Sabre Corporation — Q1 2017 Form 10-Q
Business context and reporting period. Sabre provides technology and distribution services to the travel industry through Travel Network and Airline and Hospitality Solutions. This unaudited filing covers the three months ended March 31, 2017, compared with the same period in 2016.
Key financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $915.4 million | $859.5 million |
| Operating income | $163.3 million | $171.4 million |
| Income from continuing operations | $77.7 million | $92.9 million |
| Net income attributable to common stockholders | $75.9 million | $105.2 million |
| Diluted GAAP EPS | $0.27 | $0.37 |
| Adjusted EBITDA | $297.6 million | $287.5 million |
| Cash from operations | $123.0 million | $140.2 million |
| Free cash flow | $34.7 million | $64.7 million |
Revenue increased 6%. Operating margin declined to approximately 17.8% from 19.9%; continuing-operations net margin was approximately 8.5% versus 10.8%. Adjusted EBITDA is a non-GAAP measure; Sabre cautions that it is not a substitute for GAAP results or cash flow.
Travel Network revenue rose 6% to $663.5 million, alongside 5.8% growth in Direct Billable Bookings. Airline and Hospitality Solutions revenue increased 8% to $258.0 million; Passengers Boarded grew 7.1% to 196.3 million. Hospitality Solutions growth was driven primarily by central reservation system revenue.
Capital expenditures were $88.3 million; adjusted capital expenditures, including capitalized implementation costs, were $105.4 million. Cash and equivalents were $287.6 million at quarter-end, down from $364.1 million at year-end. Available revolver capacity was $367.5 million, after letters of credit.
Total debt was approximately $3.50 billion at March 31, 2017, compared with $3.45 billion at December 31, 2016. The $400 million revolving facility had no borrowings outstanding. Sabre paid a $101 million Tax Receivable Agreement obligation during the quarter, including interest, and paid $39 million in dividends.
Material changes and unusual items
- In February, Sabre refinanced certain term loans with a $1.9 billion Term Loan B due in 2024 and used part of the proceeds to repay its headquarters mortgage. The refinancing generated $12 million of debt-modification costs and contributed to higher other expense.
- Other expense was $15.2 million, versus other income of $3.4 million a year earlier. Q1 2016 also included a $6 million earn-out gain; Q1 2017 included foreign-exchange losses and refinancing costs.
- Net income fell partly because Q1 2016 included a $17 million tax benefit related to discontinued Travelocity operations. Discontinued operations reported a $0.5 million loss in Q1 2017.
- Sabre recorded a $16 million reversal of an Abacus purchase-accounting liability as a reduction of cost of revenue.
- The effective tax rate decreased to 29% from 31%, primarily reflecting a relative increase in forecast earnings in lower-tax jurisdictions.
Outlook, risks and contingencies
Sabre gave no specific numerical full-year guidance. Management stated that cash, operating cash flow and revolver availability were expected to provide adequate liquidity for operations, capital spending and other obligations over the next 12 months. The company expected to continue quarterly dividends, subject to board approval, and may use cash, revolver borrowings or debt offerings for future Tax Receivable Agreement payments.
- Cybersecurity: Sabre was investigating unauthorized access to payment information in a subset of hotel reservations processed through its SynXis system. The access had been shut off; the filing says the extent of any data compromise and potential liabilities could not yet be determined.
- Antitrust litigation: A court entered a $15 million trebled judgment for US Airways. Sabre appealed; the amount of attorneys’ fees remained unresolved. Sabre accrued $32 million and estimated a possible range of $32 million to $65 million, inclusive of the damages award.
- Other legal and tax matters: A DOJ antitrust investigation remained open, with no recent communications reported. Indian tax litigation could expose Sabre to approximately $45 million in taxes, interest and penalties if the authorities prevailed; no liability was recorded because Sabre did not consider an adverse outcome more likely than not.
- Operating exposure: Revenue depends heavily on travel volumes and airline transactions, and is exposed to supplier pricing pressure, direct distribution, customer concentration, contract renewals and implementation risks. Venezuela currency controls delayed collections; $21 million of receivables remained outstanding and was to be recognized as revenue only when collected.
- Financial risks: Substantial debt, floating interest rates, foreign-exchange movements, debt covenants and future Tax Receivable Agreement payments may constrain liquidity. The $500 million share-repurchase program began in February; $12 million had been used by quarter-end.
- The company reported effective disclosure controls and no material quarterly change in internal control over financial reporting. Its global ERP consolidation project was ongoing.
Most important facts for investors to verify
- Whether booking and passenger growth translates into sustainable revenue and operating-margin improvement, particularly as costs and incentive consideration rise.
- Free cash flow and working-capital trends, given lower operating cash flow and the seasonal increase in receivables.
- Debt, interest-rate exposure, covenant headroom and cash required for debt service and Tax Receivable Agreement payments.
- Developments in the US Airways appeal, attorneys’ fees, DOJ investigation and other material litigation.
- Findings, remediation costs and insurance coverage relating to the SynXis security incident.
- Whether the $500 million repurchase authorization and continued dividends remain consistent with liquidity needs and debt obligations.