Sabre Corporation: 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual report, not a standalone fourth-quarter filing; quarterly results are included below. Amounts are in U.S. dollars.
Business context
Sabre provides technology and travel distribution services through Travel Network, its global business-to-business travel marketplace, and Airline and Hospitality Solutions, which supplies software to airlines and hotels. In the fourth quarter, Sabre committed to exit its Travelocity online travel agency business and classified it as discontinued operations. Travelocity.com was sold to Expedia in January 2015 for $280 million cash; lastminute.com was sold in March 2015 without material cash proceeds.
Key financial metrics
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Revenue from continuing operations | $2,631 million | $2,524 million | Up 4% |
| Operating income | $421 million | $381 million | Up 11% |
| Operating margin | 16.0% | 15.1% | Up 0.9 percentage points |
| Income from continuing operations | $111 million | $52 million | Up $59 million |
| Net income attributable to Sabre | $69 million | Net loss of $100 million | Improved |
| Net income attributable to common shareholders | $58 million; $0.24 per diluted share | Net loss of $137 million; $0.74 per diluted share | Improved |
| Cash provided by operating activities | $388 million | $228 million | Up $159 million |
| Capital expenditures | $227 million | $210 million | Up $18 million |
| Free cash flow | $160 million | $19 million | Up $142 million |
| Adjusted EBITDA (non-GAAP) | $840 million | $779 million | Up 8% |
| Adjusted Free Cash Flow (non-GAAP) | $293 million | $182 million | Up 61% |
At December 31, 2014, cash and cash equivalents were $156 million, versus $308 million a year earlier. Face-value debt was approximately $3.10 billion; the company reported no revolver borrowings and $359 million available under the revolver, with $47 million of letters of credit outstanding. Working capital was a deficit of $19 million. Total stockholders’ equity was $84 million, compared with a deficit of $953 million in 2013, following the IPO and conversion of preferred stock.
Fourth quarter 2014: Revenue was $646 million, operating income $104 million, income from continuing operations $41 million, and net income attributable to common shareholders $46 million, or $0.17 per diluted share. The comparable 2013 quarter had revenue of $627 million, operating income of $77 million, a continuing-operations loss of $9 million, and common-shareholder net income of $17 million.
Material changes versus prior periods
- Travel Network revenue rose 2% to $1.855 billion; direct billable bookings increased 2.3% to 376 million. Average booking fees declined slightly, partly due to the American Airlines and US Airways merger, Venezuela conditions, and resolution of a US Airways billing dispute.
- Airline and Hospitality Solutions revenue increased 10% to $786 million. Airline passengers boarded rose 6.8% to 511 million; Hospitality Solutions benefited from higher central reservation system transactions and the Genares acquisition.
- Travel Network cost of revenue increased 3%, mainly because incentive consideration rose $37 million. Selling, general and administrative expense increased 9%, reflecting IPO-related management fees, public-company and strategic transaction costs, higher labor costs, and bad debt expense.
- Net loss from discontinued operations narrowed to $39 million from $150 million in 2013. The Travelocity segment reported revenue of $329 million in 2014 versus $636 million in 2013, amid its restructuring and divestiture process.
- Interest expense declined 20% to $219 million, reflecting debt prepayments and lower borrowing margins. The company also recorded a $34 million loss on debt extinguishment.
Outlook, risks and unusual items
- Management said cash from operations, cash on hand, and revolver availability should provide adequate liquidity for operations, capital spending, and other obligations over the next 12 months. It expected 2015 capital expenditures of approximately $250 million and capitalized implementation costs of approximately $75 million.
- The filing identifies a possible Travel Network acquisition requiring approximately $500 million, including advisory and financing costs; funding could combine cash, revolver borrowings, and debt. This is a potential strategic investment, not a firm commitment.
- Sabre expects to continue quarterly cash dividends, subject to board discretion and debt restrictions. It paid $0.18 per share in 2014 and declared a further $0.09 per share dividend for March 2015.
- Debt and refinancing are significant considerations: $400 million of 8.35% senior unsecured notes mature in March 2016. The company reported compliance with debt covenants at year-end; scheduled principal payments over the next 12 months were $22 million.
- After reversing an $82 million U.S. deferred-tax valuation allowance, Sabre recorded a $387 million tax receivable agreement liability, estimated on the assumption it realizes the relevant tax benefits. The fourth-quarter $66 million charge related to the increase in that liability was offset by an income-tax benefit. Estimated future TRA payments total approximately $387 million, with most expected over six years and no material payments expected before 2016.
- Risks include dependence on travel and air transaction volumes; supplier and travel-buyer contract renewals and pricing pressure; direct distribution and competition; system outages, cybersecurity and reliance on HP; foreign exchange and customer credit exposure, including Venezuela; and substantial debt and covenant requirements.
- Material contingencies include US Airways antitrust litigation, with remaining claimed single damages of $45 million or $73 million before possible trebling; a DOJ antitrust investigation whose status was not reported as closed; hotel occupancy and sales tax proceedings, with an $18 million reserve; and Indian tax litigation with potential exposure of about $26 million if the tax authority prevailed fully. Management could not estimate potential loss ranges for all proceedings.
- The independent auditor issued an unqualified opinion on the financial statements but was not engaged to audit internal control over financial reporting. Sabre reported effective disclosure controls and noted that the internal-control audit requirement was deferred under the transition rules for newly public companies.
Important facts for investors to verify
- Reconcile the cash-flow improvement with the $206 million of cash used by discontinued operating activities and the $153 million decline in year-end cash.
- Review debt maturities, refinancing plans for the 2016 notes, revolver availability, covenant definitions, and the sensitivity of interest expense to rates.
- Assess the assumptions, timing, and liquidity impact of the $387 million TRA liability, including how future tax asset utilization affects payments.
- Track the final costs and continuing liabilities from the Travelocity disposals, including hotel-tax litigation and the GDS incentive commitments to the buyers.
- Monitor US Airways litigation and the DOJ investigation, including potential damages, appeals, and any effect on Sabre’s airline distribution model.
- Compare GAAP results with management’s non-GAAP measures, which exclude specified expenses and have limitations as measures of performance and liquidity.