Sabre Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless otherwise noted. Sabre operates Travel Network, Airline Solutions and Hospitality Solutions. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $988.4 million | $915.4 million | Up 8% |
| Operating income | $165.4 million | $163.3 million | Up 1% |
| Operating margin | 16.7% | 17.8% | Down 1.1 percentage points |
| Continuing-operations income | $90.4 million | $77.7 million | Up 16% |
| Net income attributable to common stockholders | $87.9 million | $75.9 million | Up 16% |
| Diluted EPS | $0.32 | $0.27 | Up $0.05 |
| Adjusted EBITDA (non-GAAP) | $301.3 million | $297.6 million | Up 1% |
| Cash from operating activities | $195.2 million | $123.0 million | Up $72.2 million |
| Free cash flow (non-GAAP) | $130.5 million | $34.7 million | Up $95.8 million |
Revenue grew across all segments: Travel Network $721.1 million, up 9%; Airline Solutions $206.6 million, up 7%; and Hospitality Solutions $68.1 million, up 6%. Travel Network bookings rose 5.7%, while Airline Solutions passengers boarded fell 11.1%, principally following the 2017 termination of Southwest’s legacy-reservations agreement.
Cost of revenue rose 14%, faster than revenue, including a $55 million increase in Travel Network incentive consideration. Selling, general and administrative expense declined 10%, largely due to lower acquired-intangible amortization and workforce costs. Operating margin consequently contracted despite higher revenue. Adjusted EBITDA increased modestly; this non-GAAP measure excludes specified expenses and should not be treated as a substitute for GAAP results or cash flow.
Cash and cash equivalents were $361.1 million at quarter-end. Debt was approximately $3.44 billion, including $57.2 million current; the $400 million revolving facility had no borrowings and approximately $382.6 million available after letters of credit. Current assets were $1.09 billion and current liabilities $1.01 billion. Capital expenditures were $64.7 million, and Sabre paid $38.6 million in dividends. Operating cash flow benefited from lower working-capital outflows than in the prior-year quarter; receivables increased $89 million, attributed primarily to seasonality.
Material changes and outlook
- Sabre adopted ASC 606 using the modified retrospective method. Adoption reduced opening retained earnings by approximately $102 million before tax ($78 million net of tax). The standard increased reported Q1 2018 revenue by $3.2 million versus the former standard; prior-year results were not restated.
- Management expected ASC 606 to reduce Airline Solutions revenue by approximately $30–$40 million in 2018, before the impact of new sales. The filing does not provide broader numerical earnings or revenue guidance.
- On March 2, 2018, Sabre refinanced Term Loan B, lowering its Eurocurrency margin to 2.00% without adding debt. The quarter-end reported debt balance was slightly below year-end. In April, after quarter-end, the company entered into $1.35 billion of interest-rate swaps to fix rates on part of its floating-rate debt.
- The company said cash on hand, operating cash flow and revolver availability should provide adequate liquidity for operating and capital needs over the next 12 months. It expected most remaining Tax Receivable Agreement payments—estimated at $170 million excluding interest in the liquidity discussion—to be made over the next two years; the filing’s tax note gives a different $328 million estimate under assumptions of full realization of tax benefits, so the estimates’ differing bases merit review.
- The board’s $500 million share-repurchase authorization had approximately $391 million remaining, but Sabre repurchased no shares in Q1. Existing stockholders, not Sabre, sold 15 million shares in a secondary offering; Sabre received no proceeds. The quarterly dividend was $0.14 per share, subject to board approval in future periods.
Risks, contingencies and unusual items
- Antitrust matters: Sabre appealed a $15 million trebled judgment in the US Airways case. It had accrued $32 million, estimating a possible range of $32–$65 million, including legal fees and costs. US Airways’ approximately $125 million fee request was denied without prejudice pending appeal. A separate consumer antitrust case and a long-running DOJ investigation remained unresolved; the company said the DOJ had not notified it that the investigation was closed.
- Cybersecurity: Unauthorized access to payment-card and some reservation information in a subset of SynXis hotel reservations was identified. Sabre said the access was stopped and there was no indication other platforms were affected; costs, penalties and customer indemnification exposure could be material but were not estimable. A separate hotel-credential incident was also under investigation.
- Other contingencies: Indian tax litigation could involve approximately $46 million in taxes, interest and penalties if authorities prevailed fully; Sabre had not accrued a liability. Air Berlin alleged contractual breaches and damages after terminating its contract; Sabre said losses were neither probable nor estimable and had not been accrued.
- Tax and debt exposure: Accounting for the 2017 U.S. tax-law changes remained provisional, with completion expected by Q4 2018. Debt is predominantly floating-rate, and credit agreements include leverage and other covenants. Sabre also cited travel-volume dependence, supplier pricing and distribution competition, technology and service-provider reliance, implementation risks, and privacy and regulatory requirements including GDPR.
Most important facts for investors to verify
- Whether booking growth and revenue gains can offset higher incentive costs and the resulting pressure on operating margin.
- The realized 2018 impact of ASC 606 on Airline Solutions revenue, and how new sales compare with the disclosed $30–$40 million expected reduction.
- Cash conversion and working-capital trends, particularly receivables, incentive payments, capital investment and upcoming TRA payments.
- Debt-service sensitivity to interest rates, covenant headroom and the effect of the new hedges.
- Developments and potential costs in the US Airways appeal, DOJ investigation, hotel-data incidents, Indian tax disputes and Air Berlin claims.
- Reconciliation of the differing TRA payment estimates and assumptions disclosed in the filing.