Sabre Corporation — Q3 2018 Form 10-Q
Business context and period: Sabre provides travel distribution and technology through Travel Network, Airline Solutions and Hospitality Solutions. This unaudited quarterly report covers the three and nine months ended September 30, 2018; comparisons are to the corresponding 2017 periods unless stated otherwise. Dollar figures below are in millions except per-share data.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $970.3 | $900.6 | $2,943.0 | $2,716.6 |
| Operating income | $136.8 | $176.8 | $441.0 | $358.8 |
| Income from continuing operations | $70.9 | $92.8 | $253.9 | $166.4 |
| Net income attributable to common stockholders | $73.0 | $91.0 | $253.1 | $160.4 |
| Diluted EPS | $0.26 | $0.33 | $0.91 | $0.57 |
| Operating margin | 14.1% | 19.6% | 15.0% | 13.2% |
- Revenue and segments: Q3 revenue rose 8%, led by Travel Network (+11%); Airline Solutions grew 1% and Hospitality Solutions 3%. Nine-month revenue also increased 8%, with Travel Network +11%, Airline Solutions +2% and Hospitality Solutions +6%.
- Profitability: Q3 operating income fell 23% and continuing-operations income fell 24%, despite higher revenue. Cost of revenue rose 11%, including higher Travel Network incentive payments; SG&A increased 42%, partly because Q3 2017 included a $43 million net insurance reimbursement related to American Airlines litigation. Nine-month operating income improved 23%, partly reflecting the absence of the $92 million 2017 impairment charge; continuing-operations income rose 53%.
- Cash flow: Nine-month cash from operating activities was $536.2 million versus $455.9 million. Capital expenditures were $205.7 million versus $242.8 million; reported free cash flow (a non-GAAP measure) was $330.5 million versus $213.1 million. Cash and cash equivalents were $444.3 million at September 30, 2018, up from $361.4 million at year-end 2017.
- Debt and liquidity: Debt carrying value was approximately $3.42 billion, down from $3.46 billion at December 31, 2017. The $400 million revolving facility had no borrowings; available capacity was $384.7 million after letters of credit. The company reported a $35.5 million reduction in borrowings during the nine-month period.
- Capital returns and obligations: Sabre paid $115.6 million in dividends during the first nine months ($0.14 per share quarterly) and repurchased $26 million of stock; about $365 million remained authorized under its repurchase program. The current and noncurrent Tax Receivable Agreement liability totaled about $171 million, with most future payments expected over the next two years.
Material changes and accounting
- Sabre adopted ASC 606 in Q1 2018 using the modified retrospective method. For the first nine months, the company reported $23.6 million more revenue and $17.8 million more operating income than it would have under ASC 605. The adoption reduced opening retained earnings by approximately $102 million before tax ($78 million net of tax). Prior-year results were not restated, so reported growth comparisons are not fully like-for-like.
- Management expects ASC 606 to significantly reduce Airline Solutions revenue in the adoption year and subsequent years on existing open contracts, before new sales. The filing does not quantify the future reduction.
- In March 2018, Sabre refinanced its Term Loan B, reducing the applicable margin; no additional debt was incurred. The nine-month effective tax rate was 19% versus 25% in 2017, including a $19 million deferred-tax benefit from remeasurement. Accounting for certain Tax Cuts and Jobs Act effects remained provisional, with finalization expected in Q4 2018.
- Airline Solutions passengers boarded were up 6% in Q3 but down 5% for the first nine months, reflecting the 2017 termination of Southwest’s legacy reservations-system agreement, partly offset by carrier growth and LATAM Brasil implementation.
Outlook, risks and contingencies
- Management stated that cash on hand, operating cash flows and revolving-facility capacity should provide adequate liquidity for operating expenses, capital expenditures, cash taxes and other obligations over the next 12 months. No numerical earnings or revenue guidance is provided in the supplied filing text.
- Key business risks include dependence on travel transaction volumes; airline and travel-agency concentration; supplier pricing pressure and direct distribution; competition and technology change; service interruptions and reliance on third-party technology providers; cybersecurity, privacy and regulatory exposure; and substantial debt, floating interest rates and debt covenants.
- Cybersecurity: The previously disclosed SynXis hotel-reservation incidents involved access to payment-card and some reservation information. Sabre said the access was stopped, found no evidence that information was removed, and believed affected reservations were a fraction of 1% of system bookings. Potential penalties, customer indemnification and remediation costs could be material, but the company said it could not estimate any liability.
- Legal and tax matters: Sabre had accrued $32 million for the US Airways antitrust judgment and estimated a possible range of $32 million to $65 million, with appeals ongoing. The DOJ investigation remained open, with no communications for several years. Potential Indian tax exposure was estimated at approximately $42 million if authorities prevailed on all claims; no liability was recorded. Greek VAT refund claims of about $20 million were also subject to audit; a preliminary report rejected $8 million of claims and asserted $5 million in tax, penalties and interest. Management did not consider the adverse outcomes probable for these matters.
- Sabre estimated that adopting the new lease standard on January 1, 2019 could increase other noncurrent assets and liabilities by approximately $65 million to $80 million; the estimate remained subject to change.
Investor verification points
- Assess underlying Q3 operating performance separately from the prior-year $43 million insurance reimbursement and the current-period $5 million tax-claim accrual.
- Reconcile ASC 606’s effect on reported growth and monitor its expected impact on Airline Solutions revenue and contract economics.
- Track Travel Network incentive costs, booking growth and booking-fee mix, alongside Airline Solutions passenger volumes and the effects of customer contract changes.
- Review debt service, interest-rate exposure, covenant headroom, TRA payment timing and the sustainability of dividends and repurchases.
- Monitor the resolution and potential financial effects of the antitrust, Indian and Greek tax matters, and the SynXis cybersecurity incidents.