Sabre Corporation — Q3 2014 Form 10-Q
Business and period: Sabre provides technology and booking services to the travel industry through Travel Network, Airline and Hospitality Solutions, and Travelocity. This unaudited report covers the three and nine months ended September 30, 2014, compared with the same 2013 periods.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $756.3m | $775.8m | $2,229.3m | $2,303.4m |
| Operating income | $116.7m | $75.0m | $251.6m | $105.6m |
| Income (loss) from continuing operations | $39.0m | $3.1m | $33.0m | $(104.2)m |
| Net income (loss) attributable to common shareholders | $36.6m | $(3.9)m | $11.4m | $(154.5)m |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $121.7m | $252.1m |
| Capital spending on property and equipment | Not provided by quarter | Not provided by quarter | $160.4m | $168.7m |
Q3 operating margin was approximately 15.4%, versus 9.7% a year earlier; nine-month operating margin was approximately 11.3%, versus 4.6%. Q3 basic EPS was $0.14 and diluted EPS $0.13; nine-month EPS was $0.05. Nine-month effective tax rate was 46%, compared with 5% in 2013.
- Segment trends: Q3 Travel Network revenue rose 4% to $466.3m and Airline and Hospitality Solutions rose 14% to $208.7m. Travelocity revenue fell 45% to $88.9m. For nine months, those segments changed by +3%, +9%, and -41%, respectively.
- Non-GAAP measures: Adjusted EBITDA was $229.9m in Q3 versus $201.3m, and $617.4m for nine months versus $584.0m. Nine-month free cash flow, defined as operating cash flow less property and equipment additions, was negative $38.7m; adjusted free cash flow was $204.1m and includes substantial specified add-backs, including Travelocity working-capital effects.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $157.7m at September 30, down from $308.2m at year-end 2013. Total debt was $3.088bn on the balance sheet ($3.102bn face value), versus $3.730bn at year-end.
- The company had no revolver borrowings and reported $345.1m available under its $405m revolver after letters of credit. It reported compliance with debt covenants. Scheduled principal payments for the next 12 months were approximately $22m.
- April’s IPO generated $672m net proceeds. Sabre used proceeds to repay $296m of term loans and $320m of 2019 notes, and paid the notes’ redemption premium and accrued interest. It also exchanged all preferred stock for 40.3m common shares. Interest expense fell 21% in Q3 and 20% year to date, principally from debt repayments and refinancing repricing; nine-month debt-extinguishment loss was $33.5m.
- The $400m senior unsecured notes mature in March 2016. The company said operating cash flow, cash on hand and revolver availability should cover operating and capital needs, dividends and other obligations for the next 12 months. It paid a $0.09-per-share Q3 dividend and declared another $0.09 dividend for December 2014.
Changes, outlook and key risks
- Revenue declined 3% in both Q3 and the first nine months, despite booking growth in the core businesses. The principal offset was Travelocity’s transition to Expedia-powered U.S. and Canadian sites, which reduced reported revenue while lowering operating costs. Travel Network bookings rose 3% in Q3; Airline Solutions passengers boarded rose 8%.
- Management expected the Expedia migration to be substantially complete by year-end 2014. It projected Travelocity revenue at 55%–65% of 2013 levels and costs at 45%–55% after full implementation, with anticipated margin improvement; success was not assured. Approximately $3m of additional Travelocity restructuring costs were estimated for Q4 2014. Sabre was reviewing strategic options for lastminute.com; no transaction was assured.
- Cash from operations declined year over year, with working-capital outflows including payment of Travelocity supplier liabilities following the business-model transition and a $50m payment to American Airlines under a new technology contract. The company also paid $30m in PRISM contingent consideration and $32m for the Genares hotel-solutions acquisition during Q3.
- Key contingencies include airline-distribution antitrust litigation with US Airways, for which damages claimed were $317m or $482m before potential trebling; a DOJ investigation; hotel occupancy and excise-tax disputes, with a $20m reserve; and Indian tax litigation with potential exposure of approximately $26m if the tax authority prevailed. Management stated outcomes are uncertain and some potential losses are not accrued.
- Other exposures include $24m of VAT receivables subject to audits or disputes, Venezuelan collection and currency restrictions (with $9m receivable outstanding at quarter-end), and the tax receivable agreement. Sabre recorded a $321m initial TRA liability and estimated future payments could total $330m–$380m over six years, assuming sufficient taxable income; material payments were not expected before 2016.
Investor verification priorities
- Reconcile reported GAAP cash flow with adjusted free cash flow and assess the sustainability of working-capital normalization after the Travelocity transition.
- Evaluate Travelocity’s Expedia-driven revenue, cost and margin trajectory, including the strategic review of lastminute.com and any future transaction.
- Review debt maturities, refinancing needs for the $400m 2016 notes, floating-rate exposure after the September 2014 swap maturities, and covenant headroom.
- Track material litigation and tax disputes, especially US Airways antitrust claims, hotel taxes, VAT recoverability and Indian tax exposure.
- Assess whether cash generation can support dividends, investment needs and possible TRA payments while servicing substantial debt.