Sabre Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; filed November 6, 2020. Sabre provides travel distribution and technology services through Travel Solutions and Hospitality Solutions. COVID-19 sharply reduced travel volumes and transaction-based revenue. Beginning in Q3, the company combined its former Travel Network and Airline Solutions segments into Travel Solutions and changed certain expense classifications; comparative figures were reclassified.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $278.4m | $984.2m | $1,020.4m | $3,033.6m |
| Operating income (loss) | ($233.0m) | $113.5m | ($768.5m) | $305.8m |
| Net income (loss) attributable to common stockholders | ($312.4m) | $63.8m | ($969.3m) | $148.5m |
| Adjusted EBITDA | ($104.4m) | $241.6m | ($290.3m) | $739.5m |
| Operating cash flow | Not separately presented | Not separately presented | ($587.1m) | $424.4m |
| Free cash flow | Not separately presented | Not separately presented | ($635.3m) | $332.2m |
Q3 operating margin was approximately negative 84%, versus positive 12% a year earlier; Q3 Adjusted EBITDA margin was approximately negative 38%, versus positive 25%. These are calculated from reported figures. Q3 diluted loss per common share was $1.07; nine-month diluted loss per share was $3.45.
Revenue drivers: Q3 Travel Solutions revenue fell 74% to $237.0m; Hospitality Solutions fell 40% to $44.9m. Air direct billable bookings declined 86%, total distribution bookings 86%, passengers boarded 70%, and hotel central reservation transactions 37%. For the nine months, total revenue declined 66%. Lower incentive consideration and cost-reduction actions partly offset the revenue decline.
Liquidity and debt: Cash and cash equivalents were $1.668bn at September 30, versus $436.2m at year-end 2019. Total debt carrying value was $4.673bn, versus $3.343bn; face value was $4.809bn. The $400m revolver had $375m drawn, leaving approximately $14m available after letters of credit. Current assets were $2.088bn and current liabilities $688.7m. Stockholders’ equity was $641.4m, down from $947.7m.
Financing included $1.970bn of notes, $375m drawn on the revolver, and $598m net proceeds from common and preferred stock offerings. The August equity issuance added 41.1m common shares and 3.34m preferred shares. Common dividends and share repurchases were suspended; preferred stock carries a 6.5% cumulative dividend and is mandatorily convertible in 2023. Interest expense rose 70% in Q3 to $67.7m. The company extended Term Loan A and revolver maturities, subject to springing maturity conditions, and issued secured notes bearing 9.25% and 7.375% due 2025, plus 4.00% exchangeable notes due 2025.
Material changes and unusual items
- COVID-19 drove extraordinary volume and revenue declines and operating cash outflow. Nine-month operating cash flow included a $182m decrease in receivables, but working-capital movements overall reduced cash by $67m; lower bookings also reduced incentive-related costs.
- Sabre recorded $74m of restructuring charges for the first nine months, primarily severance; the realignment was substantially complete and further related charges were not expected to be significant.
- The proposed Farelogix acquisition was terminated after the U.K. competition authority blocked it. Related charges included a $46m termination-related charge and $22m of acquisition-related costs for the nine months.
- Other expense included a $14m pension settlement charge. The company recorded a $10m debt-extinguishment loss from refinancing.
- Expected credit-loss provision was $58m for the nine months, including reserves for aged customer balances and bankruptcies. The cancellation reserve declined from $60m at June 30 to $33m at September 30; about $18m of Q3 revenue reflected lower-than-estimated cancellations.
- No material goodwill or other long-lived-asset impairment was identified in the Q3 review. The company recorded a $139m valuation allowance on deferred tax assets; future realization depends on taxable income.
Outlook, risks, and contingencies
Management expects COVID-19 to continue materially harming results and liquidity, but said the duration and financial impact could not be reasonably estimated. Sabre expected a full-year 2020 net loss on both GAAP and adjusted bases; no numerical revenue or earnings guidance was provided. Management believed available resources would fund liquidity needs for at least the next 12 months, while noting assumptions could prove inaccurate. During the leverage-covenant suspension, the amended credit agreement requires at least $450m of monthly liquidity; the leverage covenant was suspended for at least Q3 and Q4 2020. Sabre reported compliance with covenants that remained in effect.
Key risks include a prolonged or structurally lasting travel downturn, airline or hotel customer insolvencies and collection losses, further cancellations and refunds, substantial leverage and interest costs, limited remaining revolver availability, covenant and maturity conditions, and potential future impairment charges. Other material uncertainties include antitrust matters (including US Airways litigation and DOJ and European Commission investigations), Indian tax litigation, and potential liabilities associated with prior hospitality-system security incidents. Possible losses for several matters were not estimable; the filing states that a full adverse outcome in the Indian income-tax cases could involve approximately $44m of taxes, interest, and penalties. Sabre also disclosed approximately $23m of Greek VAT receivables subject to challenge. Controls and procedures were reported effective.
Investor verification priorities
- Track travel transaction volumes, revenue recovery, cancellation-reserve estimates, and customer payment/insolvency developments.
- Reconcile cash burn and financing sources against cash, remaining revolver availability, the $450m minimum-liquidity covenant, and upcoming debt maturities and interest obligations.
- Assess the dilution and cash cost of the common and mandatory convertible preferred offerings, including preferred dividends and future conversion shares.
- Review the basis and sustainability of management’s 12-month liquidity assessment and its full-year loss expectation, given the absence of quantified guidance.
- Monitor credit-loss allowances, deferred-tax-asset realizability, possible impairments, and litigation, tax, and cybersecurity contingencies.