Sabre Corporation — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results. Sabre provides travel distribution through Travel Network and software solutions to airlines and hoteliers through Airline and Hospitality Solutions.
Financial performance
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $3.373 billion | $2.961 billion | +14% |
| Operating income | $459.6 million | $459.8 million | Approximately flat |
| Operating margin | 13.6% | 15.5% | Down 1.9 percentage points |
| Income from continuing operations | $241.4 million | $234.6 million | +3% |
| Diluted EPS from continuing operations | $0.84 | $0.83 | +$0.01 |
| Net income attributable to Sabre | $242.6 million | $545.5 million | Down; prior year included substantial discontinued-operation gains |
| Cash from operating activities | $699.4 million | $529.2 million | +32% |
| Free cash flow (company-defined) | $371.8 million | $242.5 million | +53% |
| Adjusted EBITDA (non-GAAP) | $1.047 billion | $941.6 million | +11% |
| Adjusted net income (non-GAAP) | $370.9 million | $308.1 million | +20% |
Fourth-quarter revenue was $829.6 million versus $758.5 million in Q4 2015. Operating income fell to $56.0 million from $109.4 million; income from continuing operations was $31.0 million versus $29.5 million, and diluted EPS was $0.09 versus $0.46. Sabre says Travel Network bookings and revenue are typically seasonally weaker in the fourth quarter.
Segments and operating trends
- Travel Network: FY revenue rose 13% to $2.375 billion. Direct billable bookings increased 14% to 505.5 million, including 15.8% growth in air bookings. Excluding Abacus, total bookings grew 3%.
- Airline and Hospitality Solutions: Revenue rose 17% to $1.019 billion. Airline Solutions passengers boarded increased 35% to 789.3 million, largely reflecting customer cutovers and existing-customer growth. Hospitality revenue increased, including contribution from the Trust Group acquisition.
- Revenue growth included acquisitions: Abacus was acquired in 2015 and Trust Group in January 2016. Cost of revenue increased 18%, faster than revenue; operating income was essentially unchanged. Management cited higher technology, headcount, depreciation, incentive and acquisition-related costs.
Cash, debt and liquidity
- Cash and cash equivalents were $364.1 million at year-end, compared with $321.1 million a year earlier. The $400 million revolving facility had no borrowings and approximately $365.0 million available after letters of credit.
- Debt face value was approximately $3.478 billion, in addition to $31.2 million of capital lease obligations; balance-sheet debt, net of issuance costs and discounts, was approximately $3.446 billion. Long-term debt was $3.276 billion and current debt was $169.2 million.
- Working capital deficit was $313.0 million. Management stated that cash, operating cash flow and revolver availability should provide adequate liquidity for operating and capital needs over the next 12 months.
- FY capital expenditures were $327.6 million; including $83.4 million of capitalized implementation costs, adjusted capital expenditures were $411.1 million. 2017 estimates: capital expenditures of approximately $360–$380 million and capitalized implementation costs of $85–$95 million.
- Cash dividends paid in 2016 totaled $144.4 million ($0.52 per share). Sabre announced a $0.14-per-share dividend for March 2017 and, after year-end, a multi-year share repurchase program of up to $500 million.
Outlook, risks and unusual items
- Management expects continued significant technology investment to modernize infrastructure, improve reliability and security, and expand cloud and open-source capabilities; associated operating costs and capital spending are expected to rise. Implementation schedules for several airline customers were delayed into future years.
- Sean Menke became President and CEO effective December 31, 2016. The filing notes that strategic changes and increased long-term technology investment could affect near-term expenses and capital expenditures. No quantified earnings or revenue guidance is provided.
- In the US Airways antitrust case, a jury awarded $5 million in single damages. Sabre accrued $32 million for trebled damages and estimated fees and costs; the company estimated a possible range of $32–$65 million and was seeking judgment as a matter of law, with an appeal possible.
- The DOJ antitrust investigation remained open, although Sabre reported no communications from the DOJ for several years. A consumer antitrust case retained a claim seeking injunctive relief.
- Other exposures include Indian tax litigation with a stated maximum potential assessment of approximately $43 million (not accrued as management did not consider loss probable), and $19 million of Venezuelan airline receivables for which revenue recognition is deferred until cash collection.
- Sabre’s principal business risks include travel-volume sensitivity, supplier and agency pricing power, direct distribution and competition, customer implementation delays, cybersecurity and system outages, reliance on HPE-managed technology, foreign-exchange exposure, and substantial debt. Pension plans were underfunded by approximately $120 million at year-end.
- Prior-year comparisons are affected by the 2015 sale of Travelocity and related discontinued-operation gains. FY2016 also included a $32 million US Airways litigation accrual and a $15 million gain from selling marketable securities. The 2016 effective tax rate was 26.4%, versus 33.7% in 2015, partly reflecting excess tax benefits from share-based awards.
Important facts for investors to verify
- Whether revenue growth and booking growth persist after separating organic performance from acquisitions, and whether delayed airline implementations resume as planned.
- Whether operating margins recover as technology investment, incentive costs and other expenses rise.
- Debt maturities and refinancing progress, especially the $1.710 billion Term Loan B and Incremental Term Loan Facility due in 2019 and the mortgage note due in April 2017; confirm covenant headroom and refinancing terms.
- Final US Airways judgment, attorneys’ fees and appeal outcome; status of the DOJ investigation and consumer litigation.
- Collection of Venezuelan receivables, outcomes of Indian tax proceedings, and future cash requirements under the tax receivable agreement.
- Progress and cost of technology modernization and the ERP transition. The filing reports unqualified audit opinions and effective internal control over financial reporting as of December 31, 2016.