UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT
REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) September 17, 2015
EXPEDIA, INC.
(Exact
name of registrant as specified in its charter)
|
|
|
|
|
Delaware |
|
001-37429 |
|
20-2705720 |
(State or other jurisdiction
of incorporation) |
|
(Commission
File Number) |
|
(I.R.S. Employer
Identification No.) |
333 108th Avenue NE
Bellevue, Washington 98004
(Address of principal executive offices) (Zip code)
(425) 679-7200
Registrants telephone number, including area code
Not Applicable
(Former
name or former address if changed since last report)
Check the appropriate box below
if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
¨ |
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
¨ |
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
¨ |
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
¨ |
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Amendment No. 1
This
Form 8-K/A is filed as an amendment (Amendment No. 1) to the Current Report on Form 8-K filed by Expedia, Inc. (the Company) under Items 2.01, 7.01 and 9.01 on September 17, 2015, disclosing, among other
things, the completion of its acquisition of Orbitz Worldwide, Inc. (Orbitz). Amendment No. 1 is being filed to include the financial statements and financial information of Orbitz required by Item 9.01.
Item 9.01 |
Financial Statements and Exhibits. |
(a) |
Financial Statements of Business Acquired. |
The unaudited condensed consolidated financial
statements of Orbitz as of June 30, 2015 and for the three and six months ended June 30, 2014 and 2015, and the notes related thereto are attached as Exhibit 99.1 to this Amendment No. 1 and are incorporated by reference into
this Amendment No. 1.
The audited consolidated financial statements of Orbitz as of December 31, 2013 and December 31,
2014, and for the years ended December 31, 2012, December 31, 2013 and December 31, 2014, and the notes related thereto are attached as Exhibit 99.2 to this Amendment No. 1 and are incorporated by reference into this
Amendment No. 1.
The consent of Deloitte & Touche LLP, Orbitz independent accountants, is attached as Exhibit 23.1 to
this Amendment No. 1.
(b) |
Pro Forma Financial Information. |
The unaudited pro forma condensed combined financial
information of the Company and Orbitz for the year ended December 31, 2014 and as of and for the six months ended June 30, 2015, and the notes related thereto are attached as Exhibit 99.3 to this Amendment No. 1 and are
incorporated by reference into this Amendment No. 1.
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Exhibit Number |
|
Description |
|
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23.1 |
|
Consent of Deloitte & Touche LLP, Independent Accountants of Orbitz Worldwide, Inc. |
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99.1 |
|
Unaudited condensed consolidated financial statements of Orbitz Worldwide, Inc. as of June 30, 2015 and for the three and six months ended June 30, 2015 and 2014, and the notes related thereto. |
|
|
99.2 |
|
Audited consolidated financial statements of Orbitz Worldwide, Inc. as of December 31, 2013 and December 31, 2014, and for the years ended December 31, 2012, December 31, 2013 and December 31, 2014, and
the notes related thereto. |
|
|
99.3 |
|
Unaudited pro forma condensed combined financial information of Expedia, Inc. and Orbitz Worldwide, Inc. for the year ended December 31, 2014, and as of and for the six months ended June 30, 2015, and the notes related
thereto. |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
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EXPEDIA, INC. |
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By: |
|
/s/ Mark D. Okerstrom |
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|
Mark D. Okerstrom |
|
|
Chief Financial Officer |
Dated: November 12, 2015
EXHIBIT INDEX
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Exhibit Number |
|
Description |
|
|
23.1 |
|
Consent of Deloitte & Touche LLP, Independent Accountants of Orbitz Worldwide, Inc. |
|
|
99.1 |
|
Unaudited condensed consolidated financial statements of Orbitz Worldwide, Inc. as of June 30, 2015 and for the three and six months ended June 30, 2015 and 2014, and the notes related thereto. |
|
|
99.2 |
|
Audited consolidated financial statements of Orbitz Worldwide, Inc. as of December 31, 2013 and December 31, 2014, and for the years ended December 31, 2012, December 31, 2013 and December 31, 2014, and
the notes related thereto. |
|
|
99.3 |
|
Unaudited pro forma condensed combined financial information of Expedia, Inc. and Orbitz Worldwide, Inc. for the year ended December 31, 2014, and as of and for the six months ended June 30, 2015, and the notes related
thereto. |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements on Forms S-3 (Nos. 333-194292, 333-202401,
333-197974), Forms S-4 (Nos. 333-169654, 333-140195, 333-175828) and Forms S-8 (Nos. 333-178650, 333-187111, 333-190254, 333-205996, 333-206990) of Expedia, Inc. of our
report dated March 9, 2015 relating to the consolidated financial statements of Orbitz Worldwide, Inc. and subsidiaries as of December 31, 2014 and 2013 and for each of the three years in the period ended December 31, 2014, appearing in
this Current Report on Form 8-K of Expedia, Inc.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
November 10, 2015
Exhibit 99.1
Orbitz Worldwide, Inc.
Unaudited Condensed
Consolidated Interim Financial Statements
Three and Six Months Ended June 30, 2015 and 2014
Orbitz Worldwide, Inc.
Index
Three and Six Months Ended June 30, 2015
and 2014
|
|
|
|
|
Condensed Consolidated Interim Financial Statements (Unaudited) |
|
Pages |
|
|
|
Condensed Consolidated Statements of Operations |
|
|
1 |
|
|
|
Condensed Consolidated Statements of comprehensive Income/(Loss) |
|
|
2 |
|
|
|
Condensed Consolidated Balance Sheets |
|
|
3 |
|
|
|
Condensed Consolidated Statements of Cash Flows |
|
|
4 |
|
|
|
Notes to Condensed Consolidated Financial Statements |
|
|
5-18 |
|
ORBITZ WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six months ended June 30, |
|
|
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
Net revenue |
|
$ |
239,597 |
|
|
$ |
248,053 |
|
|
$ |
459,802 |
|
|
$ |
458,308 |
|
Cost and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
63,897 |
|
|
|
47,638 |
|
|
|
136,380 |
|
|
|
90,383 |
|
Selling, general and administrative |
|
|
72,562 |
|
|
|
72,018 |
|
|
|
143,211 |
|
|
|
138,260 |
|
Marketing |
|
|
82,520 |
|
|
|
89,604 |
|
|
|
158,245 |
|
|
|
166,382 |
|
Depreciation and amortization |
|
|
13,958 |
|
|
|
15,287 |
|
|
|
28,478 |
|
|
|
28,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
232,937 |
|
|
|
224,547 |
|
|
|
466,314 |
|
|
|
423,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income/(loss) |
|
|
6,660 |
|
|
|
23,506 |
|
|
|
(6,512 |
) |
|
|
34,403 |
|
Other expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest expense |
|
|
(7,467 |
) |
|
|
(8,595 |
) |
|
|
(15,877 |
) |
|
|
(18,172 |
) |
Other expense |
|
|
|
|
|
|
(2,236 |
) |
|
|
|
|
|
|
(2,236 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
|
(7,467 |
) |
|
|
(10,831 |
) |
|
|
(15,877 |
) |
|
|
(20,408 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes |
|
|
(807 |
) |
|
|
12,675 |
|
|
|
(22,389 |
) |
|
|
13,995 |
|
Provision for income taxes |
|
|
3,444 |
|
|
|
5,794 |
|
|
|
2,801 |
|
|
|
13,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) |
|
$ |
(4,251 |
) |
|
$ |
6,881 |
|
|
$ |
(25,190 |
) |
|
$ |
947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) per share - basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) per share |
|
$ |
(0.04 |
) |
|
$ |
0.06 |
|
|
$ |
(0.22 |
) |
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding |
|
|
112,418,132 |
|
|
|
110,218,036 |
|
|
|
112,007,027 |
|
|
|
109,907,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) per share - diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) per share |
|
$ |
(0.04 |
) |
|
$ |
0.06 |
|
|
$ |
(0.22 |
) |
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding |
|
|
112,418,132 |
|
|
|
115,079,178 |
|
|
|
112,007,027 |
|
|
|
114,474,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Condensed
Consolidated Financial Statements.
1
ORBITZ WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) (UNAUDITED)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six months ended June 30, |
|
|
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
Net income/(loss) |
|
$ |
(4,251 |
) |
|
$ |
6,881 |
|
|
$ |
(25,190 |
) |
|
$ |
947 |
|
Other comprehensive income/(loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment |
|
|
(4,120 |
) |
|
|
(5,239 |
) |
|
|
3,079 |
|
|
|
(8,793 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income/(loss) |
|
|
(4,120 |
) |
|
|
(5,239 |
) |
|
|
3,079 |
|
|
|
(8,793 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income/(loss) |
|
$ |
(8,371 |
) |
|
$ |
1,642 |
|
|
$ |
(22,111 |
) |
|
$ |
(7,846 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Condensed
Consolidated Financial Statements.
2
ORBITZ WORLDWIDE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015 |
|
|
December 31, 2014 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
304,798 |
|
|
$ |
188,482 |
|
Accounts receivable (net of allowance for doubtful accounts of $1,401 and $1,541, respectively) |
|
|
161,340 |
|
|
|
132,951 |
|
Prepaid expenses |
|
|
10,806 |
|
|
|
10,039 |
|
Other current assets |
|
|
34,092 |
|
|
|
17,560 |
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
511,036 |
|
|
|
349,032 |
|
Property and equipment (net of accumulated depreciation of $307,433 and $302,031, respectively) |
|
|
110,135 |
|
|
|
111,832 |
|
Goodwill |
|
|
351,098 |
|
|
|
351,098 |
|
Trademarks and trade names |
|
|
89,762 |
|
|
|
89,890 |
|
Other intangible assets, net |
|
|
1,144 |
|
|
|
1,300 |
|
Deferred income taxes, non-current |
|
|
135,095 |
|
|
|
135,807 |
|
Restricted cash |
|
|
92,544 |
|
|
|
97,810 |
|
Other non-current assets |
|
|
12,453 |
|
|
|
39,200 |
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
1,303,267 |
|
|
$ |
1,175,969 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
20,237 |
|
|
$ |
13,954 |
|
Accrued merchant payable |
|
|
504,385 |
|
|
|
366,062 |
|
Accrued expenses |
|
|
165,608 |
|
|
|
158,754 |
|
Deferred income |
|
|
57,334 |
|
|
|
40,816 |
|
Term loan, current |
|
|
24,100 |
|
|
|
25,871 |
|
Other current liabilities |
|
|
5,970 |
|
|
|
1,544 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
777,634 |
|
|
|
607,001 |
|
Term loan, non-current |
|
|
405,499 |
|
|
|
421,879 |
|
Tax sharing liability |
|
|
55,415 |
|
|
|
61,289 |
|
Other non-current liabilities |
|
|
14,733 |
|
|
|
14,702 |
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
1,253,281 |
|
|
|
1,104,871 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (see Note 5) |
|
|
|
|
|
|
|
|
Shareholders Equity: |
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 100 shares authorized, no shares issued or outstanding |
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 140,000,000 shares authorized, 112,660,845 and 110,758,513 shares issued,
respectively |
|
|
1,126 |
|
|
|
1,107 |
|
Treasury stock, at cost, 25,237 shares held |
|
|
(52 |
) |
|
|
(52 |
) |
Additional paid-in capital |
|
|
1,061,616 |
|
|
|
1,060,636 |
|
Accumulated deficit |
|
|
(1,025,449 |
) |
|
|
(1,000,259 |
) |
Accumulated other comprehensive income |
|
|
12,745 |
|
|
|
9,666 |
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity |
|
|
49,986 |
|
|
|
71,098 |
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity |
|
$ |
1,303,267 |
|
|
$ |
1,175,969 |
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Condensed
Consolidated Financial Statements.
3
ORBITZ WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, |
|
|
|
2015 |
|
|
2014 |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net income/(loss) |
|
$ |
(25,190 |
) |
|
$ |
947 |
|
Adjustments to reconcile net income/(loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
28,478 |
|
|
|
28,880 |
|
Non-cash net interest expense |
|
|
4,532 |
|
|
|
5,237 |
|
Deferred income taxes |
|
|
2,271 |
|
|
|
11,556 |
|
Stock compensation |
|
|
7,416 |
|
|
|
6,803 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(29,759 |
) |
|
|
(63,438 |
) |
Accounts payable, accrued expenses and other current liabilities |
|
|
15,857 |
|
|
|
24,168 |
|
Accrued merchant payable |
|
|
139,588 |
|
|
|
175,944 |
|
Deferred income |
|
|
16,787 |
|
|
|
21,920 |
|
Other |
|
|
14,716 |
|
|
|
(5,893 |
) |
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
174,696 |
|
|
|
206,124 |
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Property and equipment additions |
|
|
(29,312 |
) |
|
|
(21,168 |
) |
Acquisitions, net of cash acquired |
|
|
|
|
|
|
(10,000 |
) |
Changes in restricted cash |
|
|
5,116 |
|
|
|
(17,748 |
) |
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(24,196 |
) |
|
|
(48,916 |
) |
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Payments on and retirement of term loans |
|
|
(18,151 |
) |
|
|
(443,250 |
) |
Issuance of long-term debt, net of issuance costs |
|
|
|
|
|
|
443,256 |
|
Employee tax withholdings related to net share settlements of equity-based awards |
|
|
(8,452 |
) |
|
|
(6,747 |
) |
Proceeds from exercise of employee stock options |
|
|
2,140 |
|
|
|
143 |
|
Payments on tax sharing liability |
|
|
(8,921 |
) |
|
|
(4,616 |
) |
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(33,384 |
) |
|
|
(11,214 |
) |
|
|
|
|
|
|
|
|
|
Effects of changes in exchange rates on cash and cash equivalents |
|
|
(800 |
) |
|
|
1,288 |
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
116,316 |
|
|
|
147,282 |
|
Cash and cash equivalents at beginning of period |
|
|
188,482 |
|
|
|
117,385 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
304,798 |
|
|
$ |
264,667 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Income tax payments, net |
|
$ |
1,686 |
|
|
$ |
1,889 |
|
Cash interest payments |
|
$ |
11,553 |
|
|
$ |
13,104 |
|
Non-cash investing activity: |
|
|
|
|
|
|
|
|
Capital expenditures incurred not yet paid |
|
$ |
2,570 |
|
|
$ |
3,811 |
|
See Notes to Unaudited Condensed
Consolidated Financial Statements.
4
ORBITZ WORLDWIDE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. |
Organization and Basis of Presentation |
Description of the Business
Orbitz, Inc. was established in early 2000 by American Airlines, Inc., Continental Airlines, Inc., Delta Air Lines, Inc., Northwest Airlines,
Inc. and United Air Lines, Inc. (the Founding Airlines). In November 2004, Orbitz was acquired by Cendant Corporation (Cendant), whose online travel distribution businesses included the HotelClub and RatesToGo brands
(collectively referred to as HotelClub) and the CheapTickets brand. In February 2005, Cendant acquired ebookers Limited, an international online travel brand which currently has operations in 8 countries throughout Europe
(ebookers).
Orbitz Worldwide, Inc. was incorporated in Delaware on June 18, 2007 and was formed to be the parent company
of the business-to-consumer travel businesses of Travelport, including Orbitz.com, ebookers and HotelClub and the related subsidiaries and affiliates of those businesses. We are the registrant as a result of the completion of the initial public
offering (the IPO) of 34.4 million shares of our common stock on July 25, 2007. On April 15, 2013, following the completion of the Travelport refinancing plan, Orbitz Worldwide, Inc. is no longer a controlled
company as defined in Section 303A of the New York Stock Exchange listing rules.
We are a global online travel company
(OTC) that uses innovative technology to enable leisure and business travelers to research, plan and book a broad range of travel products and services including hotels, flights, vacation packages, car rentals, cruises, rail tickets,
travel insurance, destination services and event tickets. We provide our customers an easy-to-use booking experience across a wide variety of devices. Our global brand portfolio includes Orbitz.com and CheapTickets in the United States; ebookers in
Europe; and HotelClub, which focuses on the Asia Pacific region. We also own and operate Orbitz for Business, which is a corporate travel management company, and the Orbitz Partner Network, which delivers private label travel solutions to a broad
range of partners.
On February 12, 2015, Orbitz Worldwide, Inc., Expedia, Inc. (Expedia), and Xeta, Inc., an indirect
wholly owned subsidiary of Expedia (Merger Sub), entered into an Agreement and Plan of Merger (the Merger Agreement).
The Merger Agreement provides, subject to the terms and conditions set forth therein, that Merger Sub will be merged with and into the Company
(the Merger) among other things and, with the Company surviving the Merger as an indirect wholly owned subsidiary of Expedia. At the effective time of the Merger (the Effective Time), each share of common stock of the Company
outstanding immediately prior to the Effective Time (other than any shares owned by the Company, Expedia, Merger Sub or Merger Subs direct parent or any dissenting shares) will be automatically converted into the right to receive $12.00 in
cash, without interest.
The Board of Directors of the Company by a unanimous vote of directors present approved the Merger Agreement and
the transactions contemplated thereby, including the Merger. On May 27, 2015, the Companys shareholders voted to approve the Merger Agreement and the transactions contemplated thereby, including the Merger. Because the Companys
shareholders have approved the Merger, the Companys Board of Directors may no longer effect a Change of Board Recommendation (as defined in the Merger Agreement) in connection with its fiduciary duties to the shareholders.
The closing of the Merger is subject to various customary conditions, including the expiration or termination of the applicable waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and other regulatory clearances, the absence of any governmental order prohibiting the consummation of the transactions contemplated by the Merger Agreement, the accuracy of
the representations and warranties contained in the Merger Agreement (subject to certain materiality qualifications) and compliance with the covenants and agreements in the Merger Agreement in all material respects.
5
ORBITZ WORLDWIDE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Merger Agreement entered into on February 12, 2015, contains
certain termination rights, and if the Merger Agreement is terminated as a result of the failure to obtain competition law approvals or a legal prohibition related to competition law matters, a termination fee of $115.0 million will be payable by
Expedia to the Company, subject to certain limitations. In addition, subject to certain exceptions and limitations, if all conditions to closing other than obtaining regulatory clearances and conditions that by their nature are to be satisfied at
the closing have been satisfied as of August 12, 2015, either the Company or Expedia may extend the termination date of the Merger Agreement until November 12, 2015. As of the date of this report, all conditions to the closing of the
Merger other than obtaining all regulatory clearances and conditions that by their nature are to be satisfied at the closing have been satisfied. If neither party elects to extend the termination date on August 12, then either party may
terminate the agreement.
On March 25, 2015, each of Orbitz and Expedia received a request for additional information or materials
from the U.S. Department of Justice (the DOJ) in connection with the DOJ pending review of the proposed merger.
Reclassifications
Certain prior year amounts in the Condensed Consolidated Financial Statements have been reclassified to conform with the current year
presentation.
Basis of Presentation
The accompanying Condensed Consolidated Financial Statements present the accounts of Orbitz.com, ebookers and HotelClub and the related
subsidiaries and affiliates of those businesses, collectively doing business as Orbitz Worldwide, Inc.
As mentioned above, the Company
entered into an agreement on February 12, 2015, that, if consummated, would result in the Company becoming an indirect wholly-owned subsidiary of Expedia, Inc. The accompanying Condensed Consolidated Financial Statements do not reflect any
effects that would result if the agreement is consummated.
6
ORBITZ WORLDWIDE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. |
Summary of Significant Accounting Policies |
Our significant accounting policies are
discussed in Note 2 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2014 and our critical accounting estimates in Part II, Item 7. Managements Discussion
and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2014.
Use of Estimates
The
preparation of our consolidated financial statements and related notes in conformity with GAAP requires us to make certain estimates and assumptions. Our estimates and assumptions affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to matters that require a significant level of judgment or are otherwise subject to an inherent degree of
uncertainty.
Our significant estimates include elements of revenue recognition, the realization of deferred tax assets, amounts that may
be due under the tax sharing agreement, the reserve for fraudulent transactions, impairment of long-lived assets, goodwill and indefinite-lived intangible assets, costs to be capitalized as well as the useful life of capitalized software, and
contingent liabilities, including taxes related to hotel occupancy. Actual amounts may differ from these estimates.
During the six months
ended June 30, 2015, the Company experienced a significant increase in fraudulent transaction expense. While we have taken extensive actions to reduce such transactions, there is no guarantee that we will be successful in further reducing
fraudulent transactions in the future or that the losses from such transactions will be reduced to a rate experienced prior to 2015.
We
utilize recent loss experience, including reported debit memo information and expected delays and processing times to estimate our reserve for fraudulent transaction expense. It is possible that changes in the frequency of losses or lag times or
changes in the effectiveness of our counter-measures could cause actual losses from fraudulent transactions to differ materially from our estimates.
3. |
Term Loan and Revolving Credit Facility |
Our $530.0 million senior secured credit
facility (the Credit Agreement) consists of a $450.0 million term loan (the Term Loan) maturing April 15, 2021 and a five year $80.0 million revolving credit facility maturing April 15, 2019 (the
Revolver).
Term Loan
The Term Loan bears interest at a variable rate, at our option, of the Eurocurrency Rate plus a margin of 3.50% per annum, or the Base
Rate plus 2.50% per annum. The Eurocurrency Rate is equal to the LIBOR rate as determined by the British Bankers Association (adjusted for any applicable statutory reserves as defined in the Credit Agreement) and with respect to the Term Loan
shall not be less than 1.00% per annum. The Base Rate for any day is equal to the greater of (a) the Fed Funds Rate in effect plus 0.5%, (b) the Credit Suisse AG prime rate and (c) the one-month Eurocurrency Rate plus 1.00%.
The principal amount of the Term Loan is payable in quarterly installments of $1.125 million, with the final installment of the remaining
outstanding balance due at the applicable maturity date with respect to such Term Loan. In addition, we are required, subject to certain exceptions, to make payments on the Term Loan (a) annually in the first quarter of each fiscal year in an
amount of 50% (which percentage will be reduced to 25% and 0% subject to achieving certain first lien leverage ratios) of the prior years excess cash flow, as defined in the Credit Agreement, (b) in an amount of 100% of net cash proceeds
from asset
7
ORBITZ WORLDWIDE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
sales subject to certain reinvestment rights, and (c) in an amount of 100% of net
cash proceeds of any issuance of debt other than debt permitted to be incurred under the Credit Agreement. Due to the excess cash flow payment we made in March of this year, we are not required to make any quarterly installment payments on the Term
Loan until 2019.
The change in the Term Loan during the six months ended June 30, 2015 was as follows:
|
|
|
|
|
|
|
Amount |
|
|
|
(in thousands) |
|
Balance at January 1, 2015 (current and non-current) |
|
$ |
447,750 |
|
Prepayment from excess cash flow (1) |
|
|
(18,151 |
) |
|
|
|
|
|
Balance at June 30, 2015 (current and non-current) |
|
$ |
429,599 |
|
|
|
|
|
|
|
(1) |
Some lenders exercised the right to reject their pro rata share of the prepayment. |
Based on
our current financial projections for the year ending December 31, 2015, we estimate that we will be required to make a $24.1 million prepayment from excess cash flow in the first quarter of 2016. The amount of prepayment required is subject to
change based on actual results, which could differ materially from our financial projections as of June 30, 2015. Prepayments from excess cash flow are applied to the scheduled quarterly Term Loan principal payments in order of maturity. The
potential amount of prepayment from excess cash flow that will be required beyond the first quarter of 2016 is not reasonably estimable as of June 30, 2015.
At June 30, 2015, $200.0 million of the Term Loan had a fixed interest rate as a result of interest rate swaps and $229.6 million had a
variable rate based on LIBOR, resulting in a blended interest rate of 4.94%, excluding the impact of the amortization of debt issuance costs (see Note 7 - Derivative Financial Instruments).
The table below shows the aggregate maturities of the Term Loan over the remaining term of the Credit Agreement, excluding any mandatory
prepayments from excess cash flow that could be required under the Term Loan in future periods.
|
|
|
|
|
Year |
|
(in thousands) |
|
2015 |
|
|
|
|
2016 |
|
|
|
|
2017 |
|
|
|
|
2018 |
|
|
|
|
2019 |
|
|
4,349 |
|
Thereafter |
|
|
425,250 |
|
|
|
|
|
|
Total |
|
$ |
429,599 |
|
|
|
|
|
|
Revolver
The Revolver provides for borrowings and letters of credit up to $80.0 million, through which we are allowed to issue up to $55.0 million in
letters of credit. The Revolver bears interest at a variable rate, at our option, of the Eurocurrency Rate plus a margin of 3.00% per annum or the Base Rate plus a margin of 2.00% per annum. We pay a letter of credit fee in the amount of
the Eurocurrency Rate on all outstanding letters of credit and we incur a facility fee of 0.50% per annum on all loans, letters of credit and any unused amounts on the Revolver. At June 30, 2015 there were no outstanding borrowings or
letters of credit issued under the Revolver.
Credit Agreement Terms
The Term Loan and Revolver are both secured by substantially all of our domestic subsidiaries tangible and intangible assets, including a
pledge of 100% of the outstanding capital stock or other equity interests of substantially all of our direct and indirect domestic subsidiaries and 65% of the capital stock or other equity interests of certain of our foreign subsidiaries, subject to
certain exceptions. The Term Loan and Revolver are also guaranteed by substantially all of our domestic subsidiaries.
8
ORBITZ WORLDWIDE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Credit Agreement contains various customary restrictive covenants
that limit our ability to, among other things: incur additional indebtedness or enter into guarantees; enter into sale/leaseback transactions; make investments, loans or acquisitions; grant or incur liens on our assets; sell our assets; engage in
mergers, consolidations, liquidations or dissolutions; engage in transactions with affiliates; and make restricted payments. The Credit Agreement requires us not to exceed a maximum first lien leverage ratio, as defined in the Credit Agreement, of
5.00 to 1.
We have a liability included in our Condensed Consolidated
Balance Sheets that relates to a tax sharing agreement between Orbitz and the Founding Airlines. As of June 30, 2015, the estimated remaining payments that may be due under this agreement were approximately $87.3 million. We estimated that the
net present value of our obligation to pay tax benefits to the Founding Airlines was $73.3 million and $78.4 million at June 30, 2015 and December 31, 2014, respectively. The change in the tax sharing liability for the six months ended
June 30, 2015 was as follows:
|
|
|
|
|
|
|
Amount |
|
|
|
(in thousands) |
|
Balance at January 1, 2015 (current and non-current) |
|
$ |
78,382 |
|
Accretion of interest expense |
|
|
3,841 |
|
Cash payments |
|
|
(8,921 |
) |
|
|
|
|
|
Balance at June 30, 2015 (current and non-current) |
|
$ |
73,302 |
|
|
|
|
|
|
|
(a) |
We accreted interest expense related to the tax sharing liability of $1.7 million and $2.3 million for the three months ended June 30, 2015 and 2014, respectively, and $3.8 million and $4.9 million for the six
months ended June 30, 2015 and 2014, respectively. |
Based upon the estimated timing of future payments we expect to
make, the current portion of the tax sharing liability of $17.9 million and $17.1 million was included in Accrued expenses in our Condensed Consolidated Balance Sheets at June 30, 2015 and December 31, 2014, respectively. The long-term
portion of the tax sharing liability of $55.4 million and $61.3 million was reflected as Tax sharing liability in our Condensed Consolidated Balance Sheets at June 30, 2015 and December 31, 2014, respectively.
5. |
Commitments and Contingencies |
Our contractual obligations as of June 30, 2015 did
not materially change from the amounts set forth in our 2014 Annual Report on Form 10-K.
Company Litigation
We are involved in various claims, legal proceedings and governmental inquiries related to contract disputes, business practices, intellectual
property and other shareholder, commercial, employment and tax matters. We believe that we have meritorious defenses, and we are vigorously defending against these claims, proceedings and inquiries. As of June 30, 2015 and December 31,
2014, we had accruals of $2.7 million and $4.3 million related to various legal proceedings, respectively. Litigation is inherently unpredictable and, although we believe we have valid defenses in these matters, unfavorable resolutions could occur.
Below, we have provided relevant information on these matters.
9
ORBITZ WORLDWIDE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We are party to various cases brought by municipalities and other state
and local governmental entities in the U.S. involving hotel occupancy or related taxes and our merchant hotel business model for hotel and car rental reservations. Most of the cases were brought simultaneously against other OTCs, including Expedia,
Travelocity and Priceline. Certain of these cases are class actions, some of which have been confirmed on a state-wide basis and some which are purported. The cases allege, among other things, that we violated the jurisdictions hotel occupancy
tax ordinances, as well as related sales and use taxes. While not identical in their allegations, the cases generally assert similar claims, including violations of local or state occupancy tax ordinances, failure to pay sales or use tax, and in
some cases, violations of consumer protection ordinances, conversion, unjust enrichment, imposition of a constructive trust, demand for a legal or equitable accounting, injunctive relief, declaratory judgment, and civil conspiracy. The plaintiffs
seek relief in a variety of forms, including: declaratory judgment, full accounting of monies owed, imposition of a constructive trust, compensatory and punitive damages, disgorgement, restitution, interest, penalties and costs, attorneys
fees, and where a class action has been claimed, an order certifying the action as a class action. An adverse ruling in one or more of these cases could require us to pay tax retroactively and prospectively and possibly pay interest, penalties and
fines. The proliferation of additional cases could result in substantial additional defense costs.
We have also been contacted by several
municipalities or other taxing bodies concerning our possible obligations with respect to state or local hotel occupancy or related taxes. Some of these municipalities have issued notices of audit but have not issued assessments; others have issued
assessments that are not administratively final; and some have issued assessments that are administratively final and are currently subject to judicial review. In addition to these matters, certain taxing authorities have filed suit against the OTCs
without issuing audit notices or assessments.
|
|
|
Certain taxing authorities have not issued assessments, but have requested information to conduct an audit and/or have requested that the Company register to pay local hotel occupancy taxes. This group of taxing
authorities includes 43 cities in California; the following cities in Colorado: Broomfield, Colorado Springs, Durango, Frisco, Glendale, Glenwood Springs, Golden, Grand Junction, Greeley, Greenwood Village, Lafayette, Lakewood, Littleton, Loveland,
Silverthorne and Steamboat Springs; Arlington, Texas; Brunswick and Stanly, North Carolina; the following counties in Utah: Davis, Summit, Salt Lake and Weber; the Arizona Department of Revenue; the Ohio Department of Taxation; Paradise Valley,
Arizona; various Alabama Municipalities; the Louisiana Department of Revenue; and the Vermont Department of Taxation. |
|
|
|
The following taxing authorities have issued assessments which are not final and are subject to further review by such taxing authorities: the Colorado Department of Revenue; the City of Aurora, Colorado; the Maryland
Comptroller; the Texas Comptroller; the City of Portland, Oregon, and Multnomah County, Oregon; and Lake County, Indiana. These assessments range from $0.02 million to approximately $5.8 million, and total approximately $10.5 million.
|
|
|
|
Assessments or declaratory rulings that are administratively final and subject to judicial review have been issued by the cities of San Francisco, Los Angeles, and San Diego, California; the city of Denver, Colorado;
the counties of Miami-Dade, Broward and Osceola, Florida; the Indiana Department of Revenue; and the Hawaii Department of Taxation for merchant car reservations for the years 2002-2012, and merchant hotel reservations for the years 2012 and 2013.
These assessments and declaratory rulings range from $0.2 million to approximately $16.9 million, and total approximately $47.5 million. Trial courts rejected the assessments in San Francisco and San Diego, California and Broward County, Florida.
The Colorado Court of Appeals reversed the assessments against the OTCs in the City of Denver case. The final assessments by the county of Osceola, Florida, the county of Miami-Dade, Florida, the Indiana Department of Revenue, and Hawaii Department
of Taxation for merchant car reservations for the years 2002-2012 and merchant hotel reservations for 2012-2013 have not yet been judicially reviewed. |
10
ORBITZ WORLDWIDE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On March 17, 2015, the Hawaii Supreme Court issued a ruling that
addressed final assessments that had been issued by the Hawaii Department of Taxation for merchant hotel reservation for the years 2002 through 2011 that collectively amounted to $58.8 million against Orbitz for General Excise Tax (GET)
and Transient Accommodations Taxes (TAT). In 2013, the Hawaii Tax Court of Appeals (the Tax Court) held the OTCs liable for GET on the gross amounts of merchant hotel reservations that they facilitated during this time
period, and required Orbitz to pay approximately $26.0 million into a contested litigation fund, pending the outcome of the appeal to the Hawaii Supreme Court. In its March 17, 2015 ruling, the Hawaii Supreme Court affirmed in part and vacated
in part the rulings of the Tax Court. The Hawaii Supreme Court affirmed the Tax Courts ruling that the OTCs are not subject to Hawaii TAT. The Hawaii Supreme Court also affirmed the Tax Courts ruling that the OTCs are liable for GET, and
that the OTCs are subject to penalties and interest on those amounts. However, the Hawaii Supreme Court vacated the Tax Courts ruling that OTCs are liable for GET on the gross amounts of the merchant model hotel reservations they facilitate,
and instead ruled the OTCs are liable only on their markup and service fees. The Hawaii Supreme Court remanded this case to the Tax Court to calculate damages consistent with the Hawaii Supreme Courts decision.
On July 20, 2015, the Tax Court heard argument on issues relating to calculation of damages and the amounts of the OTCs refunds for
amounts paid into the contested litigation fund to satisfy the judgment relating to the 2002-2011 assessments. The Tax Court held that Hawaii must refund all undisputed amounts to the OTCs. For the Orbitz entities, the amount of the refund that is
not disputed is $21.1 million (of the $26 million that Orbitz originally paid). Under the Tax Courts order, Hawaii must refund that amount within 30 days of the entry of judgment, which we expect will occur shortly. The Court did not issue a
final determination on the legal and factual issues that will determine whether and to what extent Orbitz will be refunded additional amounts. Orbitz believes that it is entitled to an additional refund of approximately $1.3 million; Hawaii disputes
that it owes this amount. At the time Orbitz made the $26 million payment to Hawaiis contested litigation fund, it recorded an asset of $22 million. In light of the Tax Courts recent rulings, Orbitz has not made any adjustments to these
amounts.
The Hawaii Department of Taxation has issued three sets of assessments that have not yet been finally resolved. These are
assessments on merchant hotel reservations for 2012 in the amount of $16.9 million; on merchant hotel and car rental reservations for 2013 in the amount of $14.6 million; and for merchant car rental reservations for the 2002-2012 time period in the
amounts of $3.4 million against each of the Orbitz entities. (Based on Hawaiis past merchant model hotel assessments, Orbitz believes that Hawaiis rental car assessments represent an aggregate of $3.4 million total against the Orbitz
entities for the time period). We anticipate that the Hawaii Supreme Courts March 17, 2015 ruling will substantially reduce Orbitzs potential liability for these assessments.
On July 23, 2015, the District of Columbia Court of Appeals issued a decision in which it held that the OTCs are subject to the District
of Columbias sales tax. The Court determined that the OTCs are liable for sales tax going to back to the time that they began facilitating merchant model hotel reservations at hotels located in Washington D.C. The Court of Appeals also held
that the OTCs are not liable for sales tax on the tax recovery charge. Although Orbitz is evaluating the possibility of seeking rehearing in this case, it believes that loss is probable as a result of this decision, and has expensed the entire
amount of the $3.8 million judgment that it paid in March 2014. This judgment represents the sales tax and interest attributable to Orbitz.coms hotel reservations through December 31, 2011. Previously, Orbitz had not expensed
approximately $3.7 million of the judgment, on the expectation that it would prevail for the portion attributable to any period before July 2011, when the District of Columbia amended its sales tax law. After all appeals have been exhausted, Orbitz
anticipates that it will need to make a catch up payment to bring itself current through the current date. That amount has not yet been determined, but Orbitz has accrued $0.9 million, which represents its estimate of its liability for this time
period.
In July 2011, related to the City of San Antonio hotel occupancy tax case, the United States District Court for the
Western District of Texas issued its findings of fact and conclusions of law in which it held the defendant OTCs, including Orbitz, liable for hotel occupancy taxes on markup, fees and breakage revenue, and also imposed penalties and interest. On
April 4, 2013, the court entered judgment against Orbitz in the amount of approximately $4.3 million and post-judgment motions are still pending. The OTCs, including Orbitz, intend to appeal once the pending motions are ruled upon by the court.
Because we do not believe a loss is probable given the numerous issues that exist on appeal, we have not accrued any liability related to this case.
11
ORBITZ WORLDWIDE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On July 29, 2015, Orbitz settled a lawsuit that Trilegiant filed
against it in the Supreme Court of New York. The lawsuit alleged that Orbitz was obligated to make a series of termination payments arising out of a promotion agreement that Orbitz terminated in 2007. Orbitz agreed to settle the matter for $13.6
million, which was consistent with the accrual we previously established for this matter.
We cannot estimate our aggregate range of loss
in the cases for which we have not recorded an accrual, except to the extent taxing authorities have issued assessments against us. Although we believe it is unlikely that an adverse outcome will result from these proceedings, an adverse outcome
could be material to us with respect to earnings or cash flows in any given reporting period.
Financing Arrangements
We are required to issue letters of credit and similar instruments to support certain suppliers, commercial agreements, leases and
non-U.S. regulatory and governmental agencies primarily to satisfy consumer protection requirements. We believe we have access to sufficient letter of credit availability to meet our short- and long-term requirements through a combination of
the restricted cash balance currently used to cash collateralize letters of credit or similar instruments, cash from our balance sheet which can be used to support letters of credit and similar instruments and our $80.0 million revolving credit
facility through which we are allowed to issue up to $55.0 million in letters of credit.
The following table shows the amount of letters
of credit and similar instruments outstanding by facility, as well as the amounts of our restricted cash balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015 |
|
|
December 31, 2014 |
|
|
|
Letters of Credit and Other Credit Support |
|
|
Restricted Cash |
|
|
Letters of Credit and Other Credit Support |
|
|
Restricted Cash |
|
|
|
(in thousands) |
|
Multi-currency letter of credit facility |
|
$ |
|
|
|
$ |
|
|
|
$ |
2,892 |
|
|
$ |
3,176 |
|
Uncommitted letter of credit facilities and surety bonds |
|
|
96,053 |
|
|
|
92,544 |
|
|
|
98,406 |
|
|
|
94,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
96,053 |
|
|
$ |
92,544 |
|
|
$ |
101,298 |
|
|
$ |
97,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total letter of credit fees were less than $0.1 million for both the three months ended June 30, 2015 and
2014, and $0.1 million and $0.2 million for the six months ended June 30, 2015 and 2014, respectively.
Continuity Incentives
In conjunction with the Merger, the Company has offered key employees a continuity incentive for continuing employment through the
closing date and beyond. The incentives will be paid 50% on the closing date of the Merger and 50% will be paid 180 days after the closing date of the transaction (or upon involuntary termination, if applicable). The incentives will not be paid if
the transaction is not consummated and therefore the Company has not recorded any liability related to the incentives.
6. |
Equity-Based Compensation |
We issue share-based awards under the Orbitz Worldwide, Inc.
2007 Equity and Incentive Plan, as amended (the Plan). The Plan provides for the grant of equity-based awards, including restricted stock, restricted stock units, stock options, stock appreciation rights and other equity-based awards to
our directors, officers and other employees, advisors and consultants who are selected by the Compensation Committee of the Board of Directors for participation in the Plan. As of June 30, 2015, 3,518,537 shares were available for future
issuance under the Plan.
12
ORBITZ WORLDWIDE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Restricted Stock Units
We granted 805,251 restricted stock units (RSUs) during the six months ended June 30, 2015, with a weighted-average grant date
fair value per share of $11.48. The fair value of RSUs is amortized on a straight-line basis over the requisite service period of four years.
Non-Employee Directors Deferred Compensation Plan
We granted 92,977 deferred stock units to our non-employee directors during the six months ended June 30, 2015 with a weighted-average
grant date fair value per share of $11.36. These deferred stock units are issued as RSUs under the Plan and are immediately vested and non-forfeitable and expensed on the grant date at their fair value.
Compensation Expense
We
recognized total equity-based compensation expense of $4.5 million and $3.9 million for the three months ended June 30, 2015 and 2014, respectively and $7.4 million and $6.8 million for the six months ended June 30, 2015 and 2014,
respectively. As of June 30, 2015, a total of $21.8 million of unrecognized compensation costs related to unvested RSUs and unvested PSUs are expected to be recognized over the remaining weighted-average lives of 2.7 years.
7. |
Derivative Financial Instruments |
Interest Rate Hedges
At June 30, 2015, we had the following interest rate swaps outstanding that effectively converts $200.0 million of the term loan from a
variable interest rate to a fixed interest rate. We will pay a fixed interest rate on the notional amount and in exchange receive a variable interest rate based on the one-month LIBOR rate. We do not use derivatives for speculative or trading
purposes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount |
|
Effective Date |
|
|
Maturity Date |
|
|
Fixed Interest Rate Paid |
|
|
Variable Interest Rate Received |
|
$100.0 million |
|
|
August 29, 2014 |
|
|
|
August 31, 2016 |
|
|
|
1.11 |
% |
|
|
One-month LIBOR |
|
$100.0 million |
|
|
August 29, 2014 |
|
|
|
August 31, 2016 |
|
|
|
1.15 |
% |
|
|
One-month LIBOR |
|
We entered into interest rate derivative contracts to protect against volatility of future cash flows of the
variable interest payments related to our term loan. These derivative contracts are economic hedges and are not designated as cash flow hedges. We mark-to-market these instruments and record the changes in the fair value of these items in Net
interest expense in the Companys Condensed Consolidated Statements of Operations and recognize the unrealized gain or loss in Other non-current assets or liabilities. Unrealized losses of $1.6 million and $2.2 million were recognized at
June 30, 2015 and 2014, respectively.
13
ORBITZ WORLDWIDE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the location and fair value of derivative instruments on
the Companys Condensed Consolidated Balance Sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location |
|
Fair Value Measurements as of |
|
|
|
|
June 30, 2015 |
|
|
December 31, 2014 |
|
|
|
|
|
(in thousands) |
|
Interest rate swaps not designated as hedging instruments |
|
Other non-current liabilities |
|
$ |
1,608 |
|
|
$ |
1,723 |
|
Foreign Currency Hedges
We enter into foreign currency contracts to manage our exposure to changes in exchange rates associated with foreign currency receivables,
payables and intercompany transactions. We primarily hedge our foreign currency exposure to several currencies in Europe and the Australian dollar. As of June 30, 2015, we had foreign currency contracts outstanding with a total net notional
amount of $170.0 million, all of which subsequently matured. The foreign currency contracts do not qualify for hedge accounting treatment; accordingly, changes in the fair value of the foreign currency contracts are reflected in net income as a
component of Selling, general and administrative expense in our Condensed Consolidated Statements of Operations.
The following table
shows the fair value of our foreign currency hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location |
|
Fair Value Measurements as of |
|
|
|
|
June 30, 2015 |
|
|
December 31, 2014 |
|
|
|
|
|
(in thousands) |
|
Asset Derivatives: |
|
|
|
|
|
|
|
|
|
|
Foreign currency hedges |
|
Other current assets |
|
$ |
|
|
|
$ |
4,275 |
|
Liability Derivatives: |
|
|
|
|
|
|
|
|
|
|
Foreign currency hedges |
|
Other current liabilities |
|
$ |
3,993 |
|
|
$ |
|
|
The following table shows the changes in the fair value of our foreign currency contracts, which were recorded
as losses in Selling, general and administrative expense in our Condensed Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
|
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Foreign currency hedges (a) |
|
$ |
(6,884 |
) |
|
$ |
(5,236 |
) |
|
$ |
(3,068 |
) |
|
$ |
(10,105 |
) |
|
(a) |
We recorded transaction gains associated with the re-measurement and settlement of our foreign denominated assets and liabilities of $5.0 million and $4.1 million for the three months ended June 30, 2015 and 2014,
respectively, and $0.4 million and $6.9 million for the six months ended June 30, 2015 and 2014, respectively. These transaction gains were included in Selling, general and administrative expense in our Condensed Consolidated Statements of
Operations. The net impact of these transaction gains, together with the losses incurred on our foreign currency hedges, were losses of $1.8 million and $1.1 million for the three months ended June 30, 2015 and 2014, respectively, and $2.7
million and $3.2 million for the six months ended June 30, 2015 and 2014, respectively. |
The tables below show the
gross and net amounts related to derivatives eligible for offset in the Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014. The gross asset amount of the derivative listed below is the maximum loss the Company
would incur if the counterparties failed to meet their obligation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts of Recognized Liabilities |
|
|
Gross Asset Recognized as an Offset |
|
|
Net Liabilities (Assets) Included in the Condensed Consolidated Balance Sheets |
|
|
|
(in thousands) |
|
June 30, 2015 |
|
$ |
6,746 |
|
|
$ |
(1,145 |
) |
|
$ |
5,601 |
|
December 31, 2014 |
|
$ |
2,947 |
|
|
$ |
(5,499 |
) |
|
$ |
(2,552 |
) |
14
ORBITZ WORLDWIDE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. |
Accumulated Other Comprehensive Income/(Loss) |
Accumulated other comprehensive income
(AOCI) is comprised of currency translation adjustments. The change in AOCI by component for the three months ended June 30, 2015 and 2014 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Currency Translation Adjustment |
|
|
|
2015 |
|
|
2014 |
|
|
|
(in thousands) |
|
Balance at April 1, |
|
$ |
16,865 |
|
|
$ |
(538 |
) |
Other comprehensive income/(loss) before reclassifications |
|
|
(4,120 |
) |
|
|
(5,239 |
) |
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income/(loss) |
|
|
(4,120 |
) |
|
|
(5,239 |
) |
|
|
|
|
|
|
|
|
|
Balance at June 30, |
|
$ |
12,745 |
|
|
$ |
(5,777 |
) |
|
|
|
|
|
|
|
|
|
The change in AOCI by component for the six months ended June 30, 2015 and 2014 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Currency Translation Adjustment |
|
|
|
2015 |
|
|
2014 |
|
|
|
(in thousands) |
|
Balance at January 1, |
|
$ |
9,666 |
|
|
$ |
3,016 |
|
Other comprehensive income/(loss) before reclassifications |
|
|
3,079 |
|
|
|
(8,793 |
) |
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income/(loss) |
|
|
3,079 |
|
|
|
(8,793 |
) |
|
|
|
|
|
|
|
|
|
Balance at June 30, |
|
$ |
12,745 |
|
|
$ |
(5,777 |
) |
|
|
|
|
|
|
|
|
|
9. |
Net Income/(Loss) per Share |
We calculate basic net income/(loss) per share by dividing
the net income/(loss) for the period by the weighted-average number of shares outstanding during the period. Diluted net income/(loss) per share is calculated by dividing the net income/(loss) for the period by the weighted-average number of common
shares outstanding and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares are determined by the application of the treasury stock method.
The following table presents the weighted-average shares outstanding used in the calculation of net income/(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six months ended June 30, |
|
Weighted-Average Shares Outstanding |
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
Basic |
|
|
112,418,132 |
|
|
|
110,218,036 |
|
|
|
112,007,027 |
|
|
|
109,907,641 |
|
Diluted effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units |
|
|
|
|
|
|
2,318,956 |
|
|
|
|
|
|
|
1,852,820 |
|
Performance-based restricted stock units |
|
|
|
|
|
|
2,095,044 |
|
|
|
|
|
|
|
2,255,755 |
|
Stock options |
|
|
|
|
|
|
447,142 |
|
|
|
|
|
|
|
457,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
112,418,132 |
|
|
|
115,079,178 |
|
|
|
112,007,027 |
|
|
|
114,474,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
ORBITZ WORLDWIDE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following equity awards were not included in the diluted net
income/(loss) per share calculation because they would have had an antidilutive effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six months ended June 30, |
|
Antidilutive Equity Awards |
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
Restricted stock units |
|
|
4,288,652 |
|
|
|
936,427 |
|
|
|
4,141,535 |
|
|
|
618,421 |
|
Performance-based restricted stock units |
|
|
1,798,277 |
|
|
|
410,445 |
|
|
|
1,933,003 |
|
|
|
269,851 |
|
Stock options |
|
|
787,017 |
|
|
|
|
|
|
|
919,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
6,873,946 |
|
|
|
1,346,872 |
|
|
|
6,993,798 |
|
|
|
888,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10. |
Fair Value Measurements |
The following table shows the fair value of our assets and
liabilities that are required to be measured at fair value on a recurring basis as of June 30, 2015 and December 31, 2014, which are classified as Other current assets, Other current liabilities and Other non-current liabilities in our
Condensed Consolidated Balance Sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of |
|
|
|
June 30, 2015 |
|
|
December 31, 2014 |
|
|
|
Total |
|
|
Quoted prices in active markets (Level 1) |
|
|
Significant other observable inputs (Level 2) |
|
|
Significant unobservable inputs (Level 3) |
|
|
Total |
|
|
Quoted prices in active markets (Level 1) |
|
|
Significant other observable inputs (Level 2) |
|
|
Significant unobservable inputs (Level 3) |
|
|
|
(in thousands) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivative assets |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,275 |
|
|
$ |
4,275 |
|
|
$ |
|
|
|
$ |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivative liabilities |
|
$ |
3,993 |
|
|
$ |
3,993 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Interest rate swap liabilities |
|
$ |
1,608 |
|
|
$ |
|
|
|
$ |
1,608 |
|
|
$ |
|
|
|
$ |
1,723 |
|
|
$ |
|
|
|
$ |
1,723 |
|
|
$ |
|
|
We value our foreign currency hedges based on the difference between the foreign currency contract rate and
widely available foreign currency rates as of the measurement date. Our foreign currency hedges are short-term in nature, generally maturing within 30 days. We value our interest rate swaps using valuations that are calibrated to the initial trade
prices. Using a market-based approach, subsequent valuations are based on observable inputs to the valuation model including interest rates, credit spreads and volatilities.
Fair Value of Financial Instruments
For certain of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued merchant payable
and accrued expenses, the carrying value approximates or equals fair value due to their short-term nature.
The carrying value of the Term
Loan was $429.6 million at June 30, 2015, compared with a fair value of $430.1 million. At December 31, 2014, the carrying value of the term loans as part of the Credit Agreement was $447.8 million compared with a fair value of $442.2
million. The fair values were determined based on quoted market prices, which is classified as a Level 2 measurement.
16
ORBITZ WORLDWIDE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We recorded tax expense of $3.4 million and $5.8 million for the three
months ended June 30, 2015 and June 30, 2014, respectively, a decrease of $2.4 million. The tax decrease largely reflects lower U.S. based income for which the federal tax liability is deferred and lower income in certain European based
subsidiaries.
We recorded tax expense of $2.8 million and $13.0 million for the six months ended June 30, 2015, and June 30,
2014, respectively, a decrease of $10.2 million. The decrease was primarily due to U.S. based income for which the federal tax liability is deferred.
The net deferred tax assets at June 30, 2015 and December 31, 2014 amounted to $145.0 million and $146.3 million, respectively. The
substantial majority of the net deferred tax assets relate to U.S. federal taxes.
We have established a liability for future income tax
contingencies and liabilities, referred to as unrecognized tax benefits, of $3.3 million as of both June 30, 2015 and December 31, 2014, respectively, that management believes to be adequate. This liability represents the additional taxes
that may be paid when the related items are resolved. The total amount of unrecognized benefits that, if recognized, would affect our effective tax rate was $3.3 million at both June 30, 2015 and December 31, 2014. During the next twelve
months, we anticipate no reduction to this liability due to the lapsing of statutes of limitations, which would affect our effective tax rate.
In computing the tax provision for both the three and six months ended June 30, 2015, we recognized an income tax provision in tax
jurisdictions in which we had pre-tax income for the period and are expecting to generate pre-tax book income during the remainder of fiscal year 2015. We recognized an income tax benefit in tax jurisdictions in which we incurred pre-tax losses for
the three and six months ended June 30, 2015, and are expecting to be able to realize the benefits associated with these losses during the remainder of fiscal year 2015 or expect to recognize a deferred tax asset related to such losses at
December 31, 2015. Our effective tax rate differs significantly from the U.S. federal statutory rate as we have not recognized any tax benefit for losses in certain jurisdictions that we expect will not be realized and for which we have
previously established a valuation allowance against the deferred tax assets.
17
ORBITZ WORLDWIDE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. |
Accounting Pronouncements |
In May 2015, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Update (ASU) No. 2015-05, Customers Accounting for Fees Paid in a Cloud Computing arrangement, which clarifies that the presentation of software licenses incurred in
connection with cloud computing arrangements should be presented in a manner consistent with other software license agreements in the financial statements. ASU 2015-05 will become effective for public companies beginning after December 15,
2015. Early adoption is permitted. The Company is currently assessing the impact of this ASU on its consolidated financial statements.
In
April 2015, the FASB issued ASU No.2015-03, Simplifying the Presentation of Debt Issuance Costs, which changes the presentation of debt issuance costs in financial statements to present such costs as a direct deduction from the related
debt liability rather than as an asset. ASU 2015-03 will become effective for public companies beginning after December 15, 2015. Early adoption is permitted. Upon adoption of this standard, the Company will reclassify debt issuance costs,
which are presently recorded in Other non-current assets, to a reduction of Term loan, non-current. The balance of debt issuance costs recorded in Other non-current assets as of June 30, 2015 is approximately $6.8 million.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern. ASU 2014-15 provides
guidance about managements responsibility to evaluate whether there is substantial doubt about an entitys ability to continue as a going concern and sets rules for how this information should be disclosed in the financial statements. ASU
2014-15 is effective for annual periods ending after December 15, 2016 and interim periods thereafter. Early adoption is permitted. The Company does not expect the adoption of ASU 2014-15 to have an impact on its consolidated financial
statements.
In May 2014, the FASB issued a new financial accounting standard on revenue from contracts with customers, ASU No. 2014-09, Revenue from Contracts with Customers. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and
supersedes most current revenue recognition guidance. In July 2015, the FASB affirmed its April 2015 proposal to defer the effective date by one year. Therefore, the accounting standard is effective for annual reporting periods (including interim
reporting periods within those periods) beginning after December 15, 2017. Early adoption is permitted as of annual reporting periods beginning after December 15, 2016. The Company is currently assessing the impact of this ASU on its
consolidated financial statements.
18
Exhibit 99.2
Orbitz Worldwide, Inc.
Consolidated Financial
Statements
December 31, 2014, 2013 and 2012
Orbitz Worldwide, Inc.
Index
December 31, 2014, 2013 and 2012
|
|
|
|
|
|
|
Pages |
|
Independent Auditors Report |
|
|
1 |
|
|
|
Consolidated Financial Statements |
|
|
|
|
|
|
Consolidated Statements of Operations |
|
|
2 |
|
|
|
Consolidated Statements of Comprehensive Income/(Loss) |
|
|
3 |
|
|
|
Consolidated Balance Sheets |
|
|
4 |
|
|
|
Consolidated Statements of Cash Flows |
|
|
5-6 |
|
|
|
Consolidated Statements of Shareholders Equity/(Deficit) |
|
|
7 |
|
|
|
Notes to Consolidated Financial Statements |
|
|
8-40 |
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Orbitz Worldwide,
Inc.
Chicago, Illinois
We have audited the
accompanying consolidated balance sheets of Orbitz Worldwide, Inc. and subsidiaries (the Company) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income/ (loss),
shareholders equity/(deficit), and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial
statements present fairly, in all material respects, the financial position of Orbitz Worldwide, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the
period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.
/s/ DELOITTE &
TOUCHE LLP
Chicago, Illinois
March 9, 2015
ORBITZ WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
Net revenue |
|
$ |
932,007 |
|
|
$ |
847,003 |
|
|
$ |
778,796 |
|
Cost and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
179,774 |
|
|
|
154,403 |
|
|
|
147,840 |
|
Selling, general and administrative |
|
|
278,202 |
|
|
|
280,418 |
|
|
|
260,253 |
|
Marketing |
|
|
334,472 |
|
|
|
292,470 |
|
|
|
252,993 |
|
Depreciation and amortization |
|
|
57,549 |
|
|
|
55,110 |
|
|
|
57,046 |
|
Impairment of goodwill and intangible assets |
|
|
|
|
|
|
|
|
|
|
321,172 |
|
Impairment of property and equipment and other assets |
|
|
|
|
|
|
2,636 |
|
|
|
1,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
849,997 |
|
|
|
785,037 |
|
|
|
1,040,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income/(loss) |
|
|
82,010 |
|
|
|
61,966 |
|
|
|
(261,925 |
) |
Other expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest expense |
|
|
(35,212 |
) |
|
|
(43,786 |
) |
|
|
(36,599 |
) |
Other expense |
|
|
(2,237 |
) |
|
|
(18,100 |
) |
|
|
(41 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
|
(37,449 |
) |
|
|
(61,886 |
) |
|
|
(36,640 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes |
|
|
44,561 |
|
|
|
80 |
|
|
|
(298,565 |
) |
Provision/(benefit) for income taxes |
|
|
27,281 |
|
|
|
(165,005 |
) |
|
|
3,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) |
|
$ |
17,280 |
|
|
$ |
165,085 |
|
|
$ |
(301,738 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) per share - basic: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) per share |
|
$ |
0.16 |
|
|
$ |
1.53 |
|
|
$ |
(2.86 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding |
|
|
110,537,992 |
|
|
|
107,952,327 |
|
|
|
105,582,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) per share - diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) per share |
|
$ |
0.15 |
|
|
$ |
1.46 |
|
|
$ |
(2.86 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding |
|
|
114,344,440 |
|
|
|
113,072,679 |
|
|
|
105,582,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial
Statements
2
ORBITZ WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
Net income/(loss) |
|
$ |
17,280 |
|
|
$ |
165,085 |
|
|
$ |
(301,738 |
) |
Other comprehensive income/(loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment |
|
|
6,650 |
|
|
|
7,802 |
|
|
|
(7,147 |
) |
Unrealized gain/(loss) on floating to fixed interest rate swaps (net of tax of $0, $2,558, and $0) |
|
|
|
|
|
|
(2,282 |
) |
|
|
311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income/(loss) |
|
|
6,650 |
|
|
|
5,520 |
|
|
|
(6,836 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income/(loss) |
|
$ |
23,930 |
|
|
$ |
170,605 |
|
|
$ |
(308,574 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial
Statements
3
ORBITZ WORLDWIDE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014 |
|
|
December 31, 2013 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
188,482 |
|
|
$ |
117,385 |
|
Accounts receivable (net of allowance for doubtful accounts of $1,541 and $1,186, respectively) |
|
|
117,440 |
|
|
|
82,599 |
|
Prepaid expenses |
|
|
10,039 |
|
|
|
17,113 |
|
Due from Travelport, net |
|
|
15,511 |
|
|
|
12,343 |
|
Other current assets |
|
|
17,560 |
|
|
|
13,862 |
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
349,032 |
|
|
|
243,302 |
|
Property and equipment (net of accumulated depreciation of $302,031 and $334,720) |
|
|
111,832 |
|
|
|
116,145 |
|
Goodwill |
|
|
351,098 |
|
|
|
345,388 |
|
Trademarks and trade names |
|
|
89,890 |
|
|
|
90,398 |
|
Other intangible assets, net |
|
|
1,300 |
|
|
|
89 |
|
Deferred income taxes, non-current |
|
|
135,807 |
|
|
|
160,637 |
|
Restricted cash |
|
|
97,810 |
|
|
|
118,761 |
|
Other non-current assets |
|
|
39,200 |
|
|
|
32,966 |
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
1,175,969 |
|
|
$ |
1,107,686 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
13,954 |
|
|
$ |
16,432 |
|
Accrued merchant payable |
|
|
366,062 |
|
|
|
337,308 |
|
Accrued expenses |
|
|
158,754 |
|
|
|
145,778 |
|
Deferred income |
|
|
40,816 |
|
|
|
40,616 |
|
Term loan, current |
|
|
25,871 |
|
|
|
13,500 |
|
Other current liabilities |
|
|
1,544 |
|
|
|
4,324 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
607,001 |
|
|
|
557,958 |
|
Term loan, non-current |
|
|
421,879 |
|
|
|
429,750 |
|
Tax sharing liability |
|
|
61,289 |
|
|
|
61,518 |
|
Other non-current liabilities |
|
|
14,702 |
|
|
|
16,738 |
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
1,104,871 |
|
|
|
1,065,964 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (see Note 9) |
|
|
|
|
|
|
|
|
Shareholders Equity: |
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 100 shares authorized, no shares issued or outstanding |
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 140,000,000 shares authorized, 110,758,513 and 108,397,627 shares issued,
respectively |
|
|
1,107 |
|
|
|
1,084 |
|
Treasury stock, at cost, 25,237 shares held |
|
|
(52 |
) |
|
|
(52 |
) |
Additional paid-in capital |
|
|
1,060,636 |
|
|
|
1,055,213 |
|
Accumulated deficit |
|
|
(1,000,259 |
) |
|
|
(1,017,539 |
) |
Accumulated other comprehensive income |
|
|
9,666 |
|
|
|
3,016 |
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity |
|
|
71,098 |
|
|
|
41,722 |
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity |
|
$ |
1,175,969 |
|
|
$ |
1,107,686 |
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial
Statements
4
ORBITZ WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) |
|
$ |
17,280 |
|
|
$ |
165,085 |
|
|
$ |
(301,738 |
) |
Adjustments to reconcile net income/(loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
57,549 |
|
|
|
55,110 |
|
|
|
57,046 |
|
Impairment of goodwill and intangible assets |
|
|
|
|
|
|
|
|
|
|
321,172 |
|
Impairment of property and equipment and other assets |
|
|
|
|
|
|
2,636 |
|
|
|
1,417 |
|
Amortization of unfavorable contract liability |
|
|
(325 |
) |
|
|
(3,580 |
) |
|
|
(6,717 |
) |
Non-cash net interest expense |
|
|
11,193 |
|
|
|
14,959 |
|
|
|
13,251 |
|
Deferred income taxes |
|
|
25,234 |
|
|
|
(167,479 |
) |
|
|
869 |
|
Stock compensation |
|
|
12,196 |
|
|
|
12,913 |
|
|
|
7,566 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(38,588 |
) |
|
|
(7,906 |
) |
|
|
(12,549 |
) |
Due from Travelport, net |
|
|
(3,285 |
) |
|
|
(6,735 |
) |
|
|
(1,624 |
) |
Accounts payable, accrued expenses and other current liabilities |
|
|
16,489 |
|
|
|
20,209 |
|
|
|
(5,549 |
) |
Accrued merchant payable |
|
|
34,636 |
|
|
|
66,814 |
|
|
|
28,065 |
|
Deferred income |
|
|
1,238 |
|
|
|
5,130 |
|
|
|
8,429 |
|
Other |
|
|
15,882 |
|
|
|
(3,913 |
) |
|
|
(2,579 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
149,499 |
|
|
|
153,243 |
|
|
|
107,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment additions |
|
|
(51,131 |
) |
|
|
(39,302 |
) |
|
|
(47,026 |
) |
Acquisitions, net of cash acquired |
|
|
(10,000 |
) |
|
|
|
|
|
|
|
|
Changes in restricted cash |
|
|
17,344 |
|
|
|
(93,965 |
) |
|
|
(16,812 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(43,787 |
) |
|
|
(133,267 |
) |
|
|
(63,838 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Payments on and retirement of term loans |
|
|
(445,500 |
) |
|
|
(896,780 |
) |
|
|
(32,183 |
) |
Issuance of long-term debt, net of issuance costs |
|
|
443,256 |
|
|
|
877,718 |
|
|
|
|
|
Employee tax withholdings related to net share settlements of equity-based awards |
|
|
(7,217 |
) |
|
|
(6,472 |
) |
|
|
(2,179 |
) |
Proceeds from exercise of employee stock options |
|
|
467 |
|
|
|
7,340 |
|
|
|
|
|
Payments on tax sharing liability |
|
|
(14,375 |
) |
|
|
(16,765 |
) |
|
|
(15,408 |
) |
Payments on note payable |
|
|
|
|
|
|
|
|
|
|
(231 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(23,369 |
) |
|
|
(34,959 |
) |
|
|
(50,001 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects of changes in exchange rates on cash and cash equivalents |
|
|
(11,246 |
) |
|
|
2,106 |
|
|
|
871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase/(decrease) in cash and cash equivalents |
|
|
71,097 |
|
|
|
(12,877 |
) |
|
|
(5,909 |
) |
Cash and cash equivalents at beginning of year |
|
|
117,385 |
|
|
|
130,262 |
|
|
|
136,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
188,482 |
|
|
$ |
117,385 |
|
|
$ |
130,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial
Statements
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Income tax payments, net |
|
$ |
3,231 |
|
|
$ |
1,454 |
|
|
$ |
1,170 |
|
Cash interest payments |
|
$ |
24,394 |
|
|
$ |
29,402 |
|
|
$ |
26,635 |
|
Non-cash investing activity: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures incurred not yet paid |
|
$ |
3,281 |
|
|
$ |
3,786 |
|
|
$ |
2,309 |
|
See Notes to Consolidated Financial
Statements
6
ORBITZ WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY/(DEFICIT)
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Treasury Stock |
|
|
Additional Paid in Capital |
|
|
Accumulated Deficit |
|
|
Accumulated Other Comprehensive Income/(Loss) |
|
|
Total Shareholders Equity/ (Deficit) |
|
|
|
|
|
|
|
Interest Rate Swaps |
|
|
Foreign Currency Translation |
|
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
|
|
|
|
Balance at January 1, 2012 |
|
|
103,814,769 |
|
|
$ |
1,038 |
|
|
|
(25,237 |
) |
|
$ |
(52 |
) |
|
$ |
1,036,093 |
|
|
$ |
(880,886 |
) |
|
$ |
1,971 |
|
|
$ |
2,361 |
|
|
$ |
160,525 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(301,738 |
) |
|
|
|
|
|
|
|
|
|
|
(301,738 |
) |
Amortization of equity-based compensation awards granted to employees, net of shares withheld to satisfy employee tax withholding
obligations upon vesting |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,386 |
|
Common shares issued upon vesting of restricted stock units |
|
|
1,304,275 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income/ (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
311 |
|
|
|
(7,147 |
) |
|
|
(6,836 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012 |
|
|
105,119,044 |
|
|
|
1,051 |
|
|
|
(25,237 |
) |
|
|
(52 |
) |
|
|
1,041,466 |
|
|
|
(1,182,624 |
) |
|
|
2,282 |
|
|
|
(4,786 |
) |
|
|
(142,663 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
165,085 |
|
|
|
|
|
|
|
|
|
|
|
165,085 |
|
Amortization of equity-based compensation awards granted to employees, net of shares withheld to satisfy employee tax withholding
obligations upon vesting |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,440 |
|
Common shares issued upon vesting of restricted stock units |
|
|
1,517,989 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued upon lapse of restrictions on deferred stock units |
|
|
314,865 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued upon exercise of stock options |
|
|
1,445,729 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
7,326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,340 |
|
Other comprehensive income/(loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,282 |
) |
|
|
7,802 |
|
|
|
5,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013 |
|
|
108,397,627 |
|
|
$ |
1,084 |
|
|
|
(25,237 |
) |
|
|
(52 |
) |
|
|
1,055,213 |
|
|
|
(1,017,539 |
) |
|
|
|
|
|
|
3,016 |
|
|
|
41,722 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,280 |
|
|
|
|
|
|
|
|
|
|
|
17,280 |
|
Amortization of equity-based compensation awards granted to employees, net of shares withheld to satisfy employee tax withholding
obligations upon vesting |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,979 |
|
Common shares issued upon vesting of restricted stock units |
|
|
1,721,681 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued upon lapse of restrictions on deferred stock units |
|
|
550,320 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued upon exercise of stock options |
|
|
88,885 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
467 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,650 |
|
|
|
6,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2014 |
|
|
110,758,513 |
|
|
$ |
1,107 |
|
|
|
(25,237 |
) |
|
$ |
(52 |
) |
|
$ |
1,060,636 |
|
|
$ |
(1,000,259 |
) |
|
$ |
|
|
|
$ |
9,666 |
|
|
$ |
71,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial
Statements
7
ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. |
Organization and Basis of Presentation |
Description of the Business
Orbitz, Inc. was established in early 2000 by American Airlines, Inc., Continental Airlines, Inc., Delta Air Lines, Inc., Northwest Airlines,
Inc. and United Air Lines, Inc. (the Founding Airlines). In November 2004, Orbitz was acquired by Cendant Corporation (Cendant), whose online travel distribution businesses included the HotelClub and RatesToGo brands
(collectively referred to as HotelClub) and the CheapTickets brand. In February 2005, Cendant acquired ebookers Limited, an international online travel brand which currently has operations in 8 countries throughout Europe
(ebookers).
On August 23, 2006, Travelport Limited (Travelport), which consisted of Cendants travel
distribution services businesses, including the businesses that currently comprise Orbitz Worldwide, Inc., was acquired by affiliates of The Blackstone Group and Technology Crossover Ventures.
Orbitz Worldwide, Inc. was incorporated in Delaware on June 18, 2007 and was formed to be the parent company of the business-to-consumer
travel businesses of Travelport, including Orbitz.com, ebookers and HotelClub and the related subsidiaries and affiliates of those businesses. We are the registrant as a result of the completion of the initial public offering (the IPO)
of 34.4 million shares of our common stock on July 25, 2007. On April 15, 2013, following the completion of the Travelport refinancing plan, Orbitz Worldwide, Inc. is no longer a controlled company as defined in
Section 303A of the New York Stock Exchange listing rules. In the second quarter and early third quarter of 2014, Travelport sold approximately 47.7 million shares, and after its secondary stock offering on July 22, 2014, is no longer
considered a related party. At December 31, 2014 and 2013, Travelport and the investment funds that indirectly owned Travelport, beneficially owned approximately 1% and 48% of our outstanding common stock, respectively.
We are a global online travel company (OTC) that uses innovative technology to enable leisure and business travelers to research,
plan and book a broad range of travel products and services including hotels, flights, vacation packages, car rentals, cruises, rail tickets, travel insurance, destination services and event tickets. We provide our customers an easy-to-use booking
experience across a wide variety of devices. Our global brand portfolio includes Orbitz.com and CheapTickets in the United States; ebookers in Europe; and HotelClub, which focuses on the Asia Pacific region. We also own and operate Orbitz for
Business, which is a corporate travel management company, and the Orbitz Partner Network, which delivers private label travel solutions to a broad range of partners.
Basis of Presentation
The accompanying consolidated financial statements present the accounts of Orbitz.com, ebookers and HotelClub and the related subsidiaries and
affiliates of those businesses, collectively doing business as Orbitz Worldwide, Inc. These entities became wholly-owned subsidiaries of ours as part of an intercompany restructuring that was completed on July 18, 2007 in connection with the
IPO. Prior to the IPO, these entities had operated as indirect, wholly-owned subsidiaries of Travelport.
As further discussed in Note 18
- Subsequent Events, the Company entered into an agreement on February 12, 2015, that, if consummated, would result in the Company becoming an indirect wholly-owned subsidiary of Expedia, Inc. The accompanying consolidated financial
statements do not reflect any effects that would result if the agreement is consummated.
8
ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. |
Summary of Significant Accounting Policies |
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with United States generally accepted accounting
principles (GAAP). All intercompany balances and transactions have been eliminated in the consolidated financial statements.
Use of Estimates
The
preparation of our consolidated financial statements and related notes in conformity with GAAP requires us to make certain estimates and assumptions. Our estimates and assumptions affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to matters that require a significant level of judgment or are otherwise subject to an inherent degree of
uncertainty.
Our significant estimates include elements of revenue recognition, the realization of deferred tax assets, amounts that may
be due under the tax sharing agreement, impairment of long-lived assets, goodwill and indefinite-lived intangible assets, costs to be capitalized as well as the useful life of capitalized software, and contingent liabilities, including taxes related
to hotel occupancy. Actual amounts may differ from these estimates.
Foreign Currency Translation
Balance sheet accounts of our operations outside of the United States are translated from foreign currencies into U.S. dollars at the
exchange rates as of the Consolidated Balance Sheet dates. Revenues and expenses are translated at average exchange rates during the period. Foreign currency translation gains or losses are included in accumulated other comprehensive income (loss)
in shareholders equity. Gains and losses resulting from foreign currency transactions, which are denominated in currencies other than the entitys functional currency, are included in our Consolidated Statements of Operations.
Revenue Recognition
We
recognize revenue when it is earned and realizable, when persuasive evidence of an arrangement exists, services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. We have two primary types of
contractual arrangements with our vendors, which we refer to herein as the merchant and retail models. Under both the merchant and retail models, we record revenue earned net of all amounts paid to our suppliers.
We provide customers the ability to book air travel, hotels, car rentals and other travel products and services through our various websites.
These travel products and services are made available to our customers for booking on a stand-alone basis or as part of a vacation package.
Under the merchant model, we generate revenue for our services based on the difference between the total amount the customer pays for the
travel product and the negotiated net rate plus estimated taxes that the supplier charges us for that product. Customers generally pay us for reservations at the time of booking. Initially, we record these customer receipts as accrued merchant
payables and either deferred income or net revenue, depending on the travel product. In the merchant model we do not take on credit risk with the customer since we are paid via a credit card, debit card or certain other electronic payment processors
(collectively Payment Processors), while the cardholders Payment Processors collects funds from the customer. However we are subject to charge-backs and fraud risk, which we monitor closely; we have the ability to determine the
price; we are not responsible for the actual delivery of the flight, hotel room or car rental; we take no inventory risk; we have no ability to determine or change the products or services delivered; and the customer chooses the supplier.
Transaction related taxes are recorded net of any amounts received from customers.
9
ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Under the merchant model we receive payment for a reservation from a customer via the Payment Processors. The Payment Processors transmit
payment for the reservation within one to two days of the booking date. The Payment Processors take on the risk of collecting funds from the customer. We are subject to fraud because we may be charged by the Payment Processors for fraudulent charges
after we remit funds to the supplier. In other instances, the customer may be dissatisfied with some aspect of their travel and contest the charges with the Payment Processors, which could result in a charge-back.
We recognize net revenue under the merchant model when we have no further obligations to the customer. For merchant air transactions, this is
at the time of booking. For merchant hotel transactions and merchant car transactions, net revenue is recognized at the time of check-in or customer pick-up, respectively. The timing of revenue recognition is different for merchant air travel
because our primary service to the customer is fulfilled at the time of booking.
We accrue for the cost of merchant hotel and merchant
car transactions based on amounts we expect to be invoiced by suppliers. If we do not receive an invoice within a certain period of time, generally within six months, or the invoice received is less than the accrued amount, we reverse a portion of
the accrued cost when we determine it is not probable that we will be required to pay the supplier, based on our historical experience and contract terms. This results in an increase in net revenue and a decrease to the accrued merchant payable.
Under the retail model, we pass reservations booked by our customers to the travel supplier for a commission. In the retail model: we do
not take on credit risk with the customer; we are not the primary obligor with the customer; we have no latitude in determining pricing; we take no inventory risk; we have no ability to determine or change the products or services delivered; and the
customer chooses the supplier.
We recognize net revenue under the retail model when the reservation is made, secured by a customer with a
credit card and we have no further obligations to the customer. For air transactions, this is at the time of booking. For hotel transactions and car transactions, net revenue is recognized at the time of check-in or customer pick-up, respectively,
net of an allowance for cancelled reservations. The timing of recognition is different for retail hotel and retail car transactions than for retail air travel because unlike air travel where the reservation is secured by a customers Payment
Processors at booking, car rental bookings and hotel bookings are not secured by a customers credit card until the pick-up date and check-in date, respectively. Allowances for cancelled reservations primarily relate to cancellations that do
not occur through our websites, but instead occur directly through the supplier of the travel product. The amount of the allowance is determined based on our historical experience. The majority of commissions earned under the retail model are based
upon contractual agreements.
Vacation packages offer customers the ability to book a combination of travel products. For example, travel
products booked in a vacation package may include a combination of air travel, hotel and car rental reservations. We recognize net revenue for the entire package when the customer uses the reservation, which generally occurs on the same day for each
travel product included in the vacation package.
Under both the merchant and retail models, we may, depending upon the brand and the
travel product, charge our customers a service fee for booking their travel reservation. We recognize revenue for service fees at the time we recognize the net revenue for the corresponding travel product. We also may receive override commissions
from suppliers if we meet certain contractual volume thresholds. These commissions are recognized when the amount of the commissions becomes fixed or determinable, which is generally upon notification by the respective travel supplier.
We utilize global distribution systems (GDS) services from various providers. Under our GDS service agreements, we earn revenue in
the form of an incentive payment for air, car and hotel segments that are processed through a GDS. Revenue is recognized for these incentive payments at the time the travel reservation is processed through the GDS, which is generally at the time of
booking.
10
ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company issues credits in the form of points related to its loyalty programs. The value of points earned by loyalty program members is
included in accrued liabilities and recorded as a reduction of revenue at the time the points are earned, based on the percentage of points that are projected to be redeemed.
We also generate other revenue, which is primarily composed of revenue from advertising, including sponsoring links on our websites, and
travel insurance. Advertising revenue is derived primarily from the delivery of advertisements on our websites and is recognized either at the time of display of each individual advertisement, or ratably over the advertising delivery period,
depending on the terms of the advertising contract. Revenues generated from sponsoring links are recognized upon notification from the alliance partner that a transaction has occurred. Travel insurance revenue is recognized when the reservation is
made, secured by a customer with a credit card and we have no further obligations to the customer, which for travel insurance is at the time of booking.
Cost of Revenue
Cost of
revenue is primarily composed of direct costs incurred to generate revenue, including costs to operate our customer service call centers, credit card processing fees and other costs, which include customer refunds and charge-backs, connectivity and
other processing costs. These costs are generally variable in nature and are primarily driven by transaction volume.
Marketing Expense
Marketing expense is primarily composed of online marketing costs, such as search and banner advertising and affiliate commissions,
and offline marketing costs, such as television, radio and print advertising. Online advertising expense is recognized based on the terms of the individual agreements, based on the ratio of actual impressions to contracted impressions,
pay-per-click, or on a straight-line basis over the term of the contract. Offline marketing expense is recognized in the period in which it is incurred. Our online marketing costs are significantly greater than our offline marketing costs.
Income Taxes
Our
provision for income taxes is determined using the asset and liability method. Under this method, deferred tax assets and liabilities are calculated based upon the temporary differences between the financial statement and income tax bases of assets
and liabilities using the combined federal and state or foreign effective tax rates that are applicable to us in a given year. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year
in which those temporary differences are expected to be recovered or settled. The deferred tax assets are recorded net of a valuation allowance when, based on the weight of available evidence, we believe it is more likely than not that some portion
or all of the recorded deferred tax assets will not be realized in future periods. The realization of the deferred tax assets, net of a valuation allowance, is primarily dependent on estimated future taxable income. A change in our estimate of
future taxable income may require an increase or decrease to the valuation allowance.
Derivative Financial Instruments
We measure derivatives at fair value and recognize them in our Consolidated Balance Sheets as assets or liabilities, depending on our rights or
obligations under the applicable derivative contract. For our derivatives designated as fair value hedges, if any, the changes in the fair value of both the derivative instrument and the hedged item are recorded in earnings. For our derivatives
designated as cash flow hedges, the effective portions of changes in fair value of the derivative are reported in other comprehensive income and are subsequently reclassified into earnings when the hedged item affects earnings. Changes in fair value
of derivative instruments not designated as hedging instruments, and ineffective portions of hedges, are recognized in earnings in the current period.
11
ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We manage interest rate exposure by utilizing interest rate swaps to achieve a desired mix of fixed and variable rate debt. As of
December 31, 2014, we have two interest rate swaps outstanding that effectively convert $200.0 million of the term loan from a variable to a fixed interest rate (see Note 12 - Derivative Financial Instruments). We pay a fixed interest rate on
the notional amount and in exchange receive a variable interest rate based on the one-month LIBOR rate.
We have entered into foreign
currency contracts to manage exposure to changes in foreign currencies associated with receivables, payables and intercompany transactions. These foreign currency contracts did not qualify for hedge accounting treatment. As a result, the changes in
fair values of the foreign currency contracts were recorded in selling, general and administrative expense in our Consolidated Statements of Operations.
We do not enter into derivative instruments for speculative or trading purposes. We require that the hedges or derivative financial
instruments be effective in managing the interest rate risk or foreign currency risk exposure that they are designated to hedge. Hedges that qualify for hedge accounting are formally designated as such at the inception of the contract. When the
terms of an underlying transaction are modified, or when the underlying hedged item ceases to exist, resulting in some ineffectiveness, the change in the fair value of the derivative instrument will be included in earnings. Additionally, any
derivative instrument used for risk management that becomes ineffective is marked-to-market each period. We believe that our credit risk has been mitigated by entering into these agreements with major financial institutions. Net interest
differentials to be paid or received under our interest rate swaps are included in interest expense as incurred or earned.
Concentration of Credit Risk
Our cash and cash equivalents and foreign exchange contracts are potentially subject to concentration of credit risk. We maintain cash and cash
equivalent balances with financial institutions that are in excess of Federal Deposit Insurance Corporation insurance limits or that are deposited in foreign institutions.
Additionally, we employ forward foreign exchange contracts to hedge our exposure to foreign currency fluctuations. At the maturity of these
forward contracts, the counterparties are obligated to pay settlement values.
Cash and Cash Equivalents
We consider cash and highly liquid investments, such as money market funds, with an original maturity of three months or less to be cash and
cash equivalents. Cash and cash equivalents are stated at cost, which approximates or equals fair value due to their short-term nature.
Allowance for Doubtful Accounts
Our accounts receivable are reflected in our Consolidated Balance Sheets net of an allowance for doubtful accounts. We provide for estimated
bad debts based on our assessment of our ability to realize receivables, considering historical collection experience, the general economic environment and specific customer information. When we determine that a receivable may not be collectible,
bad debt is recognized. Bad debt expense is recorded in selling, general and administrative expense in our Consolidated Statements of Operations. We recorded bad debt expense of $0.8 million and $0.6 million for the years ended December 31,
2014 and 2013, respectively.
12
ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Property and Equipment, Net
Property and equipment is recorded at cost, net of accumulated depreciation. We depreciate property and equipment over their estimated useful
lives using the straight-line method. The estimated useful lives by asset category are:
|
|
|
Asset Category |
|
Estimated Useful Life |
Leasehold improvements |
|
Shorter of assets useful life or non-cancellable lease term |
Capitalized software |
|
3 - 10 years |
Furniture, fixtures and equipment |
|
3 - 7 years |
We capitalize the costs of software developed for internal use when the preliminary project stage of the
application has been completed and it is probable that the project will be completed and used to perform the function intended. Depreciation commences when the software is placed into service.
We evaluate the recoverability of the carrying value of our long-lived assets, including property and equipment and finite-lived intangible
assets, when circumstances indicate that the carrying value of those assets may not be fully recoverable. This analysis is performed by comparing the carrying values of the assets to the expected undiscounted future cash flows to be generated from
these assets, including estimated sales proceeds when appropriate. If this analysis indicates that the carrying value of an asset is not recoverable, the carrying value is reduced to fair value through an impairment charge in our Consolidated
Statements of Operations.
Annually, we write off the cost and accumulated depreciation of any assets that are no longer in service.
Goodwill, Trademarks and Other Intangible Assets
Goodwill represents the excess of the purchase price over the estimated fair value of the underlying assets acquired and liabilities assumed in
the acquisition of a business. We assign goodwill to reporting units that are expected to benefit from the business combination as of the acquisition date. Goodwill is not subject to amortization.
Our indefinite-lived intangible assets include our trademarks and trade names, which are not subject to amortization. Our finite-lived
intangible assets primarily include our customer and vendor relationships and are amortized over their estimated useful lives, generally 4 to 8 years, using the straight-line method. Our intangible assets relate to the acquisition of entities
accounted for using the purchase method of accounting and are estimated by management based on the fair value of assets acquired.
We
assess the carrying value of goodwill and other indefinite-lived intangible assets for impairment annually or more frequently whenever events occur and circumstances change indicating potential impairment. We perform our annual impairment testing of
goodwill and other indefinite-lived intangible assets as of December 31.
We assess goodwill for possible impairment using a two-step
process. The first step identifies if there is potential goodwill impairment. If the step one analysis indicates that impairment may exist, a step two analysis is performed to measure the amount of the goodwill impairment, if any. Goodwill
impairment exists when the estimated fair value of goodwill is less than its carrying value. If impairment exists, the carrying value of the goodwill is reduced to fair value through an impairment charge in our Consolidated Statements of Operations.
For purposes of goodwill impairment testing, we estimate the fair value of our reporting units to which goodwill is allocated using
generally accepted valuation methodologies, including market and income based approaches, and relevant data available through and as of the testing date. The market approach is a valuation method in which fair value is estimated based on observed
prices in actual transactions and on asking prices for similar assets. Under the market approach, the valuation process is essentially that of comparison and correlation between the subject asset and other similar assets. The income approach is a
method in which fair value is estimated based on the cash flows that an asset could be expected to generate over its useful life, including residual value cash flows. These cash flows are then discounted to their present value equivalents using a
rate of return that accounts for the relative risk of not realizing the estimated annual cash flows and for the time value of money. Variations of the income approach are used to estimate certain of the intangible asset fair values.
13
ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We assess our trademarks and trade names for impairment by comparing their carrying values to their estimated fair values. Impairment exists
when the estimated fair value of the trademark or trade name is less than its carrying value. If impairment exists, then the carrying value is reduced to fair value through an impairment charge in our Consolidated Statements of Operations. We use an
income based valuation approach to estimate fair values of the relevant trademarks and trade names.
Restricted Cash
In order to collateralize letters of credit and similar instruments, as well as for other general business purposes, we have funds deposited as
restricted cash.
Tax Sharing Liability
We have a liability included in our Consolidated Balance Sheets that relates to a tax sharing agreement between Orbitz and the Founding
Airlines. The agreement governs the allocation of tax benefits resulting from a taxable exchange that took place in connection with the Orbitz initial public offering in December 2003 (the Orbitz IPO). As a result of this taxable
exchange, the Founding Airlines incurred a taxable gain. The taxable exchange caused Orbitz to have additional future tax deductions for depreciation and amortization due to the increased tax basis of its assets. The additional tax deductions for
depreciation and amortization may reduce the amount of taxes we are required to pay in future years. For each tax period during the term of the tax sharing agreement, we are obligated to pay the Founding Airlines a significant percentage of the
amount of the tax benefit realized as a result of the taxable exchange. The tax sharing agreement commenced upon consummation of the Orbitz IPO and continues until all tax benefits have been utilized.
We use discounted cash flows in calculating and recognizing the tax sharing liability. We review the calculation of the tax sharing liability
on a quarterly basis and make revisions to our estimated timing of payments when appropriate. We also assess whether there are any significant changes, such as changes in the amount of payments and tax rates that could materially affect the present
value of the tax sharing liability. Although the expected gross remaining payments that may be due under this agreement were $96.2 million as of December 31, 2014, the timing and amount of payments may change. Any changes in timing of payments
are recognized prospectively as accretions to the tax sharing liability in our Consolidated Balance Sheets and non-cash interest expense in our Consolidated Statements of Operations. Any changes in the estimated amount of payments, including changes
to tax rates, are recognized in Selling, general and administrative expense in our Consolidated Statements of Operations.
Equity-Based
Compensation
We measure equity-based compensation cost at fair value and recognize the corresponding compensation expense over the
service period during which awards are expected to vest. Performance-based compensation is amortized on a graded basis over the requisite service period of each vesting tranche. We include equity-based compensation in Selling, general and
administrative expense in our Consolidated Statements of Operations. The fair value of restricted stock and restricted stock units is determined based on the average of the high and low price of our common stock on the date of grant. The fair value
of stock options is determined on the date of grant using the Black-Scholes valuation model. The fair value of the restricted stock subject to market-based conditions is determined on the date of grant using a Monte Carlo simulation for sampling
random outcomes. The amount of equity-based compensation expense recorded each period is net of estimated forfeitures based on historical forfeiture rates.
14
ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Hotel Occupancy Taxes
Some states and localities impose a tax on the use or occupancy of hotel accommodations (hotel occupancy tax). Generally, hotels
collect hotel occupancy tax based on the amount of money they receive for renting their hotel rooms and remit the tax to the appropriate taxing authorities. Using the travel services our websites offer, customers are able to make hotel room
reservations. While applicable tax laws vary among different taxing jurisdictions, we generally believe that these laws do not require us to collect and remit hotel occupancy tax on the compensation that we receive for our travel services. Some
tax authorities have initiated lawsuits or administrative proceedings asserting that we are required to collect and remit hotel occupancy tax on the amount of money we receive from customers for facilitating their reservations and are more
frequently addressing the taxability of fees by online travel companies through new legislation. The ultimate resolution of these lawsuits and proceedings in all jurisdictions cannot be determined at this time. We establish an accrual for
legal proceedings (tax or otherwise) when we determine that a loss is both probable and can be reasonably estimated. See Note 9 - Commitments and Contingencies.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued a new financial accounting standard on revenue from contracts with customers, ASU No. 2014-09,
Revenue from Contracts with Customers. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition
guidance. The accounting standard is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016. Early adoption is not permitted. The Company is currently assessing the
impact of this ASU on its consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15, Presentation
of Financial Statements - Going Concern. ASU 2014-15 provides guidance about managements responsibility to evaluate whether there is substantial doubt about an entitys ability to continue as a going concern and sets rules for
how this information should be disclosed in the financial statements. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and interim periods thereafter. Early adoption is permitted. The Company does not expect the
adoption of ASU 2014-15 to have an impact on its consolidated financial condition and results of operations.
On February 19, 2014, the Company entered into an asset sale and
purchase agreement with Travelocity.com LP (Travelocity) for certain assets and contracts of the Travelocity Partner Network (TPN), which provides private label travel technology solutions for bank loyalty programs and online
commerce sites. On February 28, 2014, the Company closed the transaction for cash consideration of $10.0 million with the potential for additional consideration of up to $10.0 million payable if post-acquisition revenue targets for 2014 and
2015 are achieved in excess of agreed amounts (Earn-Out). The companies also entered into a transition services agreement, under which Travelocity will provide the Company various services and support, which expires no later than 24
months from the contract date. The Company may, at its sole discretion, terminate one or more of the services under the agreement with 15 days notice to Travelocity at which time the parties will have no further obligation with respect to such
terminated services. It has been determined that the transition services agreement is unfavorable as compared with market conditions as of the purchase date and a net unfavorable contract liability of approximately $0.8 million has been established,
of which $0.5 million remains at December 31, 2014. Transaction costs were incurred in connection with this acquisition of approximately $0.8 million and $0.4 million for the years ended December 31, 2014 and 2013, respectively, and are
included in Selling, general and administrative expenses in our Consolidated Statements of Operations for those periods.
The acquisition
was accounted for pursuant to ASC 805, Business Combinations, which requires the acquired assets and liabilities to be recorded at fair value as of the acquisition date. The Company generally used the income approach to estimate fair values.
Cash flows utilized in the valuation were discounted to their present value using a rate of return that includes the relative risk of cash flows and the time value of money.
15
ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair value of the estimated Earn-Out was calculated based on various levels of revenue thresholds for each year and by assigning an
expected probability of reaching each level and the corresponding payment. The Company does not expect that any Earn-Out will be payable.
The following table summarizes the purchase price and the allocation of the purchase price:
|
|
|
|
|
|
|
Amount |
|
|
|
(in thousands) |
|
Purchase Price |
|
|
|
|
Consideration |
|
|
|
|
Cash paid |
|
$ |
10,000 |
|
|
|
Allocation of Purchase Price |
|
|
|
|
Property and equipment (software) |
|
$ |
3,510 |
|
Finite-lived intangible assets - Customer relationships |
|
|
1,560 |
|
Unfavorable contracts |
|
|
(780 |
) |
Goodwill |
|
|
5,710 |
|
|
|
|
|
|
Fair value of net assets acquired |
|
$ |
10,000 |
|
|
|
|
|
|
The amounts of TPNs revenue and pre-tax loss included in the Consolidated Statements of Operations for
the year ended December 31, 2014 were $51.9 million and $7.8 million, respectively. The revenue and earnings of the combined entity had the acquisition date been January 1, 2014 and January 1, 2013 are not available as the related
business was not reported separately from that of Travelocity.
Our acquired finite-lived customer relationship assets will be amortized
over their estimated useful lives of 5 years, using a straight-line basis. The property and equipment will be amortized over their estimated useful lives of 1.5 years.
4. |
Property and Equipment, Net |
Property and equipment, net, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014 |
|
|
December 31, 2013 |
|
|
|
(in thousands) |
|
Capitalized software |
|
$ |
321,460 |
|
|
$ |
336,376 |
|
Furniture, fixtures and equipment |
|
|
59,344 |
|
|
|
83,800 |
|
Leasehold improvements |
|
|
13,882 |
|
|
|
14,047 |
|
Construction in progress |
|
|
19,177 |
|
|
|
16,642 |
|
|
|
|
|
|
|
|
|
|
Gross property and equipment |
|
|
413,863 |
|
|
|
450,865 |
|
Less: accumulated depreciation |
|
|
(302,031 |
) |
|
|
(334,720 |
) |
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
111,832 |
|
|
$ |
116,145 |
|
|
|
|
|
|
|
|
|
|
We recorded depreciation expense related to property and equipment in the amount of $57.2 million, $54.4
million and $55.3 million for the years ended December 31, 2014, 2013 and 2012, respectively.
There were no assets subject to
capital leases at December 31, 2014 or 2013.
In 2014, we evaluated property and equipment that has become fully depreciated (see
Note 2 - Summary of Significant Accounting Policies) and wrote-off $85.1 million of fully depreciated assets that were no longer in service.
16
ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As a result of our decision during the first quarter of 2013 to exit the Away Network business, we recorded a $2.6 million non-cash charge to
impair property and equipment associated with that business. This charge was included in Impairment of property and equipment and other assets in our Consolidated Statement of Operations.
5. |
Goodwill and Intangible Assets |
The changes in the carrying amount of goodwill during
the years ended December 31, 2014 and 2013 were as follows:
|
|
|
|
|
|
|
Amount |
|
|
|
(in thousands) |
|
Balance at January 1, 2013, net of accumulated impairment of $832,626 |
|
$ |
345,388 |
|
|
|
|
|
|
Balance at December 31, 2013, net of accumulated impairment of $832,626 |
|
|
345,388 |
|
Acquisition |
|
|
5,710 |
|
|
|
|
|
|
Balance at December 31, 2014, net of accumulated impairment of $832,626 |
|
$ |
351,098 |
|
|
|
|
|
|
Trademarks and trade names, which are not subject to amortization, totaled $89.9 million and $90.4 million as
of December 31, 2014 and 2013, respectively.
Impairment of Goodwill and Trademarks and Trade Names
We estimate the fair value of our reporting units to which goodwill is allocated using generally accepted valuation methodologies, including
market and income based approaches, and relevant data available through and as of December 31. We use the income based approach to estimate the fair value of our reporting units that have goodwill balances and use the market approach to
corroborate these estimates. We considered the market approach from a reasonableness standpoint by comparing the multiples of guideline companies with the implied multiples from the income based approach, and we also consider our market
capitalization to assess reasonableness of the income based approach valuations. The key assumptions we use in determining the estimated fair value of our reporting units are the terminal growth rates, forecasted cash flows and the discount rates.
At December 31 we used an income based valuation approach to separately estimate the fair values of all of our trademarks and trade
names and compared those estimates to the respective carrying values. The key assumptions we use in determining the estimated fair value of our trademarks and trade names are the terminal growth rates, forecasted revenues, assumed royalty rates and
discount rates. Significant judgment is required to select these inputs based on observed market data.
There were no impairment charges
in 2014 and 2013.
In connection with our annual impairment test as of December 31, 2012, and as a result of lower than expected
performance and future cash flows for the Americas reporting unit, we recorded a non-cash impairment charge of $319.5 million during the year ended December 31, 2012, of which $301.9 million was related to the goodwill of the Americas reporting
unit and $17.6 million was related to the trademarks and trade names associated with Orbitz and CheapTickets. These charges were included in Impairment of goodwill and intangible assets in our Consolidated Statements of Operations.
17
ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Finite-Lived Intangibles
The changes in the carrying amounts of finite-lived intangible assets during the years ended December 31, 2014 and 2013 were as follows:
|
|
|
|
|
|
|
Amount |
|
|
|
(in thousands) |
|
Balance at January 1, 2013 |
|
$ |
830 |
|
Amortization expense |
|
|
(741 |
) |
|
|
|
|
|
Balance at December 31, 2013 |
|
|
89 |
|
Intangible assets acquired (a) |
|
|
1,560 |
|
Amortization expense |
|
|
(349 |
) |
|
|
|
|
|
Balance at December 31, 2014 |
|
$ |
1,300 |
|
|
|
|
|
|
|
(a) |
Intangible assets acquired in 2014 relate to our purchase of certain TPN assets. See Note 3 - Acquisitions. |
Finite-lived intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014 |
|
|
December 31, 2013 |
|
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Carrying Amount |
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Carrying Amount |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Finite-Lived Intangible Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
1,560 |
|
|
$ |
(260 |
) |
|
$ |
1,300 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Vendor relationships |
|
|
4,293 |
|
|
|
(4,293 |
) |
|
|
|
|
|
|
4,693 |
|
|
|
(4,604 |
) |
|
|
89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total finite-lived intangible assets |
|
$ |
5,853 |
|
|
$ |
(4,553 |
) |
|
$ |
1,300 |
|
|
$ |
4,693 |
|
|
$ |
(4,604 |
) |
|
$ |
89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2014, 2013 and 2012, we recorded amortization expense related to
finite-lived intangible assets in the amount of $0.3 million, $0.7 million and $1.7 million, respectively. These amounts were included in depreciation and amortization expense in our Consolidated Statements of Operations.
The table below shows the estimated amortization expense related to our finite-lived intangible assets over their remaining useful lives:
|
|
|
|
|
Year |
|
(in thousands) |
|
2015 |
|
$ |
312 |
|
2016 |
|
|
312 |
|
2017 |
|
|
312 |
|
2018 |
|
|
312 |
|
2019 |
|
|
52 |
|
|
|
|
|
|
Total |
|
$ |
1,300 |
|
|
|
|
|
|
18
ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014 |
|
|
December 31, 2013 |
|
|
|
(in thousands) |
|
Advertising and marketing |
|
$ |
45,475 |
|
|
$ |
37,612 |
|
Employee costs |
|
|
26,921 |
|
|
|
33,315 |
|
Tax sharing liability (see Note 8) |
|
|
17,093 |
|
|
|
18,673 |
|
Customer service costs |
|
|
13,564 |
|
|
|
7,020 |
|
Contract exit costs (a) |
|
|
11,629 |
|
|
|
11,371 |
|
Customer incentive costs |
|
|
11,545 |
|
|
|
6,974 |
|
Professional fees |
|
|
7,723 |
|
|
|
10,294 |
|
Airline rebates |
|
|
6,644 |
|
|
|
3,323 |
|
Customer refunds |
|
|
5,767 |
|
|
|
5,669 |
|
Technology costs |
|
|
4,727 |
|
|
|
7,142 |
|
Other |
|
|
7,666 |
|
|
|
4,385 |
|
|
|
|
|
|
|
|
|
|
Total accrued expenses |
|
$ |
158,754 |
|
|
$ |
145,778 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
In connection with the early termination of an agreement with Trilegiant Corporation (now Affinion Group) in 2007, we accrued termination payments for the period from January 1, 2008 to December 31, 2016. At
December 31, 2014 and 2013, the liabilitys carrying value of $11.7 million was included in our Consolidated Balance Sheets, $11.6 million of which was included in Accrued expenses and $0.1 million of which was included in Other
non-current liabilities at December 31, 2014, and $11.4 million of which was included in Accrued expenses and $0.3 million of which was included in Other non-current liabilities at December 31, 2013. |
7. |
Term Loan and Revolving Credit Facility |
On April 15, 2014, we entered into an
amendment (the Second Amendment) to the $515.0 million senior secured credit agreement entered into on March 25, 2013, as refinanced and amended on May 24, 2013 (the Credit Agreement), composed of a 7-year, $450.0
million term loan maturing April 15, 2021 (the Term Loan) and a 5-year $80.0 million revolving credit facility maturing April 15, 2019 (the Revolver). The proceeds of the Term Loan were used to repay approximately
$439.9 million of term loans outstanding under the Credit Agreement, pay certain fees and expenses incurred with the Second Amendment and for general corporate purposes. The term loans under the Credit Agreement, which were repaid, had original
principal amounts of $100.0 million maturing September 25, 2017 and $350.0 million maturing March 25, 2019. Interest rates on these tranches were the Eurocurrency Rate plus 3.50% per annum, or the Base Rate plus 2.50% per annum
and the Eurocurrency Rate plus 4.75% per annum or the Base Rate plus 3.75% per annum, respectively.
Following the Second
Amendment, the $530.0 million senior secured credit facility (the Amended Credit Agreement) consists of the Term Loan and the Revolver. Among other things, the Second Amendment reduced the financial maintenance covenants, increased
certain baskets and added certain exceptions under certain negative covenants in the Credit Agreement.
Term Loan
The Term Loan bears interest at a variable rate, at our option, of the Eurocurrency Rate plus a margin of 3.50% per annum, or the Base
Rate plus 2.50% per annum. The Eurocurrency Rate is equal to the LIBOR rate as determined by the British Bankers Association (adjusted for any applicable statutory reserves as defined in the Amended Credit Agreement) and with respect to the
Term Loan shall not be less than 1.00% per annum. The Base Rate for any day is equal to the greater of (a) the Fed Funds Rate in effect plus 0.5%, (b) the Credit Suisse AG prime rate and (c) the one-month Eurocurrency Rate plus
1.00%.
19
ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The principal amount of the Term Loan is payable in quarterly installments of $1.125 million beginning September 30, 2014, with the final
installment of the remaining outstanding balance due at the applicable maturity date with respect to such Term Loan. In addition, we are required, subject to certain exceptions, to make payments on the Term Loan (a) annually in the first
quarter of each fiscal year in an amount of 50% (which percentage will be reduced to 25% and 0% subject to achieving certain first lien leverage ratios) of the prior years excess cash flow, as defined in the Amended Credit Agreement,
(b) in an amount of 100% of net cash proceeds from asset sales subject to certain reinvestment rights, and (c) in an amount of 100% of net cash proceeds of any issuance of debt other than debt permitted to be incurred under the Amended
Credit Agreement.
Based on our excess cash flow for the year ended December 31, 2014, we are required to make a $25.9 million
prepayment in the first quarter of 2015. Prepayments from excess cash flow are applied, in order of maturity, to the scheduled quarterly Term Loan payments. As a result, we will not be required to make any scheduled principal payments on the Term
Loan until 2020.
The changes in term loans during the years ended December 31, 2014 and 2013 were as follows:
|
|
|
|
|
|
|
Amount |
|
|
|
(in thousands) |
|
Balance at January 1, 2013 (current and non-current) |
|
$ |
440,030 |
|
Payment from excess cash flow under the 2007 Credit Agreement |
|
|
(24,708 |
) |
Repayment of the 2007 Credit Agreement |
|
|
(415,322 |
) |
|
|
|
|
|
Balance per 2007 Credit Agreement |
|
$ |
|
|
|
|
|
|
|
|
|
Proceeds from issuance of the March 23, 2013 term loan |
|
|
450,000 |
|
Repayment of the March 23, 2013 term loan |
|
|
(450,000 |
) |
Proceeds from the May 24, 2013 Credit Agreement |
|
|
450,000 |
|
Scheduled principal payments of the term loan under the Credit Agreement |
|
|
(6,750 |
) |
|
|
|
|
|
Balance at December 31, 2013 (current and non-current) |
|
$ |
443,250 |
|
Scheduled principal payments of the term loan under the Credit Agreement |
|
|
(3,375 |
) |
Repayment of term loan under the Credit Agreement |
|
|
(439,875 |
) |
|
|
|
|
|
Balance per Credit Agreement |
|
$ |
|
|
|
|
|
|
|
|
|
Proceeds from issuance of Term Loan pursuant to the Second Amendment |
|
$ |
450,000 |
|
Scheduled principal payments of Term Loan |
|
|
(2,250 |
) |
|
|
|
|
|
Balance at December 31, 2014 (current and non-current) |
|
$ |
447,750 |
|
|
|
|
|
|
At December 31, 2014, $200.0 million of the Term Loan had a fixed interest rate as a result of interest
rate swaps and $247.8 million had a variable rate based on LIBOR, resulting in a blended interest rate of 4.94%, excluding the impact of the amortization of debt issuance costs (see Note 12 - Derivative Financial Instruments).
The table below shows the aggregate maturities of the Term Loans over the remaining term of the Amended Credit Agreement, excluding any
mandatory prepayments that could be required under the Term Loan beyond the first quarter of 2015. The potential amount of prepayment from excess cash flow that will be required beyond the first quarter of 2015 is not reasonably estimable as of
December 31, 2014.
20
ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
Year |
|
(in thousands) |
|
2015 |
|
|
25,871 |
|
2016 |
|
|
|
|
2017 |
|
|
|
|
2018 |
|
|
|
|
2019 |
|
|
|
|
Thereafter |
|
|
421,879 |
|
|
|
|
|
|
Total |
|
$ |
447,750 |
|
|
|
|
|
|
Revolver
The Revolver provides for borrowings and letters of credit up to $80.0 million, through which we are allowed to issue up to $55.0 million in
letters of credit. The Revolver bears interest at a variable rate, at our option, of the Eurocurrency Rate plus a margin of 3.00% per annum or the Base Rate plus a margin of 2.00% per annum. We pay a letter of credit fee in the amount of
the Eurocurrency Rate on all outstanding letters of credit and we incur a facility fee of 0.50% per annum on all loans, letters of credit and any unused amounts on the Revolver. At December 31, 2014 there were no outstanding borrowings or
letters of credit issued under the Revolver.
Amended Credit Agreement Terms
The Term Loan and Revolver are both secured by substantially all of our domestic subsidiaries tangible and intangible assets, including a
pledge of 100% of the outstanding capital stock or other equity interests of substantially all of our direct and indirect domestic subsidiaries and 65% of the capital stock or other equity interests of certain of our foreign subsidiaries, subject to
certain exceptions. The Term Loan and Revolver are also guaranteed by substantially all of our domestic subsidiaries.
The Amended Credit
Agreement contains various customary restrictive covenants that limit our ability to, among other things: incur additional indebtedness or enter into guarantees; enter into sale/leaseback transactions; make investments, loans or acquisitions; grant
or incur liens on our assets; sell our assets; engage in mergers, consolidations, liquidations or dissolutions; engage in transactions with affiliates; and make restricted payments.
The Amended Credit Agreement requires us not to exceed a maximum first lien leverage ratio, as defined in the Amended Credit Agreement, of
5.00 to 1. As of December 31, 2014, we were in compliance with the financial covenants of the Amended Credit Agreement.
We incurred
an aggregate of $6.7 million of debt issuance costs to obtain the Amended Credit Agreement in April 2014 and due to the nature and terms of the Second Amendment, the entire amount was capitalized and is included in Other non-current assets in the
Consolidated Balance Sheet. The capitalized debt issuance costs will be amortized to interest expense over the contractual terms of the Term Loan and Revolver. Due to the extinguishment of the term loan of the Credit Agreement, unamortized debt
issuance costs of $2.2 million related to the Credit Agreement were expensed during the year ended December 31, 2014, and included in Other expense in the Consolidated Statements of Operations.
2007 Credit Agreement
On
March 25, 2013, we used proceeds from the issuance of term loans and existing cash on hand to pay in full the amount outstanding relating to the $685.0 million senior secured credit agreement entered into on July 25, 2007 (the 2007
Credit Agreement), which included a term loan facility and a revolving credit facility. Upon repayment, the 2007 Credit Agreement was terminated and there are no borrowings or letters of credit outstanding.
21
ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We have a liability included in our Consolidated Balance Sheets
that relates to a tax sharing agreement between Orbitz and the Founding Airlines. The agreement governs the allocation of tax benefits resulting from a taxable exchange that took place in connection with the Orbitz IPO in December 2003. As a result
of this taxable exchange, the Founding Airlines incurred a taxable gain. The taxable exchange caused Orbitz to have additional future tax deductions for depreciation and amortization due to the increased tax basis of its assets. The additional tax
deductions for depreciation and amortization may reduce the amount of taxes we are required to pay in future years. For each tax period while the tax sharing agreement is in effect, we are obligated to pay the Founding Airlines a significant
percentage of the amount of the tax benefit realized as a result of the taxable exchange. The tax sharing agreement commenced upon consummation of the Orbitz IPO and continues until all tax benefits have been utilized.
As of December 31, 2014, the estimated remaining payments that may be due under this agreement were approximately $96.2 million. We
estimated that the net present value of our obligation to pay tax benefits to the Founding Airlines was $78.4 million and $80.2 million at December 31, 2014 and 2013, respectively. This estimate was based upon certain assumptions, including our
future taxable income, the tax rate, the timing of tax payments, current and projected market conditions, and the applicable discount rate, all of which we believe are reasonable. These assumptions are inherently uncertain, however, and actual
amounts may differ from these estimates.
The changes in the tax sharing liability for the years ended December 31, 2014 and 2013
were as follows:
|
|
|
|
|
|
|
Amount |
|
|
|
(in thousands) |
|
Balance at January 1, 2013 (current and non-current) |
|
$ |
86,138 |
|
Accretion of interest expense |
|
|
10,818 |
|
Cash payments |
|
|
(16,765 |
) |
|
|
|
|
|
Balance at December 31, 2013 (current and non-current) |
|
|
80,191 |
|
Accretion of interest expense and tax rate changes (a) |
|
|
12,566 |
|
Cash payments |
|
|
(14,375 |
) |
|
|
|
|
|
Balance at December 31, 2014 (current and non-current) |
|
$ |
78,382 |
|
|
|
|
|
|
|
(a) |
We accreted interest expense related to the tax sharing liability of $10.1 million and $10.8 million for the years ended December 31, 2014 and 2013, respectively. Due to a tax rate change in one of our tax
jurisdictions, the net present value of the amount we expect to pay to the Founding Airlines increased by approximately $2.5 million during the year ended December 31, 2014, and the related charge is recorded in Selling, general and
administrative expenses in the Consolidated Statement of Operations. |
Based upon the estimated timing of future payments we
expect to make, the current portion of the tax sharing liability of $17.1 million and $18.7 million was included in Accrued expenses in our Consolidated Balance Sheets at December 31, 2014 and 2013, respectively. The long-term portion of the
tax sharing liability of $61.3 million and $61.5 million was reflected as the tax sharing liability in our Consolidated Balance Sheets at December 31, 2014 and 2013, respectively. Our estimated payments under the tax sharing agreement are as
follows:
|
|
|
|
|
Year |
|
(in thousands) |
|
2015 |
|
$ |
18,224 |
|
2016 |
|
|
27,355 |
|
2017 |
|
|
39,873 |
|
2018 |
|
|
10,719 |
|
|
|
|
|
|
Total |
|
$ |
96,171 |
|
|
|
|
|
|
22
ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. |
Commitments and Contingencies |
The following table summarizes the timing of our
commitments as of December 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 |
|
|
2016 |
|
|
2017 |
|
|
2018 |
|
|
2019 |
|
|
Thereafter |
|
|
Total |
|
|
|
(in thousands) |
|
Operating leases (a) |
|
|
5,787 |
|
|
|
5,071 |
|
|
|
4,958 |
|
|
|
4,804 |
|
|
|
4,033 |
|
|
|
9,395 |
|
|
|
34,048 |
|
GDS contracts (b) |
|
|
15,000 |
|
|
|
16,120 |
|
|
|
12,370 |
|
|
|
16,120 |
|
|
|
1,120 |
|
|
|
|
|
|
|
60,730 |
|
Other service and licensing contracts |
|
|
7,141 |
|
|
|
5,134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
27,928 |
|
|
$ |
26,325 |
|
|
$ |
17,328 |
|
|
$ |
20,924 |
|
|
$ |
5,153 |
|
|
$ |
9,395 |
|
|
$ |
107,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
These operating leases are primarily for facilities and equipment and represent non-cancellable leases. Certain leases contain periodic rent escalation adjustments and renewal options. Our operating leases expire at
various dates, with the latest maturing in 2023. For the years ended December 31, 2014, 2013 and 2012, we recorded rent expense in the amount of $7.3 million, $6.8 million and $6.2 million, respectively. As a result of a subleasing arrangement
that we have entered into, we are expecting approximately $1.0 million in sublease income through 2017. |
|
(b) |
In February 2014, the Company announced that it has entered into an agreement with Travelport for the provision of GDS services (New Travelport GDS Service Agreement). Beginning January 1, 2015, the
Company will no longer be subject to exclusivity obligations. Under the New Travelport GDS Service Agreement beginning in 2015, we are obligated to provide certain levels of volume over the contract period and may be subject to pay shortfall
payments in certain cases if we fail to meet volume commitments. The agreement terminates on December 31, 2018. |
In
February 2014, the Company entered into an agreement with Amadeus IT Group, S.A. to provide GDS services. This contract requires the Company to meet certain minimum annual booking requirements beginning in 2016 through the end of the contract at
December 31, 2019.
In addition to the commitments shown above, we are required to make principal payments on the Term Loan (see
Note 7 - Term Loan and Revolving Credit Facility). We also expect to make approximately $96.2 million of payments in connection with the tax sharing agreement with the Founding Airlines (see Note 8 - Tax Sharing Liability). Also excluded
from the above table are $3.3 million of liabilities for uncertain tax positions for which the period of settlement is not currently determinable.
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 that we have meritorious defenses, and
we are vigorously defending against these claims, proceedings and inquiries. As of December 31, 2014, and December 31, 2013, we had accruals of $4.3 million and $5.5 million related to various legal proceedings, respectively. Litigation is
inherently unpredictable and, although we believe we have valid defenses in these matters, unfavorable resolutions could occur. Below, we have provided relevant information on these matters.
We are party to various cases brought by municipalities and other state and local governmental entities in the U.S. concerning hotel
occupancy or related taxes and our merchant model for hotel and car rental reservations. Most of the cases were brought simultaneously against other OTCs, including Expedia, Travelocity and Priceline. Certain of these cases are class actions, some
of which have been confirmed on a state-wide basis and some which are purported. The cases allege, among other things, that we violated the jurisdictions hotel occupancy tax ordinances, as well as related sales and use taxes. While not
identical in their allegations, the cases generally assert similar claims, including violations of local or state occupancy tax ordinances, failure to pay sales or use tax, and in some cases, violations of consumer protection ordinances, conversion,
unjust
23
ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
enrichment, imposition of a constructive trust, demand for a legal or equitable accounting, injunctive relief, declaratory judgment, and civil conspiracy. The
plaintiffs seek relief in a variety of forms, including: declaratory judgment, full accounting of monies owed, imposition of a constructive trust, compensatory and punitive damages, disgorgement, restitution, interest, penalties and costs,
attorneys fees, and where a class action has been claimed, an order certifying the action as a class action. An adverse ruling in one or more of these cases could require us to pay tax retroactively and prospectively and possibly pay interest,
penalties and fines. The proliferation of additional cases could result in substantial additional defense costs.
We have also been
contacted by several municipalities or other taxing bodies concerning our possible obligations with respect to state or local hotel occupancy or related taxes. We received tax assessments which range from $0.02 million to approximately $58.8
million, and collectively exceed approximately $116.0 million. The following taxing bodies have issued notices to the Company: 43 cities in California; the following cities in Colorado: Broomfield, Colorado Springs, Durango, Frisco, Glendale,
Glenwood Springs, Golden, Grand Junction, Greeley, Greenwood Village, Lafayette, Lakewood, Littleton, Loveland, Silverthorne and Steamboat Springs; Arlington, Texas; Brunswick and Stanly, North Carolina; the following counties in Utah: Davis,
Summit, Salt Lake and Weber; the Arizona Department of Revenue; the New Mexico Department of Revenue; the Ohio Department of Taxation; Paradise Valley, Arizona; St. Louis, Missouri; various Alabama Municipalities; the Louisiana Department of
Revenue; the Maine Department of Revenue; and the Vermont Department of Taxation. These taxing authorities have not issued assessments, but have requested information to conduct an audit and/or have requested that the Company register to
pay local hotel occupancy taxes.
The following taxing authorities have issued assessments which are not final and are subject to further
review by such taxing authorities: the Colorado Department of Revenue; the City of Aurora, Colorado; the Maryland Comptroller; the Texas Comptroller; the City of Portland, Oregon, and Multnomah County, Oregon; and Lake County, Indiana. These
assessments range from $0.02 million to approximately $5.8 million, and total approximately $9.67 million.
In addition, the Hawaii
Department of Taxation has issued final assessments for merchant model hotel reservations in the amount of $16.9 million for the taxable year 2012, and for merchant model hotel reservations and rental car transactions in the amount of $14.6 million
for the taxable year 2013. Additionally, on December 9, 2013, the Hawaii Department of Taxation issued final assessments for rental car transactions in the amount of $3.4 million against each of three Orbitz entities for the period of
January 1, 2002, through December 31, 2012. Based on Hawaiis past merchant model hotel assessments, Orbitz believes that Hawaiis rental car assessments represent an aggregate of $3.4 million total against the Orbitz entities
for the time period. None of the final assessments issued for the taxable years 2012 and 2013 were based on historical transaction data, and each are still subject to review by the Hawaii Tax Appeal Court. These 2012 and 2013 assessments are in
addition to the $58.8 million final assessment for merchant model hotel reservations previously issued by the Hawaii Department of Taxation for 2011 and prior years, more than $30.0 million of which was rejected by the Hawaii Tax Appeal Court.
Assessments or declaratory rulings that are administratively final and subject to judicial review have been issued by the cities of
San Francisco, Los Angeles, and San Diego, California; the city of Denver, Colorado; the counties of Miami-Dade, Broward and Osceola, Florida; and the Indiana Department of Revenue. These assessments and declaratory rulings range from $0.2
million to approximately $3.2 million, and total approximately $10.8 million. Trial courts rejected the assessments in San Francisco, Los Angeles and San Diego, California and Broward County, Florida. The Colorado Court of Appeals reversed the
assessments against the OTCs in the City of Denver case. Collectively, the amounts of the assessments and declaratory rulings not rejected or reversed (the counties of Osceola and Miami-Dade and the Indiana Department of Revenue) amount to
approximately $2.0 million.
The OTCs, including Orbitz, have prevailed in the large majority of hotel tax cases that have been decided to
date, having obtained favorable judgments in more than two dozen cases. However, there have been certain adverse lower court decisions against Orbitz and the other OTCs that, if affirmed, could result in significant liability to the Company.
24
ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
First, in July 2011, related to the City of San Antonio hotel occupancy tax case, the United States District Court for the Western
District of Texas issued its findings of fact and conclusions of law in which it held the defendant OTCs, including Orbitz, liable for hotel occupancy taxes on markup, fees and breakage revenue, and also imposed penalties and interest. On
April 4, 2013, the court entered judgment against Orbitz in the amount of approximately $4.3 million and post-judgment motions are still pending. The OTCs, including Orbitz, intend to appeal once the pending motions are ruled upon by the court.
Because we do not believe a loss is probable given the numerous issues that exist on appeal, we have not accrued any liability related to this case.
Second, in September 2012, the Superior Court of the District of Columbia granted the Districts motion for partial summary judgment and
denied the OTCs motion for summary judgment, finding the companies liable for sales tax on hotel reservations dating back to the inception of the merchant model. Although the court acknowledged that the District had amended its law in 2011,
and that the sales tax law was ambiguous prior to that time, the court nonetheless found the OTCs liable for merchant model hotel reservations before that date. Because we believe that the courts finding of liability was the result of a
misapplication of the law, we do not believe a loss is probable relating to the pre-amendment case and have appealed. Accordingly, we have not accrued any liability relating to the District of Columbia case for the period prior to July 2011.
On March 25, 2014, Orbitz paid a judgment of $3.8 million, which represents the sales tax attributable to Orbitz.coms hotel reservations through December 31, 2011. This amount is subject to a refund if Orbitz prevails in its appeal.
The District of Columbia Court of Appeals heard oral argument on September 30, 2014. Although the Company expects to prevail on the issue of whether it is liable for sales tax before July 2011, it is possible that we will not prevail, and if
that occurs, the amount of the judgment that we have not expensed is approximately $3.7 million. Additionally, the District of Columbia has cross-appealed the Superior Courts denial of the Districts argument that amounts charged to
consumers as a tax recovery charge should have been included in the Superior Courts damage calculation. Although we do not believe that Orbitz is likely to be liable for tax on the tax recovery charge, it is possible that the Court of Appeals
could determine that it is, and if that occurs, Orbitzs additional liability could exceed $0.95 million.
Third, in January 2013,
the Tax Court of Appeals in Hawaii ruled that the OTCs are subject to Hawaiis general excise tax. The court also determined that the splitting provision contained in the Hawaii general excise tax statute, which limits application
of the tax to only the amounts that travel agents receive for their services, does not apply to the transactions at issue. On March 19, 2013, the court issued an order in which it also imposed failure to file and failure to
pay penalties on the OTCs. On August 15, 2013, the Hawaii Tax Appeal court ruled that the OTCs were required to pay interest on penalties, and entered final judgment disposing of all issues and claims of all parties. On September 11,
2013, the OTCs filed their notice of appeal. Under Hawaii law, in order to appeal, Orbitz was required to pay the total amount of the final judgment to Hawaii prior to appealing the courts order. Accordingly, Orbitz made payments to Hawaii of
$16.9 million in April 2013, and approximately $9.2 million to Hawaii in September 2013. These amounts reflected a determination of Orbitzs liability for general excise tax (both on the amounts that it receives for its services and the amounts
that the hotels receive for the rental of their rooms), interest, penalties and interest on penalties through the tax year 2011. Although Orbitz disagrees with the courts rulings on general excise tax and has appealed them, we have recorded an
expense of $4.2 million in light of the decision. The $4.2 million represents the amount Orbitz estimates it would owe if the court had correctly applied the general excise tax splitting provision on merchant reservations through December 31,
2012 and a 25% failure to file penalty imposed on that figure. Orbitz has not reserved for the remainder of the ruling because it believes that the general excise tax splitting provision plainly applies to the transactions in question, and that the
award of failure to pay penalties is entirely unsupported by the record in the case, and that interest on penalties should not have been awarded. Although we believe that it is not probable that Orbitz ultimately will be liable for more
than $4.2 million as a result of the courts order, it is possible that Orbitz will not prevail, and if it does not, the amount of any final award of general excise tax, penalties and interest against Orbitz could exceed $26.0 million. It is
also possible that the State of Hawaii could prevail in its cross-appeal on the issue of whether the transient accommodations tax applies to the OTCs merchant model hotel transactions. The OTCs appeal on the Tax Court of Appeals
ruling on General Excise Tax, and Hawaiis cross-appeal on the Tax Court of Appeals determination that the OTCs are not subject to Hawaiis transient accommodations tax, are currently pending before the Hawaii Supreme Court. The
Hawaii Supreme Court heard oral argument on both appeals on October 2, 2014.
25
ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In an unrelated matter, Trilegiant Corporation filed an action for breach of contract and declaratory judgment in the Supreme Court of New York
against us, alleging that we are obligated to make a series of termination payments arising out of a promotion agreement that we terminated in 2007. In 2007, we accrued the present value of the termination payments and in 2010 we ceased making
termination payments due to a dispute with Trilegiant. On October 2, 2013, the Court denied Orbitzs motion for summary judgment on one of its affirmative defenses, and on December 24, 2013, the court rejected most of our remaining
defenses. On August 22, 2014, the court denied Orbitzs remaining affirmative defenses. As of December 31, 2014, we had an accrual totaling $13.5 million, which includes $1.8 million for potential interest. The parties have a dispute
as to the rate of prejudgment interest. Trilegiant has asserted an applicable rate of 9%, and as of October 2014, was seeking approximately $3.1 million in interest. Although we believe we will prevail on this issue, it is possible that the Court
will determine that the higher rate of interest applies, and if it does, we estimate that we would owe approximately $3.6 million in interest.
We cannot estimate our aggregate range of loss in the cases for which we have not recorded an accrual, except to the extent taxing authorities
have issued assessments against us. Although we believe it is unlikely that an adverse outcome will result from these proceedings, an adverse outcome could be material to us with respect to our financial position, earnings or cash flows in any given
reporting period.
Surety Bonds and Bank Guarantees
In the ordinary course of business, we obtain surety bonds and bank guarantees, to secure performance of certain of our obligations to third
parties. At December 31, 2014 and 2013, there were $7.5 million and $6.7 million of surety bonds outstanding, respectively, of which $5.3 million and $6.2 million were secured by cash collateral or letters of credit, respectively. At
December 31, 2014 and 2013, there were $25.3 million and $24.7 million of bank guarantees outstanding, respectively. All bank guarantees were secured by restricted cash at December 31, 2014 and 2013.
Financing Arrangements
We are required to issue letters of credit to support certain suppliers, commercial agreements, leases and non-U.S. regulatory and
governmental agencies primarily to satisfy consumer protection requirements. We believe we have access to sufficient letter of credit availability to meet our short-term and long-term requirements through a combination of the restricted cash balance
currently used to collateralize letters of credit or similar instruments, cash from our balance sheet which can be used to support letters of credit and similar instruments and our $80.0 million Revolver through which we are allowed to issue up to
$55.0 million in letters of credit.
The following table shows the amount of letters of credit and similar instruments outstanding by
facility, as well as the amounts of our restricted cash balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014 |
|
|
December 31, 2013 |
|
|
|
Letters of Credit and Other Credit Support |
|
|
Restricted Cash |
|
|
Letters of Credit and Other Credit Support |
|
|
Restricted Cash |
|
|
|
(in thousands) |
|
Multi-currency letter of credit facility |
|
|
2,892 |
|
|
|
3,176 |
|
|
|
21,863 |
|
|
|
22,670 |
|
Uncommitted letter of credit facilities and surety bonds |
|
|
98,406 |
|
|
|
94,634 |
|
|
|
91,033 |
|
|
|
96,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
101,298 |
|
|
$ |
97,810 |
|
|
$ |
112,896 |
|
|
$ |
118,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total letter of credit fees were $0.3 million, $4.2 million, and $7.0 million for the years ended December 31, 2014,
2013, and 2012, respectively.
26
ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Pre-tax income/(loss) for U.S. and non-U.S. operations consisted
of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
|
(in thousands) |
|
U.S. |
|
$ |
67,093 |
|
|
$ |
26,105 |
|
|
$ |
(277,375 |
) |
Non-U.S. |
|
|
(22,532 |
) |
|
|
(26,025 |
) |
|
|
(21,190 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes |
|
$ |
44,561 |
|
|
$ |
80 |
|
|
$ |
(298,565 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision/(benefit) for income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
|
(in thousands) |
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal and state |
|
$ |
272 |
|
|
$ |
157 |
|
|
$ |
(95 |
) |
Non-U.S. |
|
|
1,775 |
|
|
|
1,262 |
|
|
|
2,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current |
|
|
2,047 |
|
|
|
1,419 |
|
|
|
2,304 |
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal and state |
|
|
22,910 |
|
|
|
(167,714 |
) |
|
|
253 |
|
Non-U.S. |
|
|
2,324 |
|
|
|
1,290 |
|
|
|
616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred |
|
|
25,234 |
|
|
|
(166,424 |
) |
|
|
869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision/(benefit) for income taxes |
|
$ |
27,281 |
|
|
$ |
(165,005 |
) |
|
$ |
3,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2014 and 2013, our U.S. federal, state and foreign income taxes
receivable/(payable) was $0.0 million and $(0.2) million, respectively.
The tax provision for the year ended December 31, 2014 was
primarily deferred taxes on income from our U.S. operations and certain foreign subsidiaries where we have not established a valuation allowance. The 2014 tax provision was disproportionate to pre-tax book income due to the valuation allowances
which still remain with respect to the majority of our non-US operations.
The tax benefit for the year ended December 31, 2013 was
due primarily to a release of $174.4 million in valuation allowances related to our U.S. federal deferred tax assets and therefore the benefit was disproportionate to the amount of pretax book income.
The tax provision for the year ended December 31, 2012 was due primarily to taxes on the income of certain European-based subsidiaries
and U.S. state and local income taxes. The tax provision recorded for the year ended December 31, 2012 was disproportionate to the amount of pre-tax net loss incurred during the period primarily because we were not able to realize any tax
benefits on the goodwill and trademark and trade names impairment charges. The provision for income taxes only includes the tax effect of the income or loss of certain foreign subsidiaries that had not established a valuation allowance and U.S.
state and local income taxes.
We currently have a valuation allowance of $109.2 million against certain deferred tax assets, of which
$107.3 million relates to foreign jurisdictions. We will continue to assess the level of the valuation allowance required; if sufficient positive evidence exists in future periods to support a release of some or all of the valuation allowance, such
a release would likely have a material impact on our results of operations. With respect to the valuation allowance established against our non-U.S.-based deferred tax assets, a significant item of objective negative evidence evaluated in our
determination was cumulative losses incurred over the three-year period ended December 31, 2014. This objective evidence limited our ability to consider other subjective evidence such as future income projections.
27
ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Our effective income tax rate differs from the U.S. federal statutory rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
Federal statutory rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
State and local income taxes, net of federal benefit |
|
|
0.2 |
|
|
|
197.5 |
|
|
|
|
|
Taxes at differing rates |
|
|
7.6 |
|
|
|
* |
* |
|
|
(0.4 |
) |
Change in valuation allowance |
|
|
19.1 |
|
|
|
* |
* |
|
|
0.2 |
|
Goodwill impairment charges |
|
|
|
|
|
|
|
|
|
|
(35.4 |
) |
Reserve for uncertain tax positions |
|
|
0.3 |
|
|
|
32.8 |
|
|
|
|
|
Other |
|
|
(1.0 |
) |
|
|
* |
* |
|
|
(0.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate |
|
|
61.2 |
% |
|
|
* |
* |
|
|
(1.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
**Not meaningful due to the low level of pre-tax income and release of U.S. valuation allowance of $174.4
million in 2013.
Current and non-current deferred income tax assets and liabilities in various jurisdictions are composed of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014 |
|
|
December 31, 2013 |
|
|
|
(in thousands) |
|
Current deferred income tax assets/(liabilities): |
|
|
|
|
|
|
|
|
Accrued liabilities and deferred income |
|
$ |
2,185 |
|
|
$ |
3,422 |
|
Provision for bad debts |
|
|
314 |
|
|
|
199 |
|
Prepaid expenses |
|
|
(2,069 |
) |
|
|
(1,854 |
) |
Tax sharing liability |
|
|
6,295 |
|
|
|
6,774 |
|
Reserve accounts |
|
|
4,283 |
|
|
|
4,129 |
|
Valuation allowance |
|
|
(509 |
) |
|
|
(1,521 |
) |
|
|
|
|
|
|
|
|
|
Current net deferred income tax assets (a) |
|
$ |
10,499 |
|
|
$ |
11,149 |
|
|
|
|
|
|
|
|
|
|
Non-current deferred income tax assets/(liabilities): |
|
|
|
|
|
|
|
|
U.S. net operating loss carryforwards |
|
$ |
46,431 |
|
|
$ |
51,887 |
|
Non-U.S. net operating loss carryforwards |
|
|
93,244 |
|
|
|
92,637 |
|
Accrued liabilities and deferred income |
|
|
6,995 |
|
|
|
7,309 |
|
Depreciation and amortization |
|
|
66,462 |
|
|
|
84,434 |
|
Tax sharing liability |
|
|
22,571 |
|
|
|
22,339 |
|
Other |
|
|
8,818 |
|
|
|
9,070 |
|
Valuation allowance |
|
|
(108,714 |
) |
|
|
(107,039 |
) |
|
|
|
|
|
|
|
|
|
Non-current net deferred income tax assets |
|
$ |
135,807 |
|
|
$ |
160,637 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
The current portion of the deferred income tax asset at December 31, 2014 and 2013 is included in Other current assets in our Consolidated Balance Sheets. |
The net deferred tax assets at December 31, 2014 and 2013 amounted to $146.3 million and $171.8 million, respectively. These net deferred
tax assets largely relate to temporary tax to book differences and net operating loss carryforwards, the realization of which is, in managements judgment, more likely than not. We have assessed the likelihood of realization based on our
expectations of future taxable income, carry-forward periods available and other relevant factors.
28
ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2014, we had U.S. federal and state net operating loss carry-forwards of approximately $119.6 million and $109.0
million, respectively, which expire between 2021 and 2034. In addition, we had $424.6 million of non-U.S. net operating loss carry-forwards, most of which do not expire. Additionally, we had $4.4 million of U.S. federal and state income
tax credit carry-forwards which expire between 2027 and 2034 and $1.1 million of U.S. federal income tax credits which have no expiration date. No provision has been made for U.S. federal or non-U.S. deferred income taxes on
approximately $16.5 million of accumulated and undistributed earnings of foreign subsidiaries at December 31, 2014. A provision has not been established because it is our present intention to reinvest the undistributed earnings indefinitely in
those foreign operations. The determination of the amount of unrecognized U.S. federal or non-U.S. deferred income tax liabilities for unremitted earnings at December 31, 2014 is not practicable. As of December 31, 2014, we have
established a deferred income tax liability on $2.0 million of accumulated and undistributed earnings in anticipation of the liquidation of an inactive foreign subsidiary next year.
We have established a liability for unrecognized tax benefits. Once established, unrecognized tax benefits are adjusted if more accurate
information becomes available, or a change in circumstance or an event occurs necessitating a change to the liability. Given the inherent complexities of the business and that we are subject to taxation in a substantial number of jurisdictions, we
routinely assess the likelihood of additional assessment in each of the taxing jurisdictions.
The table below shows the changes in the
liability for unrecognized tax benefits during the years ended December 31, 2014, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
|
(in thousands) |
|
Balance at January 1, |
|
$ |
3,569 |
|
|
$ |
4,106 |
|
|
$ |
3,429 |
|
Increase as a result of tax positions taken during the prior year |
|
|
|
|
|
|
21 |
|
|
|
952 |
|
Decrease as a result of tax positions taken during the prior year |
|
|
(209 |
) |
|
|
(433 |
) |
|
|
(285 |
) |
Impact of foreign currency translation |
|
|
(12 |
) |
|
|
(125 |
) |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, |
|
$ |
3,348 |
|
|
$ |
3,569 |
|
|
$ |
4,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total amount of unrecognized benefits that, if recognized, would affect our effective tax rate was $3.3
million, $3.5 million and $0.9 million at December 31, 2014, 2013 and 2012. During the next twelve months, we anticipate no reduction to this liability due to the lapsing of statutes of limitations.
We recognize interest and penalties related to unrecognized tax benefits in income tax expense. We recognized interest and penalties of $0,
during each of the years ended December 31, 2014, 2013 and 2012. Accrued interest and penalties were $0.7 million and $0.7 million at December 31, 2014 and 2013, respectively.
We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. A number of years may elapse
before an uncertain tax position, for which we have unrecognized tax benefits, is audited and finally resolved. We adjust these unrecognized tax benefits, as well as the related interest and penalties, in light of changing facts and circumstances.
Settlement of any particular position could require the use of cash. Favorable resolution could result in a reduction to our effective income tax rate in the period of resolution.
The number of years with open tax audits varies depending on the tax jurisdiction. Our major taxing jurisdictions include the United
States (federal and state), the United Kingdom (federal) and Australia (federal). With limited exceptions, we are no longer subject to income tax examinations by tax authorities for years before 2010.
With respect to periods prior to the Blackstone Acquisition, we are only required to take into account income tax returns for which we or one
of our subsidiaries is the primary taxpaying entity, namely separate state returns and non-U.S. returns. Uncertain tax positions related to U.S. federal and state combined and unitary income tax returns filed are only applicable in the
post-acquisition accounting period. We and our domestic subsidiaries currently file a consolidated income tax return for U.S. federal income tax purposes.
29
ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. |
Equity-Based Compensation |
We issue share-based awards under the Orbitz Worldwide, Inc.
2007 Equity and Incentive Plan, as amended (the Plan). The Plan provides for the grant of equity-based awards, including restricted stock, restricted stock units, stock options, stock appreciation rights and other equity-based awards to
our directors, officers and other employees, advisors and consultants who are selected by the Compensation Committee of the Board of Directors for participation in the Plan. There are 25,600,000 shares of common stock available for issuance under
the Plan, subject to adjustment as provided by the Plan. As of December 31, 2014, 4,291,197 shares were available for future issuance under the plan.
Restricted Stock Units
The table below summarizes activity regarding unvested restricted stock units under the Plan during the year ended December 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units |
|
|
Weighted- Average Grant Date Fair Value (per share) |
|
Unvested at January 1, 2014 |
|
|
4,857,840 |
|
|
$ |
3.73 |
|
Granted |
|
|
2,175,112 |
|
|
$ |
8.86 |
|
Vested (a) |
|
|
(1,682,289 |
) |
|
$ |
3.72 |
|
Forfeited |
|
|
(690,830 |
) |
|
$ |
4.79 |
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2014 |
|
|
4,659,833 |
|
|
$ |
5.97 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
We issued 1,159,060 shares of common stock in connection with the vesting of restricted stock units during the year ended December 31, 2014, which is net of the number of shares retained (but not issued) by us in
satisfaction of minimum tax withholding obligations associated with the vesting. |
The fair value of restricted stock units
that vested during the years ended December 31, 2014, 2013 and 2012 was $6.3 million, $4.6 million and $4.4 million, respectively. The weighted-average grant date fair value of restricted stock units granted during the years ended
December 31, 2014, 2013 and 2012 was $8.86, $4.07 and $3.31 per unit, respectively. The fair value of restricted stock units on the date of grant is amortized on a straight-line basis over the requisite service period of four years.
Performance-Based and Market-Based Restricted Stock Units
The table below summarizes activity regarding unvested performance-based and market-based restricted stock units (PSUs) under the
Plan during the year ended December 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
Performance- Based Restricted Stock Units |
|
|
Weighted- Average Grant Date Fair Value (per share) |
|
Unvested at January 1, 2014 |
|
|
3,089,250 |
|
|
$ |
2.99 |
|
Granted (a) |
|
|
410,445 |
|
|
$ |
12.64 |
|
Vested |
|
|
(904,093 |
) |
|
$ |
2.98 |
|
Forfeited |
|
|
(344,001 |
) |
|
$ |
5.67 |
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2014 |
|
|
2,251,601 |
|
|
$ |
4.35 |
|
|
|
|
|
|
|
|
|
|
30
ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
a. |
We granted 136,815 performance-based restricted stock units with a fair value per share of $9.72 and 273,630 market-based restricted stock units with a fair value per share of between $11.89 and $16.32
(PSUs) in March 2014 to certain of our executive officers. The PSUs entitle the executives to receive one share of our common stock for each PSU earned, subject to the satisfaction of the performance and market conditions. Each metric
will be equally weighted, with the ability to earn between 25% to 200% of target based on a straight-line interpolation of the criteria. The performance-based condition requires that the Company attain certain performance metrics for the three-year
period ended December 31, 2016 and the market-based conditions require that the Company achieve a certain absolute shareholder return and a certain relative shareholder return at the conclusion of the three-year measurement period. If the
minimum performance criteria are not met, each PSU will be forfeited. If the minimum conditions are met, the PSUs earned will cliff vest on the third anniversary of the grant date. The fair value of the PSUs subject to market-based conditions was
measured using a Monte Carlo simulation for sampling random outcomes. |
As of December 31, 2014, we expect that the
performance-based condition PSUs granted in 2014 will be satisfied at approximately 60% of their target level. The fair value of the market-based PSUs is being amortized on a straight-line basis over the requisite service period of each vesting
tranche.
The weighted-average grant date fair value of PSUs that vested during the years ended December 31, 2014, 2013 and 2012 was
$2.7 million, $1.6 million and $0.8 million, respectively. The weighted-average grant date fair value of PSUs granted during the years ended December 31, 2014, 2013 and 2012 was $12.64, $3.34 and $2.40 per unit, respectively.
Stock Options
The table
below summarizes the stock option activity under the Plan during the year ended December 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
Weighted- Average Exercise Price (per share) |
|
|
Weighted- Average Remaining Contractual Term (in years) |
|
|
Aggregate Intrinsic Value (in thousands) |
|
Outstanding at January 1, 2014 |
|
|
1,227,719 |
|
|
$ |
4.84 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(88,885 |
) |
|
$ |
5.25 |
|
|
|
|
|
|
|
|
|
Cancelled |
|
|
(7,143 |
) |
|
$ |
6.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2014 |
|
|
1,131,691 |
|
|
$ |
4.80 |
|
|
|
1.7 |
|
|
$ |
3,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2014 |
|
|
1,131,691 |
|
|
$ |
4.80 |
|
|
|
1.7 |
|
|
$ |
3,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The exercise price of stock options granted under the Plan is equal to the fair market value of the underlying
stock on the date of grant. Stock options generally expire seven to ten years from the grant date. Stock options vest either annually over a four-year period, or 25% of the options vest after one year and the remaining awards vest ratably on a
monthly basis for the three years that follow. The fair value of stock options on the date of grant is amortized on a straight-line basis over the requisite service period. There were no stock options granted in 2014, 2013 or 2012.
During the years ended December 31, 2014, 2013 and 2012, the total fair value of options that vested during the period was $0.7 million,
$1.1 million and $1.3 million, respectively. In addition, the intrinsic value of options exercised was $0.3 million, $3.1 million, and $0 for the years ended December 31, 2014, 2013 and 2012, respectively.
31
ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Non-Employee Directors Deferred Compensation Plan
We have a deferred compensation plan that enables our non-employee directors to defer the receipt of certain compensation earned in their
capacity as non-employee directors. Eligible directors may elect to defer up to 100% of their annual retainer fees (which are paid by us on a quarterly basis). In addition, 100% of the annual equity granted to non-employee directors is deferred
under the Plan.
We grant deferred stock units (DSUs) annually to each participating director. The DSUs are issued as
restricted stock units under the Plan and are immediately vested and non-forfeitable. The DSUs entitle the non-employee director to receive one share of our common stock for each deferred stock unit following the directors retirement or
termination of service from the Board of Directors. For all awards granted prior to 2011, the DSUs are distributed 200 days immediately following such termination date and for all awards granted in 2011 or later, the DSUs are distributed immediately
at termination. The entire grant date fair value of deferred stock units is expensed on the date of grant.
The table below summarizes the
deferred stock unit activity under the Plan during the year ended December 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
Deferred Stock Units |
|
|
Weighted- Average Grant Date Fair Value (per share) |
|
Outstanding at January 1, 2014 |
|
|
923,306 |
|
|
$ |
4.41 |
|
Granted |
|
|
120,563 |
|
|
$ |
7.94 |
|
Distributed |
|
|
(550,357 |
) |
|
$ |
5.10 |
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2014 |
|
|
493,512 |
|
|
$ |
4.50 |
|
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair value for deferred stock units granted during the years ended
December 31, 2014, 2013 and 2012 was $7.94, $7.79 and $3.47, respectively.
Compensation Expense
We recognized total equity-based compensation expense of $12.2 million, $12.9 million and $7.6 million for the years ended December 31,
2014, 2013 and 2012, respectively, none of which has provided us with a tax benefit due to existence of net operating losses. As of December 31, 2014, a total of $20.1 million of unrecognized compensation costs related to unvested restricted
stock units, unvested stock options and unvested PSUs are expected to be recognized over the remaining weighted-average period of 2.8 years.
12. |
Derivative Financial Instruments |
Interest Rate Hedges
At December 31, 2014, we had the following interest rate swaps outstanding that effectively converts $200.0 million of the term loan from
a variable to a fixed interest rate. We pay a fixed interest rate on the notional amount and in exchange receive a variable interest rate based on the one-month LIBOR rate. The Company does not use derivatives for speculative or trading purposes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount |
|
Effective Date |
|
|
Maturity Date |
|
|
Fixed Interest Rate Paid |
|
|
Variable Interest Rate Received |
|
$100.0 million |
|
|
August 29, 2014 |
|
|
|
August 31, 2016 |
|
|
|
1.11 |
% |
|
|
One-month LIBOR |
|
$100.0 million |
|
|
August 29, 2014 |
|
|
|
August 31, 2016 |
|
|
|
1.15 |
% |
|
|
One-month LIBOR |
|
32
ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We entered into interest rate derivative contracts to protect against volatility of future cash flows of the variable interest payments related
to our term loan. These derivative contracts are economic hedges and are not designated as cash flow hedges. We mark-to-market instruments not designated as hedges and record the changes in the fair value of these items in Net interest expense in
the Companys Consolidated Statements of Operations and recognize the unrealized gain or loss in Other non-current assets or liabilities. Unrealized losses of $1.7 million and $1.2 million were recognized at December 31, 2014 and 2013,
respectively.
The following table summarizes the location and fair value of our interest rate derivative instruments on the
Companys Consolidated Balance Sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location |
|
Fair Value Measurements as of |
|
|
|
|
December 31, 2014 |
|
|
December 31, 2013 |
|
|
|
|
|
(in thousands) |
|
Interest rate swaps not designated as hedging instruments |
|
Other non-current liabilities |
|
$ |
1,723 |
|
|
$ |
1,205 |
|
Interest rate swaps previously designated as hedging instruments were terminated in conjunction with the
termination of our credit agreement in March 2013. Interest rate swaps designated as hedging instruments were reflected in our Consolidated Balance Sheets at market value. The corresponding market adjustment related to the hedging instrument was
recorded to Accumulated other comprehensive income (AOCI).
The following table shows the market adjustments recorded during
the years ended December 31, 2014, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain in Other Comprehensive Income/(Loss) |
|
|
(Loss) Reclassified from Accumulated OCI into Interest Expense (Effective Portion) |
|
|
Gain/(Loss) Recognized in Income (Ineffective Portion and the Amount Excluded from Effectiveness Testing) |
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
|
(in thousands) |
|
Interest rate swaps |
|
$ |
|
|
|
$ |
276 |
|
|
$ |
311 |
|
|
$ |
|
|
|
$ |
(277 |
) |
|
$ |
(561 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Foreign Currency Hedges
We enter into foreign currency contracts to manage our exposure to changes in the foreign currency associated with foreign currency
receivables, payables and intercompany transactions. We primarily hedge our foreign currency exposure to the Pound sterling, Euro, Swiss Franc and the Australian dollar. As of December 31, 2014, we had foreign currency contracts outstanding
with a total net notional amount of $190.3 million, all of which subsequently matured in early 2015. The foreign currency contracts do not qualify for hedge accounting treatment; accordingly, changes in the fair value of the foreign currency
contracts are reflected in net income as a component of Selling, general and administrative expense in our Consolidated Statements of Operations.
The following table shows the fair value of our foreign currency hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location |
|
Fair Value Measurements as of |
|
|
|
|
December 31, 2014 |
|
|
December 31, 2013 |
|
|
|
|
|
(in thousands) |
|
Asset Derivatives: |
|
|
|
|
|
|
|
|
|
|
Foreign currency hedges |
|
Other current assets |
|
$ |
4,275 |
|
|
$ |
|
|
Liability Derivatives: |
|
|
|
|
|
|
|
|
|
|
Foreign currency hedges |
|
Other current liabilities |
|
$ |
|
|
|
$ |
1,412 |
|
33
ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table shows the changes in the fair value of our foreign currency contracts which were recorded as a gain/(loss) in Selling,
general and administrative expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
|
(in thousands) |
|
Foreign currency hedges (a) |
|
$ |
6,813 |
|
|
$ |
3,877 |
|
|
$ |
(11,385 |
) |
|
(a) |
We recorded transaction gains/(losses) associated with the re-measurement and settlement of our foreign denominated assets and liabilities of $(12.9) million, $(9.3) million and $6.7 million for the years ended
December 31, 2014, 2013 and 2012, respectively. These transaction gains and losses were included in Selling, general and administrative expense in our Consolidated Statements of Operations. The net impact of these transaction gains and losses,
together with the gains/(losses) incurred on our foreign currency hedges, were losses of $6.1 million, $5.4 million and $4.7 million for the years ended December 31, 2014, 2013 and 2012, respectively. |
The tables below show the gross and net information related to derivatives eligible for offset in the Consolidated Balance Sheets as of
December 31, 2014 and 2013. The gross asset amount of the derivative listed below is the maximum loss the Company would incur if the counterparties failed to meet their obligation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts of Recognized Liabilities |
|
|
Gross Amounts Offset in the Consolidated Balance Sheets |
|
|
Net Amounts of Liabilities Presented in the Consolidated Balance Sheets |
|
|
|
(in thousands) |
|
December 31, 2014 |
|
$ |
2,947 |
|
|
$ |
(5,499 |
) |
|
$ |
(2,552 |
) |
December 31, 2013 |
|
$ |
8,324 |
|
|
$ |
(5,707 |
) |
|
$ |
2,617 |
|
13. |
Employee Benefit Plans |
We sponsor a defined contribution savings plan for employees in
the United States that provides certain of our eligible employees an opportunity to accumulate funds for retirement. We also sponsor similar HotelClub and ebookers defined contribution savings plans. After employees have attained one year of
service, we match the contributions of participating employees on the basis specified by the plans, up to a maximum of 3% of participant compensation. We recorded total expense related to these plans in the amount of $5.3 million, $4.9 million and
$4.8 million for the years ended December 31, 2014, 2013 and 2012, respectively.
34
ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. |
Net Income/(Loss) per Share |
We calculate basic net income/(loss) per share by dividing
the net income/(loss) for the period by the weighted-average number of shares outstanding during the period. The weighted-average number of shares includes common shares outstanding and deferred stock units, which are immediately vested and
non-forfeitable. Diluted net income/(loss) per share is calculated by dividing the net income/(loss) for the period by the weighted-average number of common shares outstanding and potentially dilutive common shares outstanding during the period.
Potentially dilutive common shares are determined by the application of the treasury stock method.
The following table presents the
weighted-average shares outstanding used in the calculation of net income/(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
Weighted-Average Shares Outstanding |
|
2014 |
|
|
2013 |
|
|
2012 |
|
Basic |
|
|
110,537,992 |
|
|
|
107,952,327 |
|
|
|
105,582,736 |
|
Diluted effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units |
|
|
1,367,392 |
|
|
|
2,586,325 |
|
|
|
|
|
Performance-based restricted stock units |
|
|
1,969,674 |
|
|
|
2,117,454 |
|
|
|
|
|
Stock options |
|
|
469,382 |
|
|
|
416,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
114,344,440 |
|
|
|
113,072,679 |
|
|
|
105,582,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following equity awards were not included in the diluted net income/(loss) per share calculation because
they would have had an antidilutive effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
Antidilutive Equity Awards |
|
2014 |
|
|
2013 |
|
|
2012 |
|
Restricted stock units |
|
|
704,809 |
|
|
|
5,772 |
|
|
|
4,379,665 |
|
Performance-based restricted stock units |
|
|
239,725 |
|
|
|
|
|
|
|
907,616 |
|
Stock options |
|
|
|
|
|
|
200,409 |
|
|
|
3,009,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
944,534 |
|
|
|
206,181 |
|
|
|
8,296,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. |
Related Party Transactions |
Related Party Transactions with Travelport and its Subsidiaries
We had amounts due from Travelport of $15.5 million and $12.3 million at December 31, 2014 and 2013, respectively. Amounts
due to or from Travelport are generally settled on a net basis.
At December 31, 2013, 48% of the shares of our common stock
outstanding were beneficially owned by Travelport and the investment funds that indirectly own Travelport. In the second quarter and early third quarter of 2014, Travelport sold a majority of its shares of our common stock and after its secondary
common stock offering on July 22, 2014, beneficially owns less than 1% of shares of our common stock as of December 31, 2014 and is no longer considered a related party (see Note 1 - Organization and Basis of Presentation in the Notes to
Consolidated Financial Statements).
The following table summarizes the related party transactions with Travelport and its subsidiaries
through July 22, 2014, reflected in our Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
|
(in thousands) |
|
Net revenue (a) |
|
$ |
54,969 |
|
|
$ |
85,293 |
|
|
$ |
98,113 |
|
Cost of revenue |
|
|
59 |
|
|
|
(60 |
) |
|
|
250 |
|
Selling, general and administrative expense |
|
|
|
|
|
|
116 |
|
|
|
260 |
|
Marketing expense |
|
|
58 |
|
|
|
53 |
|
|
|
|
|
Interest expense (b) |
|
|
|
|
|
|
4,106 |
|
|
|
6,706 |
|
|
(a) |
Net revenue includes incentive revenue for segments processed through Galileo and Worldspan, both of which are subsidiaries of Travelport. This incentive revenue accounted for more than 10% of our total net revenue in
2012. |
|
(b) |
Interest expense relates to letters of credit issued on our behalf by Travelport. |
Master
License Agreement
We entered into a Master License Agreement with Travelport at the time of the IPO. Pursuant to this agreement,
Travelport licenses certain of our intellectual property and pays us fees for related maintenance and support services. The licenses include our supplier link technology; portions of ebookers booking, search and vacation package technologies;
certain of our products and online booking tools for corporate travel; portions of our private label vacation package technology; and our extranet supplier connectivity functionality.
The Master License Agreement granted us the right to use a corporate online booking product developed by Travelport. We have entered into a
value added reseller license with Travelport for this product.
GDS Service Agreement
In connection with the IPO, we entered into the Travelport GDS Service Agreement, which terminated in February 2014. The Travelport GDS Service
Agreement was structured such that we earned incentive revenue for each air, car and hotel segment that was processed through the Travelport GDSs. This agreement required that we process a certain minimum number of segments for our domestic brands
through the Travelport GDSs each year. Our domestic brands were required to process a total of 27.8 million and 31.4 million segments through the Travelport GDSs during the years ended December 31, 2013 and 2012, respectively. Of the
required number of segments, 16.0 million segments were required to be processed each year through Worldspan, and 11.8 million and 15.4 million segments were required to be processed through Galileo during the years ended
December 31, 2013 and 2012, respectively. We were not subject to these minimum volume thresholds to the extent that we processed all eligible segments through the Travelport GDS.
36
ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In February 2014, the Company entered into an agreement with Travelport for the provision of GDS services, which terminated and replaced our
prior Travelport GDS service agreement (the New Travelport GDS Service Agreement). Under the New Travelport GDS Service Agreement, Orbitz was obligated in 2014 to use only Travelport GDSs for all air and car segments booked on its
domestic agencies and was subject to certain other exclusivity obligations for its segments booked in Europe and other markets as defined in the New Travelport GDS Service Agreement. The Company was required to pay a fee for each segment not booked
through Travelport GDSs in 2014 subject to exclusivity obligations discussed above. However, beginning January 1, 2015, the Company is no longer subject to exclusivity obligations. Under the New Travelport GDS Service Agreement, beginning in
2015, we are obligated to provide certain levels of volume over the contract period and may be subject to pay shortfall payments in certain cases if we fail to meet volume commitments. The agreement terminates on December 31, 2018.
No payments were required to be made to Travelport related to the minimum segment requirements for our domestic and European brands for the
years ended December 31, 2014, 2013 and 2012.
Corporate Travel Agreement
We provide corporate travel management services to Travelport and its subsidiaries.
16. |
Fair Value Measurements |
The following table shows the fair value of our assets and
liabilities that are required to be measured at fair value on a recurring basis as of December 31, 2014 and 2013, which are classified as Other current assets, Other current liabilities and Other non-current liabilities in our Consolidated
Balance Sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of |
|
|
|
December 31, 2014 |
|
|
December 31, 2013 |
|
|
|
Total |
|
|
Quoted prices in active markets (Level 1) |
|
|
Significant other observable inputs (Level 2) |
|
|
Significant unobservable inputs (Level 3) |
|
|
Total |
|
|
Quoted prices in active markets (Level 1) |
|
|
Significant other observable inputs (Level 2) |
|
|
Significant unobservable inputs (Level 3) |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivative assets |
|
$ |
4,275 |
|
|
$ |
4,275 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivative liabilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,412 |
|
|
$ |
1,412 |
|
|
$ |
|
|
|
$ |
|
|
Interest rate swap liabilities |
|
$ |
1,723 |
|
|
$ |
|
|
|
$ |
1,723 |
|
|
$ |
|
|
|
$ |
1,205 |
|
|
$ |
|
|
|
$ |
1,205 |
|
|
$ |
|
|
We value our foreign currency hedges based on the difference between the foreign currency contract rate and
widely available foreign currency rates as of the measurement date. Our foreign currency hedges are short-term in nature, generally maturing within 30 days. We value our interest rate swaps using valuations that are calibrated to the initial trade
prices. Using a market-based approach, subsequent valuations are based on observable inputs to the valuation model including interest rates, credit spreads and volatilities.
37
ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair Value of Financial Instruments
For certain of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued merchant payable
and accrued expenses, the carrying value approximates or equals fair value due to their short-term nature.
The carrying value of the Term
Loan was $447.8 million at December 31, 2014, compared with a fair value of $442.2 million. At December 31, 2013, the carrying value of the Term Loan was $443.3 million, compared with a fair value of $446.8 million. The fair values
were determined based on quoted market ask prices, which is classified as a Level 2 measurement.
We determine operating segments based on how our chief operating
decision maker manages the business, including making operating decisions deciding how to allocate resources and evaluating operating performance. We operate in one segment and have one reportable segment.
We maintain operations in the United States, United Kingdom, Australia, Germany, Sweden, France, Finland, Ireland, Switzerland and other
international territories. The table below presents net revenue by geographic area: the United States and all other countries.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
|
(in thousands) |
|
Net revenue |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
674,079 |
|
|
$ |
618,623 |
|
|
$ |
562,026 |
|
All other countries |
|
|
257,928 |
|
|
|
228,380 |
|
|
|
216,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
932,007 |
|
|
$ |
847,003 |
|
|
$ |
778,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below presents property and equipment, net, by geographic area.
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014 |
|
|
December 31, 2013 |
|
|
|
(in thousands) |
|
Long-lived assets |
|
|
|
|
|
|
|
|
United States |
|
$ |
106,816 |
|
|
$ |
111,458 |
|
All other countries |
|
|
5,016 |
|
|
|
4,687 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
111,832 |
|
|
$ |
116,145 |
|
|
|
|
|
|
|
|
|
|
As previously announced, on February 12, 2015, the Company,
Expedia, Inc., (Expedia), and Xeta, Inc., an indirect wholly owned subsidiary of Expedia (Merger Sub) entered into an Agreement and Plan of Merger (the Merger Agreement).
The Merger Agreement provides, subject to the terms and conditions set forth therein, that Merger Sub will be merged with and into the Company
(the Merger) among other things and, with the Company surviving the Merger as an indirect wholly owned subsidiary of Expedia. At the effective time of the Merger (the Effective Time), each share of common stock of the Company
outstanding immediately prior to the Effective Time (other than any shares owned by the Company, Expedia, Merger Sub or Merger Subs direct parent or any dissenting shares) will be automatically converted into the right to receive $12.00 in
cash, without interest.
38
ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Board of Directors of the Company by a unanimous vote of directors present approved the Merger Agreement and the transactions contemplated
thereby, including the Merger. The closing of the Merger is subject to the adoption of the Merger Agreement by the affirmative vote of holders of a majority of the outstanding shares of common stock of the Company. The closing of the Merger is also
subject to various customary conditions, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and other regulatory clearances, the absence of any
governmental order prohibiting the consummation of the transactions contemplated by the Merger Agreement, the accuracy of the representations and warranties contained in the Merger Agreement (subject to certain materiality qualifications) and
compliance with the covenants and agreements in the Merger Agreement in all material respects.
The Merger Agreement contains certain
termination rights, including the right of the Company to terminate the Merger Agreement to accept a superior proposal (subject to compliance with certain notice and other requirements). The Merger Agreement provides that, in connection with
termination of the Merger Agreement by the Company or Expedia upon specified conditions, the Company will be required to pay to Expedia a termination fee of $57.5 million. If the Merger Agreement is terminated as a result of the failure to obtain
competition law approvals or a legal prohibition related to competition law matters, a termination fee of $115.0 million will be payable by Expedia to the Company, subject to certain limitations. In addition, subject to certain exceptions and
limitations, the Company or Expedia may terminate the Merger Agreement if the Merger is not consummated by August 12, 2015 (or as such date may be extended pursuant to the terms of the Merger Agreement).
39
ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. |
Quarterly Financial Data (Unaudited) |
The following tables present certain unaudited
consolidated quarterly financial information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
December 31, 2014 |
|
|
September 30, 2014 |
|
|
June 30, 2014 |
|
|
March 31, 2014 |
|
|
|
(in thousands, except per share data) |
|
Net revenue |
|
$ |
220,564 |
|
|
$ |
253,135 |
|
|
$ |
248,053 |
|
|
$ |
210,255 |
|
Cost and expenses |
|
|
198,582 |
|
|
|
227,510 |
|
|
|
224,547 |
|
|
|
199,358 |
|
Operating income |
|
|
21,982 |
|
|
|
25,625 |
|
|
|
23,506 |
|
|
|
10,897 |
|
Net income/(loss) |
|
|
7,296 |
|
|
|
9,037 |
|
|
|
6,881 |
|
|
|
(5,934 |
) |
Basic net income/(loss) per share |
|
$ |
0.07 |
|
|
$ |
0.08 |
|
|
$ |
0.06 |
|
|
$ |
(0.05 |
) |
Diluted net income/(loss) per share |
|
$ |
0.06 |
|
|
$ |
0.08 |
|
|
$ |
0.06 |
|
|
$ |
(0.05 |
) |
|
|
|
|
Three Months Ended |
|
|
|
December 31, 2013 |
|
|
September 30, 2013 |
|
|
June 30, 2013 |
|
|
March 31, 2013 (a) |
|
|
|
(in thousands, except per share data) |
|
Net revenue |
|
$ |
197,426 |
|
|
$ |
220,919 |
|
|
$ |
225,798 |
|
|
$ |
202,860 |
|
Cost and expenses |
|
|
182,746 |
|
|
|
193,450 |
|
|
|
203,171 |
|
|
|
205,670 |
|
Operating income/(loss) |
|
|
14,680 |
|
|
|
27,469 |
|
|
|
22,627 |
|
|
|
(2,810 |
) |
Net income |
|
|
5,342 |
|
|
|
12,982 |
|
|
|
561 |
|
|
|
146,200 |
|
Basic net income per share |
|
$ |
0.05 |
|
|
$ |
0.12 |
|
|
$ |
0.01 |
|
|
$ |
1.38 |
|
Diluted net income per share |
|
$ |
0.05 |
|
|
$ |
0.11 |
|
|
$ |
0.00 |
|
|
$ |
1.34 |
|
|
(a) |
During the three months ended March 31, 2013, we reversed $157.5 million in valuation allowance related to deferred tax assets (see Note 10 - Income Taxes). |
40
Exhibit 99.3
Expedia, Inc.
Unaudited
Pro Forma Condensed Combined Financial Information
Unaudited Pro Forma Information
The following unaudited pro forma condensed combined financial information and related notes present the historical financial statements of
Expedia, Inc. and its subsidiaries (Expedia) and Orbitz Worldwide, Inc. (Orbitz) after giving effect to Expedias acquisition of Orbitz that was completed on September 17, 2015 as well as the assumptions,
reclassifications and adjustments described in the accompanying notes to the unaudited pro forma financial statements.
The unaudited pro
forma condensed combined statements of operations for the six months ended June 30, 2015 and for the year ended December 31, 2014 assume that the acquisition occurred as of January 1, 2014. The unaudited pro forma condensed combined
balance sheet as of June 30, 2015 is presented as if the acquisition had occurred as of June 30, 2015.
The unaudited pro forma
condensed combined financial information is presented for illustrative purposes only and does not purport to represent what the results of operations or financial position of Expedia would actually have been had the acquisition occurred on the dates
noted above, or to project the results of operations or financial position of Expedia for any future periods. The pro forma adjustments are based on available information and certain assumptions that management believes are reasonable. Unless
otherwise indicated, the pro forma adjustments are directly attributable to the acquisition and are expected to have a continuing impact on the results of operations of Expedia. In the opinion of management, all adjustments necessary to present
fairly the unaudited pro forma condensed consolidation financial information have been made.
The accompanying unaudited pro forma
condensed combined financial information should be read in conjunction with the notes thereto and Expedias consolidated financial statements and notes thereto included in Expedias Annual Report on Form 10-K as of and for the year ended
December 31, 2014, Expedias Quarterly Report on Form 10-Q as of and for the six months ended June 30, 2015, the historical financial statements of Orbitz as of and for the year ended December 31, 2014 included herein and the
historical unaudited condensed consolidated interim financial statements of Orbitz as of and for the six months ended June 30, 2015 included herein.
1
EXPEDIA, INC.
PRO FORMA COMBINED BALANCE SHEETS
As of June 30, 2015
(In thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical |
|
|
|
|
|
|
|
|
|
Expedia |
|
|
Orbitz(1) |
|
|
Pro Forma Adjustments |
|
|
Pro Forma Combined |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
3,187,129 |
|
|
$ |
304,798 |
|
|
$ |
(1,794,593 |
)(a) |
|
$ |
1,697,334 |
|
Restricted cash and cash equivalents |
|
|
27,261 |
|
|
|
|
|
|
|
|
|
|
|
27,261 |
|
Short-term investments |
|
|
195,984 |
|
|
|
|
|
|
|
|
|
|
|
195,984 |
|
Accounts receivable, net of allowance |
|
|
1,123,555 |
|
|
|
161,340 |
|
|
|
(7,976 |
)(b) |
|
|
1,276,919 |
|
Deferred income taxes |
|
|
169,449 |
|
|
|
9,881 |
|
|
|
|
|
|
|
179,330 |
|
Income taxes receivable |
|
|
73,807 |
|
|
|
1,079 |
|
|
|
|
|
|
|
74,886 |
|
Prepaid expenses and other current assets |
|
|
213,207 |
|
|
|
33,938 |
|
|
|
|
|
|
|
247,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
4,990,392 |
|
|
|
511,036 |
|
|
|
(1,802,569 |
) |
|
|
3,698,859 |
|
Property and equipment, net |
|
|
867,137 |
|
|
|
110,135 |
|
|
|
(80,859 |
)(c) |
|
|
896,413 |
|
Long-term investments and other assets |
|
|
516,883 |
|
|
|
104,997 |
|
|
|
(11,417 |
)(d) |
|
|
610,463 |
|
Deferred income taxes |
|
|
4,858 |
|
|
|
135,095 |
|
|
|
(135,095 |
)(e) |
|
|
4,858 |
|
Intangible assets, net |
|
|
1,476,039 |
|
|
|
90,906 |
|
|
|
583,633 |
(f) |
|
|
2,150,578 |
|
Goodwill |
|
|
3,976,617 |
|
|
|
351,098 |
|
|
|
1,072,756 |
(g) |
|
|
5,400,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
11,831,926 |
|
|
$ |
1,303,267 |
|
|
$ |
(373,551 |
) |
|
$ |
12,761,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, merchant |
|
$ |
1,346,242 |
|
|
$ |
189,457 |
|
|
$ |
|
|
|
$ |
1,535,699 |
|
Accounts payable, other |
|
|
519,834 |
|
|
|
70,118 |
|
|
|
(2,214 |
)(h) |
|
|
587,738 |
|
Deferred merchant bookings |
|
|
3,214,868 |
|
|
|
362,188 |
|
|
|
(43,306 |
)(i) |
|
|
3,533,750 |
|
Deferred revenue |
|
|
57,142 |
|
|
|
11,748 |
|
|
|
(7,098 |
)(i) |
|
|
61,792 |
|
Income taxes payable |
|
|
89,492 |
|
|
|
772 |
|
|
|
|
|
|
|
90,264 |
|
Term loan, current |
|
|
|
|
|
|
24,100 |
|
|
|
(24,100 |
)(j) |
|
|
|
|
Accrued expenses and other current liabilities |
|
|
740,650 |
|
|
|
119,251 |
|
|
|
52,380 |
(k) |
|
|
912,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
5,968,228 |
|
|
|
777,634 |
|
|
|
(24,338 |
) |
|
|
6,721,524 |
|
Long-term debt |
|
|
2,472,536 |
|
|
|
405,499 |
|
|
|
(405,499 |
)(j) |
|
|
2,472,536 |
|
Deferred income taxes |
|
|
437,959 |
|
|
|
|
|
|
|
137,141 |
(e) |
|
|
575,100 |
|
Other long-term liabilities |
|
|
220,545 |
|
|
|
70,148 |
|
|
|
(10,059 |
)(l) |
|
|
280,634 |
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interests |
|
|
557,749 |
|
|
|
|
|
|
|
|
|
|
|
557,749 |
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
20 |
|
|
|
1,126 |
|
|
|
(1,126 |
)(m) |
|
|
20 |
|
Class B common stock |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Additional paid-in capital |
|
|
5,989,725 |
|
|
|
1,061,616 |
|
|
|
(1,015,669 |
)(n) |
|
|
6,035,672 |
|
Treasury stock - Common stock, at cost |
|
|
(4,039,376 |
) |
|
|
(52 |
) |
|
|
52 |
(m) |
|
|
(4,039,376 |
) |
Retained earnings (deficit) |
|
|
417,428 |
|
|
|
(1,025,449 |
) |
|
|
958,692 |
(o) |
|
|
350,671 |
|
Accumulated other comprehensive income (loss) |
|
|
(256,692 |
) |
|
|
12,745 |
|
|
|
(12,745 |
)(p) |
|
|
(256,692 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
2,111,106 |
|
|
|
49,986 |
|
|
|
(70,796 |
) |
|
|
2,090,296 |
|
Non-redeemable noncontrolling interests |
|
|
63,803 |
|
|
|
|
|
|
|
|
|
|
|
63,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity |
|
|
2,174,909 |
|
|
|
49,986 |
|
|
|
(70,796 |
) |
|
|
2,154,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
11,831,926 |
|
|
$ |
1,303,267 |
|
|
$ |
(373,551 |
) |
|
$ |
12,761,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The consolidated balance sheet of Orbitz as of June 30, 2015 has been derived from the historical unaudited financial statements as of and for the six months ended June 30, 2015 with certain reclassification
adjustments made by Expedia as described in Note 1, Basis of Pro Forma Presentation. |
See accompanying notes to unaudited pro forma
condensed combined financial information.
2
EXPEDIA, INC.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
For the Six Months Ended June 30, 2015
(In thousands, except for per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma |
|
|
Pro Forma |
|
|
|
Expedia |
|
|
Orbitz(2) |
|
|
Adjustments |
|
|
Combined |
|
Revenue |
|
$ |
3,035,997 |
|
|
$ |
446,956 |
|
|
$ |
(9,461 |
)(q) |
|
$ |
3,473,492 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue (1) |
|
|
643,000 |
|
|
|
139,236 |
|
|
|
(2,885 |
)(r) |
|
|
779,351 |
|
Selling and marketing (1) |
|
|
1,648,861 |
|
|
|
214,051 |
|
|
|
(17,893 |
)(s) |
|
|
1,845,019 |
|
Technology and content (1) |
|
|
376,971 |
|
|
|
51,884 |
|
|
|
(8,210 |
)(t) |
|
|
420,645 |
|
General and administrative (1) |
|
|
257,791 |
|
|
|
41,221 |
|
|
|
(20,182 |
)(u) |
|
|
278,830 |
|
Amortization of intangible assets |
|
|
51,922 |
|
|
|
156 |
|
|
|
40,090 |
(v) |
|
|
92,168 |
|
Legal reserves, occupancy tax and other |
|
|
8,039 |
|
|
|
4,292 |
|
|
|
(3,800 |
)(w) |
|
|
8,531 |
|
Restructuring and related reorganization charges |
|
|
10,322 |
|
|
|
|
|
|
|
|
|
|
|
10,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
39,091 |
|
|
|
(3,884 |
) |
|
|
3,419 |
|
|
|
38,626 |
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
10,238 |
|
|
|
223 |
|
|
|
|
|
|
|
10,461 |
|
Interest expense |
|
|
(56,509 |
) |
|
|
(16,100 |
) |
|
|
6,718 |
(x) |
|
|
(65,891 |
) |
Gain on sale of business |
|
|
508,810 |
|
|
|
|
|
|
|
|
|
|
|
508,810 |
|
Other, net |
|
|
88,078 |
|
|
|
(2,628 |
) |
|
|
|
|
|
|
85,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net |
|
|
550,617 |
|
|
|
(18,505 |
) |
|
|
6,718 |
|
|
|
538,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
589,708 |
|
|
|
(22,389 |
) |
|
|
10,137 |
|
|
|
577,456 |
|
Provision for income taxes |
|
|
(130,311 |
) |
|
|
(2,801 |
) |
|
|
(3,548 |
)(y) |
|
|
(136,660 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
459,397 |
|
|
|
(25,190 |
) |
|
|
6,589 |
|
|
|
440,796 |
|
Net (income) loss attributable to noncontrolling interests |
|
|
34,390 |
|
|
|
|
|
|
|
2,274 |
(z) |
|
|
36,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders |
|
$ |
493,787 |
|
|
$ |
(25,190 |
) |
|
$ |
8,863 |
|
|
$ |
477,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
3.85 |
|
|
|
|
|
|
|
|
|
|
$ |
3.72 |
|
Diluted |
|
|
3.74 |
|
|
|
|
|
|
|
|
|
|
|
3.61 |
|
Shares used in computing earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
128,229 |
|
|
|
|
|
|
|
|
|
|
|
128,229 |
|
Diluted |
|
|
132,184 |
|
|
|
|
|
|
|
|
|
|
|
132,184 |
|
____________
(1) Includes stock-based compensation as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
$ |
2,474 |
|
|
$ |
942 |
|
|
$ |
110 |
(r) |
|
$ |
3,526 |
|
Selling and marketing |
|
|
13,332 |
|
|
|
2,822 |
|
|
|
323 |
(s) |
|
|
16,477 |
|
Technology and content |
|
|
12,343 |
|
|
|
2,728 |
|
|
|
314 |
(t) |
|
|
15,385 |
|
General and administrative |
|
|
42,231 |
|
|
|
924 |
|
|
|
102 |
(u) |
|
|
43,257 |
|
(2) |
The consolidated statement of operations of Orbitz for the six months ended June 30, 2015 has been derived from the historical unaudited financial statements as of and for the six months ended June 30, 2015
with certain reclassification adjustments made by Expedia as described in Note 1, Basis of Pro Forma Presentation. |
See accompanying
notes to unaudited pro forma condensed combined financial information.
3
EXPEDIA, INC.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
For the Year Ended December 31, 2014
(In thousands, except for per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical |
|
|
|
|
|
|
|
|
|
Expedia |
|
|
Orbitz(2) |
|
|
Pro Forma Adjustments |
|
|
Pro Forma Combined |
|
Revenue |
|
$ |
5,763,485 |
|
|
$ |
910,420 |
|
|
$ |
(9,979 |
)(q) |
|
$ |
6,663,926 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue (1) |
|
|
1,179,081 |
|
|
|
196,392 |
|
|
|
(4,866 |
)(r) |
|
|
1,370,607 |
|
Selling and marketing (1) |
|
|
2,808,329 |
|
|
|
449,777 |
|
|
|
(24,580 |
)(s) |
|
|
3,233,526 |
|
Technology and content (1) |
|
|
686,154 |
|
|
|
97,814 |
|
|
|
(12,729 |
)(t) |
|
|
771,239 |
|
General and administrative (1) |
|
|
425,373 |
|
|
|
77,507 |
|
|
|
(5,392 |
)(u) |
|
|
497,488 |
|
Amortization of intangible assets |
|
|
79,615 |
|
|
|
349 |
|
|
|
128,887 |
(v) |
|
|
208,851 |
|
Legal reserves, occupancy tax and other |
|
|
41,539 |
|
|
|
531 |
|
|
|
3,800 |
(w) |
|
|
45,870 |
|
Restructuring and related reorganization charges |
|
|
25,630 |
|
|
|
|
|
|
|
|
|
|
|
25,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
517,764 |
|
|
|
88,050 |
|
|
|
(95,099 |
) |
|
|
510,715 |
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
27,288 |
|
|
|
422 |
|
|
|
|
|
|
|
27,710 |
|
Interest expense |
|
|
(98,089 |
) |
|
|
(35,634 |
) |
|
|
12,684 |
(x) |
|
|
(121,039 |
) |
Other, net |
|
|
17,678 |
|
|
|
(8,277 |
) |
|
|
|
|
|
|
9,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net |
|
|
(53,123 |
) |
|
|
(43,489 |
) |
|
|
12,684 |
|
|
|
(83,928 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
464,641 |
|
|
|
44,561 |
|
|
|
(82,415 |
) |
|
|
426,787 |
|
Provision for income taxes |
|
|
(91,691 |
) |
|
|
(27,281 |
) |
|
|
28,845 |
(y) |
|
|
(90,127 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
372,950 |
|
|
|
17,280 |
|
|
|
(53,570 |
) |
|
|
336,660 |
|
Net (income) loss attributable to noncontrolling interests |
|
|
25,147 |
|
|
|
|
|
|
|
2,398 |
(z) |
|
|
27,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders |
|
$ |
398,097 |
|
|
$ |
17,280 |
|
|
$ |
(51,172 |
) |
|
$ |
364,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
3.09 |
|
|
|
|
|
|
|
|
|
|
$ |
2.83 |
|
Diluted |
|
|
2.99 |
|
|
|
|
|
|
|
|
|
|
|
2.73 |
|
Shares used in computing earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
128,912 |
|
|
|
|
|
|
|
|
|
|
|
128,912 |
|
Diluted |
|
|
133,168 |
|
|
|
|
|
|
|
|
|
|
|
133,168 |
|
____________
(1) Includes stock-based compensation as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
$ |
3,921 |
|
|
$ |
1,584 |
|
|
$ |
583 |
(r) |
|
$ |
6,088 |
|
Selling and marketing |
|
|
18,067 |
|
|
|
4,702 |
|
|
|
1,748 |
(s) |
|
|
24,517 |
|
Technology and content |
|
|
22,100 |
|
|
|
4,190 |
|
|
|
1,524 |
(t) |
|
|
27,814 |
|
General and administrative |
|
|
40,923 |
|
|
|
1,720 |
|
|
|
627 |
(u) |
|
|
43,270 |
|
(2) |
The consolidated statement of operations of Orbitz for the year ended December 31, 2014 has been derived from the historical financial statements as of and for the year ended December 31, 2014 with certain
reclassification adjustments made by Expedia as described in Note 1, Basis of Pro Forma Presentation. |
See accompanying notes to
unaudited pro forma condensed combined financial information.
4
Expedia, Inc.
Notes to Unaudited Pro Forma Condensed Combined Financial Information
Note 1. |
Basis of Pro Forma Presentation |
The unaudited pro forma balance sheet as of
June 30, 2015 combines Expedia, Inc.s (Expedia) historical condensed balance sheet derived from the unaudited condensed consolidated financial statements from its Quarterly Report on Form 10-Q as of and for the six months
ended June 30, 2015 with the historical unaudited condensed consolidated interim balance sheet of Orbitz Worldwide, Inc. (Orbitz) for the same period and has been prepared as if Expedias acquisition of Orbitz had occurred on
June 30, 2015. The unaudited pro forma statements of operations for the six months ended June 30, 2015 and for the year ended December 31, 2014 were derived from the unaudited condensed consolidated financial statements from
Expedias Quarterly Report on Form 10-Q for the six months ended June 30, 2015 and the audited consolidated financial statements from Expedias Annual Report on Form 10-K for the year ended December 31, 2014,
respectively, with the historical consolidated statements of operations for Orbitz for the same periods and has been prepared as if Expedias acquisition had occurred on January 1, 2014.
Orbitz audited historical consolidated financial statements for the year ended December 31, 2014 and unaudited condensed
consolidated financial statements for the six months ended June 30, 2015 are included in this Current Report on Form 8-K/A. These statements should be read in conjunction with such historical financial statements. The historical financial
information is adjusted in the unaudited pro forma financial statements to give effect to pro forma adjustments that are (1) directly attributable to the acquisition, (2) factually supportable, and (3) with respect to the pro forma
statements of operations, expected to have a continuing impact on the combined results.
Expedia has accounted for the acquisition of
Orbitz under the acquisition method of accounting in accordance with the authoritative guidance on business combinations. The accounting for the acquisition of Orbitz was based on a preliminary valuation of the assets acquired and liabilities
assumed and is subject to revision as more detailed analyses are completed and additional information about the fair value of assets acquired and liabilities assumed become available. The final allocation may include changes to the amount of
intangible assets, goodwill, deferred taxes, accounts receivable, loyalty liabilities and other current liabilities as well as other items. Accordingly, the pro forma adjustments are preliminary and have been made solely for the purpose of providing
unaudited pro forma condensed combined financial information. Differences between these preliminary estimates and the final acquisition accounting may occur and these differences could be material. Additionally, the differences, if any, could have a
material impact on the accompanying unaudited pro forma condensed combined financial statements and Expedias future results of operation and financial position.
The unaudited pro forma financial statements are presented solely for informational purposes and are not necessarily indicative of
the combined results of operations or financial position that might have been achieved for the periods or dates indicated, nor is it necessarily indicative of the future results of the combined company.
The unaudited pro forma financial statements do not reflect any cost savings from future operating synergies or integration activities, or any
revenue, tax, or other synergies that could result from the acquisition.
5
Certain reclassification adjustments have been made to conform to the current presentation. The
following reclassifications have been made to Orbitz historical financial statements to conform to Expedias presentation (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical Orbitz |
|
|
Reclassification |
|
|
|
|
|
|
financial statement |
|
|
adjustments to conform to |
|
|
Revised historical |
|
|
|
line items |
|
|
Expedias presentation |
|
|
Orbitz |
|
Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2015 |
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses |
|
$ |
10,806 |
|
|
$ |
(10,806 |
) |
|
$ |
|
|
Other current assets |
|
|
34,092 |
|
|
|
(34,092 |
) |
|
|
|
|
Deferred income taxes |
|
|
|
|
|
|
9,881 |
|
|
|
9,881 |
|
Income taxes receivable |
|
|
|
|
|
|
1,079 |
|
|
|
1,079 |
|
Prepaid expenses and other current assets |
|
|
|
|
|
|
33,938 |
|
|
|
33,938 |
|
|
|
|
|
Trademarks and trade names |
|
|
89,762 |
|
|
|
(89,762 |
) |
|
|
|
|
Other intangible assets, net |
|
|
1,144 |
|
|
|
(1,144 |
) |
|
|
|
|
Intangible assets, net |
|
|
|
|
|
|
90,906 |
|
|
|
90,906 |
|
|
|
|
|
Restricted cash |
|
|
92,544 |
|
|
|
(92,544 |
) |
|
|
|
|
Other non-current assets |
|
|
12,453 |
|
|
|
(12,453 |
) |
|
|
|
|
Long-term investments and other assets |
|
|
|
|
|
|
104,997 |
|
|
|
104,997 |
|
|
|
|
|
Accounts payable |
|
|
20,237 |
|
|
|
(20,237 |
) |
|
|
|
|
Accrued merchant payable |
|
|
504,385 |
|
|
|
(504,385 |
) |
|
|
|
|
Accrued expenses |
|
|
165,608 |
|
|
|
(165,608 |
) |
|
|
|
|
Deferred income |
|
|
57,334 |
|
|
|
(57,334 |
) |
|
|
|
|
Other current liabilities |
|
|
5,970 |
|
|
|
(5,970 |
) |
|
|
|
|
Accounts payable, merchant |
|
|
|
|
|
|
189,457 |
|
|
|
189,457 |
|
Accounts payable, other |
|
|
|
|
|
|
70,118 |
|
|
|
70,118 |
|
Deferred merchant bookings |
|
|
|
|
|
|
362,188 |
|
|
|
362,188 |
|
Deferred revenue |
|
|
|
|
|
|
11,748 |
|
|
|
11,748 |
|
Income taxes payable |
|
|
|
|
|
|
772 |
|
|
|
772 |
|
Accrued expenses and other current liabilities |
|
|
|
|
|
|
119,251 |
|
|
|
119,251 |
|
|
|
|
|
Tax sharing liability |
|
|
55,415 |
|
|
|
(55,415 |
) |
|
|
|
|
Other long-term liabilities |
|
|
14,733 |
|
|
|
55,415 |
|
|
|
70,148 |
|
|
|
|
|
Statement of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2015 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
459,802 |
|
|
$ |
(12,846 |
) |
|
$ |
446,956 |
|
Cost of revenue |
|
|
136,380 |
|
|
|
2,856 |
|
|
|
139,236 |
|
Selling, general and administrative |
|
|
143,211 |
|
|
|
(143,211 |
) |
|
|
|
|
Marketing |
|
|
158,245 |
|
|
|
(158,245 |
) |
|
|
|
|
Depreciation and amortization |
|
|
28,478 |
|
|
|
(28,478 |
) |
|
|
|
|
Selling and marketing |
|
|
|
|
|
|
214,051 |
|
|
|
214,051 |
|
Technology and content |
|
|
|
|
|
|
51,884 |
|
|
|
51,884 |
|
General and administrative |
|
|
|
|
|
|
41,221 |
|
|
|
41,221 |
|
Amortization of intangible assets |
|
|
|
|
|
|
156 |
|
|
|
156 |
|
Legal reserves, occupancy tax and other |
|
|
|
|
|
|
4,292 |
|
|
|
4,292 |
|
Interest income |
|
|
|
|
|
|
223 |
|
|
|
223 |
|
Interest expense |
|
|
(15,877 |
) |
|
|
(223 |
) |
|
|
(16,100 |
) |
Other, net |
|
|
|
|
|
|
(2,628 |
) |
|
|
(2,628 |
) |
|
|
|
|
Year ended December 31, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
932,007 |
|
|
$ |
(21,587 |
) |
|
$ |
910,420 |
|
Cost of revenue |
|
|
179,774 |
|
|
|
16,618 |
|
|
|
196,392 |
|
Selling, general and administrative |
|
|
278,202 |
|
|
|
(278,202 |
) |
|
|
|
|
Marketing |
|
|
334,472 |
|
|
|
(334,472 |
) |
|
|
|
|
Depreciation and amortization |
|
|
57,549 |
|
|
|
(57,549 |
) |
|
|
|
|
Selling and marketing |
|
|
|
|
|
|
449,777 |
|
|
|
449,777 |
|
Technology and content |
|
|
|
|
|
|
97,814 |
|
|
|
97,814 |
|
General and administrative |
|
|
|
|
|
|
77,507 |
|
|
|
77,507 |
|
Amortization of intangible assets |
|
|
|
|
|
|
349 |
|
|
|
349 |
|
Legal reserves, occupancy tax and other |
|
|
|
|
|
|
531 |
|
|
|
531 |
|
Interest income |
|
|
|
|
|
|
422 |
|
|
|
422 |
|
Interest expense |
|
|
(35,212 |
) |
|
|
(422 |
) |
|
|
(35,634 |
) |
Other, net |
|
|
(2,237 |
) |
|
|
(6,040 |
) |
|
|
(8,277 |
) |
6
Note 2. Purchase Consideration and Preliminary Purchase Price Allocation
On September 17, 2015, Expedia completed its acquisition of Orbitz Worldwide, Inc., including all of its brands,
including Orbitz, ebookers, HotelClub, CheapTickets, Orbitz Partner Network and Orbitz for Business, for a total purchase consideration of $1.8 billion. The acquisition provides Expedia the opportunity to deliver a better customer experience to
Orbitz loyal customer base and to further enhance the marketing and distribution capabilities Expedia offers to its global supply partners.
The purchase consideration consisted primarily of $1.4 billion in cash, or $12 per share for all shares of Orbitz common stock outstanding as
of the purchase date, as well as the settlement of $432 million of pre-existing Orbitz debt at the closing of the acquisition. Purchase consideration also included $17 million for certain employee restricted stock unit awards of Orbitz, measured at
fair value on the acquisition date and vested based on pre-combination service, which were replaced with Expedia restricted stock awards in conjunction with the acquisition.
The following summarizes the preliminary allocation of the purchase price for Orbitz as if the acquisition had occurred on June 30, 2015,
which is the assumed acquisition date for the purposes of the pro forma balance sheet, in thousands:
|
|
|
|
|
Cash consideration for shares |
|
$ |
1,362,362 |
|
Settlement of Orbitz debt |
|
|
432,231 |
|
Replacement restricted stock units attributable to pre-acquisition service |
|
|
16,717 |
|
Other consideration |
|
|
2,214 |
|
|
|
|
|
|
Total purchase consideration |
|
$ |
1,813,524 |
|
|
|
|
|
|
Cash |
|
$ |
304,798 |
|
Accounts receivable, net(1) |
|
|
155,578 |
|
Other current assets |
|
|
35,017 |
|
Long-term assets |
|
|
122,856 |
|
Intangible assets with definite lives(2) |
|
|
483,639 |
|
Intangible assets with indefinite lives(3) |
|
|
190,900 |
|
Goodwill |
|
|
1,423,854 |
|
Current liabilities |
|
|
(715,769 |
) |
Other long-term liabilities |
|
|
(60,089 |
) |
Deferred tax liabilities, net |
|
|
(127,260 |
) |
|
|
|
|
|
Total |
|
$ |
1,813,524 |
|
|
|
|
|
|
(1) |
Gross accounts receivable was $163 million, of which $7 million is estimated to be uncollectible. |
(2) |
Acquired definite-lived intangible assets primarily consist of customer relationship assets, developed technology assets and partner relationship assets with average lives ranging from less than one to ten years.
|
(3) |
Acquired indefinite-lived intangible assets primarily consist of trade names and trademarks. |
The goodwill of $1.4 billion is primarily attributable to operating synergies and is not expected to be deductible for tax purposes.
Upon completion of the fair value assessment, it is anticipated that the final purchase price allocation will differ from the preliminary
assessment outlined above. Any changes to the preliminary estimates of the fair value of the assets acquired and liabilities assumed will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill.
7
Note 3. Pro Forma Adjustments
The pro forma adjustments included in the unaudited pro forma condensed combined financial information are as follows (in
thousands):
|
(a) |
Cash and cash equivalents |
|
|
|
|
|
|
|
June 30, 2015 |
|
To record cash consideration paid for shares |
|
$ |
(1,362,362 |
) |
To record the settlement of Orbitz debt |
|
|
(432,231 |
) |
|
|
|
|
|
Total adjustments to Cash and cash equivalents |
|
$ |
(1,794,593 |
) |
|
|
|
|
|
|
(b) |
Accounts receivable, net of allowance |
|
|
|
|
|
|
|
June 30, 2015 |
|
To record preliminary fair value adjustments to acquired receivables |
|
$ |
(5,762 |
) |
To eliminate intercompany accounts receivable between Orbitz and a majority-owned, Expedia subsidiary |
|
|
(2,214 |
) |
|
|
|
|
|
Total adjustments to Accounts receivable, net of allowance |
|
$ |
(7,976 |
) |
|
|
|
|
|
|
(c) |
Property and equipment, net |
|
|
|
|
|
|
|
June 30, 2015 |
|
To eliminate the historical net book value of Orbitz website development and internal use software costs for which the
preliminary fair value was determined in purchase accounting and is included in intangible assets |
|
$ |
(86,547 |
) |
To adjust certain property and equipment to estimated fair value |
|
|
5,688 |
|
|
|
|
|
|
Total adjustments to Property and equipment, net |
|
$ |
(80,859 |
) |
|
|
|
|
|
|
(d) |
Long-term investments and other assets |
|
|
|
|
|
|
|
June 30, 2015 |
|
To eliminate the unamortized debt issuance costs associated with Orbitz Term loan settled at the closing of the acquisition |
|
$ |
(6,784 |
) |
To record preliminary fair value adjustments to acquired assets |
|
|
(4,633 |
) |
|
|
|
|
|
Total adjustments to Long-term investments and other assets |
|
$ |
(11,417 |
) |
|
|
|
|
|
|
(e) |
Deferred income taxes, net |
|
|
|
|
|
|
|
June 30, 2015 |
|
Estimated fair value adjustment to deferred tax liabilities for intangible assets |
|
$ |
224,807 |
|
To remove historical deferred tax assets |
|
|
43,534 |
|
Estimated fair value adjustment to deferred tax liabilities for deferred revenue |
|
|
19,708 |
|
Estimated fair value adjustment to deferred tax assets related to net operating losses |
|
|
(15,813 |
) |
|
|
|
|
|
Total adjustments to Deferred income taxes, net |
|
$ |
272,236 |
|
|
|
|
|
|
|
(f) |
Intangible assets, net |
|
|
|
|
|
|
|
June 30, 2015 |
|
To eliminate the historical net book value of Orbitz intangible assets |
|
$ |
(90,906 |
) |
To record preliminary fair value of intangible assets acquired in connection with the Orbitz acquisition |
|
|
674,539 |
|
|
|
|
|
|
Total adjustments to Intangible assets, net |
|
$ |
583,633 |
|
|
|
|
|
|
8
|
|
|
|
|
|
|
June 30, 2015 |
|
To eliminate the historical goodwill of Orbitz |
|
$ |
(351,098 |
) |
To record preliminary goodwill for the purchase consideration in excess of the fair value of net assets acquired in connection with the
Orbitz acquisition |
|
|
1,423,854 |
|
|
|
|
|
|
Total adjustments to Goodwill |
|
$ |
1,072,756 |
|
|
|
|
|
|
|
(h) |
Accounts payable, other |
To eliminate intercompany accounts payable, other between
Orbitz and a majority-owned, Expedia subsidiary.
|
(i) |
Deferred merchant bookings and deferred revenue |
Preliminary fair value adjustments made
to deferred merchant bookings of $43 million and deferred revenue of $7 million to reflect the acquisition date fair value of Expedias assumed performance obligations.
|
(j) |
Term loan, current and non-current |
To reflect the settlement of Orbitz pre-existing
term loan debt at closing of the acquisition.
|
(k) |
Accrued expenses and other current liabilities |
|
|
|
|
|
|
|
June 30, 2015 |
|
To accrue for an estimate of Orbitz employee severance and benefits triggered by and directly related to the acquisition |
|
$ |
17,500 |
|
To accrue for estimated transaction costs not yet recognized in the historical financial statements for Orbitz or Expedia |
|
|
20,027 |
|
To record preliminary fair value adjustments to assumed liabilities |
|
|
14,895 |
|
To eliminate interest payable associated with Orbitz Term loan |
|
|
(42 |
) |
|
|
|
|
|
Total adjustments to Accrued expenses and other current liabilities |
|
$ |
52,380 |
|
|
|
|
|
|
|
(l) |
Other long-term liabilities |
|
|
|
|
|
|
|
June 30, 2015 |
|
To eliminate the historical long-term deferred rent of Orbitz |
|
$ |
(11,334 |
) |
To record preliminary fair value adjustments to assumed liabilities |
|
|
2,883 |
|
To eliminate the interest rate swaps associated with Orbitz Term loan |
|
|
(1,608 |
) |
|
|
|
|
|
Total adjustments to Other long-term liabilities |
|
$ |
(10,059 |
) |
|
|
|
|
|
|
(m) |
Common stock and Treasury stock |
To eliminate $1 million of historical common stock and
$52,000 of treasury stock of Orbitz.
|
(n) |
Additional paid-in capital |
|
|
|
|
|
|
|
June 30, 2015 |
|
To eliminate the historical additional paid-in capital of Orbitz |
|
$ |
(1,061,616 |
) |
To record adjustments to additional paid-in capital related to stock compensation |
|
|
29,230 |
|
To record the replacement restricted stock awards attributable to pre-acquisition service |
|
|
16,717 |
|
|
|
|
|
|
Total adjustments to Additional paid-in capital |
|
$ |
(1,015,669 |
) |
|
|
|
|
|
9
|
(o) |
Retained earnings (deficit) |
|
|
|
|
|
|
|
June 30, 2015 |
|
To eliminate the historical accumulated deficit of Orbitz |
|
$ |
1,025,449 |
|
To accrue for an estimate of employee severance and benefits under pre-existing contracts and plans for certain Orbitz
employees |
|
|
(17,500 |
) |
To record adjustments to additional paid in capital related to stock compensation |
|
|
(29,230 |
) |
To accrue for estimated transaction costs not yet recognized in the historical financial statements for Orbitz or Expedia |
|
|
(20,027 |
) |
|
|
|
|
|
Total adjustments to Retained earnings (deficit) |
|
$ |
958,692 |
|
|
|
|
|
|
|
(p) |
Accumulated other comprehensive income (loss) |
To eliminate $13 million of historical
accumulated other comprehensive income of Orbitz.
To eliminate intercompany revenue between Orbitz and a majority-owned, Expedia
subsidiary.
|
|
|
|
|
|
|
|
|
|
|
Six months |
|
|
Year ended |
|
|
|
ended |
|
|
December 31, |
|
|
|
June 30, 2015 |
|
|
2014 |
|
To record the net impact of eliminating the historical depreciation expense related to certain software included within the operating
results of Orbitz as well as adjusting for depreciation of a step up adjustment of certain other fixed assets as part of the purchase accounting |
|
$ |
(2,995 |
) |
|
$ |
(5,449 |
) |
To record the net increase to stock-based compensation for the difference in the historical stock-based expense recorded by Orbitz as
compared to the stock-based compensation expense for the replacement awards issued by Expedia |
|
|
110 |
|
|
|
583 |
|
|
|
|
|
|
|
|
|
|
Total adjustments to Cost of revenue |
|
$ |
(2,885 |
) |
|
$ |
(4,866 |
) |
|
|
|
|
|
|
|
|
|
|
(s) |
Selling and marketing |
|
|
|
|
|
|
|
|
|
|
|
Six months |
|
|
Year ended |
|
|
|
ended |
|
|
December 31, |
|
|
|
June 30, 2015 |
|
|
2014 |
|
To record the net impact of eliminating the historical depreciation expense related to certain software included within the operating
results of Orbitz as well as adjusting for depreciation of a step up adjustment of certain other fixed assets as part of the purchase accounting |
|
$ |
(8,755 |
) |
|
$ |
(16,349 |
) |
To record the net increase to stock-based compensation for the difference in the historical stock-based expense recorded by Orbitz as
compared to the stock-based compensation expense for the replacement awards issued by Expedia |
|
|
323 |
|
|
|
1,748 |
|
To eliminate sales and marketing expense between Orbitz and a majority-owned, Expedia subsidiary that is now considered
intercompany |
|
|
(9,461 |
) |
|
|
(9,979 |
) |
|
|
|
|
|
|
|
|
|
Total adjustments to Selling and marketing |
|
$ |
(17,893 |
) |
|
$ |
(24,580 |
) |
|
|
|
|
|
|
|
|
|
10
|
(t) |
Technology and content |
|
|
|
|
|
|
|
|
|
|
|
Six months |
|
|
Year ended |
|
|
|
ended |
|
|
December 31, |
|
|
|
June 30, 2015 |
|
|
2014 |
|
To record the net impact of eliminating the historical depreciation expense related to certain software included within the operating
results of Orbitz as well as adjusting for depreciation of a step up adjustment of certain other fixed assets as part of the purchase accounting |
|
$ |
(8,524 |
) |
|
$ |
(14,253 |
) |
To record the net increase to stock-based compensation for the difference in the historical stock-based expense recorded by Orbitz as
compared to the stock-based compensation expense for the replacement awards issued by Expedia |
|
|
314 |
|
|
|
1,524 |
|
|
|
|
|
|
|
|
|
|
Total adjustments to Technology and content |
|
$ |
(8,210 |
) |
|
$ |
(12,729 |
) |
|
|
|
|
|
|
|
|
|
|
(u) |
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
Six months |
|
|
Year ended |
|
|
|
ended |
|
|
December 31, |
|
|
|
June 30, 2015 |
|
|
2014 |
|
To record the net impact of eliminating the historical depreciation expense related to certain software included within the operating
results of Orbitz as well as adjusting for depreciation of a step up adjustment of certain other fixed assets as part of the purchase accounting |
|
$ |
(2,765 |
) |
|
$ |
(5,869 |
) |
To record the net increase to stock-based compensation for the difference in the historical stock-based expense recorded by Orbitz as
compared to the stock-based compensation expense for the replacement awards issued by Expedia |
|
|
102 |
|
|
|
627 |
|
To eliminate transaction costs in connection with the acquisition of Orbitz |
|
|
(17,519 |
) |
|
|
(150 |
) |
|
|
|
|
|
|
|
|
|
Total adjustments to General and administrative |
|
$ |
(20,182 |
) |
|
$ |
(5,392 |
) |
|
|
|
|
|
|
|
|
|
|
(v) |
Amortization of intangible assets |
To eliminate $0.2 million and $0.3 million of
historical amortization expense of Orbitz for the six months ended June 30, 2015 and year ended December 31, 2014 and record a preliminary estimate of $40 million and $129 million of amortization expense for the six months ended
June 30, 2015 and year ended December 31, 2014 related to the acquired identifiable intangible assets calculated as if the acquisition had occurred on January 1, 2014.
|
(w) |
Legal reserves, occupancy tax and other |
To expense certain occupancy tax litigation
amounts when paid by Orbitz to conform to Expedias accounting policy.
To eliminate $12 million and $24 million of historical interest
expense of Orbitz for the six months ended June 30, 2015 and year ended December 31, 2014 related to the debt repaid at closing of the acquisition and record $5 million and $12 million of interest expense for the six months ended
June 30, 2015 and year ended December 31, 2014 related to Expedias Euro 650 million of registered senior unsecured notes that were issued in June 2015 and bear interest at 2.5%. The proceeds of Expedias June 2015 debt
issuance were used to fund a portion of the cash consideration payable in connection with our acquisition of Orbitz.
|
(y) |
Provision for income taxes |
To record the tax effect of the pro forma adjustments to
increase income before income taxes using an estimated statutory tax rate of 35.0%.
|
(z) |
Net (income) loss attributable to noncontrolling interests |
To record the
non-controlling interest impact of the elimination of intercompany revenue between Orbitz and a majority-owned, Expedia subsidiary.
11
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