentiation is driving change in the travel and tourism industry. Travel buyers demand faster, more relevant and more personalized travel content to help reach their target customers and drive higher revenue per seat, per room and per rental. Our use of enabling technologies, such as APIs, cloud computing, data and analytics, machine learning and robotics allows us to ensure insights are available and translated into relevant, personalized and smarter responses, enabling travel buyers to realize efficiency gains and the ability to differentiate. Additionally, in the past, the travel industry has not met the need for a secure and efficient payment solutions using traditional means of payments as a primary means to settle transactions, but there has been increasing demand and usage of digital solutions to eliminate the associated risks.

 

We are well positioned to benefit from these favorable trends and significant growth potential of the travel and tourism industry. Being a well-diversified global player, we have significant exposure to the fastest growing regions, including Asia Pacific, Middle East and Africa and Latin America and Canada, which, in 2017, contributed 24%, 13% and 5%, respectively, of our Travel Commerce Platform revenue. We have strategically invested over $1.2 billion in technology over the past 5 years to address the increasing importance of these market trends. These investments have enabled us to diversify further away from traditional GDS services to a leading global travel commerce platform, providing our customers with payment solutions and other digital and technology services, in addition to the traditional GDS offering.

 

Leading and Differentiated Travel Commerce Platform Addressing the Evolving Needs of the Travel Industry

 

Travel providers need flexible systems to distribute and merchandise their increasingly sophisticated core products and broadening offerings of ancillary products and services. We offer them a portfolio of industry-leading, value-add tools to increase revenue, lower costs and efficiently reach travel buyers globally in every channel. Our global reach allows travel providers to display and sell products in approximately 180 countries and territories and across approximately 65,000 travel agency locations representing approximately 230,000 online and offline travel agency terminals worldwide. Our Travel Commerce Platform enables travel providers to (i) extend their distribution by broadening their geographic reach to away markets and connects them with higher value business travelers, (ii) access higher yielding ticket prices from long-haul segments, room rates, complex itineraries and business travelers and (iii) encourage travelers to purchase ancillary services and/or upgrade or upsell travelers through our highly-differentiated merchandising capabilities.

 

 5 

 

 

Our Travelport Merchandising Suite, consisting of three distinct solutions—Travelport Aggregated Shopping, Travelport Ancillary Services and Travelport Rich Content and Branding— offers a range of sophisticated travel sales and marketing capabilities that allow airlines to promote their products and services to the right buyers, at the right time and in the right place. Travelport Aggregated Shopping allows travel agencies to efficiently and directly compare results from network carriers, who deliver data through the traditional industry standard, airline tariff publishing company (“ATPCO”), which regularly updates traditional GDSs, with those from LCCs and other carriers who use an API connection to deliver data directly and in real time to us. Travelport Ancillary Services allow travel agencies to sell airline ancillaries, such as checked baggage, premium seats and lounge passes, directly through their existing interface rather than needing to book separately on an airline’s website. Travelport Rich Content and Branding allows airlines to more effectively control how their flights and ancillaries are visually presented and described on travel agency screens, bringing the display more in line with the airlines’ own website. This is especially valuable to airlines given the increasing importance of ancillary revenue for profitability and allows travel agencies to sell more effectively. The benefits also are available to customers connected to our leading API solutions, including Travelport Universal API. This means that OTAs, corporate booking tool providers or other travel consultants, who are designing their own customized user interfaces, can still understand an airline’s full value proposition, including its branded fares and ancillaries, in the same way as a customer connected to Travelport’s POS solution, Travelport Smartpoint, would. Our ability to help travel providers and travel agencies increase their revenue reinforces the value proposition of our Travel Commerce Platform when compared to alternative distribution channels and is a key part of our strategy to shift the focus of our relationship with travel providers from priced-focused to value-focused.

 

Our leading access to global travel provider content helps attract more travel agencies, both online and offline, as well as corporations and self-serve travelers, onto our platform, which in turn drives greater value for the travel providers, increasing their addressable customer base. Our leading POS solutions, such as Travelport Smartpoint, along with Travelport Branded Fares and Ancillaries, provide travel agencies with greater choice and detailed information on key differences between the products and services offered by travel providers, allowing them to provide more valuable insights to their customers, higher levels of customer service and improved sales productivity. Travelport Smartpoint is Travelport’s innovative POS solution that allows travel consultants to more effectively advise their customers about the entire range of products, optional services and offers available from the travel providers Travelport distributes, with fully interactive, graphical screen displays and real time booking. Travelport Smartpoint provides upselling and cross-selling opportunities through the integration of Travelport’s Rich Content and Branding merchandising solution for airlines. In addition, Travelport Smartpoint mirrors for travel agents the experience of consumers booking hotels and car rentals online by allowing them to access enhanced features, including pictures, comparisons and maps, all within the same workflow. This allows travelers to be better informed of the products available to them, the options that might exist, the cost of enhanced products and the ancillary products available to buy, which allows them to tailor their journey to their specific requirements. Utilization of our leading Travelport Smartpoint POS simplifies highly complex, high volume operations, freeing up more time for travel agencies to focus on the selling process.

 

In addition, our Travel Commerce Platform reduces operating costs for travel agencies by offering a single point of access to broad global travel content and by integrating critical data for back office, accounting and corporate customer reporting. Furthermore, our Travel Commerce Platform gives travelers a quick and easy way to compare a multitude of available travel options and obtain the true cost of a desired itinerary, buy ancillaries directly after the core booking has been made and provides greater control over itineraries through an option to add features at later stages in the travel process.

 

Stable, Resilient and Recurring Transaction-based Business Model with High Revenue Visibility and Strong Cash Flow Generation

 

Our operations are primarily founded on a transaction-based business model that ties our revenue to travel providers’ transaction volumes rather than the price paid by a consumer for airfare, hotel rooms or other travel products and services booked through our systems. Travel related businesses with volume-based revenue models have generally shown strong visibility, predictability and resilience across economic cycles because travel providers have historically sought to maintain traveler volumes by reducing prices in an economic downturn.

 

In general, our business is characterized by multi-year travel provider and travel agency contracts. Our base distribution agreements with travel providers are open-ended or rollover unless specifically terminated. In 2017, we had 59 planned airline contract renewals, and we successfully renewed substantially all such contracts. We currently have 50 and 77 planned airline contract renewals in 2018 and 2019, respectively, including contracts that rollover on an annual basis. We also enter into contracts with travel buyers, such as travel agencies and corporate travel departments. A meaningful portion of our travel buyer agreements, representing approximately 15% of our revenue on average, are up for renewal in any given year. The length of our contracts, as well as the transaction-based and recurring nature of our revenue, provides high revenue visibility going forward.

 

We generate strong cash flows on a consistent basis, with net cash provided by operating activities of $318 million and $299 million for the years ended December 31, 2017 and 2016, respectively. Drivers of our cash flows benefit from relatively modest capital expenditure requirements and attractive working capital position. Furthermore, the diversity of our business provides us with multiple independent revenue streams from various markets and channels that lessen the impact of potential strategic and geographic shifts within the industry. These characteristics, combined with the contractual nature of our revenue and costs, our leading industry position and our long-standing customer relationships provide for a strong and predictable stream of cash flows.

 

Fast Growing Portfolio of Beyond Air Initiatives

 

Our Travel Commerce Platform provides us with a foundation to offer a fast growing portfolio of additional products and services, which in turn results in additional revenue. Our Beyond Air portfolio includes distribution and merchandising solutions for hotel, car rental, rail, cruise-line and tour operators, payment solutions, digital services, advertising and other platform services.

 

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Independent hotels were largely unaddressed by the GDS industry; however, we integrate on one platform by combining the content from chain hotels captured by the traditional GDSs with independent hotel content our system accesses through our meta-search technology. In particular, our B2B solution, Travelport Rooms and More, is a single user interface that combines detailed product insights with meta-search functionality to deliver a fully-integrated hotel booking platform to travel agencies. Travelport Rooms and More captures highly fragmented content in one interface (including approximately 650,000 hotel properties) by combining content from large global OTAs with that from aggregators specializing in a particular geographic area. This streamlined and efficient interface also enables travel agencies to more easily upsell hotel content in a single, consistent and efficient workflow and user experience, as well as a new business travel booking app.

 

Travelport Hotelzon, a B2B hotel distribution technology provider, is part of our ongoing strategy to strengthen our hotel offering to both corporations and TMCs and make booking independent hotels easier for business travelers, including unmanaged travelers who do not use travel agencies. Many hotel bookings, especially for independent hotel properties, are still being booked direct by business travelers themselves. Through Travelport Hotelzon, we provide both corporations and Travelport-connected travel agencies with a best-in-class booking tool with extensive independent hotel content, complementing the extensive hotel chain content that has been in our system for many years. In turn, this also enables corporations to more easily track their employees while on business travel as part of their duty of care responsibilities. We have invested in Travelport Hotelzon’s technology and enhanced it with a user-friendly extranet that is uniquely positioned to capture independent hotels and privately negotiated corporate hotel rates that are provided to corporations.

 

We are an early adopter in automated B2B payments and are redefining payments from travel agencies to travel providers. We pioneered a new class of payments for the unmet needs of the travel industry that is focused on replacing cash and other payment methods with secure virtual pre-funded payment cards. eNett’s innovative, cost-efficient and secure travel payment solutions offer a strong value proposition to travel agencies and travel providers, including providing them with full flexibility, lower administrative cost due to significantly reduced time spent on reconciliation, rewards to travel agencies with incentive payments based on payment volumes and a lower spread for foreign currency payments. eNett exclusively utilizes Mastercard under a long-term arrangement, giving unparalleled access to the payment systems of virtually all the world’s travel providers who accept Mastercard as a form of payment. We believe the model is highly scalable as we expand beyond the core hospitality sector into air travel, including LCCs, as well as other sectors of the travel industry. We estimate that there is over $2 trillion of direct spending on travel annually, approximately $900 billion of which is booked through the indirect channel, and payment is made from travel agencies to travel providers.

 

Travelport Digital provides a mobile travel platform and digital product set that allows travel providers and travel agencies to engage with their customers through sophisticated, tailored mobile services, including apps, mobile web and intelligent mobile messaging. In response to increased demand for advanced mobile services at all stages of travel, Travelport has developed Travelport Fusion, a robust and rich mobile app solution for airlines of all sizes that can work across all host systems. Through Travelport Fusion, airlines can provide end-to-end trip engagement via mobile, allowing them to grow their revenues, streamline their operations and extend their digital engagement. For airlines that need highly customized mobile solutions adapted to their specific digital roadmap, Travelport Digital will continue to offer its unique and proven blend of market leading design, agile delivery and mobile customer engagement solutions. For travel agencies, we have developed Travelport Trip Assist, a mobile solution that brings the agency brand to the app store and a rich set of features directly into the end-traveler’s hands. This new mobile platform allows travel companies to better manage the travel experience through a powerful set of mobile tools available on iOS and Android, including a smart itinerary manager, a day of travel assistant, a push-notification engine, a real-time alert system and the ability to contact an agent from within the app. Through Travelport Locomote, we provide a corporate travel platform that empowers travel managers to drive change and achieve efficiencies. Travelport Locomote creates seamless experiences and integrated solutions from approval management to cost savings to duty of care. Customers control the entire travel program, enabling greater insight into travel expenditure.

 

In addition to hospitality, payment solutions and digital services, we utilize the broad connections and extensive data managed by our Travel Commerce Platform to provide advertising solutions to over 3,000 advertisers, which includes, among others, travel providers who use our advertising solutions to easily and cost-effectively promote upgrades, ancillary products or services, package deals and other offers and, as a result, more effectively merchandise their products and services to targeted customers. We give advertisers direct access to a captive professional audience across approximately 65,000 travel agency locations representing approximately 230,000 online and offline travel agency terminals worldwide, with a full-time focus on global travel bookings and cover all main domestic and international travel flows. In 2017, we generated over 9 billion advertising impressions. Our improved, graphically rich point of sale solutions provide increased capabilities and advertising space to display banner advertisements, add click through functionality and market ancillary products through our user interface.

 

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Innovative, Flexible and Scalable Open Technology Platform Tailored to Meet Evolving Industry Needs

 

Through our industry-leading technology platform, we have been able to maintain our position at the forefront of innovation by meeting the global demands of our travel agents and travel providers for speed, flexibility and convergence. Our technology-enabled solutions offer rich content through multiple distribution channels, such as Travelport Smartpoint. To address unmet industry needs, we made significant strategic investments in innovative technology over the last five years, and we continue to invest in developing new technologies, platforms and ideas, all on an open and accessible platform that delivers expansive content, improved performance, empowered travel experience and intelligence. Our open connectivity approach allows for fully-flexible access to content and services across a range of delivery mechanisms, from the latest IATA NDC and XML protocols to more traditional industry sources such as ATPCO. Our open platform allows us to pull together content delivered from multiple sources into a cohesive display for the travel buyer, enabling search, comparison, reservation and payment across multiple providers. We deliver our content and functionality through state-of-the-art POS tools, mobile solutions for the traveler or via our own leading APIs, including Travelport Universal API, which enables the flexibility for travel agencies and intermediaries to design customized user interfaces. In 2017, a broad network of approximately 1,700 developers utilized our Travelport Universal API to create their own applications and increase the robustness of our systems. Our POS tools are device agnostic, allowing travel agents to access our platform via internet connection on a desktop or a variety of mobile devices, such as smartphones and tablets. Travel consultants connecting to the Travelport Universal API also can access the same rich product descriptions and graphics, branded fare and ancillary content available in Travelport Rich Content and Branding. In 2017, our systems processed over 6 billion travel related system messages per day and approximately 18 billion API calls per month with 99.977% core system uptime using over 20,000 physical and virtual servers and had total storage capacity of approximately 16 petabytes. In addition, we operate our own in-house data center.

 

In recognition of the advantages provided by our open platform, we were the first among our competitors to offer Delta Air Lines’ full range of seating products. In addition, starting in 2013, we offered Travelport Aggregated Shopping through XML connectivity to airline content, which has enabled and encouraged leading LCCs such as AirAsia, easyJet, IndiGo and Ryanair to join our fully integrated Travel Commerce Platform. In 2013, we launched our innovative Travelport Merchandising Suite to enhance user experience and focus on the sale of ancillary products and services, which are becoming increasingly important for airlines’ profitability. In the hospitality industry, we were the first GDS to our knowledge to offer a one-stop portal for hotel content distribution powered by “meta-search” technology.

 

Balanced Global Footprint with Diversified Customer Base and Longstanding Relationships

 

We have a broad geographic footprint in the travel distribution industry. In 2017, we generated $2,341 million in Travel Commerce Platform revenue, of which 74% is international (with 24% from Asia Pacific, 32% from Europe, 5% from Latin America and Canada and 13% from the Middle East and Africa), and 26% is from the United States. Our geographically dispersed footprint helps insulate us from particular country or regional instability, allows for optimal IT 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. This strategically diversified geographic footprint allows us to focus on higher value transactions in the international travel segment. Our balanced network positions us well to benefit from global industry growth, while lessening the impact of potential geographic shifts within the industry. Our footprint also positions us as the challenger to the industry leader for air segments processed in each geographic region and provides us opportunities to grow our share.

 

We also have highly diversified, strong, long-standing relationships with both our travel providers and travel buyers. None of our travel buyers or travel providers accounted for more than 10% of our revenue for the year ended December 31, 2017. Our top 15 travel providers (by 2017 revenue) have been with us for more than ten years on average.

 

Proven and Motivated Management Team with Strong Track Record and Deep Travel and Technology Industry Expertise

 

Our management team has extensive travel and technology industry experience and is committed to improving and maintaining operational excellence by utilizing their in-depth knowledge of these industries. Their dedication and excellence has been demonstrated by improving our key business metrics and our capital structure improvements. Our management team’s compensation structure directly incentivizes them to improve business performance and profitability, and more than half of the compensation opportunity for our executive officers is equity-based in order to properly align the interests of our executive officers and shareholders.

 

Our management team is supported by a skilled, diverse, motivated and global workforce, comprised of over 4,000 full-time employees as of December 31, 2017. By investing in training and skills development for our employees, we seek to develop leaders with broad knowledge of our business, the industry, technology and customer-specific needs. We also hire externally as needed to bring in new expertise. Our combination of deep industry and company experience combined with the fresh perspective and insight of new hires across our management team creates a solid foundation for driving our business to success, profitability and industry leadership.

 

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Our Growth Strategies

 

We believe we are well positioned for future growth. Our balanced geographic footprint aligns us with anticipated industry growth across geographies, and we expect trends such as the increasing importance of ancillary revenue, the need of travel providers to personalize their offers to travelers, expansion by LCCs into the business travel industry, continued penetration by GDSs into hospitality distribution and growth of B2B travel advertising to further underpin our growth. We continue to make significant strategic investments in innovative technology, platforms and ideas, all on an open and accessible multi-source platform that delivers expansive content, improved performance, empowered travel experiences and intelligence and improved service. Our focused strategy in search technology, including speed of search and relevance and bookability of search results, ensures we are positioned to manage the continued growth in the industry, particularly through mobile customer engagement, while maintaining a low cost to serve. By leveraging cloud, machine learning, mobile-enabled APIs and data and analytics, we can ensure insights are available and translated into personalized and smarter responses for the customer. We continue to leverage our domain expertise and relationships with travel providers to grow eNett and Travelport Digital. We will continue to evaluate and pursue strategic acquisition opportunities that enhance our Travel Commerce Platform. Our strategic capital investments, current product portfolio and strategic positioning enable us to benefit from industry trends, and we intend to capitalize further on these industry trends by focusing on the following initiatives:

 

Driving Beyond Air Innovation and Growth

 

Our fast growing Beyond Air portfolio includes hospitality, payment solutions, digital services, advertising and other platform services. Given growth rates and the underpenetrated nature of these areas, we believe we can grow our Beyond Air portfolio at a multiple to overall travel industry growth by continuing to strategically invest in the development of state-of-the-art capabilities in order to achieve a leading industry position.

 

Hospitality: Through our leading meta-search capabilities, we are increasing our presence among independent hotels. In addition, we provide superior chain hotel content to OTAs relative to our competitors by providing direct XML connectivity. Our strategy to grow in hospitality distribution is also focused on delivering corporate access to aggregated hotel content, including both chain and independent hotels through a single point of sale. The Travelport Hotelzon solution also works well when a corporate hotel booking is not an ‘add on’ to an air booking, which is particularly the case for travel within Continental Europe, where many business trips actually take place in the traveler’s home country or to bordering countries, and trains and cars are often the preferred method of transport rather than flights. Through Travelport Hotelzon’s technology, privately negotiated rates for corporations can be added and accessed directly by the corporation and its employees.

 

Our strategy is to continue to build on our extensive car rental content offering for travel agencies. Our travel agencies have access to more choice of car content, as well as the ability to search and book content from smaller regional car rental companies.

 

Payments Solutions: Our strategy for eNett is to continue growing the scale of the business through further investment in operational capabilities, new products, sales and marketing and targeted geographic expansion. We plan to further capitalize on our early adopter advantage to address the travel industry’s previously unmet needs for a secure and efficient payment solution. Our Travel Commerce Platform allows us to leverage our extensive network of travel agencies to grow the penetration rate for eNett payments.

 

Digital Services: We have a strong focus on mobile commerce, providing a wide range of services that allows airlines, hotels, corporate TMCs and travel agencies to engage with their customers through digital services, including apps, corporate booking tools and mobile messaging. We develop robust and rich mobile app solutions for airlines of all sizes that can provide end-to-end trip engagement and a mobile solution for travel agencies that allows travel companies to better manage the end-user travel experience through a powerful set of mobile tools available on iOS and Android, including a smart itinerary manager, a day of travel assistant, a push-notification engine, a real-time alert system and the ability to contact an agent from within the app. We offer a corporate travel platform that empowers travel managers to drive change and achieve program efficiencies. It is more than an online booking tool and provides a range of app-powered workflows that consolidate the entire travel lifecycle.

 

Advertising: Our strategy is to focus on the B2B advertising opportunity by targeting travel agencies. Hotel advertising will remain our core offering, but other advertising categories (especially air) also represent areas for growth, which we believe we are well positioned to capitalize on through our Travel Commerce Platform.

 

Other Platform Services: Our strategy is to develop new insights into travel behaviors that will allow us to improve our 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.

 

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Expand Platform Capabilities and Reach

 

We are well positioned in both the high-value, complex segment of air travel distribution, as well as the growing LCC segment, which is characterized by its larger number of business travelers, complex itineraries and international bookings. Our strategy to grow our platform focuses on providing state-of-the-art solutions to address the changing manner in which airlines, hotel chains and car rental companies are positioning and selling their products and services. Our Travel Commerce Platform provides us the foundation to offer a wide-ranging and expanding portfolio of differentiated products and services.

 

We intend to focus on the following strategies to drive growth across our Travel Commerce Platform:

 

Growth through Retailing, Personalization and Merchandising Capabilities: In order to address the growing importance for travel providers of flexible systems to distribute and merchandise their increasingly sophisticated core products and broadening offerings of ancillary products, we have heavily invested in our Travelport Merchandising Suite to more effectively market and sell products and services. The Travelport Merchandising Suite, which includes our Rich Content and Branding airline merchandising solutions, integrates XML content with traditional content in a graphically rich, single user interface and, together with our sourced travel content, including air, hotel and car rental options, is fully accessible to all customers and channels. These customers include our global network of offline travel agencies, as well as OTAs, corporate travelers who prefer to self-serve and use corporate booking tools and developers who are part of our developer community. The online channel is able to connect to this content and functionality via our leading APIs, including our Travelport Universal API.

 

Our Rich Content and Branding airline merchandising solutions allow for more flexible and effective distribution and merchandising of both core travel content and ancillary products and services, resulting in a higher value proposition for both network carriers and LCCs, while facilitating travel agencies to upsell more content efficiently. As of December 31, 2017, we have over 250 airlines utilizing our Rich Content and Branding solution with approximately 20 more contracted. We will continue to target additional airlines with this solution suite. In addition, increasing the sale of ancillaries through our platform not only results in additional transaction revenue, but also helps us attract new content from carriers. We intend to continuously invest in our retailing and ancillary merchandising capabilities and grow by partnering with both traditional carriers and LCCs.

 

Growth through Technologies that Enhance Performance: Artificial intelligence, machine learning and more sophisticated API-connected platforms are powering better speed, relevance and accuracy of search and automating services across all touchpoints of the traveler journey, allowing travel providers and buyers to connect with customers more efficiently. We continue to invest in these technologies to address the needs of travel buyers. Our continued investment in our search capabilities, data analytics, state of the art mobile interfaces, robotics and automation will drive greater customer conversion and business efficiency.

 

LCC Participation Growth: As LCCs continue to evolve and look for further growth opportunities, they seek to expand their offering to higher yield customers, mainly business travelers. 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 AirAsia, easyJet, IndiGo and Ryanair into our Travel Commerce Platform. We view the expansion of LCCs into the business travel segment as a significant growth opportunity for us, and we will continue building our offering to win their business.

 

Targeted Geographic Expansion: Because the ability to increase away segments provides more revenue to airlines, away segments attract a premium to home segments, a dynamic that will benefit our performance as this trend continues. Furthermore, due to our balanced global footprint, we are well placed to benefit from global airline capacity shifts and increased LCC participation. We will continue to grow our international business and will focus on expanding into new emerging regions such as Africa, Latin America and Eastern Europe.

 

Business Travel Growth: Our strategy to grow in the business travel space is focused on investing in products that distribute travel technology solutions directly to corporations, allowing them to easily access and book travel content that incorporates their travel management policies directly through our platform. The demographic make-up of corporate travelers is changing rapidly, with many now preferring to self-serve and use their mobile devices rather than booking travel through more traditional methods. We intend to be at the forefront of these changes as we deploy our content and digital technology assets to address them. Our investments to support the growth and changes we are seeing in the business travel sector include Travelport Hotelzon, a B2B hotel distribution technology provider focused on corporates, which has made booking independent hotels and accessing privately negotiated corporate hotel rates more efficient for business travelers. Through Travelport Locomote, we are focused on empowering corporate travelers through an improved mobile user experience. The Travelport Locomote platform provides solutions for all corporate travel management needs, including travel authorization and policy compliance, flexibility to change bookings, and more efficient back-office reconciliation. We will continue to develop our offering in the business travel space, as well as strengthening our partnerships with TMCs and we will look at new opportunities to invest in products that distribute travel technology solutions directly to corporations.

 

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Expanded Mobile Engagement: Travelers increasingly expect brands and businesses to meet their expectations of “connectedness”. This means to be present, active, useful and available at every stage of the travel journey. Through Travelport Digital, which we believe to be the world’s leading provider of innovative mobile apps development and digital services in the travel industry, we design, build and power the mobile experience for many of the world’s leading travel brands, including BCD Travel, easyJet, Etihad and Singapore Airlines. We will continue to invest in developing innovative mobile technologies that allow travel providers and travel agencies to engage with their customers through sophisticated, tailored mobile services, including apps, mobile web and intelligent mobile messaging.

 

Focus on Distribution Technology Leadership and Differentiated Products

 

Achieving growth in our Travel Commerce Platform is predicated on our continued investment in developing advanced technologies and differentiated products to maintain our competitive position. We intend to continue our strong commitment to product innovation and technological excellence to maintain our state-of-the-art product portfolio and preserve our early adopter advantage in several key growth areas, such as the sale of ancillaries, B2B travel payments solutions, digital services, hospitality merchandising and advertising. We plan to continue offering rich travel content and empowered selling experiences on an open platform with service oriented architecture and industry leading APIs, and plan to continue to focus on developing a diverse application set to consistently increase the value of our Travel Commerce Platform to our customers. We are exploring new adjacencies that will allow us to improve our products and data offerings to our customers and develop insights into travel behaviors. We have chosen not to focus our resources on more capital and labor intensive airline and hospitality related hosting solutions. Instead, we focus on distribution products, payment related solutions and digital services. Our ability to offer differentiated, high value products and services allows us to shift the focus of our dialogue with travel providers from price to value, leading to higher RevPas.

 

In February 2017, we named Tata Consultancy Services (“TCS”), part of the Tata Group and a leading global IT services, consulting and business solutions organization, as our primary technology partner. TCS was selected in recognition of its strengths in the global travel industry and its ability to work alongside us and provide scale in application engineering and assurance services. Through this appointment, we have rationalized the number of third-party IT development companies with whom we work. At the same time, we have consolidated our U.S. technology hubs into two centers in Atlanta and Denver. Our increased investment in technology forms an integral part of our overall growth plan and long-term strategy.

 

Travel Providers

 

Our relationships with travel providers extend to airlines, hotels, car rental companies, rail networks, cruise-line and tour operators. Travel providers are offered varying levels of services and functionality at which they can participate in our Travel Commerce Platform. These levels of functionality generally depend upon the travel provider’s preference as well as the type of communications and real-time access allowed with respect to the particular travel provider’s host reservations and other systems.

 

We provide air distribution services to approximately 400 airlines globally, including approximately 125 LCCs. We distribute ancillaries for over 100 airlines. We have relationships with approximately 310 hotel chains, representing approximately 145,000 hotel properties, which provide us with live availability and instant confirmation for bookings, in addition to approximately 15 hotel aggregators resulting in an aggregate of approximately 650,000 hotel properties bookable through Travelport Rooms and More. In addition, we serve over 38,000 car rental locations, approximately 50 cruise-lines and tour operators and 14 major rail networks worldwide.

 

The table below lists alphabetically our largest airline providers in the regions presented for the year ended December 31, 2017, based on revenue:

 

Asia Pacific      Europe      Latin America and 
Canada 
    Middle East and 
Africa 
    United States 
Air India     Aeroflot Airlines     Aeromexico     Emirates Airlines     Alaska Airlines
Jet Airways     Alitalia Airlines     Aerovias DAP     Ethiopian Airlines     American Airlines
Qantas Airways     British Airways     Air Canada     Qatar Airways     Delta Air Lines
Singapore Airlines     Lufthansa Airlines     LATAM Airlines     South African Airways     Hawaiian Airlines
Thai Airways     TAP Portugal     WestJet     Turkish Airlines     United Airlines

 

The majority of our agreements remain in effect each year, with exceptions usually linked to airline mergers or insolvencies. In 2017, we had 59 planned airline contract renewals, and we successfully renewed substantially all such contracts. We currently have 50 and 77 planned airline contract renewals in 2018 and 2019, respectively, including contracts which roll on an annual basis. Our top fifteen travel providers as measured by revenue for the year ended December 31, 2017, all of which are airlines, have been customers on average for more than ten years. For the year ended December 31, 2017, our top ten travel providers represented approximately 23% of revenue, and no single provider accounted for more than 10% of revenue.

 

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We have entered into a number of specific-term agreements with airlines across the globe to secure all of the airline’s public content. These content agreements allow our travel agencies to have access to the full range of our airline providers’ public content, including the ability to book the last available seat, as well as other functionalities. We have secured full-content or distribution parity agreements with approximately 165 airlines, including LCCs. Revenue attributable to these agreements comprised 77% of Air revenue in the year ended December 31, 2017. Certain full-content agreements expire, or may be terminated, during 2018.

 

We have approximately 125 airlines that we classify as LCCs participating in our Travel Commerce Platform around the world, including AirAsia, easyJet, IndiGo and Ryanair. Revenue from LCCs accounted for less than 5% of our total Air revenue in 2017.

 

Our top hotel providers for the year ended December 31, 2017 were Hilton, Intercontinental Hotels Group and Marriott Hotels.

 

Our top car rental company providers by brand for the year ended December 31, 2017 were Advantage/EZ Group, Avis, Enterprise and Hertz. We provide electronic ticket distribution to 14 major international and national rail networks, including Amtrak (United States), Deutsche Bahn (Germany), Eurostar Group (United Kingdom/France) and Société Nationale des Chemins de Fer France (SNCF) (France).

 

Travel Agencies

 

As of December 31, 2017, approximately 65,000 travel agency locations representing approximately 230,000 online and offline travel agency terminals worldwide use us for travel information, booking and ticketing capabilities, travel purchases, workflow automation and management tools for travel information and travel agency operations. Access to our Travel Commerce Platform enables travel agencies to electronically search travel related data such as schedules, availability, services and prices offered by travel providers and to book travel for end customers.

 

Our Travel Commerce Platform also facilitates travel agencies’ internal business processes such as quality control, operations and financial information management. Increasingly, this includes the integration of products and services from independent parties that complement our core product and service offerings, including a wide array of mid- and back-office service providers. We also provide technical support, training and other assistance to travel agencies, including numerous customized access options, productivity tools, automation, training and customer support focusing on process automation, back-office efficiency, aggregation of content at the desktop and online booking solutions. In addition, we provide business intelligence and data solutions to our travel agencies.

 

Our relationships with travel agencies typically are non-exclusive, meaning they subscribe to and have the ability to use more than one GDS but may require a substantial portion to be booked through our Travel Commerce Platform. We pay travel agencies a commission for segments booked on our Travel Commerce Platform and, in order to encourage greater use of our Travel Commerce Platform, we may pay an increased commission based on negotiated segment volume thresholds. Travel agencies or other customers in some cases pay a fee for access to our Travel Commerce Platform or to access specific services or travel content. Our travel agencies comprise online, offline, corporate and leisure travel agencies. Our largest OTA customers, by revenue, in 2017 included Expedia, Inc. (“Expedia”), which includes Orbitz Worldwide, and Priceline. Our largest business travel agencies in 2017 included American Express Global Business Travel, Carlson Wagonlit Travel and Flight Centre Limited. Our largest leisure travel agencies in 2017 included Connexions Loyalty Travel Solutions and GTT Global/USA Gateway. For the year ended December 31, 2017, our top ten travel agencies represented approximately 22% of revenue, and no single travel agency customer accounted for more than 10% of revenue. Travel agency contracts representing approximately 27%, 11% and 62% of 2017 revenue are up for renewal in 2018, 2019 and beyond, respectively.

 

Competition

 

Travel Commerce Platform

 

The marketplace for travel distribution is large, multi-faceted and highly competitive. We compete with a number of travel distributors, including:

 

traditional GDSs, such as Amadeus IT Group SA (“Amadeus”) and Sabre Corporation (“Sabre”);

 

local distribution systems that are primarily owned by airlines or governmental entities and operated predominately in their home countries, including TravelSky in China, Infini in Japan and Sirena Travel in Russia;

 

travel providers that use direct distribution, including through the use of travel provider websites and mobile applications;

 

corporate booking tools, including Concur Technologies, GetThere, Deem, KDS, eTravel and Egencia (although most corporate booking tools interface with a GDS to access the content and functionality offered by the GDS); and

 

other participants, including Kayak, TripAdvisor, Yahoo! and Google, which have launched business-to-consumer travel search tools (although bookings are often fulfilled through a GDS) that connect travelers with direct distribution channels and OTAs.

 

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While many of the products and services offered by non-GDSs offer some of the functionality and integration provided by our Travel Commerce Platform, we believe none of them offer the full functionality and integration we offer, including serving the end consumer who desires to explore all booking options. Among industry participants with a traditional GDS, we believe our Travel Commerce Platform differentiates us from our competitors. We believe that competition in the industry is based on the following criteria:

 

the timeliness, reliability and scope of travel inventory and related content;

 

service, reliability and ease of use of the system;

 

the number and size of travel agencies and the fees charged by a GDS and incentives and loyalty payments made to travel agencies;

 

travel provider participation levels, inventory and the transaction fees charged to travel providers;

 

the range of products and services that deliver efficiencies that are available to travel providers and travel agencies; and

 

geographical reach, consistency of data and content, cross border capabilities and end traveler and corporation servicing.

 

GDS Transacted Air Segments: According to our view of the GDS air market, which is based on all air-related transactions processed on GDS platforms as reported by Marketing Information Data Tapes (“MIDT”), our share for the years ended December 31, 2017 and 2016 amounted to 22% and 23%, respectively.

 

Payment Solutions

 

While we believe eNett redefined payments from travel agencies to travel providers, there are currently multiple ways to settle travel payments from travel agencies to travel providers. Traditional methods of settling travel payments include:

 

cash and check;

 

consumer cards, corporate cards, lodge cards and bank-issued VANs; and

 

wire transfers and Electronic Funds Transfer (“EFT”).

 

In addition to the traditional methods to settle travel payments, eNett’s principal competitor is WEX Inc.

 

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Technology Services

 

The technology services sector of the travel industry is highly fragmented by service offering, including hosting solutions, such as internal reservation system services, as well as flight operations technology services and software development services. For example, sector participants include Amadeus, HP Enterprise Services, Sabre, SITA and Google, as well as airlines that provide the services and support for their own internal reservation system services and also host external airlines.

 

Sales and Marketing

 

Our SMOs and national distribution companies (“NDCs”) are organized by country or region and are typically divided between the new account teams, which seek to add new travel agencies to our Travel Commerce Platform, and account management teams, which service and expand existing business. Our SMOs are wholly-owned and represented approximately 70% of our Travel Commerce Platform revenue in 2017. We continue to utilize NDCs in certain regions where our appointed distributor either provides specialized expertise in the technology or in the countries or local regions in which they operate for us. We also contract with new NDCs in countries and regions where doing so would be more cost-effective than establishing an SMO. Our top ten NDCs generated approximately 12% of our Travel Commerce Platform revenue in 2017, and no single NDC accounted for more than 5% of revenue.

 

We have dedicated teams that cover sales, marketing, product and application development for air commerce, agency commerce and hospitality. eNett and Travelport Digital work closely with the Travel Commerce Platform SMOs to realize cross-sale opportunities.

 

Technology

 

Achieving growth for our Travel Commerce Platform is predicated on our continued investment in developing advanced technologies and differentiated products to maintain our competitive position. We intend to continue our commitment to product innovation and technological excellence to maintain our product portfolio and preserve our early adopter advantage in several key growth areas, such as the sale of ancillaries, B2B travel payment solutions, digital services, hospitality merchandising and advertising. We plan to continue offering rich travel content on an open platform with service oriented architecture and an industry leading APIs, and are also focused on developing a diverse application set to consistently keep increasing value of our Travel Commerce Platform to our customers. We are developing new insights into travel behaviors that will allow us to improve our products and data offerings to our customers. We have chosen not to focus our resources on more capital and labor intensive airline and hospitality related IT solutions. Instead, we focus on distribution products, payment solutions, digital services and technology services. For example, we offer Travelport Aggregated Shopping through XML connectivity to airline content, which has enabled and encouraged leading LCCs such as AirAsia, easyJet, IndiGo and Ryanair to join our fully integrated Travel Commerce Platform, and have focused on providing superior chain hotel content to OTAs relative to our competitors by directly connecting via XML to key hotel chains. Our ability to offer differentiated, high value products and services allows us to shift the focus of our dialogue with travel providers from price to value, leading to higher revenue per transaction.

 

Our operations are supported from two data centers in the Atlanta, Georgia metropolitan area:  a primary facility south and a second site north of Atlanta.  The primary data center environment offers customers one of the industry’s most powerful, reliable and responsive travel distribution and hosting platforms and is supported by the secondary site, which provides backup data storage and additional processing resources. Continued modernization of both technical environments is an integral part of our aim to support growth by efficiently delivering distribution systems to our customers. We believe that our data centers are state-of-the-art facilities that have completed comprehensive technology upgrades to current network, processing and storage platforms. The facilities feature technology platforms that we believe lead the industry in terms of functionality, performance, reliability and security. The existing systems are certified compliant with the Payment Card Industry Data Security Standard (“PCI-DSS”), an information security standard for organizations that handle branded credit cards from the major credit card schemes, offering a secure environment for operations and have operated at a 99.977% core systems uptime. In 2017, our systems processed over 2 trillion messages, over 6 billion travel related system messages per day and approximately 18 billion API calls per month. Our data center uses over 20,000 physical and virtual servers and has total storage capacity of approximately 16 petabytes.

 

Intellectual Property

 

We regard our technology and other intellectual property as critical components and assets of our business. We protect our intellectual property rights through a combination of copyright, trademark and patent laws, and trade secret and confidentiality laws and procedures, as well as database rights, where applicable. We own and seek protection of key technology and business processes and rely on trade secret and copyright laws to protect proprietary software and processes. We also use confidentiality procedures and non-disclosure and other contractual provisions to protect our intellectual property assets. We rely on appropriate laws to protect the ownership of our data and databases.

 

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Where appropriate, we seek statutory and common law protection of our material trade and service marks. The laws of some foreign jurisdictions, however, vary and offer less protection than other jurisdictions for our proprietary rights. Unauthorized use of our intellectual property could have a material adverse effect on us, and there is no assurance that our legal remedies would adequately compensate us for the damages caused by such unauthorized use.

 

We rely on technology that we license or obtain from third parties to operate our business. Vendors that support our core GDS technology include IBM, CA, Inc., SAS Group, Inc., Cisco Systems, Inc., EMC Corporation and Red Hat, Inc. In 2010, we obtained licenses to our Transaction Processing Facility operating system from IBM. Associated software, maintenance and support are available through December 31, 2019 under an agreement with IBM, and we expect such services will continue to be available to us after December 31, 2019.

 

Employees

 

As of December 31, 2017, we had over 4,000 full-time employees. None of our employees in the United States are subject to collective bargaining agreements governing employment with us. In certain of the European countries in which we operate, we are subject to, and comply with, local law requirements in relation to the establishment of work councils. In addition, due to our presence across Europe and pursuant to an E.U. Directive, we have a Travelport European Works Council in which we address E.U. and enterprise-wide issues. We believe that our employee relations are good.

 

Seasonality

 

Our business experiences 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.

 

Segments

 

We have two operating segments, Travelport and eNett, that we report together as one reportable segment. See footnote 19—Segment Information to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

 

Government Regulation

 

In the countries in which we operate, we are subject to or affected by international, federal, state and local laws, regulations and policies, including anti-bribery rules, trade sanctions, data privacy requirements, labor laws and anti-competition regulations, which are constantly subject to change. In addition, certain government trade sanctions affect our ability to operate in Cuba, Iran, Syria and Crimea. The descriptions of the laws, regulations and policies that follow are summaries and should be read in conjunction with the texts of the laws and regulations. The descriptions do not purport to describe all present and proposed laws, regulations and policies that affect our businesses.

 

We believe that we are in material compliance with these laws, regulations and policies. Although we cannot predict the effect of changes to the existing laws, regulations and policies or of the proposed laws, regulations and policies that are described below, we are not aware of proposed changes or proposed new laws, regulations and policies that will have a material adverse effect on our business.

 

Industry Regulations

 

Our business is subject to GDS industry specific regulations, including, but not limited to, relevant regulations in the E.U., India and China. Additionally, eNett operates in the highly regulated financial services industry.

 

Historically, regulations were adopted in the E.U. to guarantee consumers access to competitive information by Computer Reservation Systems (“CRSs”) (then owned by individual airlines) and to provide travel agencies with unbiased displays and rankings of flights. Under the current E.U. CRS Regulations, GDSs and airlines are free to negotiate booking fees charged by GDSs and the information content provided by the airlines. The E.U. CRS Regulations include provisions to ensure a neutral and non-discriminatory presentation of travel options in the GDS displays and to prohibit the identification of travel agencies in MIDT data without their consent. The E.U. CRS Regulations also require GDSs to display rail or rail/air alternatives to air travel on the first screen of their principal displays in certain circumstances. In addition, to prevent parent carriers of GDSs from hindering competition from other GDSs, parent carriers will continue to be required to provide other GDSs with the same information on their transport services and to accept bookings from another GDS.

 

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Although most GDS regulations in the United States (which only covered airline distribution) expired as of July 2004, the U.S. Department of Transportation, or DOT, continues to regulate GDSs with regard to certain practices that the DOT has identified as “unfair or deceptive” practices relating to airfare display.

 

In 2010, new Civil Aviation Requirements were issued by the Government of India to regulate CRSs operating in India for the purpose of displaying or selling air services, to promote fair competition in the airline sector and to ensure that consumers do not receive inaccurate or misleading information on airline services.

 

On October 1, 2012, the Interim Regulations on Administering the Permit of Direct Access to and Use of Foreign Computer Reservation System by Foreign Airlines’ Agents in China were published by the Civil Aviation Administration of China, or CAAC, and became effective on that date. The key element of the new regulations is the introduction of a permit scheme whereby foreign airlines are able to apply to CAAC for approval to allow Chinese-based travel agencies to access their nominated foreign CRS provider’s system for the purpose of making international bookings.

 

Because eNett operates an innovative payments solution, the regulatory environment for eNett products and services varies from country to country. In November 2013, eNett was granted a financial services license in Australia by the Australian Securities and Investments Commission. In January 2016, eNett was granted a money service operator services license in Hong Kong by the Customs and Excise Department of Hong Kong. The E.U. has enhanced its regulatory framework with the second Payment Services Directive and national implementing legislation, much of which has come into force in January 2018. In the E.U, eNett partners with its banking service provider and minority joint venture partner, Optal Financial Limited (“Optal”), and other regulated entities to limit its obligation to be regulated as a financial services provider with regard to its management of client funds. In jurisdictions where eNett’s operations are regulated, the regulations generally require licensing, insurance, systems and controls, client identification checks, and/or compliance staffing. Any violation of these regulatory requirements could compromise licenses and lead to financial penalties, imposed changes to systems and controls, closer monitoring, and detailed regulatory reviews.

 

We are also subject to regulations affecting issues such as international trade.

 

Privacy and Data Protection Regulations

 

Privacy regulations continue to evolve and on occasion may be inconsistent from one jurisdiction to another. Most states in the United States have enacted laws that provide for penalties for failure to notify customers when security is breached, even by third parties.

 

Many countries have enacted or are considering legislation to regulate the protection of private information of consumers. In the United States, significant legislation is pending at the federal level. We cannot predict whether any of the proposed privacy legislation currently pending will be enacted and what effect, if any, it would have on our business.

 

In Europe, the E.U. Data Protection Directive 95/46/EC of the European Parliament and Council (October 24, 1995), or the E.U. Data Protection Directive, will be repealed and replaced with the General Data Protection Regulation (“GDPR”) on May 25, 2018. The GDPR is intended to unify and elaborate upon the requirements for handling the personal data of E.U. data subjects and requires companies doing business in E.U. member states to comply with its standards. Similar to the E.U. Data Protection Directive, the GDPR provides for, among other things, specific regulations requiring all non-E.U. countries doing business with E.U. member states to provide adequate data privacy protection when processing personal data from any of the E.U. member states. The E.U. has enabled several means for U.S.-based companies to comply with the E.U. requirements, including a set of standard form contractual clauses for the transfer of personal data outside of Europe. We have instituted a multi-functional GDPR program to review, achieve and document compliance with GDPR’s operational requirements by the regulations’ effectiveness in May 2018.

 

We rely upon model contracts as one legal mechanism for the transfer of personal data to our U.S. data center. These contracts originally were published by the European Commission with an adequacy finding and have been executed between our European affiliates and our U.S. data processing companies.

 

The CRS Regulations in force in Europe also incorporate personal data protection provisions that, among other things, classify GDSs as data controllers under the E.U. Data Protection Directive. The data protection provisions contained in the CRS Regulations are complementary to E.U. national and international data protection and privacy laws.

 

Many other countries have adopted data protection regimes. We monitor further legal developments and enforcement practices by data protection authorities.

 

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Iran Sanctions Disclosure

 

As part of our global business in the travel industry, we provide certain passenger travel related Travel Commerce Platform and Technology Services to Iran Air. We also provide certain Technology Services to Iran Air Tours. All of these services are either exempt from applicable sanctions prohibitions pursuant to a statutory exemption permitting transactions ordinarily incident to travel or, to the extent not otherwise exempt, specifically licensed by the U.S. Office of Foreign Assets Control. Subject to any changes in the exempt/licensed status of such activities, we intend to continue these business activities, which are directly related to and promote the arrangement of travel for individuals.

 

The gross revenue and net profit attributable to these activities for the year ended December 31, 2017 were approximately $482,000 and $344,000, respectively, and $571,000 and $411,000 for the year ended December 31, 2016, respectively.

 

Company Information

 

Our principal executive office is located at Axis One, Axis Park, Langley, Berkshire SL3 8AG, United Kingdom, and our telephone number is +44-1753-288-000. We file electronically with the Securities and Exchange Commission (the “SEC”) required reports on Form 8-K, Form 10-Q and Form 10-K, proxy materials, ownership reports for insiders as required by Section 16 of the Securities Exchange Act of 1934, registration statements and other forms or reports as required. Certain of our officers and directors also file statements of changes in beneficial ownership on Form 4 with the SEC. The public may read and copy any materials that we have filed with the SEC at the SEC’s Public Reference Room located at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Such materials also may be accessed electronically on the SEC’s Internet site (sec.gov). We maintain a website (travelport.com), and copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Section 16 reports, proxy materials and any amendments to these reports filed or furnished with the SEC are available free of charge in the Investor Relations section of our website, as soon as reasonably practicable after filing with the SEC. Copies of our Board committee charters, Codes of Conduct and Ethics, Corporate Governance Guidelines and other corporate governance information are also available on our website. If we decide to amend any of our Board committee charters, Codes of Conduct and Ethics or other corporate governance document, copies of such amendments will be made available to the public through our website. Investors and others should note that we announce material financial information to our investors using our investor relations website (http://ir.travelport.com), SEC filings, press releases, public conference calls and webcasts. We use these channels, as well as social media, to communicate with our shareholders and the public about our company, our services and products and other issues. It is possible that the information we post on social media could be deemed to be material information. Therefore, we encourage investors, the media, and others interested in our company to review the information we post on these various channels. The information contained on our website or social media is not included in, or incorporated by reference into, this Annual Report on Form 10-K.

 

ITEM 1A. RISK FACTORS

 

The following is a cautionary discussion of the most significant risks, uncertainties and assumptions that we believe are significant to our business and should be considered carefully in conjunction with all of the other information set forth in this Annual Report on Form 10-K. If any of the risks described below actually occur, our business, financial condition and results of operations could be materially adversely affected. Based on the information currently known to us, we believe that the following information identifies the most significant risk factors affecting us in each of these categories of risk. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business, financial condition and results of operations. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions. Past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods.

 

Risks Relating to Our Business

 

Market and Industry Risks

 

Our revenue is derived from the global travel industry and a prolonged or substantial decrease in global travel volume, particularly air travel, as well as other industry trends, could adversely affect us.

 

Our revenue is derived from the global travel industry. As a result, our revenue is directly related to the overall level of travel activity, particularly air travel volume, and is therefore significantly impacted by declines in, or disruptions to, travel in any region due to factors entirely outside of our control. Such factors include:

 

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global security issues, political instability, acts or threats of terrorism, including those that target the travel industry, hostilities or war and other political issues that could adversely affect global air travel volume;

 

epidemics or pandemics, such as the Zika virus, the ebola virus and Severe Acute Respiratory Syndrome and;

 

natural disasters, such as hurricanes, volcanic activity and resulting ash clouds, earthquakes and tsunamis;

 

general economic conditions, particularly to the extent that adverse conditions may cause a decline in travel volume, such as the crisis in the global credit and financial markets, diminished liquidity and credit availability, declines in consumer confidence and discretionary income, declines in economic growth, increases in unemployment rates and uncertainty about economic stability;

 

the impact on business conditions worldwide as a result of political decisions, including the U.K.’s decision to leave the E.U.;

 

the financial condition of travel providers, including airlines, hotels and car rental providers and the impact of any changes such as travel provider bankruptcies or mergers, on the cost and availability of air travel and hotel rooms;

 

changes to laws and regulations governing the airline and travel industry and the adoption of new laws and regulations detrimental to operations, including potential enhanced travel restrictions;

 

fuel price escalation or availability;

 

work stoppages or labor unrest at any of the major airlines or other travel providers or at airports;

 

increased security, particularly airport security, that could reduce the convenience of air travel;

 

travelers’ perception of the occurrence of travel related accidents, of the environmental impact of air travel, particularly in regards to CO2 emissions, or of the scope, severity and timing of the other factors described above; and

 

changes in hotel occupancy rates.

 

If there were to be a prolonged substantial decrease in travel volume, particularly air travel volume, for these or any other reason, it would have an adverse impact on our business, financial condition and results of operations.

 

The travel industry is highly competitive, and we are subject to risks relating to competition that may adversely affect our performance.

 

Our business operates in highly competitive industries. If we cannot compete effectively, we may lose share to our competitors, which may adversely affect our financial performance. Our continued success depends, to a large extent, upon our ability to compete effectively in industries that contain numerous competitors, some of which may have significantly greater financial, marketing, personnel and other resources than us.

 

Our Travel Commerce Platform has two different primary categories of customers, namely travel providers, which provide travel content, and travel agencies, which shop for and book that content on behalf of end customers. The inter-dependence of effectively serving these customer groups, and the resulting network effects, may impact our ability to attract customers. If we are unable to attract a sufficient number of travel providers to provide comprehensive travel content, our ability to service travel agencies will be adversely impacted. Conversely, if we are unable to attract or retain a sufficient number of travel agencies, our ability to maintain our large base of travel providers and attract new travel providers will be impaired.

 

In addition to supplying sufficient content, the ability of our Travel Commerce Platform to attract travel agencies is dependent on the development of new products to enhance our Travel Commerce Platform and on the provision of adequate commissions to travel agencies. Competition to attract travel agencies is particularly intense as travel agencies, particularly larger ones, have the ability to access content from a variety of sources, including subscribing to more than one GDS at any given time. We also have had to, and expect that it will continue in certain circumstances to be necessary to, increase commissions to travel agencies in connection with renewals of their contracts, which may in the future reduce margins. If travel agencies are dissatisfied with our Travel Commerce Platform or we do not pay adequate commissions or provide other incentives to travel agencies to remain competitive, our Travel Commerce Platform may lose a number of travel agencies.

 

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Our Travel Commerce Platform competes against traditional GDSs operated by Amadeus and Sabre, as well as against local distribution systems and alternative distribution technologies. Our Travel Commerce Platform also competes against direct distribution of travel content by travel providers, such as airlines, hotels and car rental companies, many of which distribute all or part of their inventory directly through their own travel distribution websites. In addition, our Travel Commerce Platform competes against travel providers that supply content directly to travel agencies as well as new companies in the industry that are developing distribution systems without the large technology investment and network costs of a traditional GDS. The revolutionary emergence of mobile applications that link directly to providers may create a vigorous source of new competition that bypasses GDSs.

 

Increased competition may result in reduced operating margins, as well as loss of share and brand recognition. We may not be able to compete successfully against current and future competitors, and competitive pressures we face could have a material adverse effect on our business, financial condition or results of operations.

 

In addition, our customers may not be able to compete successfully against current and future competitors such as search engines and meta-search products, and competitive pressures could result in, among other things, reduced operating margins, loss of share and brand recognition.  Such potential negative impacts on our customers could adversely affect our business, financial condition or results of operations.

 

If we fail to develop and deliver new innovative products or enhance our existing products and services in a timely and cost-effective manner in response to rapid technological change and customer demands, our business will suffer.

 

Our industry is subject to constant and rapid technological change and product obsolescence as customers and competitors create new and innovative products and technologies. Products or technologies developed by our competitors may render our products or technologies obsolete or noncompetitive. We must develop innovative products and services and enhance our existing products and services to meet rapidly evolving demands to attract travel agencies. The development process to design leading, sustainable and desirable products to generate new revenue streams and profits requires us to accurately anticipate technological changes and business trends. Developing and enhancing these products is uncertain and can be time-consuming, costly and complex. For example, we may not be successful in developing products or integrating and distributing multi-source content obtained through traditional sources and new distribution capabilities promoted by our largest airline customers. If we do not continue to develop innovative products that are in demand by our customers, we may be unable to maintain existing customers or attract new customers. Customer and business requirements can change during the development process. There is a risk that these developments and enhancements will be late, fail to meet customer or business specifications, not be competitive with products or services from our competitors that offer comparable or superior performance and functionality or fail to generate new revenue streams and profits. Our business will suffer if we fail to develop and introduce new innovative products and services or product and service enhancements on a timely and cost-effective basis.

 

Trends in pricing and other terms of agreements among airlines and travel agencies have become less favorable to us, and a further deterioration or a failure to renew these agreements may occur in the future, which could reduce our revenue and margins.

 

A significant portion of our revenue is derived from fees paid by airlines for bookings made through our Travel Commerce Platform. Airlines have sought to reduce or eliminate these fees in an effort to reduce distribution costs. One manner in which they have done so is to develop their own offerings tailored to our travel agencies, often using new distribution capabilities promoted by IATA, in an attempt to drive business to their direct channels. This tactic has been accompanied by surcharges that certain suppliers have imposed on GDS channel bookings. We have negotiated new agreements containing revised business models and price points with surcharging carriers while procuring the content available from these carriers, resulting in increased fees for surcharged bookings. Another manner is to differentiate the content, in this case, the fares and inventory, that they provide to us and to our competitors from the content that they distribute directly themselves, whether through their website, direct connections with travel agencies or other mechanism to bypass us and our competitors. In these cases, airlines may provide some of their content to us and our competitors, while withholding other content, such as lower cost fares, for distribution via other channels unless we agree to significant discounts. Certain airlines have withdrawn, and other airlines have threatened to withdraw, content, in whole or in part, from us or our competitors as a means of obtaining lower booking fees or, alternatively, have charged, or threatened to charge, to access their lower cost fares or charge travel agencies or consumers for bookings generated in our Travel Commerce Platform. There also has been an increase in the number of airlines that seek to sell optional ancillary services, such as fees for checked baggage or premium seats, only through their direct distribution channels, which threaten to further fragment content and disadvantage us and our competitors by making it more difficult to deliver a platform that allows travel agencies to shop for a single, “all-inclusive” price for travel. Increased use by airlines of new distribution capabilities to direct travel agencies to their own websites or direct connections with travel agencies and/or the imposition of surcharges by airlines could reduce the content available on, and transactions booked in, our Travel Commerce Platform.

 

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We have entered into content agreements with most major carriers in the Americas and Europe, and a growing number of carriers in the Middle East and Africa, which provides us with access to the near-complete scope of public fares and inventory which the carriers generally make available through direct channels, such as their own websites, with a contract duration usually ranging from three to ten years. In addition, we have entered into agreements with most major carriers in Asia Pacific, which provide us with access to varying levels of their content. We may not be able to renew these agreements on a commercially reasonable basis or at all. If we are unable to renew these agreements, our financial results will be adversely impacted and we may be disadvantaged compared to our competitors. The content agreements have required us to make price concessions to the participating airlines. If we are required to make additional concessions to renew or extend the agreements, it could have a material adverse effect on our business, financial condition or results of operations. Moreover, as existing content agreements come up for renewal, there is no guarantee that the participating airlines will continue to provide their content to us to the same extent or on the same terms as they do now. For example, our content agreements with airlines representing approximately 11% of Travel Commerce Platform revenue for the year ended December 31, 2017 are up for renewal or are potentially terminable by such airlines in 2018. In addition, certain content agreements may be terminated earlier pursuant to the specific terms of each agreement. A substantial reduction in the amount of content received from the participating airlines or changes in pricing options will also negatively affect our competitive positioning, revenue and financial condition. Although we continue to have participation agreements with these airline providers, in which they have agreed to participate in our Travel Commerce Platform, a material adverse impact on our business may occur if these agreements are terminated and we are unable to reach agreement with such carriers regarding new content agreements or alternative distribution arrangements employing new technologies. There is a risk that travel providers may seek to disrupt the traditional distribution model and try to obtain significant price concessions. For example one major airline group in Europe has actively sought to agree content directly with key travel agencies on an agency-by-agency basis, together with implementing a surcharge that apply to other travel agencies.

 

In addition, we have implemented, in some countries, an alternative business and financial model, generally referred to as the “opt-in” model, for travel agencies. Under the “opt-in” model, travel agencies are offered the opportunity to pay a fee to us or to agree to a reduction in the financial incentives to be paid to them in order to be assured of having access to all the content provided to us by the participating airlines or to avoid an airline-imposed surcharge on bookings made through our Travel Commerce Platform. There is pressure on us to provide highly competitive terms for such “opt-in” models as many travel agencies have the ability to access content from a variety of sources, including our competitors. The “opt-in” model has been introduced in a number of situations in parallel with content agreements between us and certain airlines to recoup certain fees from travel agencies and to offset some of the discounts provided to airlines in return for guaranteed access to content. The rate of adoption by travel agencies, where “opt-in” has been implemented, has been very high. If airlines require further discounts in connection with guaranteeing access to full content and in response thereto, the “opt-in” model becomes widely adopted, we could receive lower fees from the airlines. These lower fees are likely to be only partially offset by new fees paid by travel agencies and/or reduced incentives or loyalty payments to travel agencies, which would adversely affect our results of operations. In addition, if travel agencies choose not to opt in, such travel agencies would not receive access to all the content available through us without making further payment, which could have an adverse effect on the number of segments booked through our Travel Commerce Platform. Larger online and multinational travel agencies have negotiated their own content and financial arrangements with some carriers. These agreements, to which we are not a party, have been structured such that the fees we are able to obtain from airlines are reduced.

 

The level of fees and commissions we pay to travel agencies is subject to continuous competitive pressure as we renew our agreements with them. If we are required to pay higher rates of commissions, it will adversely affect our margins.

 

We depend on our relationships with travel providers, and adverse changes in these relationships or our inability to enter into new relationships could negatively affect our access to travel offerings and reduce our revenue.

 

We rely significantly on our relationships with airlines, hotels, car rental companies and other travel providers to enable us to offer our travel agencies comprehensive access to travel services and products. The majority of our agreements remain in effect each year, with exceptions usually linked to mergers or insolvencies. Adverse changes in any of our relationships with travel providers or the inability to enter into new relationships with travel providers could reduce the volume or variety of content that we are able to offer through our Travel Commerce Platform, and could negatively impact our results of operations and the availability and competitiveness of travel products we offer. Our arrangements with travel providers may not remain in effect on current or similar terms, and the net impact of future pricing options may adversely impact revenue. Our top ten providers by revenue, combined, accounted for approximately 23% of our revenue for the year ended December 31, 2017, and no single provider accounted for more than 10% of revenue. In 2017, we had 59 planned airline contract renewals, and we successfully renewed substantially all such contracts. We currently have 50 and 77 planned airline contract renewals in 2018 and 2019, respectively, including contracts which roll on an annual basis.

 

Travel providers are increasingly focused on driving online demand to their own websites and may cease to supply us with the same level of access to travel inventory in the future. In addition, some LCCs historically have not distributed content through us or other third-party intermediaries. If the airline industry continues to shift from a full-service carrier model to a low-cost one, this trend may result in more carriers moving ticket distribution systems in-house and a decrease in the demand for our products.

 

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We are in continuous dialogue with our major hotel providers about the nature and extent of their participation in our Travel Commerce Platform. If hotel occupancy rates improve to the point that our hotel providers no longer place the same value on our Travel Commerce Platform, such providers may reduce the amount of inventory they make available through our Travel Commerce Platform or the amount we are able to earn in connection with hotel transactions. A significant reduction on the part of any of our major hotel providers of their participation in our Travel Commerce Platform for a sustained period of time or a provider’s complete withdrawal could have a material adverse effect on our business, financial condition or results of operations. In addition, if we are not successful in maintaining the number of hotels participating in our system, the growth of our business may be restrained.

 

We are subject to a certain degree of revenue concentration among a portion of our travel agency base.

 

Our top ten travel agencies accounted for approximately 22% of our net revenue for the year ended December 31, 2017, and no single travel agency accounted for more than 10% of revenue. Travel agency contracts representing approximately 27%, 11% and 62% of 2017 revenue are up for renewal in 2018, 2019 and beyond, respectively. Our arrangements with our travel agencies may not remain in effect on current or similar terms.

 

In the event any substantial travel agency terminates its relationship with us, moves a portion of its business into direct channels so that bookings are made through airlines’ channels or such travel agency’s business is materially impacted for any reason, such as a travel provider withholding content from a travel agency, and, as a result, such travel agency loses, moves or fails to generate, a substantial amount of bookings that would otherwise be processed through our Travel Commerce Platform, our business and results of operations would be adversely affected.

 

Travel providers are seeking alternative distribution models, including those involving direct access to travelers, which may adversely affect our results of operations.

 

Travel providers are seeking to decrease their reliance on third-party distributors, including us and our GDS competitors, for distribution of their content. For example, some travel providers have created or expanded efforts to establish commercial relationships with online and traditional travel agencies to book travel with those providers directly, rather than through an intermediary. Many airlines, hotels, car rental companies and cruise operators have also established or improved their own websites and mobile offerings, and may offer incentives such as bonus miles or loyalty points, lower or no transaction or processing fees, priority waitlist clearance or e-ticketing for sales through these channels. In addition, metasearch travel websites facilitate access to websites by aggregating the content of those websites. Due to the combined impact of direct bookings with travel provider websites and other non-GDS distribution channels, the percentage of bookings made without the use of us or our GDS competitors at any stage in the chain between providers and end-customers may continue to increase. In addition, efforts by travel providers to encourage our travel agencies to book directly rather than through our Travel Commerce Platform could adversely affect our results of operations. A recent trend in certain regions outside of the U.S. has seen some travel providers elect not to renew their content agreements and move towards a GDS surcharging model to cover all or some of their distribution costs. This, together with wider adoption and implementation of the IATA New Distribution Capability standard for API connectivity, means that some travel providers are actively promoting to, and engaging with, travel agencies to adopt a direct connection with the quid pro quo of unsurcharged content.

 

Furthermore, recent trends towards disintermediation in the global travel industry could adversely affect our Travel Commerce Platform. For example, airlines have made some of their offerings unavailable to unrelated distributors, or made them available only in exchange for lower distribution fees. Some LCCs continue to distribute exclusively through direct channels, bypassing us and other third-party distributors completely and, as a whole, have increased their share of bookings in recent years, particularly in short-haul travel. In addition, several travel providers have formed joint ventures or alliances that offer multi-provider travel distribution websites. Finally, some airlines are exploring alternative global distribution methods developed by new entrants to the global distribution marketplace. Such new entrants propose technology that is purported to be efficient, which they claim enables the distribution of airline tickets in a manner that is more cost-effective to the airline provider because no or lower incentive or loyalty payments are paid to travel agencies. If these trends lead to lower participation by airlines and other travel providers in our Travel Commerce Platform, then our business, financial condition or results of operations could be materially adversely affected.

 

We rely on third-party distributors to market our Travel Commerce Platform services in certain regions, which exposes us to risks associated with the lack of direct management control.

 

We utilize third-party, independently owned and managed distributors, or NDCs, to market our products and distribute and provide services in certain countries, including India, Indonesia, Kuwait, Lebanon, Pakistan, Syria, Turkey, Kazakhstan and Yemen, as well as many countries in Africa and Asia. We rely on our distributors and the manner in which they operate their business to develop and promote our global business. Our top ten distributors generated approximately 12% of revenue in 2017, and no single distributor accounted for more than 5% of revenue. We pay each of our distributors a commission relative to the number of segments booked by travel agencies with which the distributor has a relationship. The distributors are independent business operators, are not our employees and we do not exercise management control over their day-to-day operations. We provide training and support to the distributors, but the success of their marketing efforts and the quality of the services they provide is beyond our control. If they do not meet our standards for distribution, our image and reputation may suffer materially, and sales in those regions could decline significantly. In addition, any interruption in these third-party services or deterioration in their performance could have a material adverse effect on our business, financial condition or results of operations.

 

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Consolidation in the travel industry may result in lost bookings and reduced revenue.

 

Consolidation among travel providers, including airline mergers and alliances, may increase competition from distribution channels related to those travel providers and place more negotiating leverage in the hands of those travel providers to attempt to lower booking fees further and to lower commissions. Examples include the merger of United Airlines and Continental Airlines, the merger of American Airlines and US Airways, the acquisition of AirTran Airways by Southwest Airlines, the merger of British Airways and Iberia and subsequent acquisitions of Aer Lingus and Vueling and the acquisition of Virgin America by Alaska Air Group. In addition, cooperation has increased within the Oneworld, SkyTeam and Star Alliances. Changes in ownership of travel providers may also cause them to direct less business towards us. If we are unable to compete effectively, competitors could divert travel providers away from our travel distribution channels, which could adversely affect our results of operations. Mergers and acquisitions of airlines may also result in a reduction in total flights and overall passenger capacity and higher fares, which may adversely affect the ability of our business to generate revenue.

 

Consolidation among travel agencies and competition for travel agencies may also adversely affect our results of operations, since we compete to attract and retain travel agencies. For example, in 2015, Expedia acquired Orbitz Worldwide and Travelocity. Reductions in commissions paid by some travel providers, such as airlines, to travel agencies contribute to travel agencies having a greater dependency on traveler-paid service fees and incentive or loyalty payments paid by us and our competitors and may contribute to travel agencies consolidating. Consolidation of travel agencies increases competition for these travel agencies and increases the ability of those travel agencies to negotiate higher incentives or loyalty payments from us. Changes in ownership of travel agencies may also cause them to direct less business towards our Travel Commerce Platform. In addition, a decision by airlines to surcharge the channel represented by travel agencies, for example, by surcharging fares booked through travel agencies or passing on charges to travel agencies, could have an adverse impact on our business, particularly in regions in which our Travel Commerce Platform is a significant source of bookings for an airline choosing to impose such surcharges. To compete effectively, we may need to increase incentives or loyalty payments, pre-pay incentives, discount or waive product or service fees or increase spending on marketing or product development.

 

Our business is exposed to customer credit risk and fraudulent booking activity, against which we may not be able to protect ourselves fully.

 

Our business is subject to the risks of non-payment and non-performance by travel providers, which may fail to make payments according to the terms of their agreements with us. For example, a small number of airlines that do not settle payment through IATA billing and settlement provider have, from time to time, not made timely payments for bookings made through our Travel Commerce Platform. We manage our exposure to credit risk through credit analysis and monitoring procedures, and sometimes use credit agreements, prepayments, security deposits and bank guarantees. However, these procedures and policies cannot fully eliminate customer credit risk, and to the extent our policies and procedures prove to be inadequate, our business, financial condition or results of operations may be adversely affected.

 

In addition, we are exposed to risk and potential liability from travel agency fraudulent booking activity resulting from travel agencies’ use of our Travel Commerce Platform for fraudulent purposes. We contractually disclaim all liability for any such loss, but periodically incur claims from travel providers who allege that we should have more responsibility for any third-party fraud.

 

Some of our travel agencies, NDC counterparties and travel providers may be highly leveraged, not well capitalized and subject to their own operating, legal and regulatory risks and, even if our credit review and analysis mechanisms work properly, we may experience financial losses in our dealings with such parties. A lack of liquidity in the capital markets or the continued weak performance in the economy may cause our customers to increase the time they take to pay or to default on their payment obligations, which could negatively affect our results. In addition, continued weakness in the economy could cause some of our customers to become illiquid, delay payments, or could adversely affect collection on their accounts, which could result in a higher level of bad debt expense.

 

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Economic conditions in the global travel industry could impact our business and results of operations.

 

As a participant in the global travel industry, our business and operating results are impacted by global economic conditions, including a general reduction in net disposable income as a result of fiscal measures adopted by countries to address high levels of budgetary indebtedness, which may adversely affect our business, results of operations and financial condition. In our industry, the past financial crisis and global recession resulted in higher unemployment, a decline in consumer confidence, large-scale business failures and tightened credit markets. As a result, the global travel industry, which historically has grown at a rate in excess of global GDP growth during economic expansions, has experienced cyclical downturns in the past. Future adverse economic developments in areas such as employment levels, business conditions, interest rates, tax rates, fuel and energy costs and other matters could reduce discretionary spending and cause the travel industry to contract. In addition, if there are adverse global economic conditions, consumer spending on leisure travel and business spending on business travel may decrease, which could adversely affect our business, financial condition or results of operations.

 

Operational Risks

 

We rely on information technology to operate our business and maintain our competitiveness, and any failure to adapt to technological developments or industry trends could harm our business.

 

We depend upon the use of sophisticated information technologies and systems, including technologies and systems utilized for reservation systems, communications, procurement and administrative systems. As our operations grow in both size and scope, we continuously need to improve and upgrade our systems and infrastructure to offer an increasing number of customers and travel providers enhanced products, services, features and functionality, while maintaining the reliability and integrity of our systems and infrastructure. Our future success also depends on our ability to adapt to rapidly changing technologies in our industry, particularly the increasing use of internet-based products and services, to change our services and infrastructure so they address evolving industry standards, including PCI-DSS, and to improve the performance, features and reliability of our services in response to competitive service and product offerings and the evolving demands of the marketplace. In recent years, we introduced a number of products and services, such as Travelport Smartpoint and the Travelport Merchandising Suite, including Travelport Rich Content and Branding and are developing products and services reliant on state-of-the-art cloud computing capabilities. If there are technological impediments to introducing or maintaining these or other products and services, or if these products and services do not meet the requirements of our customers or applicable industry standards, our business, financial condition or results of operations may be adversely affected.

 

In addition, cloud computing, the continued growth of alternative platforms and mobile computing devices, the emergence of niche competitors who may be able to optimize products, services or strategies that use cloud computing, as well as other technological changes and developing technologies, such as machine learning and artificial intelligence, have, and will continue to require, new and costly investments. We have acquired expertise in and are deploying machine learning, artificial intelligence and other leading-edge technology to support our customers. However, transitioning to these new technologies may be disruptive to resources and the services we provide, and may increase our reliance on third party service providers. We may not be successful, or may be less successful than our current or new competitors, in developing technology that operates effectively across multiple devices and platforms and that is appealing to our customers, either of which would negatively impact our business and financial performance.

 

It is possible that, if we are not able to maintain existing systems, obtain new technologies and systems, or replace or introduce new technologies and systems as quickly as our competitors or in a cost-effective manner, our business and operations could be materially adversely affected. Also, we may not achieve the benefits anticipated or required from any new technology or system, or be able to devote financial resources to new technologies and systems in the future.

 

We rely primarily on a single data center location to conduct our business.

 

Our business, which utilizes a significant amount of our information technology, and the financial business systems rely on computer infrastructure primarily housed in our data center near Atlanta, Georgia, U.S. to conduct its business. In the event the operations of this data center suffer any significant interruptions or the data center becomes significantly inoperable, such event would have a material adverse effect on our business and reputation and could result in a loss of customers. Although we have taken steps to strengthen physical and information security, add redundancy to this facility and provide services from other facilities, including a second data center that provides backup data storage and additional processing resources, the primary data center could be exposed to damage or interruption from fire, natural disaster, power loss, war, acts of terrorism, plane crashes, telecommunications failure, computer malfunctions, unauthorized entry, IT hacking and computer viruses. The steps we have taken and continue to take to prevent system failure and unauthorized transaction activity may not be successful. Our use of backup and disaster recovery systems may not allow us to recover from a system failure fully, or on a timely basis, and our property and business insurance may not be adequate to compensate us for all losses that may occur.

 

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eNett depends on critical service providers and may face pricing pressure and changes in its business model, be subject to regulatory requirements and experience conflicts.

 

eNett, operating in the payment solutions business, is exposed to operational, regulatory and governance risks. eNett is enabled to provide its virtual card solution pursuant to virtual card issuers licensed by Mastercard and, in particular, has a material relationship with Optal, a European-based issuer licensed by Mastercard. An extended service failure by Optal, eNett’s primary issuer, or Mastercard would greatly harm eNett’s current business and growth opportunities. In addition, changes in the business and competitive dynamics in the payments industry, including the ability of travel agencies to negotiate higher rebates and changes in interchange fees over time may impair eNett’s business model and its ability to offer competitive rebates to its customers, which could result in the potential loss of customers and affect eNett’s profitability. In addition, while eNett’s business model currently is not predicated on providing credit to its customers, in order to retain and attract customers, eNett may need to adapt its business model to provide credit to its customers in the future.

 

Due to its innovative solutions, the regulatory environment for eNett may be modified or adopted in ways that may impact how eNett’s solutions are provided, including an increase in costs to eNett to provide such solutions. Financial services regulators in any of the jurisdictions of the eNett customer base may construe potentially applicable requirements in a manner that results in eNett loss of business, slower growth, financial penalties and operational burdens. In addition, Optal, as the minority shareholder of eNett, may have economic or business interests or goals that are inconsistent with ours, take actions contrary to our objectives, undergo a change of control or be unable or unwilling to fulfill its obligations in support of eNett, which may affect eNett’s and our financial condition or results of operations.

 

System interruptions, defects and slowdowns may cause us to lose customers or business opportunities or to incur liabilities.

 

If we are unable to maintain and improve our IT systems and infrastructure, this might result in system interruptions, defects and slowdowns. In the event of system interruptions and/or slow delivery times, prolonged or frequent service outages or insufficient capacity which impedes us from efficiently providing services to our customers, we may lose customers and revenue or incur liabilities. We rely on our employees and internal systems to enable transactions to be processed on our platforms. In addition, our information technologies and systems are vulnerable to damage, interruption or fraudulent activity from various causes, including:

 

power losses, computer systems defects or failure, computer viruses, internet and telecommunications or data network failures, losses and corruption of data and similar events;

 

operator error, penetration by individuals seeking to disrupt operations, misappropriate information or perpetrate fraudulent activity and other physical or electronic breaches of security;

 

the failure of third-party software, systems or services that we rely upon to maintain our own operations;

 

lack of cloud computing capabilities; and

 

natural disasters, pandemics, wars and acts of terrorism.

 

We may have inadequate insurance coverage or insurance limits to compensate for losses from a major interruption, and remediation may be costly and have a material adverse effect on our operating results and financial condition. Any extended interruption or degradation in our technologies or systems, or any substantial loss of data, could significantly curtail our ability to conduct our business and generate revenue. We could incur financial liability from fraudulent activity perpetrated on our systems.

 

Cybersecurity attacks or security breaches could adversely affect our ability to operate, could result in sensitive personal information being misappropriated and may cause us to be held liable or possibly have a material adverse effect on our reputation and business.

 

The secure transmission of confidential information over the internet is essential in maintaining travel provider and travel agency confidence in our services. Substantial or ongoing data security breaches or cyber attacks, whether instigated internally or externally on our system or other internet-based systems, could significantly harm our business. Our travel providers currently require end customers to pay for their transactions with their credit card online. We rely on licensed encryption and authentication technology to effect secure transmission of confidential end customer information, including credit card numbers. It is possible that advances in computer capabilities, new discoveries or other developments could result in a cyber attack or a compromise or breach of the technology that we use to protect customer transaction data.

 

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We incur substantial expense to protect against cyber attacks or security breaches and their consequences. However, our security measures may not prevent cyber attacks or data security breaches. We may be unsuccessful in implementing remediation plans to address potential exposures. A party (whether internal, external, an affiliate or unrelated third party) that is able to circumvent our data security systems or indulge in cyber attacks could also obtain proprietary information or cause significant interruptions in our operations. Cyber attacks or security breaches could also damage our reputation and expose us to a risk of loss or litigation and possible liability. Cyber attacks or security breaches could also cause our current and potential travel providers and travel agencies to lose confidence in our data security, which would have a negative effect on the demand for our products and services.

 

We have been the target of data and cyber security attacks and may experience attacks in the future. Although we have managed to substantially counter these attacks and minimize our exposure, there can be no assurances that we will be able to successfully counter and limit any such attacks in the future.

 

We provide IT services to travel providers, primarily airlines, and any adverse changes in these relationships could adversely affect our business.

 

We provide hosting solutions and IT subscription services to airlines and the technology companies that support them. We host the reservations systems for Delta Air Lines, and provide IT subscription services for critical applications in fares, pricing and e-ticketing, directly and indirectly, for approximately 200 airlines and airline ground handlers. Adverse changes in our relationships with our IT and hosting customers or our inability to enter into new relationships with other customers could affect our business, financial condition and results of operations. Our arrangements with our customers may not remain in effect on current or similar terms and this may negatively affect our business, financial condition or results of operations. In addition, if any of our key customers enters bankruptcy, liquidates or does not emerge from bankruptcy, our business, financial condition or results of operations may be adversely affected.

 

We are dependent upon software, equipment and services provided by third parties.

 

We are dependent upon software, equipment and services provided and/or managed by third parties in the operation of our business. In the event that the performance of such software, equipment or services provided and/or managed by third parties deteriorates or our arrangements with any of these third parties related to the provision and/or management of software, equipment or services are terminated, we may not be able to find alternative services, equipment or software on a timely basis or on commercially reasonable terms, or at all, or be able to do so without significant cost or disruptions to our business, and our relationships with our customers may be adversely impacted. We have experienced occasional system outages arising from services that were provided by one of our key third-party providers. Our failure to secure agreements with such third parties, or the failure of such third parties to perform under such agreements, may have a material adverse effect on our business, financial condition or results of operations.

 

We are subject to additional risks as a result of having global operations.

 

We have a presence in approximately 180 countries and territories. As a result of having global operations, we are subject to numerous risks. At any given time, one or more of the following principal risks may apply to any or all of the countries in which our services are provided:

 

delays in the development, availability and use of the internet as a communication, advertising and commerce medium;

 

difficulties in staffing and managing operations due to distance, time zones, language and cultural differences, including issues associated with establishing management systems infrastructure;

 

differences and changes in regulatory requirements, including anti-bribery rules, trade sanctions, data privacy requirements, labor laws and anti-competition regulations;

 

exposure to local economic and political conditions;

 

changes in tax laws and regulations, and interpretations thereof;

 

limitations on repatriation of earnings, which may limit our ability to transfer revenue from our non-U.S. operations and result in substantial transaction costs;

 

increased risk of piracy and limits on our ability to enforce our intellectual property rights, particularly in the Middle East, Africa and Asia;

 

diminished ability to enforce our contractual rights;

 

exchange rate fluctuations and cost and risks inherent in hedging such exposures; and

 

withholding and other taxes on remittances and other payments by subsidiaries.

 

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In addition, we have significant operations in Europe that may be adversely affected by the economic and political conditions in the eurozone, which could have an adverse impact on our business.

 

Our ability to identify, hire and retain senior management and other qualified personnel is critical to our results of operations and future growth.

 

We depend significantly on the continued services and performance of our senior management, particularly our professionals with experience in the travel industry. Any of these individuals may choose to terminate their employment with us at any time. If unexpected leadership turnover occurs without adequate succession plans, the loss of the services of any of these individuals, or any negative perceptions of our business as a result of those losses, could damage our brand image and our business. The specialized skills we require are difficult and time-consuming to acquire and, as a result, such skills are and are expected to remain in limited supply. It requires a long time to hire and train replacement personnel. An inability to hire, train and retain a sufficient number of qualified employees or ensure effective succession plans for critical positions could materially hinder our business by, for example, delaying our ability to bring new products and services to market or impairing the success of our operations. Even if we are able to maintain our employee base, the resources needed to attract and retain such employees may adversely affect our business, financial condition or results of operations.

 

We may not effectively integrate or realize anticipated benefits from future acquisitions.

 

In the future, we may enter into other acquisitions and investments, including NDCs or joint ventures, based on assumptions with respect to operations, profitability and other matters that could subsequently prove to be incorrect. Furthermore, we may fail to successfully integrate any acquired businesses or joint ventures into our operations. If future acquisitions, significant investments or joint ventures do not perform in accordance with our expectations or are not effectively integrated, our business, operations or financial performance could be adversely affected.

 

Financial and Taxation Risks

 

We have a substantial level of indebtedness that may have an adverse impact on us.

 

As of December 31, 2017, our total indebtedness, excluding capital leases and other indebtedness, was $2,124 million under our senior secured credit agreement. If our term loans due in September 2021 or any revolving credit borrowings due September 2022 (subject to a springing maturity) are not repaid or refinanced prior to their maturity dates, we may not have the funds necessary, or otherwise be able, to repay the debt when it becomes due.

 

As of December 31, 2017, we had $142 million available for borrowing under our revolving credit facility, net of letters of credit that have been issued under the revolving credit facility and that are outstanding on such date. In addition, we may incur obligations that do not constitute indebtedness such as commitments to operating leases and commitments to purchase goods and services from specific suppliers related to information technology as disclosed further in the footnotes to our consolidated financial statements included elsewhere in this document. To the extent we incur any of these obligations, the risks associated with our substantial level of indebtedness would increase, which could further limit our financial and operational flexibility.

 

Our substantial level of indebtedness and obligations could have important consequences for us, including the following:

 

requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our capital expenditure and future business opportunities;

 

exposing us to the risk of higher interest rates because certain of our borrowings are at variable rates of interest, including the impact of LIBOR interest rates on our dollar denominated floating rate debt;

 

restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;

 

limiting our ability to obtain additional equity or debt financing for general corporate purposes, acquisitions, investments, capital expenditures or other strategic purposes;

 

limiting our ability to adjust to changing business conditions and placing us at a competitive disadvantage to our less highly leveraged competitors; and

 

making us more vulnerable to general economic downturns and adverse developments in our business.

 

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The above factors could limit our financial and operational flexibility, and as a result could have a material adverse effect on our business, financial condition and results of operations.

 

Our senior secured credit agreement contains restrictions that may limit our flexibility in operating our business.

 

Our senior secured credit agreement contains various covenants that limit our ability to engage in specified types of transactions. These covenants limit our ability to, among other things:

 

incur additional indebtedness;

 

pay dividends on, repurchase or make distributions in respect of equity interests or make other share payments;

 

make certain investments;

 

sell certain assets;

 

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.

 

In addition, under our senior secured credit agreement, we are required to satisfy and maintain compliance with a first lien net leverage ratio. Our ability to meet this requirement can be affected by events beyond our control and, in the longer term, we may not be able to meet such requirement. A breach of any of these covenants could result in a default under our senior secured credit agreement. Upon the occurrence of an event of default under our senior secured credit agreement, the lenders could elect to declare all amounts outstanding under our senior secured credit agreement to be immediately due and payable and terminate all commitments to extend further credit under our senior secured credit agreement. If we are unable to repay those amounts, the lenders under our senior secured credit agreement could take action or exercise remedies, including proceedings against the collateral granted to them to secure that indebtedness. We have pledged a significant portion of our assets as collateral under our senior secured credit agreement. If the lenders under our senior secured credit agreement accelerate the repayment of borrowings, we may not have sufficient assets to repay amounts outstanding under our senior secured credit agreement, as well as our other indebtedness.

 

Our pension and post-retirement benefit plans are underfunded and will require future cash contributions, which could be higher than we expect and could have a material adverse effect on our financial condition and liquidity.

 

We sponsor pension and post-retirement benefit plans in and outside of the U.S. As of December 31, 2017, our U.S. and non-U.S. pension and post-retirement benefit plans were underfunded by an aggregate of $127 million. We are required to make cash contributions to these plans in the future, and those cash contributions could be significant. In 2018, we expect to make cash contributions of approximately $4 million in the aggregate to our U.S. and non-U.S. pension and post-retirement benefit plans, which we believe will be sufficient to meet the minimum funding requirements. However, our future funding obligations for our pension and post-retirement benefit plans depend on the levels of benefits provided for by these plans, the future performance of assets set aside for these plans, the rates of interest used to determine funding levels, actuarial data and experience and any changes in applicable laws and regulations. Accordingly, our future funding requirements for our pension and post-retirement benefit plans could be higher than expected, which could have a material adverse effect on our financial condition and liquidity.

 

In addition, our pension plans hold investments in equity securities and mutual funds. If the market values of these securities decline, our pension expense and funding requirements will increase. Any decrease in interest rates and asset returns, if and to the extent not offset by contributions, could increase our obligations under our pension plans. If the performance of assets held in these pension plans does not meet our expectations, our cash contributions for these plans could be higher than we expect, which could have a material adverse effect on our financial condition and liquidity.

 

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Government regulation could impose taxes or other burdens on us, which could increase our costs or decrease demand for our products.

 

We rely upon generally accepted interpretations of tax laws and regulations in the countries in which we have customers and for which we provide travel inventory. We cannot be certain that these interpretations are accurate or that the responsible taxing authority is in agreement with our views. The imposition of additional taxes could cause us to have to pay taxes that we currently do not pay or collect on behalf of authorities and increase the costs of our products or services, which would increase our costs of operations.

 

Changes in tax laws or interpretations thereof may result in an increase in our effective tax rate.

 

We have operations in various countries that have differing tax laws and tax rates. A significant portion of our revenue and income is earned in countries with corporate tax rates lower than the U.S. federal tax rates. Our income tax reporting is subject to audit by domestic and foreign authorities. Our effective tax rate may change from year to year based on changes in the mix of activities and income allocated or earned among various jurisdictions, tax laws in these jurisdictions, tax treaties between countries, our eligibility for benefits under those tax treaties and the estimated values of deferred tax assets and liabilities. Such changes, which, among other reasons, may arise from ongoing inter-governmental and Organization for Economic Cooperation and Development (“OECD”)-led proposals on international corporate taxation, specific changes in the U.K. to the tax deductibility of interest and comprehensive changes to the U.S. tax legislation that were enacted in December 2017 under the Tax Cuts and Jobs Act (the “U.S. Tax Reforms”), could result in an increase in the effective tax rate applicable to all or a portion of our income, which would adversely affect our financial performance.

 

We may become subject to taxes in Bermuda after March 31, 2035, which may have a material adverse effect on our results of operations and your investment.

 

The Bermuda Minister of Finance, under the Exempted Undertakings Tax Protection Act 1966 of Bermuda, as amended, has given us an assurance that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax will not be applicable to us or any of our operations, shares, debentures or other obligations until March 31, 2035, except insofar as such tax applies to persons ordinarily resident in Bermuda or to any taxes payable by us in respect of real property owned or leased by us in Bermuda. Given the limited duration of the Bermuda Minister of Finance’s assurance, we cannot assure you that we will not be subject to any Bermuda tax after March 31, 2035.

 

Fluctuations in the exchange rate of the U.S. dollar and other currencies may adversely impact our results of operations.

 

Our results of operations are reported in U.S. dollars. While most of our revenue is denominated in U.S. dollars, a portion of our revenue and costs is denominated in other currencies, such as the British pound, the Euro and the Australian dollar. As a result, we face exposure to adverse movements in currency exchange rates. The results of our operations and our operating expenses are exposed to foreign exchange rate fluctuations as the financial results of those operations are translated from local currency into U.S. dollars upon consolidation. If the U.S. dollar weakens against the local currency, the translation of these foreign currency-based local operations will result in increased operating expenses. Similarly, our local currency-based operating expenses will decrease if the U.S. dollar strengthens against local currency. Additionally, transactions denominated in currencies other than the functional currency may result in gains and losses that may adversely impact our results of operations.

 

The decision of the United Kingdom to withdraw from the European Union may have a negative effect on global economic conditions, financial markets and our business.

 

In June 2016, a majority of voters in the U.K. elected to withdraw from the E.U. in a national referendum. In March 2017, the U.K. government formally initiated a withdrawal process, the terms of which are subject to a negotiation period that could last at least two years. The decision has created significant uncertainties and instability in financial and trade markets. As an E.U. member state, the U.K. and U.K.-based businesses have access to strong financial and trade relationships, including the E.U. Single Market. Given the lack of precedent, it is unclear how the withdrawal of the U.K. from the E.U. would affect the U.K.’s access to the E.U. Single Market and other important financial and trade relationships and how it would affect us. The withdrawal could, among other outcomes, disrupt the free movement of goods, services and people between the U.K. and the E.U., undermine bilateral cooperation in key policy areas and significantly disrupt trade between the U.K. and the E.U. Under current E.U. rules, following a withdrawal, the U.K. would not be able to negotiate bilateral trade agreements with member countries of the E.U. In addition, the withdrawal of the U.K. from the E.U. could significantly affect the fiscal, monetary and regulatory landscape, including with respect to data protection and privacy, within the U.K. and could have a material impact on its economy and the future growth of its various industries. Although it is not possible to predict fully the effects of the withdrawal of the U.K. from the E.U., it could have a material adverse effect on our business.

 

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Material modifications of U.S. laws and regulations and existing trade agreements could adversely affect global economic conditions, financial markets and our business, financial condition and results of operations.

 

Significant changes in U.S. laws and regulations and existing international trade agreements could affect a wide variety of industries and businesses, including our business. Such changes could cause a decline in travel volume and have an adverse impact on the travel industry and, as a result, our business, financial condition and results of operations could be adversely affected.

 

Legal and Regulatory Risks

 

We may not be able to protect our technology and intellectual property effectively, which would allow competitors to duplicate our products and services and could make it more difficult for us to compete with them.

 

Our success and ability to compete depend, in part, upon our technology and other intellectual property, including our brands. Among our significant assets are our software and other proprietary information and intellectual property rights. We rely on a combination of copyright, trademark and patent laws, trade secrets, confidentiality procedures and contractual provisions to protect these assets. Our software and related documentation are protected principally under trade secret and copyright laws, which afford only limited protection. Unauthorized use and misuse of our technology and other intellectual property could have a material adverse effect on our business, financial condition or results of operations, and there can be no assurance that our legal remedies would adequately compensate us for the damage caused by unauthorized use.

 

Intellectual property challenges have been increasingly brought against members of the travel industry. We have in the past, and may in the future, need to take legal action to enforce our intellectual property rights, to protect our intellectual property or to determine the validity and scope of the proprietary rights of others. Any future legal action might result in substantial costs and diversion of resources and the attention of our management.

 

Third parties may claim that we have infringed their intellectual property rights, which could expose us to substantial damages and restrict our operations.

 

We have faced and in the future could face claims that we have infringed the patents, copyrights, trademarks or other intellectual property rights of others. In addition, we may be required to indemnify travel providers for claims made against them. Any claims against us or such providers could require us to spend significant time and money in litigation or pay damages. Such claims could also delay or prohibit the use of existing, or the release of new, products, services or processes, and the development of new intellectual property. We could be required to obtain licenses to the intellectual property that is the subject of the infringement claims, and resolution of these matters may not be available on acceptable terms or at all. Intellectual property claims against us could have a material adverse effect on our business, financial condition and results of operations, and such claims may result in a loss of intellectual property protections that relate to certain parts of our business.

 

Our processing, storage, use and disclosure of personal data could give rise to liabilities or business loss as a result of governmental regulation, conflicting legal requirements, evolving security standards, differing views of personal privacy rights or security breaches.

 

In the processing of our travel transactions, we receive and store a large volume of personally identifiable information. This information is increasingly subject to legislation and regulations in numerous jurisdictions around the world, typically intended to protect the privacy and security of personal information. It is also subject to evolving security standards for credit card and personal information that is collected, processed and transmitted.

 

We could be adversely affected if legislation or regulations are expanded to require changes in our business practices or if governing jurisdictions interpret or implement their legislation or regulations in ways that negatively affect our business. For example, in 2015, the Court of Justice of the E.U. invalidated the European Commission’s finding that the Safe Harbor program, in which we previously participated, provided adequate data protection according to E.U. standards. Travel businesses have also been subjected to investigations, lawsuits and adverse publicity due to allegedly improper disclosure of passenger information. As privacy and data protection have become more sensitive and politicized issues, we may also become exposed to potential liabilities in relation to our handling, use and disclosure of travel related data, as it pertains to individuals, as a result of differing views on the privacy of such data. Our business could be affected by public concerns in some parts of the world about U.S.-based data processing following revelations of National Security Agency surveillance activities, even though these revelations and activities did not involve Travelport. Our business could receive increased scrutiny upon the effectiveness of the GDPR in the E.U. and its heightened privacy requirements. In addition, we could fail to maintain or adapt to industry standards applicable to our operations, including PCI-DSS. These and other privacy concerns, including security breaches, could adversely impact our business, financial condition and results of operations.

 

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Our business is regulated, and any failure to comply with such regulations or any changes in such regulations could adversely affect us.

 

We operate in a regulated industry. Our business, financial condition and results of operations could be adversely affected by unfavorable changes in or the enactment of new laws, rules and/or regulations applicable to us, which could decrease demand for products and services, increase costs or subject us to additional liabilities. Moreover, regulatory authorities have relatively broad discretion to grant, renew and revoke licenses and approvals and to implement regulations. Accordingly, such regulatory authorities could prevent or temporarily suspend us from carrying on some or all of our activities or otherwise penalize us if our practices were found not to comply with the then current regulatory or licensing requirements or any interpretation of such requirements by the regulatory authority. Our failure to comply with any of these requirements or interpretations could have a material adverse effect on our operations.

 

We store a large volume of personally identifiable information which is subject to legislation and regulation in numerous jurisdictions around the world, including in the U.S. and in Europe.

 

In Europe, computerized reservation systems, or CRS, regulations or interpretations of them may increase our cost of doing business or lower our revenue, limit our ability to sell marketing data, impact relationships with travel agencies, airlines, rail companies, or others, impair the enforceability of existing agreements with travel agencies and other users of our system, prohibit or limit us from offering services or products, or limit our ability to establish or change fees.

 

The CRS regulations require a GDS to display a rail or rail/air alternative to air travel on the first screen of their principal displays in certain circumstances. We currently have few rail participants in our GDS. We can display direct point to point rail services in our GDS principal displays, for those rail operators that participate in our GDS. Given the lack of standardization in the rail industry, displaying rail connections in a similar way to airline connections is extremely complex, particularly in relation to journey planning, fare quotation, ticketing and booking systems. We are working towards a solution that will include functionality to search, shop and book connected rail alternatives at such time as the rail industry in Europe agrees on and provides a standard framework to do so.

 

Continued regulation of GDSs in the E.U. and elsewhere could also create the operational challenge of supporting different products, services and business practices to conform to the different regulatory regimes.

 

Enhanced regulation by the E.U. through its newly updated Payment Services Directive may affect eNett and the payment-related services conducted through our Travel Commerce Platform.

 

Our failure to comply with these laws and regulations may subject us to fines, penalties and potential criminal violations. Any changes to these laws or regulations or any new laws or regulations may make it more difficult for us to operate our business and may have a material adverse effect on our operations. We do not currently maintain a central database of regulatory requirements affecting our worldwide operations and, as a result, the risk of non-compliance with the laws and regulations described above is heightened.

 

We may be classified as a passive foreign investment company, which could result in adverse United States federal income tax consequences to United States Holders of our common shares.

 

Based on the current and anticipated value of our assets and the composition of our income and assets, we do not expect to be treated as a passive foreign investment company (“PFIC”) for United States federal income tax purposes for our current taxable year ended December 31, 2017. However, the application of the PFIC rules is subject to uncertainty in several respects, and we cannot assure you that the United States Internal Revenue Service will not take a contrary position. A non-United States corporation will be a PFIC for any taxable year if either (i) at least 75% of its gross income for such year is passive income or (ii) at least 50% of the value of its assets (based on an average of the quarterly value of the assets) during such year is attributable to assets that produce passive income or are held for the production of passive income. A separate determination must be made after the close of each taxable year as to whether we were a PFIC for that year. Because the value of our assets for purposes of the PFIC test generally will be determined by reference to the market price of our common shares, a significant decrease in the market price of our common shares may cause us to become a PFIC. If we are a PFIC for any taxable year during which a United States Holder holds a common share, certain adverse United States federal income tax consequences could apply to such United States Holder.

 

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From time to time, we may be involved in legal proceedings and may experience unfavorable outcomes.

 

We are, and in the future may be, subject to material legal proceedings in the course of our business, including, but not limited to, actions relating to contract disputes, business practices, intellectual property and other commercial and tax matters. Such legal proceedings may involve claims for substantial amounts of money or for other relief or might necessitate changes to our business or operations, and the defense of such actions may be both time consuming and expensive. Further, if any such proceedings were to result in an unfavorable outcome, it could have a material adverse effect on our business, financial position and results of operations.

 

Risks Related to Our Common Shares

 

The market price and trading volume of our common shares may be volatile, which could result in rapid and substantial losses for our shareholders.

 

The market price of our common shares may be highly volatile and could be subject to wide fluctuations. During 2017, the price of our common shares, as reported by NYSE, ranged from a low of $11.38 on April 5, 2017 to a high of $16.17 on October 20, 2017. In addition, the trading volume in our common shares may fluctuate and cause significant price variations to occur. If the market price of our common shares declines significantly, shareholders may be unable to sell their common shares at or above the purchase price, if at all. The market price of our common shares may fluctuate or decline significantly in the future. Some of the factors that could negatively affect the price of our common shares or result in fluctuations in the price or trading volume of our common shares include: variations in our quarterly operating results; failure to meet our earnings estimates; publication of research reports about us or the travel industry or the failure of securities analysts to cover our common shares; additions or departures of our executive officers and other key management personnel; adverse market reaction to any indebtedness we may incur or securities we may issue in the future; actions by shareholders; changes in market valuations of similar companies; speculation in the press or investment community; changes or proposed changes in laws or regulations or differing interpretations thereof affecting our business or enforcement of these laws and regulations, or announcements relating to these matters; adverse publicity about the travel industry generally or individual scandals, specifically, and general market and economic conditions.

 

If we do not pay additional cash dividends in the foreseeable future, the price of our common shares may be depressed.

 

The declaration and payment of all future dividends, if any, will be at the discretion of our Board and will depend upon our financial condition, earnings, contractual conditions, restrictions imposed by our senior secured credit agreement, any future indebtedness or preferred securities or applicable laws and other factors that our Board may deem relevant. In addition, pursuant to Bermuda law and our bye-laws, no dividends may be declared or paid if there are reasonable grounds for believing that: (i) we are, or would after the payment be, unable to pay our liabilities as they become due or (ii) that the realizable value of our assets would thereby be less than our liabilities. As a result, shareholders may not receive any return on an investment in our common shares unless such common shares are sold for a price greater than that for which shareholders paid.

 

Anti-takeover provisions in our bye-laws may delay, discourage or prevent a change in control.

 

Our bye-laws contain provisions that may delay, discourage or prevent a merger or acquisition that a shareholder may consider favorable. Such provisions include, but are not limited to, shareholder advance notice and the issuance of preference shares. As a result, shareholders may be limited in their ability to obtain a premium for their common shares.

 

We are a Bermuda company, and it may be difficult for shareholders to enforce judgments against us or certain of our directors or officers.

 

We are a Bermuda limited liability exempted company. We have been advised by our Bermuda counsel that there is no treaty in force between the United States and Bermuda providing for the reciprocal recognition and enforcement of judgments in civil and commercial matters. As a result, whether a U.S. judgment would be enforceable in Bermuda depends on whether the U.S. court that entered the judgment is recognized by a Bermuda court as having jurisdiction over it, as determined by reference to Bermuda conflict of law rules. The courts of Bermuda would recognize as a valid judgment, a final and conclusive judgment in personam obtained in a U.S. court pursuant to which a sum of money is payable (other than a sum of money payable in respect of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty). The courts of Bermuda would recognize such a U.S. judgment as long as (1) the U.S. court had proper jurisdiction over the parties subject to the judgment, (2) the U.S. court did not contravene the rules of natural justice of Bermuda, (3) the U.S. judgment was not obtained by fraud, (4) the enforcement of the U.S. judgment would not be contrary to the public policy of Bermuda, (5) no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of Bermuda and (6) there is due compliance with the correct procedures under the laws of Bermuda.

 

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In addition to and irrespective of jurisdictional issues, Bermuda courts will not enforce a provision of the United States federal securities law that is either penal in nature or contrary to public policy. It is the advice of our Bermuda counsel that an action brought pursuant to a public or penal law, the purpose of which is the enforcement of a sanction, power or right at the instance of the state in its sovereign capacity, is unlikely to be entertained by Bermuda courts. Specified remedies available under the laws of U.S. jurisdictions, including specified remedies under United States federal securities laws, would not be available under Bermuda law or enforceable in a Bermuda court, as they are likely to be contrary to Bermuda public policy. Further, no claim may be brought in Bermuda in the first instance for a violation of United States federal securities laws because these laws have no extraterritorial application under Bermuda law and do not have force of law in Bermuda.

 

Our bye-laws require that derivative actions brought in our name, actions against directors, officers and employees for breach of fiduciary duty and other similar actions may be brought only in Bermuda as the exclusive forum for such actions, which could limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us.

 

Our bye-laws require, to the fullest extent permitted by law, that derivative actions brought in the name of the Company, actions against directors, officers and employees for breach of fiduciary duty and other similar actions may be brought only in Bermuda, and if brought outside of Bermuda, the shareholder bringing the suit will be deemed to have consented to service of process on such shareholder’s counsel. The choice of forum provision in our bye-laws may limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us and have the effect of discouraging lawsuits against our directors and officers. Alternatively, if a court were to find these provisions of bye-laws inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.

 

Persons who own our common shares may have more difficulty in protecting their interests than persons who are shareholders of a U.S. corporation.

 

The Companies Act 1981, as amended, of Bermuda, which applies to us, differs in certain material respects from laws generally applicable to U.S. corporations and their shareholders. As a result, persons who own our common shares may have more difficulty in protecting their interests than persons who are shareholders of a U.S. corporation.

 

If we are unable to maintain effective internal control over financial reporting in the future, shareholders may lose confidence in the accuracy and completeness of our financial reports and the trading price of our common shares may be negatively affected.

 

We are subject to Section 404 of the Sarbanes-Oxley Act (“SOX”), which requires us to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. We have consumed and will continue to consume management resources and incur expenses for SOX compliance on an ongoing basis. If we identify material weaknesses in our internal control over financial reporting, or if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, investors may lose confidence in the accuracy and completeness of our financial reports, and the trading price of our common shares could be negatively affected, and we could become subject to investigations by the NYSE, the SEC or other regulatory authorities, which could require additional financial and management resources.

 

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ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

Headquarters and Corporate Offices

 

Our principal executive office is located in Langley in the United Kingdom, under a lease with a term of 20 years that expires in June 2022. We also have an office in Atlanta, Georgia, U.S., under a lease with a term of 12 years that expires in December 2024.

 

Operations

 

Our operational business global headquarters are located in Langley, U.K. Our operational business U.S. headquarters are located in Atlanta, Georgia.

 

In addition, we have leased facilities in 45 countries that function as call centers or fulfillment or sales offices. Our product development centers are located in Atlanta, Georgia and leased offices in Denver, Colorado under a lease expiring in November 2025. As previously announced, during 2017, we consolidated our three existing U.S. technology hubs in Atlanta, Denver and Kansas City into two centers in Atlanta and Denver.

 

The table below provides a summary of our key facilities, all of which are leased:

 

Location     Purpose
Langley, United Kingdom     Corporate Headquarters; Operational Business Global Headquarters
Atlanta, Georgia, United States     Operational Business, U.S. Headquarters
Atlanta, Georgia, United States     Data Center and Product Development Center
Denver, Colorado, United States     Product Development Center
Melbourne, Australia; London, United Kingdom; and Singapore     eNett Operational Business Centers

 

Data Center

 

We operate an in-house data center out of leased facilities in Atlanta, Georgia, U.S., pursuant to a lease that expires in August 2022, and provide services from other facilities. Our data center powers our Travel Commerce Platform and provides access 24 hours a day, seven days a week and 365 days a year. The facility is a hardened building housing two data centers: one used by us and the other used by Delta Air Lines. We and Delta Air Lines each have equal space and infrastructure at the Atlanta facility. Our Atlanta data center comprises 94,000 square feet of raised floor space, 27,000 square feet of office space and 39,000 square feet of facilities support area.

 

We believe that our properties are sufficient to meet our present needs, and we do not anticipate any difficulty in securing additional space, as needed, on acceptable terms.

 

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ITEM 3. LEGAL PROCEEDINGS

 

Consumer Antitrust Class Action

 

On July 14, 2015 and July 17, 2015, approximately 24 plaintiffs filed purported class action lawsuits against us, Amadeus and Sabre in the United States District Court for the Southern District of New York (Gordon et al. v. Amadeus IT Group, S.A et al.). A consolidated, amended complaint was filed on October 2, 2015 (the “Amended Complaint”). The Amended Complaint alleges violations of the Sherman Act, state antitrust laws and state consumer protection laws by defendants beginning in 2006. In particular, the plaintiffs claim there was a conspiracy among us and the other defendants to impose contract terms on airlines, which the plaintiffs allege had the effect of maintaining higher fees and restricting competition. On January 15, 2016, the defendants moved to dismiss the Amended Complaint. On July 6, 2016, the court granted in part and denied in part defendants’ motion thereby dismissing the plaintiffs’ state law claims for damages in full, but declined to dismiss the plaintiffs’ Sherman Act claim, which seeks injunctive relief. On November 7, 2017, we entered into a settlement agreement with the plaintiffs, which, if approved by the court, would resolve all claims against us. The court granted preliminary approval of the settlement on December 29, 2017, and will consider final approval of the settlement at a hearing on April 23, 2018. At this time, the outcome of this lawsuit cannot be determined, nor can we determine whether the court will grant final approval of the proposed statement.

 

DOJ

 

On May 19, 2011, we received a Civil Investigative Demand (“CID”) from the United States Department of Justice, which seeks our documents and data in connection with an investigation into whether there have been “horizontal and vertical restraints of trade by global distribution systems.” We have complied with the CID, and the investigation remains open.

 

Other

 

In addition, we are a party to various litigation matters incidental to the conduct of our business. We do not believe that the outcome of any of the matters in which we are currently involved will have a material adverse effect on our financial condition, results of our operations or our liquidity position.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicable.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Price of Common Shares

 

Our common shares are currently traded on the NYSE under the symbol “TVPT.” The following table sets forth the quarterly high and low sales prices per common share as reported by NYSE for 2017 and 2016. At February 15, 2018, the number of shareholders of record was 27.

 

2017  High   Low 
First Quarter  $14.70   $11.42 
Second Quarter  $14.32   $11.38 
Third Quarter  $15.86   $13.22 
Fourth Quarter  $16.17   $12.74 

 

2016  High   Low 
First Quarter  $14.26   $8.50 
Second Quarter  $14.82   $11.28 
Third Quarter  $15.15   $12.77 
Fourth Quarter  $15.14   $12.95 

 

Dividend Policy

 

We paid a dividend on our common shares in each of the four quarters of 2017 and 2016 of $0.075 per common share. We intend to fund any future dividends from cash generated from our operations. The declaration and payment of all future dividends, if any, will be at the discretion of our Board and will depend upon our financial condition, earnings, contractual conditions, restrictions imposed by our senior secured credit agreement, any future indebtedness or preferred securities or applicable laws and other factors that our Board may deem relevant. In addition, pursuant to Bermuda law and our bye-laws, no dividends may be declared or paid if there are reasonable grounds for believing that: (i) we are, or would after the payment be, unable to pay our liabilities as they become due or (ii) that the realizable value of our assets would thereby be less than our liabilities.

 

Recent Sales of Unregistered Securities

 

Since January 1, 2015, we have granted and issued the following securities without registration under the Securities Act of 1933:

 

Equity Awards

 

From January 1, 2015 to December 31, 2017, we granted 523,296 restricted share units (“RSUs”) and performance share units (“PSUs”) under our equity compensation plans, and we issued 237,198 common shares under our 2013 Long-Term Management Incentive Program.

 

We deemed these grants and issuances as exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933 or in reliance on Rule 701 of the Securities Act of 1933 as offers and sales of securities under compensatory benefit plans and contracts relating to compensation in compliance with Rule 701. Each of the recipients of securities in any transaction exempt from registration either received or had adequate access, through employment, business or other relationships, to information about us. For each of the transactions listed above, share certificates were not issued, but appropriate legends were included at each issuance.

 

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Purchases of Equity Securities By the Issuer and Affiliated Purchases

 

The following is a summary of our repurchases of common shares by month for the year ended December 31, 2017:

 

           Total number of shares   Maximum number (or 
       Average   (or units) purchased as   approximate dollar value) of 
   Total number of   price paid   part of publicly   shares (or units) that may yet 
   shares (or units)   per share   announced plans or   be purchased under the plans 
Period  purchased(a)   (or unit)   programs   or programs 
January 1 – 31, 2017   8,916   $14.35         
April 1 – 30, 2017   180,395   $12.50         
July 1 – 31, 2017   5,518   $14.08         
October 1 – 31, 2017   557,705   $15.72         
Total   752,534   $14.92         

 

 

 

(a)Represents common shares that we withheld to satisfy employees’ tax liabilities attributable to the vesting of RSUs and PSUs.

 

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Performance Graph

 

The following graph and table show the cumulative total shareholder return of our common shares against the cumulative total returns of the Russell 2000 Index and the Dow Jones U.S. Travel & Leisure Index from September 25, 2014 and ending December 31, 2017. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe, and the Dow Jones U.S. Travel & Leisure Index measures the performance of U.S. stocks in the travel and leisure sector. The graph and the table depict the result of an investment on September 25, 2014 of $100 in our common shares, the Russell 2000 Index and the Dow Jones U.S. Travel & Leisure Index, including investment of dividends. Historic share performance is not necessarily indicative of future share price performance.

 

INDEXED RETURNS

Quarter Ending

 

Company /
Index
 

Base
Period

9/25/14

   9/30/14   12/31/14   3/31/15   6/30/15   9/30/15   12/31/15   3/31/16   6/30/16   9/30/16   12/31/16   3/31/17   6/30/17   9/30/17   12/31/17 
Travelport Worldwide Limited  $100   $100.37   $110.21   $102.71   $85.21   $82.22   $80.69   $85.91   $81.53   $95.59   $90.15   $75.70   $88.99   $102.02   $85.42 
Russell 2000 Index  $100   $99.28   $108.94   $113.64   $114.12   $100.52   $104.13   $102.55   $106.44   $116.07   $126.32   $129.43   $132.62   $140.14   $144.82 
Dow Jones U.S. Travel & Leisure Index  $100   $100.55   $110.19   $114.47   $110.74   $110.69   $116.69   $119.13   $109.51   $115.69   $125.53   $134.93   $147.84   $144.64   $155.42 

 

 

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ITEM 6. SELECTED FINANCIAL DATA

 

The following table sets forth our selected consolidated historical financial information and other data as of the dates and for the periods indicated as set out below:

 

The consolidated statements of operations data and the consolidated statements of cash flows data for the years ended December 31, 2017, 2016 and 2015 and the consolidated balance sheet data as of December 31, 2017 and 2016 are derived from our audited consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K.

 

The consolidated statements of operations data and the consolidated statements of cash flows data for the years ended December 31, 2014 and 2013 and the consolidated balance sheet data as of December 31, 2015, 2014 and 2013 are derived from our audited consolidated financial statements and the related notes thereto not included in this Annual Report on Form 10-K.

 

In May 2011, we completed the sale of our Gullivers Travel Associates (“GTA”) business to Kuoni Travel Holdings Ltd. (“Kuoni”) which qualified to be reported as discontinued operations. The gain from the disposal of the GTA business and the results of operations of the GTA business were presented as discontinued operations in our consolidated statements of operations and consolidated statements of cash flows. In connection with this sale, we agreed to indemnify Kuoni up to January 2018 for certain potential liabilities relating to the pre-sale period. An estimate of our obligations under such indemnity is included within our liabilities on our consolidated balance sheets. During the years ended December 31, 2017 and 2013, we either settled certain of our obligations under such indemnity and/or determined that the liabilities would not be payable due to the expiration of the statute of limitations and realized a gain that was included within “Income from discontinued operations, net of tax” in our consolidated statements of operations.

 

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The following selected consolidated historical financial and other data are qualified in their entirety by reference to, and should be read in conjunction with, our consolidated financial statements and the related notes thereto and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K.

 

Consolidated Statements of Operations Data

 

   Year ended December 31, 
(in $ thousands, except per share data)  2017   2016   2015   2014   2013 
Net revenue  $2,447,279   $2,351,356   $2,221,020   $2,148,159   $2,076,358 
Operating income   285,889    200,613    190,523    160,950    208,128 
Income (loss) from continuing operations before income taxes and share of (losses) earnings in equity method investments   170,503    44,799    48,007    130,912    (196,892)
Net income (loss) from continuing operations   138,273    15,046    20,210    91,300    (206,960)
Net income (loss)   140,280    15,046    20,210    91,300    (202,501)
Net income (loss) attributable to the Company   142,463    16,820    16,332    86,494    (205,956)
Income (loss) per share – Basic:                         
Income (loss) per share – continuing operations  $1.13   $0.14   $0.13   $1.01   $(4.62)
Basic income (loss) per share  $1.15   $0.14   $0.13   $1.01   $(4.52)
Income (loss) per share – Diluted:                         
Income (loss) per share – continuing operations  $1.11   $0.13   $0.13   $0.98   $(4.62)
Diluted income (loss) per share  $1.13   $0.13   $0.13   $0.98   $(4.52)
Cash dividends declared per common share  $0.300   $0.300   $0.300    0.075     

 

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Consolidated Balance Sheets Data

 

   As of December 31, 
(in $ thousands)  2017   2016   2015   2014   2013 
Cash and cash equivalents  $122,039   $139,938   $154,841   $138,986   $153,723 
Total current assets (excluding cash and cash equivalents)(1)   316,248    302,313    310,300    272,930    312,361 
Property and equipment, net   431,741    431,046    459,848    413,770    428,418 
Goodwill and other intangible assets, net   1,898,867    1,904,655    1,915,916    1,930,264    1,971,249 
All other non-current assets(1) (2)   89,604    55,977    64,524    135,634    222,517 
Total assets  $2,858,499   $2,833,929   $2,905,429   $2,891,584   $3,088,268 
Total current liabilities  $646,637   $601,337   $579,090   $555,072   $680,644 
Long-term debt(2)   2,165,722    2,281,210    2,363,035    2,384,210    3,528,493 
All other non-current liabilities(1)   238,461    287,164    286,162    290,322    189,643 
Total liabilities   3,050,820    3,169,711    3,228,287    3,229,604    4,398,780 
Total equity (deficit)   (192,321)   (335,782)   (322,858)   (338,020)   (1,310,512)
Total liabilities and equity  $2,858,499   $2,833,929   $2,905,429   $2,891,584   $3,088,268 

 

 

1.In the fourth quarter of 2016, we adopted the U.S. GAAP guidance on balance sheet presentation of deferred tax assets and liabilities, whereby all deferred tax assets and liabilities in a jurisdiction, along with any related valuation allowance, were classified as non-current assets or non-current liabilities on the consolidated balance sheet. As of December 31, 2016, we netted $13 million of deferred tax assets and deferred tax liabilities and reclassified $5 million of current deferred tax assets and $0 of current deferred tax liabilities to non-current deferred tax assets and liabilities, respectively, on our consolidated balance sheets. The prior period information was not retrospectively adjusted.

 

2.As of January 1, 2016, we adopted the U.S. GAAP guidance on reclassification of unamortized debt finance costs, previously disclosed as an asset on the consolidated balance sheets, to be presented as a direct deduction from the carrying value of the associated debt liability. As a result, we reclassified our unamortized debt finance costs of  $24 million, included within other non-current assets, related to the term loans as of December 31, 2015 and presented these costs as a deduction from the carrying value of the long-term debt. The corresponding amounts shown above for non-current assets and long-term debt as of December 31, 2014 and 2013 have not been restated to deduct unamortized debt finance costs of $28 million for each of the balance sheet date, since the impact of the adoption of this guidance was not material to our consolidated financial statements.

 

Consolidated Statements of Cash Flows Data

 

   Year Ended December 31, 
(in $ thousands)  2017   2016   2015   2014   2013 
Net cash provided by operating activities  $317,662   $299,019   $262,223   $58,451   $100,471 
Net cash (used in) provided by investing activities   (120,947)   (122,469)   (166,311)   225,999    (96,003)
Net cash (used in) provided by financing activities   (215,750)   (190,747)   (78,037)   (297,383)   39,607 
Effects of changes in exchange rates on cash and cash equivalents   1,136    (706)   (2,020)   (1,804)   (179)
Net (decrease) increase in cash and cash equivalents  $(17,899)  $(14,903)  $15,855   $(14,737)  $43,896 

 

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Selected Quarterly Consolidated Financial Data—Unaudited

 

Provided below is selected unaudited quarterly financial data for 2017 and 2016:

 

   2017 
(in $ thousands, except per share data)  First   Second   Third   Fourth 
Net revenue  $650,763   $612,107   $610,842   $573,567 
Cost of revenue   386,837    369,708    388,027    361,438 
Operating income   98,870    73,850    60,739    52,430 
Net income from continuing operations   55,863    34,366    4,681    43,363 
Net income   55,863    34,366    4,681    45,370 
Net income attributable to the Company   56,106    34,927    4,850    46,580 
Income per share from continuing operations:                    
Basic   0.45    0.28    0.04    0.36 
Diluted   0.45    0.28    0.04    0.35 

 

   2016 
(in $ thousands, except per share data)  First   Second   Third   Fourth 
Net revenue  $609,263   $605,905   $590,756   $545,432 
Cost of revenue   362,677    376,605    351,534    339,830 
Operating income   79,868    37,760    62,235    20,750 
Net income (loss)   17,181    (14,429)   21,404    (9,110)
Net income (loss) attributable to the Company   16,585    (14,831)   20,838    (5,772)
Income (loss) per share from continuing operations:                    
Basic   0.13    (0.12)   0.17    (0.05)
Diluted   0.13    (0.12)   0.17    (0.05)

 

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ITEM 7. 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 each of the years ended December 31, 2017, 2016 and 2015 should be read in conjunction with our consolidated financial statements and accompanying notes reported in accordance with U.S. GAAP and included elsewhere in this Annual Report on Form 10-K. 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 Annual Report on Form 10-K, particularly under the headings “Item 1A: Risk Factors” and “Forward-Looking Statements.”

 

Overview

 

We are a leading 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 B2B travel commerce platform. In 2017, we processed approximately $83 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.

 

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, 2017, Air, Beyond Air and Technology Services represented approximately 70%, 26% and 4%, 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 125 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 AirAsia, 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.

 

For payment solutions, eNett’s core offering is VANs that automatically generate 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 TMCs and travel agencies to engage with their customers through mobile services, including apps, mobile web and mobile messaging.

 

In addition to hospitality, payment solutions and digital services, we utilize the broad connections and extensive data managed by our Travel Commerce Platform to provide advertising solutions to over 3,000 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.

 

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Technology Services

 

We provide critical hosting 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. In addition, until April 2017, we owned 51% of IGTS, a technology development services provider based in Gurgaon, India that was used for both internal and external software development. We divested our 51% interest in IGTS in April 2017.

 

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, 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 performance metrics:

 

   Year Ended           Year Ended         
   December 31,   Change   December 31,   Change 
(in $ thousands, except per share data, Reported Segments and RevPas)  2017   2016       %   2016   2015       % 
Net revenue  $2,447,279   $2,351,356   $95,923    4   $2,351,356   $2,221,020   $130,336    6 
Operating income   285,889    200,613    85,276    43    200,613    190,523    10,090    5 
Net income   140,280    15,046    125,234    *    15,046    20,210    (5,164)   (26)
Income per share – diluted (in $)   1.13    0.13    1.00    *    0.13    0.13         
Adjusted EBITDA (1)     590,013    574,349    15,664    3    574,349    535,027    39,322    7 
Adjusted Operating Income (2)     351,606    340,898    10,708    3    340,898    305,319    35,579    12 
Adjusted Net Income (3)     181,174    154,494    26,680    17    154,494    122,345    32,149    26 
Adjusted Income per Share – diluted (4) (in $)     1.44    1.23    0.21    17    1.23    1.00    0.23    23 
Net cash provided by operating activities   317,662    299,019    18,643    6    299,019    262,223    36,796    14 
Free Cash Flow (5)     200,148    191,559    8,589    4    191,559    156,128    35,431    23 
Reported Segments (in thousands)   342,578    338,344    4,234    1    338,344    341,552    (3,208)   (1)
Travel Commerce Platform RevPas (in $)  $6.83   $6.59   $0.24    4   $6.59   $6.13   $0.46    7 

 

 

*Percentage calculated 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 expense, net (excluding unrealized gains (losses) on interest rate derivative instruments) and related income taxes.

 

(2)Adjusted Operating Income (Loss) is defined as Adjusted EBITDA less depreciation and amortization of property and equipment and amortization of customer loyalty payments.

 

(3)Adjusted Net Income (Loss) is defined as net income (loss) excluding amortization of acquired intangible assets, gain (loss) on early extinguishment of debt, share of losses in equity method investments and items that are excluded under our debt covenants, such as gain on sale of shares of Orbitz Worldwide, gain (loss) on the sale of a subsidiary, 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. The impact of U.S. Tax Reforms has been excluded when determining Adjusted Net Income for the year ended December 31, 2017 (see Note 3—Income Taxes to our consolidated financial statements included in this Annual Report on Form 10-K).

 

(4)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.

 

(5)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 Net 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 Operating Income (Loss) and Adjusted Net 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 Net 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 and to Adjusted EBITDA:

 

   Year Ended December 31, 
(in $ thousands)  2017   2016   2015 
Net income   $140,280   $15,046   $20,210 
Adjustments:               
Amortization of acquired intangible assets(1)     40,854    47,095    71,567 
Gain on sale of a subsidiary   (1,217)        
Loss on early extinguishment of debt   5,366    4,333     
Equity-based compensation and related taxes   34,739    31,788    28,875 
Corporate and restructuring costs(2)     24,998    38,772    19,226 
Impairment of long-lived assets (3)     1,763    11,152     
Income from discontinued operations   (2,007)        
Share of losses in equity method investments           671 
Gain on sale of shares of Orbitz Worldwide           (6,271)
Other – non cash(4)     (42,401)   17,646    (13,527)
Tax impact of adjustments and U.S. Tax Reforms(5)     (21,201)   (11,338)   1,594 
Adjusted Net Income    181,174    154,494    122,345 
Adjustments:               
Interest expense, net(6)     117,001    145,313    157,442 
Remaining provision for income taxes   53,431    41,091    25,532 
Adjusted Operating Income    351,606    340,898    305,319 
Adjustments:               
Depreciation and amortization of property and equipment   163,756    162,314    162,661 
Amortization of customer loyalty payments   74,651    71,137    67,047 
Adjusted EBITDA   $590,013   $574,349   $535,027 

 

 

 

(1)Relates to intangible assets acquired in the sale of Travelport to The Blackstone Group (“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, including restructuring activity (see Note 9—Restructuring Charges to our consolidated financial statements included in this Annual Report on Form 10-K).

 

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(3)Impairment of long-lived assets relates to $1 million impairment of property and equipment and a $1 million impairment of customer loyalty payments for the year ended December 31, 2017, and for the year ended December 31, 2016, primarily relates to an $8 million impairment of property and equipment and a $3 million impairment of customer loyalty payments.

 

(4)Other—non cash includes (i) unrealized (gains) losses on foreign currency derivative contracts of $(31) million, $11 million and $(2) million for the years ended December 31, 2017, 2016 and 2015, respectively, (ii) unrealized (gains) losses on interest rate derivative contracts of $(6) million, $6 million and $(9) million for the years ended December 31, 2017, 2016 and 2015, respectively, (iii) $8 million related to revenue deferred in previous years for the year ended December 31, 2017, and (iv) other losses (gains) of $2 million, $1 million and $(3) million for the years ended December 31, 2017, 2016 and 2015, respectively.

 

(5)Tax impact of adjustments primarily relates to the gain on sale of a subsidiary, equity-based compensation, corporate and restructuring costs and unrealized gains and losses on foreign currency derivative contracts and is calculated at the rate applicable for the jurisdiction in which the adjusting item arose. Additionally, a benefit of $24 million arising from the U.S. Tax Reforms has been excluded when determining the Adjusted Net Income for the year ended December 31, 2017 (see Note 3—Income Taxes to our consolidated financial statements included in this Annual Report on Form 10-K).

 

(6)Interest expense, net, excludes the impact of unrealized (gains) losses on interest rate derivative contracts of $(6) million, $6 million and $(9) million for the years ended December 31, 2017, 2016 and 2015, respectively, which is included within “Other—non cash”.

 

The following table provides a reconciliation of income per share – diluted to Adjusted Income per Share—diluted:

 

   Year Ended December 31, 
(in $)  2017   2016   2015 
Income per share – diluted  $1.13   $0.13   $0.13 
Per share adjustments to net income to determine Adjusted Income per Share – diluted   0.31    1.10    0.87 
Adjusted Income per Share – diluted  $1.44   $1.23   $1.00 

 

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 statements of operations.

 

For a discussion of Free Cash Flow, please see “Liquidity and Capital Resources—Cash Flows.”

 

Factors Affecting Our Results of Operations

 

Factors Affecting Our Industry Generally

 

Factors affecting our industry generally and our results of operations include:

 

Macroeconomic and Travel Industry Conditions: Our business model is primarily transaction based and is not based on end-user pricing. Our business and results of operations are, therefore, dependent upon travel volumes, particularly air passengers, and, to an increasing degree, non-air travel volumes, that are affected by general macroeconomic conditions. These conditions include the rate of growth in GDP, the availability and cost of consumer finance, interest and exchange rates, unemployment levels, fuel prices and terrorism, as well as other factors that may affect the travel and tourism industry. The overall impact on the travel and tourism industry of these and other factors can also be influenced by travelers’ perception of, and reaction to, the scope, severity and timing of such conditions. The travel industry has historically shown strong and resilient growth, typically outperforming general macroeconomic performance. Based on IATA Traffic data, scheduled air passenger volume growth has outperformed global GDP growth by approximately two times since 2005.

 

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Pricing Trends for Air Travel Distribution: In recent years, the airline industry, especially in the United States and Europe, has undergone a rapid wave of consolidation, resulting in capacity moderation and increased pricing power for airlines. Airlines around the world also are addressing factors such as fluctuations in fuel and increases in labor and operating costs, which are putting pressure on their margins. Although network airlines are focused on reducing overhead costs, such as the cost of distribution through a traditional GDS, they are also looking for ways to increase their yield through sales of ancillaries, sales to higher-yield passengers, such as business travelers, and growing the number of higher value bookings outside of their home markets. Our Travel Commerce Platform enables airlines to substantially increase their distribution reach through away bookings, which we price at a premium to home bookings. As this part of our business grows, our financial performance will benefit. Our Travel Commerce Platform offers a broad portfolio of value-added functionalities that enables airlines to effectively pursue these revenue enhancing initiatives. The ability of our platform to add this value is unique in the indirect distribution channel, which allows us to enter into value-linked pricing of airline contracts that shift the focus of the negotiation away from cost and onto value creation. As a result, we have been able to grow our RevPas over the last three years even when traditional GDS air segment fees have been under pressure.

 

We believe that securing the content of the world’s leading airlines is value-enhancing for our Travel Commerce Platform, and as a result, we have entered into full content agreements and agreements for our Rich Content and Branding airline merchandising solutions with an increasing number of airlines over recent years. We have full content or distribution parity agreements with approximately 165 airlines, including LCCs, and over 250 airlines are utilizing our merchandising solutions worldwide. Our full content or distribution parity agreements accounted for 77% of our Air revenue for the year ended December 31, 2017. We offer airlines a discount for giving us access to this content. Contracts with airlines that do not provide us with this preferential access include terms that generally allow us to increase segment fees on thirty days’ notice. Our airline merchandising solutions allow for more flexible and effective distribution and merchandising of both core travel content and ancillary products and services, resulting in a higher value proposition for both network carriers and LCCs, while facilitating travel agencies to upsell more content efficiently.

 

Certain airlines have started to develop their own offerings tailored to our travel agencies, often using new distribution capabilities promoted by IATA, and imposing surcharges on GDS channel bookings. We have negotiated new agreements containing revised business models and price points with surcharging carriers while procuring the content available from these carriers, resulting in increased fees for surcharged bookings. The mix of types of airline agreements on our Travel Commerce Platform will continue to impact our revenue. Our value-based pricing model has been instrumental in driving RevPas growth in recent years.

 

Travel agency commissions constitute a large portion of our operating costs and continue to increase due to competitive factors. We utilize the differentiated and industry leading features, functionality and innovative solutions offered on our Travel Commerce Platform to manage the commissions we pay to travel agencies.

 

Increasing Expansion and Importance of LCCs: Over the past decade, LCCs have become a substantial segment of the air travel industry, generating additional demand for air travel through low fares. LCCs have continued to grow, with LCCs’ share of global air travel volume expected to increase from 17% of revenue passenger kilometers in 2014 to 21% of revenue passenger kilometers by 2034, according to Airbus. LCCs have traditionally relied on direct distribution, but are now increasingly targeting the indirect channel to support their future growth aspirations and expand their offering into higher yield markets and to higher yield customers.

 

Increasingly, we believe that LCCs desire to grow their away bookings, reach leisure travelers seeking complex itineraries typically booked through travel agencies and increase their access to business travelers that use corporate booking tools accessible through GDSs. In addition, we believe that LCCs desire to sell their products, including ancillaries, through the indirect channel in the same manner they sell through the direct channel. Unlike a traditional GDS, we provide XML connectivity and merchandising capabilities, and, therefore, believe we are a natural partner for LCCs. Our access to business travelers, merchandising capabilities and ability to process complex itineraries have attracted and allowed for the full integration of several prominent and fast-growing LCCs such as AirAsia, easyJet, IndiGo and Ryanair into our fully integrated Travel Commerce Platform.

 

Consolidations Within the Travel Industry: The travel industry has experienced consolidation, including airline mergers and alliances, as well as among travel agencies. Examples in the airline industry include the merger of United Airlines and Continental Airlines, the merger of American Airlines and US Airways, the acquisition of AirTran Airways by Southwest Airlines, the merger of British Airways and Iberia and subsequent acquisitions of Aer Lingus and Vueling and the acquisition of Virgin America by Alaska Air Group. We have been impacted by consolidations within the airline industry in the past. Further consolidation among airlines could increase our customer concentration, reduce airline seat capacity and increase the negotiating ability of airline travel providers.

 

The travel industry also has experienced consolidation among travel agencies, including large OTAs. For example, in 2015, Expedia acquired Orbitz Worldwide and Travelocity. Further consolidation among travel agencies could increase our customer concentration and increase the ability of travel agencies to negotiate higher incentives or customer loyalty payments.

 

Growing Demand for Improved Distribution in the Fragmented Hotel Industry: The hotel industry remains highly fragmented, with the top ten global hotel chains representing less than 30% of room revenue in every region except North America and Australasia, according to Euromonitor International. The majority of hotels that currently distribute through traditional GDSs consist of large chain hotels that represent a small percentage of total hotel inventory. Independent hotels, as well as small and mid-size chain hotels, have been historically left outside of the traditional GDS distribution channel primarily due to technology connectivity issues. Developments in technology and the ability to aggregate hotel content from OTAs through meta-search technology, however, have created a significant opportunity for growth in this area of distribution, including targeting business travelers. We have already seen the impact of these trends through the growth in our hotel bookings and believe we are well positioned to meet the growing needs of independent hotels and small- to medium-sized chain hotels through our specifically tailored technology solutions.

 

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Growth in Technology-Enabled B2B Payment Solutions: Traditionally, travel payments from travel agencies to travel providers have been settled through a variety of methods, such as cash, EFTs, corporate cards, lodge cards and other methods. Each of these traditional payment methods bears numerous inefficiencies as well as significant credit-related and fraud-related risks that are costly and time consuming creating an opportunity for an alternative innovative model, such as VANs. Growth in technology-enabled B2B payment solutions benefits us directly through our majority ownership of eNett. In 2017, eNett generated revenue of $194 million, representing a 29% increase from 2016. We expect eNett to increase its penetration rate in the travel industry and continue to increase its share of our revenue growth.

 

Factors Affecting the Company

 

Factors affecting our results of operations, but not necessarily our entire industry, include:

 

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 years ended December 31, 2017, 2016 and 2015:

 

   Year Ended 
   December 31, 
(in percentages)  2017   2016   2015 
Asia Pacific   24    23    22 
Europe   32    32    30 
Latin America and Canada   5    5    5 
Middle East and Africa   13    13    14 
International   74    73    71 
United States   26    27    29 
Travel Commerce Platform   100    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.

 

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 125 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 38,000 car rental locations, approximately 50 cruise-line and tour operators and 14 major rail networks worldwide. We aggregate travel content across approximately 65,000 travel agency locations representing approximately 230,000 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 year ended December 31, 2017.

 

In general, our business is characterized by multi-year travel provider and travel agency contracts. In 2017, we had 59 planned airline contract renewals, and we successfully renewed substantially all of such contracts. We currently have 50 and 77 planned airline contract renewals in 2018 and 2019, respectively, including contracts which roll on an annual basis. Travel agency contracts representing approximately 27%, 11% and 62% of 2017 revenue are up for renewal in 2018, 2019, and beyond, respectively. We cannot guarantee that we will be able to renew our travel provider or travel agency agreements in the future on favorable economic terms, or at all.

 

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.

 

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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.

 

Components of Revenue and Expenses

 

Revenue Model

 

Travel Commerce Platform

 

Transaction Volume Model: This is our core model and is used broadly across our Travel Commerce Platform. The fee we charge per segment is not dependent on the transaction value of the segment, but is affected by other factors such as whether the booking was made in the travel providers’ home market or in an away market. We also receive revenue for cancellations of bookings previously made on our system and when tickets are issued by us that were originally booked on an alternative system. Revenue for air travel reservations is recognized at the time of the booking, net of estimated cancellations. Revenue for car and hotel reservations in Beyond Air is recognized upon fulfillment of the reservation.

 

Transaction Value Model: Our payment solutions model earns revenue as a percentage of total transaction value in the form of interchange fees payable by banks. Revenue is recognized when the payment is processed.

 

Subscription Fee Model: We collect subscription fees from travel agencies, internet sites and other subscribers to access the applications on our Travel Commerce Platform, including providing the ability to access schedule and fare information, book reservations and issue tickets. Where the contractual terms have fixed amounts of fees, revenue is recognized ratably over the contract period. Where the contractual terms have variable usage of services, revenue is recognized as the services are provided.

 

Technology Services

 

We collect fees, generally on a monthly basis under long-term contracts, for providing critical hosting solutions and other services to airlines such as shopping, ticketing, departure control, business intelligence and other solutions. Where the contractual terms have fixed amounts of fees, revenue is recognized ratably over the contract period. Where the contractual terms have variable usage of services, revenue is recognized as the services are provided.

 

Cost of Revenue

 

Cost of revenue consists primarily of:

 

Commissions: Payments or other consideration to travel agencies and NDCs for reservations made on our Travel Commerce Platform that accrue on a monthly basis. Commissions are provided in two ways depending on the terms of the contract: (i) variable per segment on a periodic basis over the term of the contract and (ii) upfront at the inception or modification of contracts, which is capitalized and amortized over the expected life of the contract and includes customer loyalty payments. The variable and amortized portion of the upfront incentive consideration is recorded within cost of revenue. Cost of revenue also includes incentive considerations to travel agencies and bank service charges for payment solutions.

 

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Technology Costs: The direct technology costs related to revenue production, consisting of the maintenance and development costs for the mainframes, servers and software that is the shared infrastructure used to run our Travel Commerce Platform and Technology Services. Such costs consist of:

 

service contracts with IBM, Cisco and other technology service providers, including on-site around-the-clock support for computer equipment and the cost of software licenses used to run our Travel Commerce Platform and our data center;

 

other operating costs associated with running our Travel Commerce Platform, including facility and other running costs of our data center;

 

telecommunication and technology costs related to maintaining the networks between us and our travel providers and our hosting solutions; and

 

salaries and benefits paid to employees and fees paid to third-party IT development companies for the development, delivery and implementation of software; the maintenance of mainframes, servers and software used in our data center; and costs related to call center operations.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses consist of (i) workforce-related expenses for sales, finance, legal, human resources and administrative support employees, (ii) non-workforce expenses, including accounting, tax and other professional services fees, legal related costs, bad debt expense, realized foreign exchange gains or losses and other miscellaneous items and (iii) non-core corporate costs, including 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.

 

Depreciation and Amortization

 

Depreciation and amortization consists of depreciation expense on property and equipment and amortization expense on certain intangible assets. Property and equipment is primarily comprised of internally developed software, purchased software licenses and computer equipment. Depreciation is computed using the straight-line method over the estimated useful lives of the assets.

 

Definite-lived intangible assets are amortized, and such assets primarily relate to customer and vendor contracts acquired in the sale of Travelport to Blackstone in 2006 and from our acquisition of Worldspan in 2007. Amortization is computed using the straight-line method over the estimated useful lives of the assets, unless another method is more appropriate.

 

Interest Expense, net

 

Interest expense, net is primarily comprised of (i) interest expense on our borrowings, financial expense on hedging derivatives and the amortization of debt discount and deferred financing fees, less (ii) financial income received from our hedging derivatives and interest earned from short-term investments and bank deposits, plus/less (iii) the change in the fair value of derivatives that do not qualify for hedge accounting.

 

Gain (Loss) on Early Extinguishment of Debt

 

Gain (loss) on early extinguishment of debt is primarily comprised of (i) gain (loss) on extinguishment of debt, (ii) unamortized debt finance costs and debt discounts written-off and (iii) early repayment penalties related to our financing arrangements.

 

Provision of 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) a valuation allowance continued to be maintained in various jurisdictions, including the U.S. and the U.K., due to the 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, (iv) certain income or gains which are not subject to tax, (v) the impact of return-to-provision adjustments, (vi) the impact of the U.S. Tax Reforms and (vii) the impact of changes in the U.K. to the tax deductibility of interest.

 

On December 22, 2017, the U.S. government enacted the U.S. Tax Reforms that made significant changes to the U.S. tax code affecting our provision for income taxes for 2017 and future years due to several changes, including (i) a reduction in the U.S. federal corporate tax rate from 35% to 21%; (ii) a transition tax on certain unremitted earnings of foreign subsidiaries; (iii) the repeal of the alternative minimum tax (“AMT”) and change in how existing AMT credit carry forwards can be realized; and (iv) accelerated depreciation of qualifying capital expenditures.

 

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On November 16, 2017, the U.K. government enacted significant changes to U.K. tax legislation concerning the tax deductibility of interest. In line with recommendations set out by the OECD-led proposals on international corporate taxation, effective April 1, 2017, a new cap on relief for interest has been introduced that affects our provision for income taxes for 2017 and future years.

 

Results of Operations

 

Year Ended December 31, 2017 Compared to Year Ended December 31, 2016

 

   Year Ended         
   December 31,   Change 
(in $ thousands)  2017   2016   $   % 
Net revenue  $2,447,279   $2,351,356   $95,923    4 
Costs and expenses                    
Cost of revenue   1,506,010    1,430,646    75,364    5 
Selling, general and administrative   448,070    510,688    (62,618)   (12)
Depreciation and amortization   207,310    209,409    (2,099)   (1)
Total costs and expenses   2,161,390    2,150,743    10,647     
Operating income   285,889    200,613    85,276    43 
Interest expense, net   (111,237)   (151,481)   40,244    27 
Gain on sale of a subsidiary   1,217        1,217    * 
Loss on early extinguishment of debt   (5,366)   (4,333)   (1,033)   (24)
Income from continuing operations before income taxes   170,503    44,799    125,704    * 
Provision for income taxes   (32,230)   (29,753)   (2,477)   (8)
Net income from continuing operations   138,273    15,046    123,227    * 
Income from discontinued operations, net of tax   2,007        2,007    * 
Net income  $140,280   $15,046   $125,234    * 

 

*Percentage calculated not meaningful

 

Net Revenue

 

Net revenue is comprised of:

 

   Year Ended         
   December 31,   Change 
(in $ thousands)  2017   2016   $   % 
Air  $1,701,097   $1,651,316   $49,781    3 
Beyond Air   640,038    579,133    60,905    11 
Travel Commerce Platform   2,341,135    2,230,449    110,686    5 
Technology Services   106,144    120,907    (14,763)   (12)
Net revenue   $2,447,279   $2,351,356   $95,923    4 

 

For the year ended December 31, 2017, net revenue increased by $96 million, or 4%, compared to the year ended December 31, 2016. This increase was due to an increase in Travel Commerce Platform revenue of $111 million, or 5%, offset by a decrease in Technology Services revenue of $15 million, or 12%.

 

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Travel Commerce Platform

 

The table below sets forth Travel Commerce Platform RevPas and Reported Segments:

 

   Year Ended         
   December 31,   Change 
   2017   2016       % 
Travel Commerce Platform RevPas (in $)    $6.83   $6.59   $0.24    4 
Reported Segments (in thousands)     342,578    338,344    4,234    1 

 

The increase in Travel Commerce Platform revenue of $111 million, or 5%, was due to a $50 million, or 3%, increase in Air revenue and a $61 million, or 11%, increase in Beyond Air revenue. Overall, there was a 4% increase in Travel Commerce Platform RevPas and a 1% 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 our Travel Commerce Platform increased to $82.7 billion for the year ended December 31, 2017 from $78.8 billion for the year ended December 31, 2016 primarily due to an increase in the value and volume of transactions in payment solutions and an increase in International Reported Segments. Our percentage of Air segment revenue from away bookings remained stable at 67%. Our hospitality segments per 100 airline tickets issued decreased to 46 from 47 primarily due to change in mix of Air bookings. Our hotel room nights and car rental days sold grew by 4% and 12%, respectively, and were 68 million and 106 million, respectively, for the year ended December 31, 2017.

 

The table below sets forth Travel Commerce Platform revenue by region:

 

   Year Ended         
   December 31,   Change 
(in $ thousands)  2017   2016       % 
Asia Pacific  $565,246   $512,521   $52,725    10 
Europe   753,462    722,058    31,404    4 
Latin America and Canada   109,632    106,834    2,798    3 
Middle East and Africa   311,813    290,068    21,745    7 
International   1,740,153    1,631,481    108,672    7 
United States   600,982    598,968    2,014     
Travel Commerce Platform  $2,341,135   $2,230,449   $110,686    5 

 

The table below sets forth Reported Segments and RevPas by region:

  

   Segments (in thousands)   RevPas (in $) 
   Year Ended           Year Ended     
   December 31,   Change   December 31,   Change 
(in $ thousands)  2017   2016       %   2017   2016       % 
Asia Pacific   69,922    66,674    3,248    5   $8.08   $7.69   $0.39    5 
Europe   83,202    82,515    687    1    9.06   $8.75   $0.31    3 
Latin America and Canada   18,168    17,377    791    5    6.03   $6.15   $(0.12)   (2)
Middle East and Africa   37,125    37,387    (262)   (1)   8.40   $7.76   $0.64    8 
International   208,417    203,953    4,464    2    8.35   $8.00   $0.35    4 
United States   134,161    134,391    (230)       4.48   $4.46   $0.02     
Travel Commerce Platform   342,578    338,344    4,234    1   $6.83   $6.59   $0.24    4 

 

International

 

Our International Travel Commerce Platform revenue increased $109 million, or 7%, due to a 4% increase in RevPas and a 2% increase in Reported Segments. The increase in RevPas was a result of growth in our Air and Beyond Air offerings. The increase in Air was mainly due to the increase in Reported Segments, improved pricing and a $9 million recognition of revenue deferred in previous years, partially offset by a decline due to mix. The increase in Beyond Air revenue was primarily driven by growth in payment solutions, hospitality and advertising and digital services. Our International Travel Commerce Platform revenue as a percentage of total Travel Commerce Platform revenue was 74% for the year ended December 31, 2017 compared to 73% for the year ended December 31, 2016.

 

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Asia Pacific

 

Revenue in Asia Pacific increased $53 million, or 10%, due to a 5% increase in both Reported Segments and RevPas. Reported Segments increased primarily due to growth in India, Hong Kong and Indonesia, partially offset by a decline in Australia resulting from the loss of a travel agency. RevPas increased due to revenue growth in Air and growth in payment solutions in Beyond Air.

 

Europe

 

Revenue in Europe increased $31 million, or 4%, primarily due to a 3% increase in RevPas and a 1% increase in Reported Segments. RevPas increased due to revenue growth in Air and growth in payment solutions and digital solutions in Beyond Air.

 

Latin America and Canada

 

Revenue in Latin America and Canada increased by $3 million, or 3%, due to a 5% increase in Reported Segments, offset by a 2% decrease in RevPas.

 

Middle East and Africa

 

Revenue in the Middle East and Africa increased by $22 million, or 7% due to an 8% increase in RevPas offset by a 1% decrease in Reported Segments. The increase in RevPas was mainly due to a $9 million recognition of revenue deferred in previous years, revenue growth in Air and growth in payment solutions and digital solutions in Beyond Air.

 

United States

 

Revenue in the United States increased $2 million, due to an increase in Beyond Air revenue, driven by growth in hospitality and advertising, partially offset by lower Air revenue. RevPas and Reported Segments remained stable.

 

Technology Services

 

Technology Services revenue decreased $15 million, or 12%, primarily due to the sale of IGTS in April 2017.

 

Cost of Revenue

 

Cost of revenue is comprised of:

 

   Year Ended         
   December 31,   Change 
(in $ thousands)  2017   2016   $   % 
Commissions  $1,184,532   $1,104,005   $80,527    7 
Technology costs   321,478    326,641    (5,163)   (2)
Cost of revenue  $1,506,010   $1,430,646   $75,364    5 

 

Cost of revenue increased by $75 million, or 5%, as a result of an $81 million, or 7%, increase in commission costs, partially offset by a $5 million, or 2%, decrease in technology costs. Commissions increased due to a 1% increase in Reported Segments, a 4% increase in travel distribution costs per segment and incremental commissions costs from our payment solutions business. The increase in travel distribution costs per segment was driven by an increase in pricing and higher volume related incentives; offset by our acquisition of our distributor in Japan and the positive impact of an $11 million allowance for a prepaid incentive related to a long-term contract with a travel agent recorded during the year ended December 31, 2016. Commissions include amortization of customer loyalty payments of $68 million and $71 million for the years ended December 31, 2017 and 2016, respectively. Technology costs across the shared infrastructure that runs our Travel Commerce Platform and Technology Services decreased by $5 million, or 2%, due to reduced costs resulting from the sale of IGTS in April 2017, partially offset by higher investments in technology.

 

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Selling, General and Administrative (SG&A)

 

SG&A is comprised of:

 

   Year Ended         
   December 31,   Change 
(in $ thousands)  2017   2016   $   % 
Workforce  $346,417   $330,532   $15,885    5 
Non-workforce   72,957    86,966    (14,009)   (16)
Sub-total   419,374    417,498    1,876     
Non-core corporate costs   28,696    93,190    (64,494)   (69)
SG&A  $448,070   $510,688   $(62,618)   (12)

 

SG&A expenses decreased by $63 million, or 12%, during the year ended December 31, 2017 compared to December 31, 2016. SG&A expenses include $29 million and $93 million of charges for the years ended December 31, 2017 and 2016, respectively, for non-core corporate costs that are removed from Adjusted EBITDA. Excluding these items, our SG&A expenses for the year ended December 31, 2017 compared to the year ended December 31, 2016 increased by $2 million. Workforce expenses, which include the wages and benefits of our selling, marketing, advertising, finance and legal personnel increased by $16 million, or 5%, primarily due to an increase in headcount and merit increases, partially offset by lower employee incentive costs and favorable foreign currency exchange movement. Non-workforce expenses, which include the costs of finance and legal professional fees, communications, marketing and foreign exchange related costs, decreased $14 million, or 16%, primarily due to realized foreign exchange gains in 2017 and reduced administrative expense.

 

Non-core corporate costs of $29 million and $93 million for the years ended December 31, 2017 and 2016, 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 $64 million, or 69%, is due to a $43 million favorable movement in the fair value of unrealized foreign currency derivative contracts, a $14 million decrease in corporate and restructuring costs and a $10 million decrease in impairment on property and equipment, offset by a $3 million increase in equity-based compensation expense.

 

Depreciation and Amortization

 

Depreciation and amortization is comprised of:

 

   Year Ended         
   December 31,   Change 
(in $ thousands)  2017   2016   $   % 
Depreciation on property and equipment  $166,456   $162,314   $4,142    3 
Amortization of acquired intangible assets   40,854    47,095    (6,241)   (13)
Total depreciation and amortization  $207,310   $209,409   $(2,099)   (1)

 

Total depreciation and amortization decreased by $2 million, or 1%. Depreciation on property and equipment increased by $4 million, or 3%, due to additional assets being depreciated upon their transfer from construction in progress to capitalized software. Amortization of acquired intangible assets decreased by $6 million, or 13%, 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 $40 million, or 27%, primarily due to (i) a $25 million decrease related to lower interest rates on term loans outstanding under our senior secured credit agreement, (ii) a $10 million net favorable impact of fair value changes on our interest rate swap derivative contracts and (iii) a $7 million decrease related to our reduced outstanding debt balance.

 

Gain on Sale of a Subsidiary

 

In April 2017, we sold our 51% controlling interest in IGTS for a total gross cash consideration of $18 million and recorded a gain on the sale of such subsidiary of $1 million.

 

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Loss on Early Extinguishment of Debt

 

During the year ended December 31, 2017, we voluntarily prepaid $124 million principal amount of the term loans outstanding under our senior secured credit agreement. Further, we amended our senior secured credit agreement under which we (i) increased the total amount available under the revolving credit facility and extended its maturity and (ii) reduced the interest rates on our term loans by 125 basis points. In connection with these amendments, certain lenders were replaced by new lenders under the revolving credit facility and certain term loan lenders were repaid partially or in full. These transactions resulted in a $5 million loss on early extinguishment of debt.

 

In June 2016, we amended our senior secured credit agreement under which we reduced the interest rate on our term loans by 75 basis points. In connection with this amendment, certain lenders under the credit agreement were repaid partially or in full. Further, in September 2016, we voluntarily prepaid $50 million principal amount of the term loans outstanding under our senior secured credit agreement. These transactions resulted in a $4 million loss on early extinguishment of debt.

 

Provision for Income Taxes

 

Our tax provision differs from the expected provision amount calculated at the U.S. federal statutory rate primarily as a result of a number of items such as (i) being subject to income tax in numerous non-U.S. jurisdictions with varying income tax rates, (ii) a valuation allowance continued to be maintained in various jurisdictions, including the U.S., due to the historical losses in such jurisdictions, (iii) certain expenses that are not deductible for tax or do not secure an effective tax deduction in the relevant jurisdictions (iv) certain income or gains which are not subject to tax, (v) the impact of return-to-provision adjustments, (vi) the impact of the U.S. Tax Reforms and (vii) the impact of changes in the U.K. to the tax deductibility of interest.

 

The U.S. Tax Reforms (i) reduced the U.S. federal corporate tax rate from 35% to 21%, effective January 1, 2018, resulting in an increased tax charge due to a decrease in our deferred tax asset of $51 million, fully offset by the release of the associated valuation allowance and an income tax benefit from the remeasurement of deferred tax liabilities of $22 million and (ii) repealed the AMT regime and allowed for AMT credit carry forwards to be offset against future regular tax liabilities, resulting in a benefit of $2 million related to the release of a valuation allowance held on these AMT credit carry forwards. For the year ended December 31, 2017, (i) under the Deemed Repatriation Transition Tax (the “Transition Tax”) on unremitted earnings of our foreign subsidiaries, we determined provisional Transition Tax income of $6 million (tax of approximately $2 million), which was fully offset using U.S. federal net operating losses (“NOLs”), and (ii) we determined a provisional impact of $3 million from the accelerated depreciation of qualifying capital expenditure, which is fully equalized and has no net impact on the tax charge. Our provision for income taxes for the year ended December 31, 2017 also includes an increased tax charge of $7 million resulting from changes to U.K. tax legislation enacted in 2017 that limits the relief for interest expense.

 

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

 

   Year Ended         
   December 31,   Change 
(in $ thousands)  2016   2015   $   % 
Net revenue   $2,351,356   $2,221,020   $130,336    6 
Costs and expenses                    
Cost of revenue   1,430,646    1,340,405    90,241    7 
Selling, general and administrative   510,688    455,864    54,824    12 
Depreciation and amortization   209,409    234,228    (24,819)   (11)
Total costs and expenses   2,150,743    2,030,497    120,246    6 
Operating income    200,613    190,523    10,090    5 
Interest expense, net   (151,481)   (148,787)   (2,694)   (2)
Gain on sale of shares of Orbitz Worldwide       6,271    (6,271)   (100)
Loss on early extinguishment of debt   (4,333)       (4,333)   * 
Income from continuing operations before income taxes and share of losses in equity method investments   44,799    48,007    (3,208)   (7)
Provision for income taxes   (29,753)   (27,126)   (2,627)   (10)
Share of losses in equity method investments       (671)   671    100 
Net income  $15,046   $20,210   $(5,164)   (26)

 

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Net Revenue

 

Net revenue is comprised of:

 

   Year Ended         
   December 31,   Change 
(in $ thousands)  2016   2015   $   % 
Air  $1,651,316   $1,603,302   $48,014    3 
Beyond Air   579,133    491,855    87,278    18 
Travel Commerce Platform   2,230,449    2,095,157    135,292    6 
Technology Services   120,907    125,863    (4,956)   (4)
Net revenue   $2,351,356   $2,221,020   $130,336    6 

 

For the year ended December 31, 2016, net revenue increased by $130 million, or 6%, compared to the year ended December 31, 2015. This increase was driven by an increase in Travel Commerce Platform revenue $135 million, or 6%.

 

Travel Commerce Platform

 

The table below sets forth Travel Commerce Platform RevPas and Reported Segments:

 

 

   Year Ended         
   December 31,   Change 
   2016   2015       % 
Travel Commerce Platform RevPas (in $)    $6.59   $6.13   $0.46    7 
Reported Segments (in thousands)     338,344    341,552    (3,208)   (1)

 

The increase in Travel Commerce Platform revenue of $135 million, or 6%, was due to a $48 million, or 3%, increase in Air revenue and an $87 million, or 18%, increase in Beyond Air revenue. Overall, there was a 7% increase in Travel Commerce Platform RevPas, offset by a 1% decrease 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 our Travel Commerce Platform decreased to $78.8 billion for the year ended December 31, 2016 from $82.4 billion for the year ended December 31, 2015 as a result of a decrease in segments in the U.S. and Middle East and Africa, a reduction in average ticket prices in line with global trends and fluctuation in foreign currency exchange rates. Our percentage of Air segment revenue from away bookings increased to 67% from 65%. We increased our car rental days sold to 94 million from 91 million and our hotel room nights sold to 66 million from 65 million, with our hospitality segments per 100 airline tickets issued remaining stable at 47.

 

The table below sets forth Travel Commerce Platform revenue by region:

 

   Year Ended         
   December 31,   Change 
(in $ thousands)  2016   2015       % 
Asia Pacific  $512,521   $459,557   $52,964    12 
Europe   722,058    634,238    87,820    14 
Latin America and Canada   106,834    99,228    7,606    8 
Middle East and Africa   290,068    289,477    591     
International   1,631,481    1,482,500    148,981    10 
United States   598,968    612,657    (13,689)   (2)
Travel Commerce Platform  $2,230,449   $2,095,157   $135,292    6 

 

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The table below sets forth Reported Segments and RevPas by region:

 

   Segments (in thousands)   RevPas (in $) 
   Year Ended           Year Ended         
   December 31,   Change   December 31,   Change 
(in $ thousands)  2016   2015       %   2016   2015       % 
Asia Pacific  $66,674   $63,537    3,137    5   $7.69   $7.23   $0.46    6 
Europe   82,515    81,350    1,165    1   $8.75   $7.80    0.95    12 
Latin America and Canada   17,377    16,881    496    3   $6.15   $5.88    0.27    5 
Middle East and Africa   37,387    38,550    (1,163)   (3)  $7.76   $7.51    0.25    3 
International   203,953    200,318    3,635    2   $8.00   $7.40    0.60    8 
United States   134,391    141,234    (6,843)   (5)  $4.46   $4.34    0.12    3 
Travel Commerce Platform  $338,344   $341,552    (3,208)   (1)  $6.59   $6.13   $0.46    7 

 

International

 

Our International Travel Commerce Platform revenue increased $149 million, or 10%, due to an 8% increase in RevPas and a 2% increase in Reported Segments. The increase in RevPas was a result of growth in our Air and Beyond Air offerings. The increase in Air was mainly due to improved pricing and merchandising, and the increase in Beyond Air was primarily driven by growth in payment solutions and expansion into digital services. Our International Travel Commerce Platform revenue as a percentage of total Travel Commerce Platform revenue was 73% for the year ended December 31, 2016 compared to 71% for the year ended December 31, 2015.

 

Asia Pacific

 

Revenue in Asia Pacific increased $53 million, or 12%, due to a 6% increase in RevPas and a 5% increase in Reported Segments. RevPas increased due to revenue growth in Air and payment solutions growth and expansion into digital services in Beyond Air. Reported Segments increased due to growth in India, South Korea and Hong Kong.

 

Europe

 

Revenue in Europe increased $88 million, or 14%, due to a 12% increase in RevPas and a 1% increase in Reported Segments. RevPas increased primarily due to revenue growth in Air and payment solutions in Beyond Air. Reported Segments increased mainly due to growth in Greece, Russia and France, partially offset by a decline in Italy.

 

Latin America and Canada

 

Revenue in Latin America and Canada increased $8 million, or 8%, due to a 5% increase in RevPas and a 3% increase in Reported Segments. The increase in RevPas was due to revenue growth in both Air and Beyond Air, primarily driven by expansion into digital services. Reported Segments experienced growth in Colombia, Argentina and Brazil, partially offset by a decline in Canada.

 

Middle East and Africa

 

Revenue in the Middle East and Africa increased marginally by $1 million.

 

United States

 

Revenue in the United States decreased $14 million, or 2%, primarily due to a 5% decrease in Reported Segments, partially offset by a 3% increase in RevPas. The decrease in Reported Segments was primarily driven by the impact of the renegotiated contract with Orbitz Worldwide in 2014, partially offset by growth in other parts of our Travel Commerce Platform. The increase in RevPas was primarily due to growth in Beyond Air revenue.

 

Technology Services

 

Technology Services revenue decreased $5 million, or 4%, primarily due to a reduction in hosting solutions and development revenue.

 

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Cost of Revenue

 

Cost of revenue is comprised of:

 

   Year Ended         
   December 31,   Change 
(in $ thousands)  2016   2015   $   % 
Commissions  $1,104,005   $1,029,002   $75,003    7 
Technology costs   326,641    311,403    15,238    5 
Cost of revenue  $1,430,646   $1,340,405   $90,241    7 

 

Cost of revenue increased by $90 million, or 7%, as a result of a $75 million, or 7%, increase in commission costs and a $15 million, or 5%, increase in technology costs. Commissions increased due to a 4% increase in travel distribution costs per segment, primarily driven by mix and pricing, an $11 million allowance for a prepaid incentive related to a long-term contract with a travel agent and incremental commission costs from our payment solutions business. This increase was partially offset by a 1% decrease in Reported Segments, reduction in commissions resulting from our acquisition of our distributor in Japan and favorable foreign currency exchange movement. Commissions include amortization of customer loyalty payments of $71 million and $67 million for the years ended December 31, 2016 and 2015, respectively. Technology costs across the shared infrastructure that runs our Travel Commerce Platform and Technology Services increased due to continued expansion of our operations through acquisitions and further investments in technology.

 

Selling, General and Administrative (SG&A)

 

SG&A is comprised of:

 

   Year Ended         
   December 31,   Change 
(in $ thousands)  2016   2015   $   % 
Workforce  $330,532   $311,108   $19,424    6 
Non-workforce   86,966    101,527    (14,561)   (14)
Sub-total   417,498    412,635    4,863    1 
Non-core corporate costs   93,190    43,229    49,961    116 
SG&A  $510,688   $455,864   $54,824    12 

 

SG&A expenses increased by $55 million, or 12%, during the year ended December 31, 2016 compared to December 31, 2015. SG&A expenses include $93 million and $43 million of charges for the years ended December 31, 2016 and 2015, respectively, for non-core corporate costs that are removed from Adjusted EBITDA. Excluding these items, our SG&A expenses for the year ended December 31, 2016 compared to the year ended December 31, 2015 increased by $5 million, or 1%. Workforce expenses, which include the wages and benefits of our selling, marketing, advertising, finance and legal personnel increased by $19 million, or 6%, primarily as a result of increased wages and benefits due to headcount increases related to the expansion of our Travel Commerce Platform through acquisitions and go-to-market capabilities and merit increases, partially offset by favorable foreign currency exchange movement. Non-workforce expenses, which include the costs of finance and legal professional fees, communications and marketing and foreign exchange related costs, decreased $15 million, or 14%, primarily due to lower realized foreign exchange losses and reduced administrative expenses.

 

Non-core corporate costs of $93 million and $43 million for the years ended December 31, 2016 and 2015, 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 increase of $50 million, or 116%, is primarily due to a $20 million increase in corporate and restructuring costs, which primarily relate to restructuring costs relating to our technology transformation program, a $13 million fluctuation in unrealized foreign exchange gains and losses on foreign currency derivative contracts, an $11 million of impairment of long-lived assets recognized in 2016 and a $3 million increase in equity-based compensation.

 

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Depreciation and Amortization

 

Depreciation and amortization is comprised of:

 

   Year Ended         
   December 31,   Change 
(in $ thousands)  2016   2015   $   % 
Depreciation on property and equipment  $162,314   $162,661   $(347)    
Amortization of acquired intangible assets   47,095    71,567    (24,472)   (34)
Total depreciation and amortization  $209,409   $234,228   $(24,819)   (11)

 

Total depreciation and amortization decreased by $25 million, or 11%, primarily due to a decrease in the amortization of acquired intangible assets 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, increased $3 million, or 2%, due to a $15 million adverse impact of fair value changes on our interest rate swaps, offset by a $12 million decrease due to the lower outstanding balance of term loans under our senior secured credit agreement and a decrease in the interest rate on such term loans from 5.75% during the year ended December 31, 2015 to 5.00% from June 2016 to December 2016.

 

Loss on Early Extinguishment of Debt

 

In June 2016, we amended our senior secured credit agreement to reduce the interest rate on our term loans by 75 basis points. In connection with this amendment, certain lenders were repaid partially or in full. In September 2016, we voluntarily prepaid $50 million principal amount of the term loans outstanding under our senior secured credit agreement. Further in December 2016, we prepaid $14 million of other indebtedness. These transactions resulted in a $4 million loss on early extinguishment of debt resulting from the write-off of unamortized debt finance costs and debt discount.

 

Gain on Sale of Shares of Orbitz Worldwide

 

In February 2015, we sold all of our remaining shares of common stock of Orbitz Worldwide, which were classified as available-for-sale securities, and realized a gain of $6 million for 2015.

 

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 a number of items such as (i) being subject to income tax in numerous non-U.S. jurisdictions with varying income tax rates, (ii) a valuation allowance continued to be maintained in various jurisdictions including the U.S. due to the 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 and (iv) certain income or gains which are not subject to tax.

 

Share of Losses in Equity Method Investments

 

Our share of losses in equity method investments was $1 million for the year ended December 31, 2015, which reflected our 49% of ownership interest in Travelport Locomote until October 8, 2015, subsequent to which date we obtained a controlling interest.

 

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 December 31, 2017, 2016 and 2015, our cash and cash equivalents, cash held as collateral and revolving credit facility availability were as follows:

 

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   Year Ended 
   December 31, 
(in $ thousands)  2017   2016   2015 
Cash and cash equivalents  $122,039   $139,938   $154,841 
Revolving credit facility availability   141,729    116,313    101,280 

 

With the cash and cash equivalents on our consolidated 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 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. The movement within these account balances are included within working capital.

 

The table below sets forth our working capital as of December 31, 2017 and 2016, as monitored by management, which is then reconciled to our working capital as presented in our consolidated balance sheets:

 

   Asset (Liability)     
   December 31,   December 31,     
(in $ thousands)  2017   2016   Change 
Accounts receivable, net  $206,524   $218,224   $(11,700)
Accrued commissions and incentives   (282,954)   (267,488)   (15,466)
Deferred revenue and prepaid incentives, net   (31,419)   (32,741)   1,322 
Cash and cash equivalents   122,039    139,938    (17,899)
Accounts payable and employee related   (145,140)   (144,657)   (483)
Accrued interest   (12,010)   (15,215)   3,205 
Current portion of long-term debt   (64,291)   (63,558)   (733)
Taxes   (2,823)   9,618    (12,441)
Other assets (liabilities), net   1,724    (3,207)   4,931 
Working Capital   $(208,350)  $(159,086)  $(49,264)
Consolidated Balance Sheets:               
Total current assets  $438,287   $442,251   $(3,964)
Total current liabilities   (646,637)   (601,337)   (45,300)
Working Capital   $(208,350)  $(159,086)  $(49,264)

 

As of December 31, 2017, we had a working capital net liability of $208 million compared to $159 million as of December 31, 2016. The increase of $49 million is primarily due to an $18 million decrease in cash and cash equivalents as discussed in “Cash flows” below, a $15 million decrease in accrued commission and incentives, a $12 million decrease in accounts receivable, net, a $12 million increase in taxes payable, partially offset by a $5 million increase in other assets (liabilities), net, and a $3 million decrease in accrued interest.

 

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The table below sets forth information on our accounts receivable:

 

   December 31,   December 31,     
   2017   2016   Change 
Accounts receivable, net (in $ thousands)    $206,524   $218,224   $(11,700)
Accounts receivable, net – Days Sales Outstanding (“DSO”)   37    39    (2)

 

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 year ended December 31, 2017, Air revenue accounted for approximately 70% of our revenue; however, only 45% of our outstanding receivables related to customers using ACH as of December 31, 2017. The ACH receivables are collected on average in 32 days. Beyond Air revenue is generally not collected through the ACH process and takes longer to collect. Our average net collection period for total accounts receivable, net, was 37 DSO as of December 31, 2017, as compared to 39 DSO as of December 31, 2016. Higher collectability of receivables in the month of December 2017 compared to December 2016 and the reduction in receivables related to IGTS contributed primarily to the decrease in our accounts receivables, net, balance.

 

We pay commissions to travel agencies on varying contractual terms, including payments made on a monthly, quarterly, semi-annual and annual basis. For the year ended December 31, 2017, our commission costs increased by $81 million, or 7%; similarly, the balance in accrued commissions and incentives increased by $15 million, or 6%, primarily due to the timing of payments to third parties.

 

The table below sets forth our working capital as of December 31, 2016 and 2015, as monitored by management, which is then reconciled to our working capital as presented in our consolidated balance sheets:

 

   Asset (Liability)     
   December 31,   December 31,     
(in $ thousands)  2016   2015   Change 
Accounts receivable, net  $218,224   $205,686   $12,538 
Accrued commissions and incentives   (267,488)   (241,358)   (26,130)
Deferred revenue and prepaid incentives, net   (32,741)   (9,340)   (23,401)
Cash and cash equivalents   139,938    154,841    (14,903)
Accounts payable and employee related   (144,657)   (153,349)   8,692 
Accrued interest   (15,215)   (18,800)   3,585 
Current portion of long-term debt   (63,558)   (74,163)   10,605 
Taxes   9,618    16,850    (7,232)
Other (liabilities) assets, net   (3,207)   5,684    (8,891)
Working Capital   $(159,086)  $(113,949)  $(45,137)
Consolidated Balance Sheets:               
Total current assets   442,251    465,141    (22,890)
Total current liabilities   (601,337)   (579,090)   (22,247)
Working Capital   $(159,086)  $(113,949)  $(45,137)

 

As of December 31, 2016, we had a working capital net liability of $159 million compared to $114 million as of December 31, 2015, an increase of $45 million, which is primarily due to a $26 million increase in accrued commissions and incentives, a $23 million increase in deferred revenue and prepaid incentives, net, a $15 million decrease in cash and cash equivalents as discussed in “Cash Flows” below, a $9 million decrease in other (liabilities) assets, net and a $7 million decrease in taxes, partially offset by a $13 million increase in accounts receivable, net, an $11 million decrease in current portion of long-term debt and a $9 million decrease in accounts payable and employee related.

 

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The table below sets forth information on our accounts receivable:

 

   December 31,   December 31,     
   2016   2015   Change 
Accounts receivable, net (in $ thousands)    $218,224   $205,686   $12,538 
Accounts receivable, net – DSO   39    38    1 

 

Substantially all of our Air revenue within our Travel Commerce Platform is collected through the 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 year ended December 31, 2016, Air revenue accounted for approximately 70% of our revenue, however, only 43% of our outstanding receivables related to customers using ACH as of December 31, 2016. The ACH receivables are collected on average in 32 days. Beyond Air revenue is generally not collected through the ACH process and takes longer to collect. Our average net collection period for total accounts receivable, net, was 39 DSO as of December 31, 2016, as compared to 38 DSO as of December 31, 2015. The increase in our DSO is primarily due to the growth of our Beyond Air revenue, in the month of December 2016 compared to December 2015, which contributed to the increase in our accounts receivables, net, balance.

 

We pay commissions to travel agencies on varying contractual terms, including payments made on a monthly, quarterly, semi-annual and annual basis. For the year ended December 31, 2016, our commissions increased by $75 million, or 7%; similarly, the balance in accrued commissions and incentives increased by $27 million, or 11%, primarily due to the timing of payments to third parties.

 

Cash Flows

 

The following table summarizes the changes to our cash flows provided by (used in) operating, investing and financing activities for the years ended December 31, 2017, 2016 and 2015:

 

   Year Ended 
   December 31, 
(in $ thousands)  2017   2016   2015 
Cash provided by (used in):               
Operating activities  $317,662   $299,019   $262,223 
Investing activities   (120,947)   (122,469)   (166,311)
Financing activities   (215,750)   (190,747)   (78,037)
Effect of exchange rate changes   1,136    (706)   (2,020)
Net (decrease) increase in cash and cash equivalents  $(17,899)  $(14,903)  $15,855 

 

Year Ended December 31, 2017 Compared to Year Ended December 31, 2016

 

As of December 31, 2017, we had $122 million of cash and cash equivalents, a decrease of $18 million compared to December 31, 2016. The following discussion summarizes changes to our cash flows from operating, investing and financing activities for the year ended December 31, 2017 compared to the year ended December 31, 2016.

 

Operating Activities: For the year ended December 31, 2017, cash provided by operating activities was $318 million compared to $299 million for the year ended December 31, 2016. The increase of $19 million is primarily a result of the increase in operating income, the positive impact from fluctuations in working capital and lower cash interest payments.

 

Investing Activities: During the year ended December 31, 2017, cash used in investing activities of $121 million was primarily due to $118 million of cash used to purchase property and equipment and a $3 million net cash outflow related to the sale of IGTS. During the year ended December 31, 2016, cash used in investing activities of $122 million was primarily due to $107 million of cash used to purchase property and equipment and $15 million of net cash consideration paid for the acquisition of our distributor in Japan.

 

Our investing activities for the years ended December 31, 2017 and 2016 include:

 

   Year ended 
   December 31, 
(in $ thousands)  2017   2016   Change 
Cash additions to software developed for internal use  $93,829   $81,741   $12,088 
Cash additions to computer equipment and other   23,685    25,719    (2,034)
Total   $117,514   $107,460   $10,054 

 

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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 capital lease and other indebtedness obligations. For the years ended December 31, 2017 and 2016, we repaid capital lease and other indebtedness obligations of $43 million and $62 million, respectively, which are primarily related to assets within our data center. We finance these investments over an average period of 3 to 5 years in line with the expected life of the equipment. Our total Capital Expenditures were $161 million and $170 million for the years ended December 31, 2017 and 2016, 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, 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.

 

Cash additions to computer equipment and other are primarily for our continuing investment in our data center.

 

Financing Activities: Cash used in financing activities for the year ended December 31, 2017 was $216 million, which primarily consisted of (i) a $124 million net repayment of term loans, (ii) $43 million of capital lease and other indebtedness repayments, (iii) $39 million in dividend payments to shareholders and (iv) $11 million in payments related to the purchase of treasury shares on vesting of equity awards. The cash used in financing activities for the year ended December 31, 2016 was $191 million, which primarily consisted of (i) $37 million in dividend payments to shareholders, (ii) $62 million of capital lease and other indebtedness repayments, (iii)  $74 million of term loans repayment, (iv) an $8 million purchase of non-controlling interest in Travelport Locomote and (v) an $8 million payment to lenders and debt finance costs in connection with the repricing of our term loans.

 

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

 

As of December 31, 2016, we had $140 million of cash and cash equivalents, a decrease of $15 million compared to December 31, 2015. The following discussion summarizes changes to our cash flows from operating, investing and financing activities for the year ended December 31, 2016 compared to the year ended December 31, 2015.

 

Operating Activities: For the year ended December 31, 2016, cash provided by operating activities was $299 million compared to $262 million for the year ended December 31, 2015. The increase of $37 million is primarily a result of the increase in operating income, the positive impact from fluctuations in working capital and lower cash interest payments.

 

Investing Activities: During the year ended December 31, 2016, cash used in investing activities of $122 million was primarily due to $107 million of cash used to purchase property and equipment and $15 million of net cash consideration paid for the acquisition of our distributor in Japan. During the year ended December 31, 2015, cash used in investing activities of $166 million was primarily due to $106 million of cash used to purchase property and equipment and $66 million of net cash consideration paid for our business acquisitions.

 

Our investing activities for the years ended December 31, 2016 and 2015 include:

 

   Year ended 
   December 31, 
(in $ thousands)  2016   2015   Change 
Cash additions to software developed for internal use  $81,741   $77,363   $4,378
Cash additions to computer equipment and other   25,719    28,732    (3,013)
Total   $107,460   $106,095   $1,365 

 

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 capital lease and other indebtedness obligations. For the years ended December 31, 2016 and 2015, we repaid capital lease and other indebtedness obligations of $62 million and $36 million, respectively, which is primarily related to assets within our data center. We finance these investments over an average period of 3 to 5 years in line with the expected life of the equipment. Our total Capital Expenditures were $170 million and $142 million for the years ended December 31, 2016 and 2015, 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, the development of our Travelport Universal API 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.

 

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Cash additions to computer equipment and other are primarily for our continuing investment in our data center.

 

Financing Activities: Cash used in financing activities for the year ended December 31, 2016 was $191 million, which primarily consisted of (i) a $74 million net repayment of term loans, (ii) $62 million of capital lease and other indebtedness repayments, (iii) $37 million in dividend payments to shareholders, (iv) an $8 million purchase of a non-controlling interest in Travelport Locomote and (v) an $8 million payment for lender fees and debt finance costs on repricing of our term loans. The cash used in financing activities for the year ended December 31, 2015 was $78 million, which primarily consisted of (i) $37 million in dividend payments to shareholders, (ii) $36 million of capital lease and other indebtedness repayments, (iii) $24 million of term loans repayment, (iv) a $13 million payment related to the purchase of treasury shares on vesting of equity awards and (v) a $3 million purchase of additional equity in eNett, offset by (v) the release of $26 million of cash provided as collateral for letters of credit and (vii) $12 million from the underwritten sale of treasury shares.

 

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 capital lease obligation 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:

 

   Year ended 
   December 31, 
   2017   2016   2015 
Net cash provided by operating activities  $317,662   $299,019   $262,223 
Less: capital expenditures on property and equipment additions   (117,514)   (107,460)   (106,095)
Free Cash Flow  $200,148   $191,559   $156,128 

 

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Financing Arrangements

 

As of December 31, 2017, our financing arrangements include our senior secured credit facilities and obligations under our capital leases and other indebtedness. The following table summarizes our Net Debt position as of December 31, 2017 and December 31, 2016:

 

   Interest     December 31,   December 31, 
(in $ thousands)  rate  Maturity  2017   2016 
Senior Secured Credit Agreement                
Term loans                
Dollar denominated(1)    L+2.75%  September 2021  $2,124,439   $2,236,157 
Revolver borrowings                
Dollar denominated(1)(2)    L+2.50%  September 2022        
Capital leases and other indebtedness         105,574    108,611 
Total debt         2,230,013    2,344,768 
Less: cash and cash equivalents         (122,039)   (139,938)
Net Debt(3)          $2,107,974   $2,204,830 

 

 

(1)As of December 31, 2016, the interest rates on the term loans and revolver borrowings were LIBOR plus 4.00% and LIBOR plus 5.00%, respectively. Further, as of December 31, 2017 and December 31, 2016, the principal amounts of term loans were $2,154 million (with a minimum LIBOR floor of 0.00%) and $2,278 million (with a minimum LIBOR floor of 1.00%), respectively, which is netted for unamortized debt finance costs of $13 million and $18 million, respectively, and unamortized debt discount of $17 million and $23 million, respectively.

 

(2)The maturity date of the revolving credit facility of September 2, 2022 automatically converts to March 2, 2021 unless the then outstanding term loans have a maturity date on or after December 2, 2022.

 

(3)Net Debt is defined as total debt comprised of current and non-current portion of long-term debt minus cash and cash equivalents. Net Debt 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.

 

During the year ended December 31, 2017, we made voluntary prepayments of $124 million principal amount of our term loans outstanding under our senior secured credit agreement. Pursuant to these prepayments, we recognized $1 million as loss on early extinguishment of debt. We currently are not contractually required to repay quarterly installments of the term loans until its maturity. However, we have classified a portion of the term loans as a current portion of long-term debt as we intend and are able to make additional voluntary prepayments of the term loans from cash flows 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.

 

In January 2017, we entered into an amendment to our senior secured credit agreement, which amended the applicable rates to 2.25% per annum, in the case of base rate (as defined in the senior secured credit agreement) term loans, and 3.25% per annum, in the case of LIBOR term loans. The term loans were subject to a LIBOR floor of 1.00% and a base rate floor of 2.00%. In August 2017, we entered into a further amendment to our senior secured credit agreement that (i) amended the applicable rates to 1.75% per annum, in the case of base rate term loans, and 2.75% per annum, in the case of LIBOR term loans, (ii) reduced the base rate floor to 1.00% from 2.00% and the LIBOR floor to 0.00% from 1.00% and (iii) reset the 1% premium on the repricing of the term loans under the senior secured credit agreement for a period of six months. The interest rate per annum applicable to the term loans is based on, at our election, LIBOR plus 2.75% or base rate plus 1.75%. We expect to pay interest based on LIBOR plus 2.75% for the term loans. During the year ended December 31, 2017, the average LIBOR rate applied to the term loans was 1.19%. In connection with the repricing, certain lenders contributed $114 million towards the term loans and an amount equal to that was paid to the lenders who opted to exit or reduce their participation. As a result, we recognized a loss on early extinguishment of debt of $4 million.

 

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During the year ended December 31, 2017, we (i) repaid a net amount of $124 million of term loans outstanding under our senior secured credit agreement, (ii) amortized $5 million of each of debt finance costs and debt discount, (iii) repaid $40 million under our capital lease obligations and entered into $38 million of new capital leases for information technology assets and (iv) repaid $3 million under our other indebtedness obligations and entered into $2 million of new debt arrangement for information technology assets.

 

Under our senior secured credit agreement, we had a $125 million revolving credit facility with a consortium of banks, which contained a letter of credit sub-limit up to a maximum $50 million. In July 2017, we entered into an amendment to our senior secured credit agreement that, among other things, (i) amended the maturity date of the revolving credit facility to September 2, 2022 (provided that such maturity date automatically converts to March 2, 2021 unless the then outstanding term loans have a maturity date on or after December 2, 2022), (ii) increased the revolving credit facility by $25 million to $150 million and letter of credit sub-limit by $50 million to $100 million and (iii) reduced the interest rate on revolver borrowings to LIBOR plus 2.50% from LIBOR plus 5.00% as of December 31, 2016. In connection with this amendment, we incurred additional lender fees and third party costs of $1 million which have been capitalized and will be amortized over the term of the revolving credit facility. As of December 31, 2017, we had no outstanding borrowings under our revolving credit facility and utilized $8 million for the issuance of letters of credit, with a balance $142 million remaining.

 

Substantially all of our debt is scheduled for repayment in September 2021.

 

Travelport Finance (Luxembourg) S.a.r.l., our indirect 100% owned subsidiary, is the obligor (the “Obligor”) under our senior secured credit agreement. All obligations under our 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 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 default and other provisions.

 

Our senior secured credit agreement limits 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;

 

sell certain assets;

 

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 December 31, 2017, our consolidated first lien net leverage ratio, as determined under our senior secured credit agreement, was 3.74 compared to the maximum allowable of 6.00, and we were in compliance with such other covenants under our senior secured credit agreement.

 

We re-evaluate our capital structure from time to time, including, but not limited to, refinancing our current indebtedness with other indebtedness that may have different interest rates, maturities and covenants. Any such transactions will depend, in part, on market conditions.

 

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Interest Rate Risk

 

We are exposed to interest rate risk relating to our floating rate debt. 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 December 31, 2017 was to interest rate fluctuations in the United States, specifically the impact of LIBOR interest rates on dollar denominated floating rate debt. Interest on the $2,154 million principal amount of term loans as of December 31, 2017 is currently charged at LIBOR plus 2.75% under our senior secured credit agreement. In order to protect against potential higher interest costs resulting from increases in LIBOR, as of December 31, 2017, we have outstanding interest rate swap contracts that fix the LIBOR rate payable as follows:

 

       Average
Notional Amount      Interest
($ in thousands)   Period  Rate
1,400,000   February 2017 to February 2019   1.4010%
1,200,000   February 2019 to February 2020   2.1906%
400,000   February 2020 to February 2021   2.1925%
          

 During the years ended December 31, 2017, 2016 and 2015, 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 statements of operations. (Gains) losses on these interest rate derivative financial instruments were $(3) million, $6 million and $(9) million for the years ended December 31, 2017, 2016 and 2015, 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 risk. We do not use derivatives for trading or speculative purposes.

 

Approximately 91% of our net revenue of $2,447 million is denominated in U.S. dollars. The other 9% is denominated in foreign currencies. Approximately 62% of our operating expenses, excluding depreciation on property and equipment, amortization of customer loyalty payments, amortization of acquired intangible assets and non-core corporate costs, are denominated in U.S. dollars. The other 38% of such operating expenses are denominated in foreign currencies, predominantly British pound, Euro and Australian dollar. In addition, a proportion of our foreign currency denominated receivables and payables are denominated in foreign currencies.

 

During 2017, we used foreign currency derivative contracts to manage our exposure to foreign currency exchange rate risk. As of December 31, 2017, we had $373 million net notional amount of foreign currency contracts.

 

During the years ended December 31, 2017, 2016 and 2015, 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 statements of operations. (Gains) losses on these foreign currency derivative financial instruments amounted to $(19) million, $29 million and $21 million for the years ended December 31, 2017, 2016 and 2015, 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 December 31, 2017, our derivative contracts that hedge our interest rate and foreign currency exposure had a net asset position of $18 million and cover transactions for a period that does not exceed four years.

 

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Financial Obligations

 

Contractual Obligations

 

The following table summarizes our future contractual obligations as of December 31, 2017. The table below does not include future cash payments related to (i) contingent payments that may be made to third parties at a future date, (ii) income tax payments for which the timing is uncertain, (iii) the various guarantees and indemnities described in the notes to the consolidated financial statements or (iv) obligations related to pension and other post-retirement defined benefit plans.

 

   Year Ending December 31, 
(in $ thousands)  2018   2019   2020   2021   2022   Thereafter   Total 
Term loans(1)    $23,750   $23,750   $23,750   $2,082,500   $   $   $2,153,750 
Capital leases and other indebtedness   40,541    34,835    17,968    10,105    2,125        105,574 
Interest payments(2)     91,962    95,519    93,317    71,224    97        352,119 
Operating leases(3)     18,161    16,350    13,401    12,319    10,236    29,340    99,807 
Purchase commitments(4)     37,432    35,008                    72,440 
Total  $211,846   $205,462   $148,436   $2,176,148   $12,458   $29,340   $2,783,690 

 

 

(1)Under certain circumstances, each year we are required to pay to our lenders a percentage of excess cash flow, if any, calculated in a manner set forth in our senior secured credit agreement. This obligation is not reflected in the table above. Further, as a result of the voluntary prepayments of terms loans we made in 2017, we currently are not contractually required to repay quarterly installments of the term loans until its maturity. However, we intend and are currently able to make additional voluntary prepayments of the term loans from cash flows from operations. The amount of any such prepayments may vary based on our actual cash flow generation and needs, as well as general economic conditions (see Note 11—Long-Term Debt to our consolidated financial statements included in this Annual Report on Form 10-K). As of December 31, 2017, we have unamortized debt discount of $17 million and unamortized debt finance costs of $13 million related to our term loans that will be amortized over their contractual period.

 

(2)Interest payments include interest on term loans and capital leases and other indebtedness. Interest on the term loans is based on the interest rate as of December 31, 2017 of LIBOR plus 2.75%. Interest payments also include an estimate of cash flows for interest rate swap contracts. As of December 31, 2017, we have $12 million of accrued interest on our consolidated balance sheet.

 

(3)Primarily reflects non-cancellable operating leases on facilities and data processing equipment.

 

(4)Primarily reflects our agreement with a third party for data center services.

 

Our obligations related to defined benefit and post-retirement plans are actuarially determined on an annual basis at our financial year end. As of December 31, 2017, plan contributions of $4 million are expected to be made in 2018. Funding projections beyond 2018 are not practical to estimate. Income tax liabilities for uncertain tax positions are excluded as we are not able to make a reasonably reliable estimate of the amount and period of related future payments. As of December 31, 2017, we had $100 million of unrecognized tax benefit (including interest and penalties) for uncertain tax positions of which $27 million has been recorded as a liability as of December 31, 2017.

 

Other Commitments

 

Company Litigation: We are involved in various claims, legal proceedings and governmental inquiries related to contract disputes, business practices, intellectual property and other commercial, employment and tax matters. We believe we have adequately accrued for such matters as appropriate or, for matters not requiring accrual, we will not have a material adverse effect on our results of operations, financial position or cash flows based on information currently available. However, litigation is inherently unpredictable and although we believe our accruals are adequate and/or that we have valid defenses in these matters, unfavorable resolutions could occur, which could have a material effect on our results of operations or cash flows in a particular reporting period.

 

Standard Guarantees/Indemnifications: In the ordinary course of business, we enter into numerous agreements that contain standard guarantees and indemnities whereby we indemnify another party for breaches of representations and warranties. In addition, many of these parties are also indemnified against any third-party claim resulting from the transaction that is contemplated in the underlying agreement. Such guarantees or indemnifications are granted under various agreements, including those governing (i) purchases, sales or outsourcing of assets or businesses, (ii) leases of real estate, (iii) licensing of trademarks, (iv) use of derivatives, and (v) issuances of debt or equity securities. The guarantees or indemnifications issued are for the benefit of the (i) buyers in sale agreements and sellers in purchase agreements, (ii) landlords in lease contracts, (iii) licensees of our trademarks, (iv) financial institutions in derivative contracts, and (v) underwriters in debt or equity security issuances. While some of these guarantees extend only for the duration of the underlying agreement, many survive the expiration of the term of the agreement or extend into perpetuity (unless subject to a legal statute of limitations). There are no specific limitations on the maximum potential amount of future payments that we could be required to make under these guarantees, nor are we able to develop an estimate of the maximum potential amount of future payments to be made under these guarantees, as the triggering events are not subject to predictability and there is little or no history of claims against us under such arrangements. With respect to certain of the aforementioned guarantees, such as indemnifications of landlords against third-party claims for the use of real estate property leased by us, we maintain insurance coverage that mitigates any potential payments to be made.

 

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Other Off-Balance Sheet Arrangements

 

We had no other off-balance sheet arrangements during the year ended December 31, 2017.

 

Critical Accounting Policies

 

In presenting our consolidated financial statements in conformity with U.S. GAAP, we are required to make estimates and assumptions that affect the amounts reported and related disclosures. Several of the estimates and assumptions required relate to matters that are inherently uncertain as they pertain to future events. If there is a significant unfavorable change to current conditions, it could result in a material adverse impact to our consolidated results of operations, financial position and liquidity. We believe the estimates and assumptions used when preparing our consolidated financial statements were the most appropriate at that time. Presented below are those accounting policies that we believe require subjective and complex judgments that could potentially affect our reported results. (See Note 2—Summary of Significant Accounting Policies to our consolidated financial statements included in this Annual Report on Form 10-K.)

 

Revenue Recognition

 

Travel Commerce Platform Revenue

 

We primarily utilize a transaction volume model to recognize revenue for our Travel Commerce Platform revenue. We charge a fee per segment booked. We also receive a fee for cancellations of bookings previously made on our system and where tickets were issued by us that were originally booked on an alternative system.

 

Revenue for air travel reservations is recognized at the time of the booking of the reservation, net of estimated cancellations and anticipated incentives for travel providers and other customers. Cancellations prior to the date of departure are estimated based on the historical level of cancellations, which have not been significant historically. Certain of our more significant contracts provide for incentive payments based upon business volume. Anticipated incentives are calculated on a consistent basis and frequently reviewed. In circumstances where expected cancellation rates or booking behavior changes, our estimates are revised, and in these circumstances, future cancellation and incentive estimates could vary materially, with a corresponding variation in net revenue. Factors which could have a significant effect on our estimates include global security issues, epidemics or pandemics, natural disasters, general economic conditions, the financial condition of travel providers, and travel related accidents.

 

As hotel and car reservations, within Beyond Air, can be cancelled without penalty, revenue is recognized upon the fulfillment of the reservation when it is contractually billed and collectability of the revenue is reasonably assured.

 

Our payment processing revenue is earned as a percentage of total transaction value in the form of interchange fees payable by banks. Revenue is recognized when the payment is processed.

 

We collect annual subscription fees from travel agencies, internet sites and other subscribers to access the applications on our Travel Commerce Platform, including providing the ability to access schedule and fare information, book reservations and issue tickets. Where the contractual terms have fixed amounts of fees, revenue is recognized ratably over the contract period. Where the contractual terms have variable usage of services, revenue is recognized as the services are provided.

 

Our Travel Commerce Platform is served through a combination of owned SMOs and a network of non-owned NDCs. The NDCs are used in regions where we do not have our own SMOs to distribute our products. In cases where NDCs are owned by airlines, we may pay a commission to the NDCs/airlines for the sales of distribution services to the travel agencies and also receive revenue from the same NDCs/airlines for the sales of segments through our platform. We account for the fees received from the NDCs/airlines as revenue, and commissions paid to NDCs/airlines as cost of revenue. Fees received and commissions paid are presented in the consolidated statements of operations on a gross basis, as the benefits derived from the sale of the segment are sufficiently separable from the commissions paid.

 

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Technology Services Revenue

 

We collect fees, generally on a monthly basis under long-term contracts, for providing hosting solutions and other services to airlines such as, shopping, ticketing, departure control, business intelligence and other solutions. Where the contractual terms have fixed amounts of fees, revenue is recognized ratably over the contract period. Where the contractual terms have variable usage of services, revenue is recognized as the services are provided.

 

From January 1, 2018, we have adopted the new revenue recognition guidance (see Note 2 – Summary of Significant Accounting Policies, Recently Issued Accounting Pronouncements, to our consolidated financial statements included in this Annual Report on Form 10-K).

 

Customer Loyalty Payments and Prepaid Incentives

 

We make payments to travel agencies for their usage of our Travel Commerce Platform. These payments may be made at the time of signing a long-term agreement, at specified intervals of time, upon reaching specified transaction thresholds or for each transaction processed through our Travel Commerce Platform.

 

Customer Loyalty Payments

 

Where the payments are made to travel agencies and travel providers with an objective of increasing the number of travel bookings and to improve the travel agencies’ or travel providers’ loyalty, instrumented through contractual agreements with a term greater than a year, and the travel agency or the travel provider commits to achieve our economic objectives, the payments are considered as customer loyalty payments and capitalized as intangible assets. These intangible assets are amortized over the period of contractual agreement on a straight line basis unless another method is more appropriate. The amortization expense is recognized within cost of revenue or revenue on the consolidated statements of operations. In addition, we estimate the recoverability of customer loyalty payments based upon the expected future cash flows from transactions generated by the related travel agencies and travel providers. If the estimate of the future recoverability of amounts capitalized declines, cost of revenue will increase as the amounts are written-off. For the years ended December 31, 2017, 2016 and 2015, we recognized $1 million, $3 million and $0, respectively, as impairment of customer loyalty payments. As of December 31, 2017 and December 31, 2016, customer loyalty payments, net of accumulated amortization, amounted to $214 million and $189 million, respectively.

 

Prepaid Incentives

 

Where payments are based on a per transaction basis, these are expensed in the month the transactions are generated. Where they are paid when the contract is signed or at specified dates they are capitalized as prepaid incentives and expensed as the related revenue is recognized. Prepaid incentives were $52 million and $35 million as of December 31, 2017 and 2016, respectively, which are included in other current and non-current assets on our consolidated balance sheets.

 

Where payments are to be made upon the achievement of specified objectives, these are assessed as to the likelihood and amount of ultimate payment and expense recognized as incurred. If the estimate of payments to be made to travel agencies in future periods changes, based upon developments in the travel industry or upon the facts and circumstances of a specific travel agency, cost of revenue could increase or decrease accordingly.

 

Equity-Based Compensation

 

We account for our stock awards and options by recognizing compensation expense, measured at the grant date based on the fair value of the award net of estimated forfeitures, on a straight-line basis over the award vesting period.

 

Performance Shares Units (“PSUs”)

 

Under our equity compensation plans, we grant PSUs that vest on achievement of certain pre-defined performance targets should the employee continue to be in employment on the vesting date. For a portion of PSUs, the ultimate number of PSUs that will vest also depends on Travelport’s ranking within a group of companies based on achievement of its total shareholder’s return (“TSR”) during the applicable performance period compared to the TSR of the companies within the selected group. However, the total number of all the outstanding PSUs that will ultimately vest will not exceed 200% of the original grant. Each reporting period, we assess the probability of vesting and, if there is any change in such probability, we record the cumulative effect of the adjustment in the current reporting period. Any changes in such estimation could result in increase or decrease in equity-based compensation expense in future periods. For PSUs earned based on a market condition, we utilize a Monte Carlo simulation to determine the fair value of these awards at the date of grant. Where there are no market conditions, the fair value of the PSUs is considered to be the closing market price of Trvelport’s common shares at the date of grant.

 

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Stock Options

 

We measure the value of stock-option awards at the grant date fair value as calculated by the Black-Scholes option-pricing model which requires the input of various assumptions, including, the expected term of the option, the expected volatility of the price of our common shares, risk-free interest rates, and the expected dividend yield of our common shares. The assumptions used in our option-pricing model represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment. If these assumptions change and different factors are used, our stock-based compensation expense could be materially different in the future. These assumptions are as follows:

 

Expected volatility is calculated utilizing daily historical volatility over a period that equates to the expected term of the option. As we do not have sufficient history of our trading stock – peer group companies’ volatility is used. The risk-free interest rate was based on the U.S. Treasury interest rates whose term is consistent with that of the expected term assumption. Dividend yield is considered in the option pricing model and represents our current annualized expected per share dividends over the current trade price of our common shares. The expected term of the stock options granted is estimated using simplified method.

 

If any of the assumptions used in the Black-Scholes option-pricing model change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period. The weighted-average assumptions used in calculating the fair value of stock options are described in Note 17—Equity-Based Compensation to the consolidated financial statements included in this Annual Report on Form 10-K.

 

Pension and Other Post-Retirement Defined Benefits

 

We provide post-employment defined benefits to a number of our current and former employees in the U.S. and in certain non-U.S. subsidiaries. Costs associated with post-employment defined benefits include pension and post-retirement health care expenses for employees, retirees and surviving spouses and dependents.

 

The determination of the obligation and expense for our pension and other post-retirement employee benefits, such as retiree health care, is dependent on certain assumptions used by actuaries in calculating such amounts. Certain of the more important assumptions are described in Note 14—Employee Benefit Plans to the consolidated financial statements included in this Annual Report on form 10-K and include the discount rate, expected long-term rate of return on plan assets, rates of increase in health care costs, retirement rates, mortality rates and other factors. The effects of any modification to those assumptions are either recognized immediately or amortized over future periods in accordance with U.S. GAAP. Actual results that differ from assumptions used are accumulated and generally amortized over future periods.

 

The primary assumptions affecting our accounting for employee benefits are:

 

Discount rate: The discount rate is used to calculate pension and post-retirement employee benefit obligations. The discount rate assumption is developed by determining a constant effective yield that produces the same result as discounting projected plan cash flows using high quality (AA) bond yields of corresponding maturities as of the measurement date. We used weighted average discount rates of 3.5% for defined benefit pension plans and 3.8% for post-retirement benefit plans to determine our pension and other benefit obligations as of December 31, 2017.

 

The impact of a 100 basis point increase or decrease in the discount rate for defined benefit pension plans would be to decrease pension liabilities by $72 million or increase pension liabilities by $89 million, respectively, as of December 31, 2017. The sensitivity to a 100 basis point increase or decrease in the discount rate assumption related to our pre-tax employee benefit expense for 2017 would be to decrease or increase, respectively, the 2017 pre-tax pension expense by $3 million and $5 million, respectively.

 

Expected long-term rate of return on plan assets: The expected long-term rate of return is used in the calculation of net periodic benefit cost. The required use of the expected long-term rate of return on plan assets may result in recognized returns that are greater or less than the actual returns on those plan assets in any given year. The expected long-term rate of return for plan assets has been determined using historical returns for the different asset classes held by our trusts and its asset allocation, as well as inputs from internal and external sources regarding expected capital market return, inflation and other variables. In determining the pension expense for 2017, we used a weighted average expected long-term rate of return on plan assets of 6.0%.

 

Actual returns/(loss) on pension assets for 2017, 2016 and 2015 were 12.2%, 8.8% and (1.7)%, respectively, compared to the expected rate of return assumption of 6.0%, 6.4% and 6.6%, respectively. The sensitivity to a 100 basis point increase or decrease in the expected rate of return on plan assets assumption related to our pre-tax employee benefit expense for 2017 would be to decrease or increase, respectively, the 2017 pre-tax expense by $5 million in each case.

 

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We estimate the service and interest cost components of net periodic benefit cost for our pension and post-retirement benefit plans by utilizing a full yield curve approach in the estimation of these components by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to their underlying projected cash flows. This estimate provides a precise measurement of service and interest costs by improving the correlation between projected benefit cash flows and their corresponding spot rates.

 

We have adopted use of the Retirement Plan ("RP") 2014 mortality tables apply the annual Mortality Projection ("MP") mortality improvement scale as issued by the Society of Actuaries for our U.S. defined benefit plans. For the year ended December 31, 2017, we applied the updated MP 2017 mortality improvement scale, which reflects improvements in longevity as compared to the MP 2016 mortality improvement scale and its use did not have significant impact in calculating defined benefit pension obligation.

 

While we believe these assumptions are appropriate, significant differences in actual experience or significant changes in these assumptions may materially affect our defined benefit pension and post-retirement employee benefit obligations and our future expense. See Note 14—Employee Benefit Plans to the annual consolidated financial statements included in this Annual Report on Form 10-K for more information regarding our retirement benefit plans.

 

Impairment of Goodwill and Trademarks and Tradenames

 

We review the carrying value of goodwill and indefinite-lived intangible assets annually or more frequently if circumstances indicate impairment may have occurred. We may first perform a qualitative assessment, evaluating a number of key factors, to determine if the fair value of the reporting unit is, more likely than not, greater than the carrying amount. If, as a result of qualitative assessment, or if we determine quantitatively that the fair value of the reporting unit is less than its carrying value, we proceed to assess impairment of goodwill and other indefinite-lived intangible assets.

 

The determination of the fair value requires us to make significant judgments and estimates, including projections of future cash flows from the business. These estimates and required assumptions include estimated revenue and revenue growth rates, operating margins used to calculate projected future cash flows, future economic and market conditions, and the estimated weighted average cost of capital (“WACC”). We base our estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates.

 

We perform our annual impairment testing of goodwill and indefinite-lived intangible assets in the fourth quarter of each year, subsequent to completing our annual forecasting process. We have adopted a quantitative approach to test goodwill and indefinite-lived assets for impairment for the year ended December 31, 2017. In performing this test, we determined fair value using the present value of expected future cash flows. The key assumptions applied in our impairment testing of goodwill and other indefinite-lived intangible assets during the fourth quarter of 2017 were (i) estimated cash flows based on financial projections for periods from 2018 through 2021, which were extrapolated to perpetuity, (ii) terminal values based on terminal growth rates not exceeding 2% – 3% and (iii) discount rates, based on WACC, ranging from 9% to 13%. As a result of the impairment testing performed in 2017, 2016 and 2015, we concluded that (i) the fair value of goodwill significantly exceeded the carrying value of the reporting units and (ii) the fair value of trademarks and tradenames exceeded their carrying values. As a result, no material impairment of goodwill, trademarks and tradenames was recorded in our consolidated statement of operations in any of these years.

 

Impairment of Definite-Lived Assets

 

Our definite-lived assets compromise property and equipment, acquired intangible assets and customer loyalty payments. We review the carrying value of these assets if indicators of impairment are present and determine whether the sum of the estimated undiscounted future cash flows attributable to these assets is less than their carrying value. If less, we recognize an impairment loss based on the excess of the carrying amount of the definite-lived asset over its respective fair value. In estimating the fair value, we are required to make a number of assumptions including assumptions related to projections of future cash flows, estimated growth and discount rates. A change in these underlying assumptions could cause a change in the results of the tests and, as such, could result in impairment in future periods. During the years ended December 31, 2017, 2016, and 2015, we recognized impairments of $2 million, $11 million and $0, respectively, in relation to definite-lived assets. Other than these, no indicators were identified during any of these years requiring further testing of our definite-lived assets for impairment.

 

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Income Taxes

 

We recognize deferred tax assets and liabilities based on the temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities. We regularly review deferred tax assets by jurisdiction to assess their potential realization and establish a valuation allowance for portions of such assets that we believe will not be ultimately realized. In performing this review, we make estimates and assumptions regarding projected future taxable income, the expected timing of the reversals of existing temporary differences and the implementation of tax planning strategies. A change in these assumptions could cause an increase or decrease to the valuation allowance resulting in an increase or decrease in the effective tax rate, which could materially impact our results of operations. During 2017, we recognized a charge of $4 million, including the impact of U.S. Tax Reforms, in respect of changes in the valuation allowance within the provision for income taxes in the consolidated statement of operations.

 

We operate in numerous countries where our income tax returns are subject to audit and adjustment by local tax authorities. As we operate globally, the nature of the uncertain tax positions is often very complex and subject to change, and the amounts at issue can be substantial. It is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various possible outcomes. We re-evaluate uncertain tax positions on a quarterly basis. This evaluation is based on factors that include, but are not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision.

 

We are currently a defendant in an income tax litigation brought by the India Tax Department (“ITD”) in a long-running dispute whereby ITD asserts that we have a permanent establishment in India and are subject to tax there. The dispute dates back to assessment year ended March 31, 1995. For assessment years ended March 31, 1996 through March 31, 2007, we have favorable judgments from the Delhi High Court ruling that no income is chargeable to tax. ITD has appealed the decisions to the Supreme Court and a hearing has commenced. We continue to aggressively defend these claims by ITD, and we do not believe the outcome of the proceedings will result in a material impact on our business or financial condition. The range of possible outcomes is wide, including the possibility of substantial repayments, and we consider that our balance sheet position is appropriate. We are fully indemnified for any tax liabilities and costs arising for periods prior to being acquired by Blackstone in 2006.

 

We were a defendant in an action brought in the state of Colorado District Court in relation to the state’s audit of income tax years from May 1997 to December 2001. The state disputed the amount of the revenue sourced to Colorado for apportionment purposes. A settlement was ultimately reached with the state of Colorado which resulted in no additional tax due to the state and no refunds due to us. The court issued an order dismissing the case in August 2017.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to a variety of market risks, including changes in foreign currency exchange rates and interest rates. Our exposure to market risks is managed through the use of derivative financial instruments when considered appropriate.

 

We use foreign currency forward contracts to manage foreign currency exchange rate risk associated with certain intercompany transactions and earnings denominated in non-U.S. dollar currencies and from non-functional currency denominated assets and liabilities. In order to hedge the risk of U.S. interest rates, during 2015 and 2017, we entered into interest rate swaps on a portion of our outstanding term loans balance for the period from February 2017 through February 2021.

 

We are exclusively an end user of these derivative financial instruments. We do not engage in trading, market making or other speculative activities in the derivatives markets. We manage our exposure to counterparty credit risk related to our use of derivative financial instruments through minimum credit standards and diversification of counterparties. Our counterparties are substantial investment and commercial banks with significant experience in providing such derivative financial instruments. More detailed information about these derivative financial instruments is provided in Note 12—Financial Instruments to the consolidated financial statements in this Annual Report on Form 10-K.

 

We assess our market risk based on changes in interest rates and foreign currency exchange rates utilizing a sensitivity analysis that measures the potential impact on earnings, fair values and cash flows based on a hypothetical 100 basis point change (increase and decrease) in interest rates and a 10% change (increase and decrease) in the exchange rates of underlying currencies being hedged, against the U.S. dollar as of December 31, 2017. There are certain limitations inherent in this sensitivity analyses as our overall market risk is influenced by a wide variety of factors, including the volatility present within markets and the liquidity of markets. These “shock tests” are constrained by several factors, including the necessity to conduct analysis based on a single point in time and the inability to include complex market reactions normally arising from the market shifts modeled.

 

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Interest Rate Risk

 

Our primary interest rate exposure as of December 31, 2017 was due to interest rate fluctuations in the U.S., specifically the impact of LIBOR interest rates on our variable rate borrowings. We anticipate such interest rate risk will remain a market risk exposure for the foreseeable future.

 

We assess our interest rate market risk utilizing a sensitivity analysis based on a hypothetical 100 basis point change (increase or decrease) in interest rates. We have determined, through such analysis, that a 100 basis point increase or decrease in interest rates as of December 31, 2017, based on the outstanding floating rate debt balance would increase or decrease, respectively, our annualized interest charge by $22 million, excluding the effect of fair value changes on our interest rate swaps.

 

Starting in 2015, in order to protect against potential higher interest costs resulting from increases in LIBOR interest rates, we have entered into several interest rate swap derivative contracts. We have not hedge accounted for these swaps. Mark to market fair value changes on these swaps, which represent the net present value of future cash flows on the swaps, are accounted for within interest expense, net, in our consolidated statement of operations. As of December 31, 2017, a 100 basis point increase or decrease in interest rates would result in a credit or debit, respectively, to interest expense of $33 million, due to changes in the fair value of these swaps.

 

Foreign Currency Risk

 

We have foreign currency exposure to exchange rate fluctuations, particularly with respect to the British pound, Euro and Australian dollar. We anticipate such foreign currency exchange rate risk will remain a market risk exposure for the foreseeable future.

 

We assess our foreign currency market risk utilizing a sensitivity analysis based upon a hypothetical 10% change (increase or decrease) in exchange rate against the U.S. dollar on the value of our foreign currency derivative instruments as of December 31, 2017. We have determined, through the sensitivity analysis, the impact of a 10% strengthening or weakening in the U.S. dollar exchange rate with respect to the British pound, Euro and Australian dollar would result in a debit or a credit, respectively, of $38 million, on our consolidated statements of operations.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

See Financial Statements and Financial Statement Index commencing on Page F-1 hereof.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

(a) Disclosure Controls and Procedures.

 

The Company maintains disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (the “Act”) is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Act) as of December 31, 2017. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures were effective.

 

(b) Management’s Annual Report on Internal Control over Financial Reporting.

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Act. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework (2013). Based on this assessment, our management believes that, as of December 31, 2017, our internal control over financial reporting is effective. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2017, has been audited by Deloitte LLP, an independent registered public accounting firm. Their attestation report is included below.

 

 72 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the shareholders and the Board of Directors of Travelport Worldwide Limited

 

Opinion on Internal Control over Financial Reporting

 

We have audited the internal control over financial reporting of Travelport Worldwide Limited and subsidiaries (the “Company”) as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2017, of the Company and our report dated February 20, 2018, expressed an unqualified opinion on those financial statements.

 

Basis for Opinion

 

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

Definition and Limitations of Internal Control over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ DELOITTE LLP  
   
London, United Kingdom  
February 20, 2018  

 

 73 

 

 

(c) Changes in Internal Control Over Financial Reporting.

 

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Act) during the Company’s fiscal fourth quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

(d) Limitations on Controls.

 

Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

The information contained in the Company’s Annual Proxy Statement under the sections titled “Corporate Governance—Board of Directors,” “Corporate Governance—Board of Directors Meetings,” “Corporate Governance—Board Committees and Membership,” “Corporate Governance—Role of our Board in Risk Oversight,” “Corporate Governance—Corporate Governance,” “Corporate Governance— Executive Officers and Other Key Officers” and “Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated herein by reference in response to this item.

 

ITEM 11. EXECUTIVE COMPENSATION

 

The information contained in the Company’s Annual Proxy Statement under the section titled “Executive Compensation” is incorporated herein by reference in response to this item.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The information contained in the Company’s Annual Proxy Statement under the sections titled “Security Ownership of Certain Beneficial Owners and Management” and “Securities Authorized for Issuance under Equity Compensation Plans” is incorporated herein by reference in response to this item.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

The information contained in the Company’s Annual Proxy Statement under the section titled “Related Person Transactions” and “Corporate Governance—Director Independence” is incorporated herein by reference in response to this item.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

The information contained in the Company’s Annual Proxy Statement under the section titled “Proposals To Be Voted On At Meeting—Proposal No. 2: Appointment of Independent Auditors and Authorization of the Audit Committee of the Board to Determine the Independent Auditors’ Remuneration” is incorporated herein by reference in response to this item.

 

 74 

 

 

PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

ITEM 15(A)(1) FINANCIAL STATEMENTS

 

See Financial Statements and Financial Statements Index commencing on page F-1 hereof.

 

ITEM 15(A)(2) FINANCIAL STATEMENT SCHEDULES

 

See Schedule II—Valuation and qualifying accounts on page F-46 hereof. All other schedules have been omitted because they are either inapplicable or the required information has been provided in the consolidated financial statements or in the notes therein.

 

ITEM 15(A)(3) EXHIBITS

 

See Exhibits Index commencing on page G-1 hereof.

 

ITEM 16. FORM 10-K SUMMARY

 

Not applicable.

 

 75 

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  TRAVELPORT WORLDWIDE LIMITED
     
  By: /s/ Antonios Basoukeas
    Antonios Basoukeas
    Chief Accounting Officer

 

Date: February 20, 2018

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Signature   Title   Date
         
/s/ Gordon Wilson   Chief Executive Officer and Director   February 20, 2018
(Gordon Wilson)        
         
/s/ Bernard Bot   Executive Vice President and Chief Financial Officer   February 20, 2018
(Bernard Bot)        
         
/s/ Douglas Steenland   Chairman of the Board and Director   February 20, 2018
(Douglas Steenland)        
         
/s/ Elizabeth Buse   Director   February 20, 2018
(Elizabeth Buse)        
         
/s/ Steven Chambers   Director   February 20, 2018
(Steven Chambers)        
         
/s/ Michael J. Durham   Director   February 20, 2018
(Michael J. Durham)        
         
/s/ Scott Forbes   Director   February 20, 2018
(Scott Forbes)        
         
/s/ Douglas Hacker   Director   February 20, 2018
(Douglas Hacker)        
         
/s/ John B. Smith   Director   February 20, 2018
(John B. Smith)        
         
/s/ Antonios Basoukeas   Chief Accounting Officer   February 20, 2018
(Antonios Basoukeas)        

 

 76 

 

 

TRAVELPORT WORLDWIDE LIMITED

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

  Page
Report of Independent Registered Public Accounting Firm F-2
Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015 F-3
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015 F-4
Consolidated Balance Sheets as of December 31, 2017 and 2016 F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015 F-6
Consolidated Statements of Changes in Total Equity (Deficit) for the years ended December 31, 2017, 2016 and 2015 F-8
Notes to the Consolidated Financial Statements F-9

 

 F-1 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the shareholders and the Board of Directors of Travelport Worldwide Limited

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Travelport Worldwide Limited and subsidiaries (the "Company") as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income, cash flows and changes in total equity (deficit) for each of the three years in the period ended December 31, 2017, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 20, 2018, expressed an unqualified opinion on the Company's internal control over financial reporting.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ DELOITTE LLP  
   
London, United Kingdom  
February 20, 2018  

 

We have served as the Company's auditor since 2009.

 

 F-2 

 

 

TRAVELPORT WORLDWIDE LIMITED

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

   Year Ended   Year Ended   Year Ended 
   December 31,   December 31,   December 31, 
(in $ thousands, except share data)  2017   2016   2015 
Net revenue  $2,447,279   $2,351,356   $2,221,020 
Costs and expenses               
Cost of revenue   1,506,010    1,430,646    1,340,405 
Selling, general and administrative   448,070    510,688    455,864 
Depreciation and amortization   207,310    209,409    234,228 
Total costs and expenses   2,161,390    2,150,743    2,030,497 
Operating income    285,889    200,613    190,523 
Interest expense, net   (111,237)   (151,481)   (148,787)
Gain on sale of a subsidiary   1,217         
Gain on sale of shares of Orbitz Worldwide           6,271 
Loss on early extinguishment of debt   (5,366)   (4,333)    
Income from continuing operations before income taxes and share of losses in equity method investments   170,503    44,799    48,007 
Provision for income taxes   (32,230)   (29,753)   (27,126)
Share of losses in equity method investments           (671)
Net income from continuing operations   138,273    15,046    20,210 
Income from discontinued operations, net of tax   2,007         
Net income   140,280    15,046    20,210 
Net loss (income) attributable to non-controlling interest in subsidiaries   2,183    1,774    (3,878)
Net income attributable to the Company   $142,463   $16,820   $16,332 
Income per share – Basic:               
Income per share  - continuing operations  $1.13   $0.14   $0.13 
Income per share  - discontinued operations   0.02         
Basic income per share  $1.15   $0.14   $0.13 
                
Weighted average common shares outstanding – Basic   124,530,102    123,871,479    122,340,491 
Income per share – Diluted:               
Income per share - continuing operations  $1.11   $0.13   $0.13 
Income per share  - discontinued operations   0.02         
Diluted income per share  $1.13   $0.13   $0.13 
                
Weighted average common shares outstanding – Diluted   126,008,533    125,396,485    122,539,422 
                
Cash dividends declared per common share  $0.300   $0.300   $0.300 

 

See Notes to the Consolidated Financial Statements

 

 F-3 

 

 

TRAVELPORT WORLDWIDE LIMITED

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

   Year Ended   Year Ended   Year Ended 
   December 31,   December 31,   December 31, 
(in $ thousands)  2017   2016   2015 
Net income  $140,280   $15,046   $20,210 
Other comprehensive income (loss), net of tax:               
Currency translation adjustment, net of tax   26,149    (4,581)   (10,554)
Unrealized actuarial gain (loss) on defined benefit plans, net of tax   8,302    (7,984)   13,551 
Changes in gain on available-for-sale securities, net of tax           (6,376)
Changes in loss on equity investments, net of tax           (516)
Other comprehensive income (loss), net of tax    34,451    (12,565)   (3,895)
Comprehensive income   174,731    2,481    16,315 
Comprehensive loss (income) attributable to non-controlling interest in subsidiaries   2,183    1,774    (3,878)
Comprehensive income attributable to the Company  $176,914   $4,255   $12,437 

 

See Notes to the Consolidated Financial Statements

 

 F-4 

 

 

TRAVELPORT WORLDWIDE LIMITED

 

CONSOLIDATED BALANCE SHEETS

 

   December 31,   December 31, 
(in $ thousands, except share data)  2017   2016 
Assets          
Current assets:          
Cash and cash equivalents  $122,039   $139,938 
Accounts receivable (net of allowances for doubtful accounts of $10,245 and $13,430, respectively)   206,524    218,224 
Other current assets   109,724    84,089 
Total current assets   438,287    442,251