Segment Information

Our reportable segments are based upon our internal organizational structure; the manner in which our operations are managed; the criteria used by our Chief Executive Officer, who is our Chief Operating Decision Maker ("CODM"), to evaluate segment performance; the availability of separate financial information; and overall materiality considerations.

Our business has two reportable segments: (i) Travel Network and (ii) Airline and Hospitality Solutions, which aggregates the Airline Solutions and Hospitality Solutions operating segments as these operating segments have similar economic characteristics, generate revenues on transaction-based fees, incur the same types of expenses and use our software-as-a-service (“SaaS”) based and hosted applications and platforms to market to the travel industry.

In January 2016 and April 2016, we completed the acquisitions of the Trust Group and Airpas Aviation, respectively, which are integrated and managed as part of our Airline and Hospitality Solutions segment.

Our CODM utilizes Adjusted Gross Profit and Adjusted EBITDA as the measures of profitability to evaluate performance of our segments and allocate resources. Corporate includes a technology organization that provides development and support activities to our segments. The majority of costs associated with our technology organization are allocated to the segments primarily based on the segments' usage of resources. Benefit expenses, facility costs and depreciation expense on the corporate headquarters building are allocated to the segments based on headcount. Unallocated corporate costs include certain shared expenses such as accounting, human resources, legal, corporate systems, and other shared technology costs, as well as all amortization of intangible assets and any related impairments that originate from purchase accounting, stock-based compensation, restructuring charges, legal reserves, and other items not identifiable with one of our segments.

We account for significant intersegment transactions as if the transactions were with third parties, that is, at estimated current market prices. The majority of the intersegment revenues and cost of revenues are fees charged by Travel Network to Airline and Hospitality Solutions for airline trips booked through our GDS.

Our CODM does not review total assets by segment as operating evaluations and resource allocation decisions are not made on the basis of total assets by segment. Our CODM uses Adjusted Capital Expenditures in making product investment decisions and determining development resource requirements.

The performance of our segments is evaluated primarily on Adjusted Gross Profit and Adjusted EBITDA which are not recognized terms under GAAP. Our uses of Adjusted Gross Profit and Adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP.

We define Adjusted Gross Profit as operating income (loss) adjusted for selling, general and administrative expenses, amortization of upfront incentive consideration, and the cost of revenue portion of depreciation and amortization and stock-based compensation.

We define Adjusted EBITDA as income (loss) from continuing operations adjusted for depreciation and amortization of property and equipment, amortization of capitalized implementation costs, acquisition-related amortization, amortization of upfront incentive consideration, interest expense, net, loss on extinguishment of debt, other, net, restructuring and other costs, acquisition-related costs, litigation costs (reimbursements), net, stock-based compensation, and income taxes.

We define Adjusted Capital Expenditures as additions to property and equipment and capitalized implementation costs during the periods presented.

Segment information for the three and nine months ended September 30, 2016 and 2015 is as follows (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Revenue
Travel Network	$	582,364		$	569,190		$	1,805,750		$	1,571,635
Airline and Hospitality Solutions	262,391			218,978			752,940			640,510
Eliminations	(5,773		)	(3,166		)	(14,923		)	(9,704		)
Total revenue	$	838,982		$	785,002		$	2,543,767		$	2,202,441

Adjusted Gross Profit ^(a)
Travel Network	$	255,657		$	263,732		$	842,557		$	733,778
Airline and Hospitality Solutions	114,136			99,373			323,481			284,354
Corporate	(24,812		)	(16,297		)	(59,596		)	(37,778		)
Total	$	344,981		$	346,808		$	1,106,442		$	980,354

Adjusted EBITDA ^(b)
Travel Network	$	219,865		$	231,230		$	744,626		$	669,274
Airline and Hospitality Solutions	95,072			85,275			269,955			237,748
Total segments	314,937			316,505			1,014,581			907,022
Corporate	(77,080		)	(74,839		)	(217,760		)	(194,197		)
Total	$	237,857		$	241,666		$	796,821		$	712,825

Depreciation and amortization
Travel Network	$	19,519		$	15,947		$	57,725		$	45,571
Airline and Hospitality Solutions	41,732			32,363			114,080			107,270
Total segments	61,251			48,310			171,805			152,841
Corporate	47,979			39,927			132,151			102,013
Total	$	109,230		$	88,237		$	303,956		$	254,854

Adjusted Capital Expenditures ^(c)
Travel Network	$	25,763		$	18,957		$	72,918		$	46,515
Airline and Hospitality Solutions	68,990			61,370			200,455			168,349
Total segments	94,753			80,327			273,373			214,864
Corporate	16,195			14,862			45,436			37,849
Total	$	110,948		$	95,189		$	318,809		$	252,713

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(a)	The following table sets forth the reconciliation of Adjusted Gross Profit to operating income in our statement of operations (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Adjusted Gross Profit	$	344,981	$	346,808	$	1,106,442	$	980,354
Less adjustments:
Selling, general and administrative	155,182		166,324		435,924		412,042
Cost of revenue adjustments:
Depreciation and amortization ⁽¹⁾	77,397		59,334		209,276		177,080
Amortization of upfront incentive consideration ⁽²⁾	17,139		9,525		43,372		31,575
Stock-based compensation	5,113		2,853		14,259		9,288
Operating income	$	90,150	$	108,772	$	403,611	$	350,369


(b)	The following table sets forth the reconciliation of Adjusted EBITDA to income from continuing operations in our statement of operations (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Adjusted EBITDA	$	237,857		$	241,666		$	796,821		$	712,825
Less adjustments:
Depreciation and amortization of property and equipment ^(1a)	58,271			49,247			168,150			157,154
Amortization of capitalized implementation costs ^(1b)	11,529			7,606			28,228			23,032
Acquisition-related amortization ^(1c)	39,430			31,384			107,578			76,270
Amortization of upfront incentive consideration ⁽²⁾	17,139			9,525			43,372			31,575
Interest expense, net	38,002			40,581			116,414			129,643
Loss on extinguishment of debt	3,683			—			3,683			33,235
Other, net ⁽³⁾	(281		)	(92,568		)	(4,517		)	(88,320		)
Restructuring and other costs ⁽⁴⁾	583			8,888			1,823			8,888
Acquisition-related costs ⁽⁵⁾	90			9,350			714			13,214
Litigation costs, net ⁽⁶⁾	7,034			9,318			5,089			14,797
Stock-based compensation	12,913			7,204			36,012			23,328
Provision for income taxes	7,208			38,007			79,905			84,966
Income from continuing operations	$	42,256		$	123,124		$	210,370		$	205,043

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(1)	Depreciation and amortization expenses:


a.	Depreciation and amortization of property and equipment includes software developed for internal use.


b.	Amortization of capitalized implementation costs represents amortization of upfront costs to implement new customer contracts under our SaaS and hosted revenue model.


c.	Acquisition-related amortization represents amortization of intangible assets from the take-private transaction in 2007 as well as intangibles associated with acquisitions since that date and amortization of the excess basis in our underlying equity in joint ventures.

(2)

Our Travel Network business at times makes upfront cash payments or other consideration to travel agency subscribers at the inception or modification of a service contract, which are capitalized and amortized over an average expected life of the service contract, generally over three years to five years. Such consideration is made with the objective of increasing the number of clients or to ensure or improve customer loyalty. Such service contract terms are established such that the supplier and other fees generated over the life of the contract will exceed the cost of the incentive consideration provided up front. Such service contracts with travel agency subscribers require that the customer commit to achieving certain economic objectives and generally have terms requiring repayment of the upfront incentive consideration if those objectives are not met.

(3)

In the first quarter of 2016, we recognized a gain of $6 million associated with the receipt of an earn-out payment from the sale of a business in 2013. Additionally, in the third quarter of 2015, we recognized a gain of $86 million associated with the remeasurement of our previously-held 35% investment in SAPPL to its fair value and a gain of $12 million related to the settlement of pre-existing agreements between us and SAPPL. In addition, other, net includes foreign exchange gains and losses related to the remeasurement of foreign currency denominated balances included in our consolidated balance sheets into the relevant functional currency.


(4)	Restructuring and other costs represent charges associated with business restructuring and associated changes implemented which resulted in severance benefits related to employee terminations, integration and facility opening or closing costs and other business reorganization costs.


(5)	Acquisition-related costs represent fees and expenses incurred associated with the acquisition of Abacus, the Trust Group and Airpas Aviation (see Note 2, Acquisitions).


(6)	Litigation costs, net represent charges and legal fee reimbursements associated with antitrust litigation (see Note 10, Contingencies).


(c)	Includes capital expenditures and capitalized implementation costs as summarized below (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Additions to property and equipment	$	89,639	$	75,108	$	254,232	$	203,071
Capitalized implementation costs	21,309		20,081		64,577		49,642
Adjusted Capital Expenditures	$	110,948	$	95,189	$	318,809	$	252,713