Sabre Corporation — FY2017 Form 10-K
Business context and reporting period. This filing covers the fiscal year ended December 31, 2017; it is an annual report, not a Q4-only filing. Sabre provides travel distribution and technology services through Travel Network and Airline and Hospitality Solutions. Beginning in Q1 2018, it planned to report Travel Network, Airline Solutions and Hospitality Solutions separately.
Financial performance
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $3,598 million | $3,373 million | +7% |
| Operating income | $493 million | $460 million | +7% |
| Income from continuing operations | $250 million | $241 million | +3% |
| Net income attributable to Sabre | $243 million | $243 million | Essentially flat |
| Diluted EPS | $0.87 | $0.86 | Up slightly |
| Cash from operating activities | $678 million | $699 million | Down 3% |
| Free cash flow (company-defined) | $362 million | $372 million | Down 3% |
| Adjusted EBITDA (non-GAAP) | $1,079 million | $1,047 million | +3% |
Travel Network revenue grew 7% to $2,550 million, supported by 4% growth in direct billable bookings to 525 million and a higher average booking fee. Airline and Hospitality Solutions revenue grew 5% to $1,074 million. Hospitality revenue increased with CRS transactions from new and existing customers. Airline Solutions passengers boarded declined 2% to 772 million, primarily following termination of Southwest Airlines legacy-reservations processing services.
Cost of revenue rose 10%, faster than revenue, reflecting higher Travel Network incentive consideration, corporate technology costs and depreciation. SG&A fell 19%, principally due to lower acquired-intangible amortization and a $43 million net insurance reimbursement related to American Airlines litigation. GAAP results also included an $81 million impairment charge tied to Air Berlin contract costs. The effective tax rate increased to 33.9% from 26.4%, including provisional Tax Cuts and Jobs Act effects.
For Q4 2017, revenue was $882 million versus $830 million in Q4 2016; operating income was $135 million versus $56 million, and continuing-operations income was $83 million versus $31 million. The filing notes that Travel Network bookings and revenue are typically seasonally weaker in Q4.
Cash, debt and liquidity
- Cash and cash equivalents were $361 million at year-end, compared with $364 million a year earlier. Revolver availability was approximately $379 million, with no revolver borrowings outstanding.
- Debt was approximately $3.5 billion face value; the balance sheet reported $3.46 billion before current/noncurrent presentation. Debt is predominantly floating-rate, with $750 million of borrowings hedged through swaps. The company refinanced facilities in 2017, lowering certain margins and extending the Term Loan A and revolver maturity to 2022; Term Loan B matures in 2024.
- Working capital was negative $11 million, an improvement from a $313 million deficit in 2016. The company said cash, operating cash flow and the revolver were adequate for operating and capital needs over the next 12 months.
- 2017 capital expenditures were $316 million, including $251 million for internally developed software. Management expected 2018 capital expenditures of approximately $305 million to $325 million.
- Sabre paid $155 million in common dividends and repurchased $109 million of shares in 2017. The board declared a $0.14-per-share dividend payable in March 2018; future dividends and repurchases remain discretionary and subject to restrictions.
Material changes, outlook and significant items
- Revenue recognition: Sabre adopted the new revenue standard on January 1, 2018. It preliminarily estimated a $40 million to $50 million reduction in consolidated revenue in the adoption year, before new sales, and a $100 million to $130 million reduction to opening retained earnings. Airline Solutions was expected to be most affected; the estimates remained subject to finalization.
- Technology investment: Management expected continued significant investment in infrastructure modernization, security, cloud and open-source capabilities, with higher product and technology operating costs. The filing provides no specific full-year 2018 earnings or revenue guidance.
- Customer and operating developments: Air Berlin entered bankruptcy and ceased operations; Sabre recorded the $81 million impairment and disclosed potential related claims whose losses it considered neither probable nor estimable. Alitalia’s financial condition could also affect future growth. The Southwest service termination reduced passenger-boarded volumes.
- Tax and refinancing: The 2017 tax provision included a provisional $48 million transition-tax expense. A separate approximately $60 million reduction in the tax receivable agreement liability benefited other income. Sabre cautioned that the TCJA’s overall effects, including interest-deduction limits and international provisions, remained uncertain.
- Cybersecurity: An unauthorized party accessed payment-card and some reservation data through credentials in a subset of hotel reservations in the SynXis system, from August 2016 to March 2017. A separate 2017 credential incident affected, in Sabre’s estimate, a fraction of 1% of bookings. The company said it had contained the access but could not estimate potential costs, penalties or other liabilities.
- Legal and regulatory contingencies: Sabre appealed a $15 million trebled US Airways antitrust judgment and accrued $32 million, estimating a possible range of $32 million to $65 million. A DOJ antitrust investigation remained open, with no recent communication disclosed. Other matters include Indian tax litigation with potential exposure of approximately $47 million if authorities prevailed fully, and legacy hotel-occupancy-tax proceedings.
- Other exposures: Management highlighted dependence on global travel transaction volumes, airline pricing and distribution choices, customer renewals, competition, system availability and third-party technology providers. The pension plans were underfunded by approximately $112 million; expected 2018 contributions were $10 million.
Investor verification priorities
- Reconcile GAAP earnings and cash flow with non-GAAP Adjusted EBITDA and free cash flow, including the impairment, litigation reimbursement and tax-related items.
- Track the 2018 revenue-standard adoption against the preliminary revenue and opening-equity estimates, and assess the effect on Airline Solutions’ reported growth.
- Review debt maturities, floating-rate exposure, covenant headroom, refinancing terms and planned capital spending alongside cash generation and shareholder returns.
- Monitor Travel Network booking growth, incentive costs and supplier/customer contract renewals, as well as Airline Solutions implementation volumes after the Southwest termination and Air Berlin insolvency.
- Follow developments in the cybersecurity investigations and related claims, the US Airways appeal and fee proceedings, the DOJ inquiry, and Indian and hotel-tax cases.
- Assess whether the TCJA provisional accounting, tax receivable agreement payments and any subsequent tax adjustments materially change cash taxes or liquidity.