Sabre Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where appropriate.
Business context and reporting period
Sabre provides technology and distribution services to the travel industry through Travel Network and Airline and Hospitality Solutions. In Q1 2015, it completed the sale of Travelocity.com and lastminute.com; Travelocity results are reported as discontinued operations. The July 2015 Abacus acquisition occurred after quarter-end.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $707.1m | $646.4m | $1,417.4m | $1,312.8m |
| Operating income | $122.6m | $96.1m | $241.6m | $199.8m |
| Operating margin | 17.3% | 14.9% | 17.0% | 15.2% |
| Continuing-operations income | $32.6m | $6.5m | $81.9m | $28.4m |
| Adjusted EBITDA (non-GAAP) | $227.6m | $214.5m | $471.2m | $425.8m |
| Net income attributable to Sabre | $32.2m | $(10.9)m | $239.7m | $(13.7)m |
- Q2 revenue rose 9%; Travel Network revenue increased 7% and Airline and Hospitality Solutions revenue increased 16%. Direct Billable Bookings grew 8.7% and Airline Solutions passengers boarded rose 5.9%.
- Q2 net interest expense declined 20% to $42.6m. A $33.2m debt-extinguishment loss partly offset operating improvement; it related to refinancing the 2019 notes.
- Six-month reported net income includes $159.6m of income from discontinued operations, including gains on the Travelocity and lastminute.com sales. It is not comparable to continuing-operations earnings alone.
- Six-month operating cash flow was $268.0m, capital expenditures were $128.0m, and free cash flow was $140.0m (non-GAAP). Adjusted free cash flow was $165.8m. Cash flow also included discontinued-operation sale proceeds.
- At June 30, cash was $578.0m and total debt was approximately $3.20bn, including $488.9m classified as current. The $405m revolver had $70m drawn, $29.3m of letters of credit, and $305.8m reported availability.
- Stockholders’ equity was $309.1m. Sabre paid $49m in common dividends during the first half; the board declared another $0.09-per-share dividend for September 2015.
Material changes versus the prior comparable period
- Revenue, operating income, and Adjusted EBITDA increased in both the quarter and first half. Growth reflected higher booking volumes and Airline and Hospitality Solutions activity; increased operating costs, including incentive consideration and technology expenses, partly offset growth.
- Travel Network first-half revenue growth was partly offset by a lower average booking fee, including the effect of the US Airways–American Airlines merger.
- Interest expense fell year over year following prior debt prepayments and the April 2015 refinancing: Sabre replaced $480m of 8.50% secured notes due 2019 with $530m of 5.375% secured notes due 2023. The refinancing generated a $33m extinguishment loss.
- Cash increased from $155.7m at year-end to $578.0m at June 30, substantially reflecting proceeds from the Travelocity.com sale and discontinued-operation cash flows. Capital expenditures increased to $128.0m from $106.5m.
Outlook, risks, and unusual items
- Outlook and liquidity: No specific full-year earnings guidance is provided. Management said cash, operating cash flow, and revolver capacity were expected to cover operating and capital needs for the next 12 months. The $400m senior unsecured notes mature in March 2016.
- Abacus: On July 1, Sabre acquired the remaining 65% of AIPL and related interests for net cash consideration of $433m, funded with cash and a $70m revolver draw. Sabre expected total spending on Abacus and further Asia-Pacific national marketing company opportunities to be about $475m, including advisory and financing costs. A significant, unquantified gain from remeasuring its prior 35% AIPL interest was expected in Q3.
- Tax and divestiture items: Sabre estimated an $80m–$95m U.S. tax benefit from writing off remaining lastminute.com tax basis in Q4 2015. It also expected completion of lastminute.com subsidiary liquidation in the second half; associated cumulative translation gains were $21m at June 30.
- Legal contingencies: Hotel and travel tax disputes remain, with an $18m reserve for identified hotel and car tax issues. Potential Indian tax exposure was estimated at about $34m if authorities prevailed fully; no liability was recorded. US Airways’ remaining antitrust relief request was limited to $20 plus costs and fees, but related proceedings remained unresolved. The DOJ investigation had not been closed.
- New litigation and cybersecurity: Two putative consumer class actions were filed in July 2015 alleging GDS antitrust conduct. Sabre also disclosed an investigation into a cybersecurity incident involving third-party-managed servers; at filing, it reported no known compromise of sensitive personal or payment-card information.
- Other risks: Revenue depends heavily on travel transaction volumes, supplier and buyer contract renewals, and airline distribution economics. The filing also highlights supplier consolidation and direct distribution, technology outages and cyber risk, foreign exchange, Venezuela receivables, and substantial debt. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether Abacus integration, acquisition funding, and the expected remeasurement gain develop as anticipated, and the resulting post-acquisition cash and debt position.
- Performance of the core segments, particularly booking-volume growth, average booking fees, incentive costs, and recurring Airline and Hospitality Solutions revenue.
- Ability to address the $400m March 2016 maturity and maintain covenant compliance while funding investment and dividends.
- Final outcomes and cash effects of hotel-tax, antitrust, Indian tax, and other legal matters, including any developments in the cybersecurity investigation.
- Whether the estimated $80m–$95m tax benefit and expected translation adjustments are realized on the stated timing.