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Segment Information
9 Months Ended
Sep. 30, 2019
Segment Reporting [Abstract]  
Segment Information
11. Segment Information
Our reportable segments are based upon our internal organizational structure; the manner in which our operations are managed; the criteria used by our Chief Executive Officer, who is our Chief Operating Decision Maker ("CODM"), to evaluate segment performance; the availability of separate financial information; and overall materiality considerations.
Our CODM utilizes Adjusted Gross Profit, Adjusted Operating Income and Adjusted EBITDA as the measures of profitability to evaluate performance of our segments and allocate resources. Corporate includes a technology organization that provides development and support activities to our segments. The majority of costs associated with our technology organization are allocated to the segments primarily based on the segments' usage of resources. Benefit expenses, facility costs and depreciation expense on the corporate headquarters building are allocated to the segments based on headcount. Unallocated corporate costs include certain shared expenses such as accounting, finance, human resources, legal, corporate systems, amortization of acquired intangible assets, impairment and related charges, stock-based compensation, restructuring charges, legal reserves and other items not identifiable with one of our segments.
We account for significant intersegment transactions as if the transactions were with third parties, that is, at estimated current market prices. The majority of the intersegment revenues and cost of revenues are fees charged by Travel Network to Hospitality Solutions for airline trips booked through our GDS.
Our CODM does not review total assets by segment as operating evaluations and resource allocation decisions are not made on the basis of total assets by segment.
The performance of our segments is evaluated primarily on Adjusted Gross Profit, Adjusted Operating Income and Adjusted EBITDA which are not recognized terms under GAAP. Our uses of Adjusted Gross Profit, Adjusted Operating Income and Adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP.
We define Adjusted Gross Profit as operating income adjusted for selling, general and administrative expenses, the cost of revenue portion of depreciation and amortization, amortization of upfront incentive compensation, and stock-based compensation included in cost of revenue.
We define Adjusted Operating Income as operating income adjusted for joint venture equity income, acquisition-related amortization, acquisition-related costs, litigation costs, net, and stock-based compensation.
We define Adjusted EBITDA as income from continuing operations adjusted for depreciation and amortization of property and equipment, amortization of capitalized implementation costs, acquisition-related amortization, amortization of upfront incentive consideration, interest expense, net, loss on extinguishment of debt, other, net, acquisition-related costs, litigation costs, net, stock-based compensation and provision for income taxes.
Segment information for the three and nine months ended September 30, 2019 and 2018 is as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Revenue
 

 
 

 
 

 
 

Travel Network
$
711,003

 
$
700,196

 
$
2,209,603

 
$
2,141,017

Airline Solutions
208,028

 
209,388

 
632,788

 
620,813

Hospitality Solutions
74,818

 
69,911

 
221,525

 
206,353

Eliminations
(9,650
)
 
(9,212
)
 
(30,350
)
 
(25,155
)
Total revenue
$
984,199

 
$
970,283

 
$
3,033,566

 
$
2,943,028

Adjusted Gross Profit (Loss) (a)
 

 
 

 
 

 
 

Travel Network
$
248,999

 
$
268,604

 
$
783,972

 
$
842,359

Airline Solutions
83,203

 
90,428

 
247,135

 
264,450

Hospitality Solutions
17,151

 
23,069

 
49,628

 
61,965

Corporate
(2,935
)
 
(4,315
)
 
(10,789
)
 
(12,732
)
Total
$
346,418

 
$
377,786

 
$
1,069,946

 
$
1,156,042

Adjusted Operating Income (Loss) (b)
 
 
 
 
 
 
 
Travel Network
$
158,938

 
$
182,533

 
$
511,907

 
$
590,380

Airline Solutions
24,644

 
28,505

 
62,728

 
82,030

Hospitality Solutions
(4,008
)
 
5,826

 
(15,471
)
 
9,927

Corporate
(46,500
)
 
(42,891
)
 
(143,375
)
 
(138,782
)
Total
$
133,074

 
$
173,973

 
$
415,789

 
$
543,555

Adjusted EBITDA(c)
 

 
 

 
 

 
 

Travel Network
$
210,306

 
$
229,983

 
$
663,525

 
$
735,669

Airline Solutions
66,945

 
74,094

 
191,284

 
217,629

Hospitality Solutions
9,618

 
16,116

 
24,497

 
38,830

Total segments
286,869

 
320,193

 
879,306

 
992,128

Corporate
(45,305
)
 
(41,688
)
 
(139,758
)
 
(135,283
)
Total
$
241,564

 
$
278,505

 
$
739,548

 
$
856,845

Depreciation and amortization
 

 
 

 
 

 
 

Travel Network
$
30,517

 
$
29,243

 
$
91,793

 
$
87,965

Airline Solutions
42,301

 
45,589

 
128,556

 
135,599

Hospitality Solutions
13,626

 
10,290

 
39,968

 
28,903

Total segments
86,444

 
85,122

 
260,317

 
252,467

Corporate
17,171

 
17,610

 
51,588

 
55,084

Total
$
103,615

 
$
102,732

 
$
311,905

 
$
307,551

Capital Expenditures
 

 
 

 
 

 
 

Travel Network
$
3,215

 
$
16,963

 
$
13,078

 
$
45,002

Airline Solutions
7,919

 
25,315

 
31,505

 
72,485

Hospitality Solutions
2,275

 
9,291

 
7,669

 
27,629

Total segments
13,409

 
51,569

 
52,252

 
145,116

Corporate
11,519

 
22,209

 
39,872

 
60,548

Total
$
24,928

 
$
73,778

 
$
92,124

 
$
205,664

______________________________
(a)
The following table sets forth the reconciliation of Adjusted Gross Profit to operating income in our statement of operations (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Adjusted Gross Profit
$
346,418

 
$
377,786

 
$
1,069,946

 
$
1,156,042

Less adjustments:
 

 
 

 
 

 
 

Selling, general and administrative
119,918

 
130,152

 
426,014

 
384,047

Cost of revenue adjustments:
 

 
 

 
 

 
 

Depreciation and amortization(1)
85,262

 
85,552

 
256,775

 
254,490

Amortization of upfront incentive consideration(2)
20,851

 
18,207

 
59,825

 
57,324

Stock-based compensation
6,927

 
7,112

 
21,552

 
19,184

Operating income
$
113,460

 
$
136,763

 
$
305,780

 
$
440,997


(b)
The following table sets forth the reconciliation of Adjusted Operating Income to operating income in our statement of operations (in thousands): 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Adjusted Operating Income
$
133,074

 
$
173,973

 
$
415,789

 
$
543,555

Less adjustments:
 

 
 

 
 

 
 

Joint venture equity income
1,027

 
333

 
1,973

 
2,455

Acquisition-related amortization(1c)
15,976

 
16,407

 
47,971

 
51,585

Acquisition-related costs(5)
9,696

 

 
30,337

 

Litigation costs, net(4)
(24,179
)
 
5,225

 
(21,355
)
 
7,073

Stock-based compensation
17,094

 
15,245

 
51,083

 
41,445

Operating income
$
113,460

 
$
136,763

 
$
305,780

 
$
440,997


(c)
The following table sets forth the reconciliation of Adjusted EBITDA to income from continuing operations in our statement of operations (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Adjusted EBITDA
$
241,564

 
$
278,505

 
$
739,548

 
$
856,845

Less adjustments:
 
 
 
 
 
 
 
Depreciation and amortization of property and equipment(1a)
78,060

 
76,226

 
232,617

 
225,649

Amortization of capitalized implementation costs(1b)
9,579

 
10,099

 
31,317

 
30,317

Acquisition-related amortization(1c)
15,976

 
16,407

 
47,971

 
51,585

Amortization of upfront incentive consideration(2)
20,851

 
18,207

 
59,825

 
57,324

Interest expense, net
39,743

 
39,291

 
117,364

 
116,809

Loss on extinguishment of debt

 

 

 
633

Other, net(3)
1,769

 
1,905

 
6,118

 
10,746

Acquisition-related costs (5)
9,696

 

 
30,337

 

Litigation costs, net(4)
(24,179
)
 
5,225

 
(21,355
)
 
7,073

Stock-based compensation
17,094

 
15,245

 
51,083

 
41,445

Provision for income taxes
7,795

 
25,021

 
31,783

 
61,371

Income from continuing operations
$
65,180

 
$
70,879

 
$
152,488

 
$
253,893

______________________________________________________




(1)
Depreciation and amortization expenses:
a.
Depreciation and amortization of property and equipment includes software developed for internal use.
b.
Amortization of capitalized implementation costs represents amortization of upfront costs to implement new customer contracts under our SaaS and hosted revenue model, as well as amortization of contract acquisition costs.
c.
Acquisition-related amortization represents amortization of intangible assets resulting from purchase accounting.
(2)
Our Travel Network business at times provides upfront incentive consideration to travel agency subscribers at the inception or modification
of a service contract, which are capitalized and amortized to cost of revenue over an average expected life of the service contract, generally
over three years to ten years. This consideration is made with the objective of increasing the number of clients or to ensure or improve customer loyalty. These service contract terms are established such that the supplier and other fees generated over the life of the contract will exceed the cost of the incentive consideration provided up front. These service contracts with travel agency subscribers require that the customer commit to achieving certain economic objectives and generally have terms requiring repayment of the upfront incentive consideration if those objectives are not met.
(3)
Other, net primarily includes foreign exchange gains and losses related to the remeasurement of foreign currency denominated balances included in our consolidated balance sheets into the relevant functional currency.
(4)
Litigation costs, net represent charges associated with antitrust litigation and for the three months ended September 30, 2019 include the reversal of our previously accrued loss related to the US Airways legal matter for $32 million. See Note 10. Contingencies, to our consolidated financial statements.
(5)
Acquisition-related costs represent fees and expenses incurred associated with the 2018 agreement to acquire Farelogix.