UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2014
or
¨ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 001-36422
Sabre Corporation
(Exact name of registrant as specified in its charter)
Delaware |
|
20-8647233 |
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
3150 Sabre Drive
Southlake, TX 76092
(Address, including zip code, of principal executive offices)
(682) 605-1000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
|
¨ |
|
Accelerated filer |
|
¨ |
Non-accelerated filer |
|
x (Do not check if a smaller reporting company) |
|
Smaller reporting company |
|
¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of November 10, 2014, 265,364,515 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.
SABRE CORPORATION
TABLE OF CONTENTS
|
|
Page No. |
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||
Item 1. |
|
|
|
|
1 |
|
|
2 |
|
Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013 |
3 |
|
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013 |
4 |
|
|
5 |
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
27 |
Item 3. |
54 |
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Item 4. |
54 |
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Item 1. |
55 |
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Item 6. |
55 |
PART I – FINANCIAL INFORMATION
SABRE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
||||
Revenue |
$ |
756,303 |
|
|
$ |
775,823 |
|
|
$ |
2,229,286 |
|
|
$ |
2,303,399 |
|
Cost of revenue (1) (2) |
|
465,689 |
|
|
|
474,090 |
|
|
|
1,399,919 |
|
|
|
1,423,242 |
|
Selling, general and administrative (2) |
|
169,183 |
|
|
|
208,033 |
|
|
|
575,413 |
|
|
|
620,226 |
|
Impairment |
|
— |
|
|
|
2,837 |
|
|
|
— |
|
|
|
138,435 |
|
Restructuring charges |
|
4,735 |
|
|
|
15,889 |
|
|
|
2,325 |
|
|
|
15,889 |
|
Operating income |
|
116,696 |
|
|
|
74,974 |
|
|
|
251,629 |
|
|
|
105,607 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
(50,153 |
) |
|
|
(63,454 |
) |
|
|
(167,332 |
) |
|
|
(209,653 |
) |
Loss on extinguishment of debt |
|
— |
|
|
|
— |
|
|
|
(33,538 |
) |
|
|
(12,181 |
) |
Joint venture equity income |
|
2,867 |
|
|
|
1,841 |
|
|
|
9,367 |
|
|
|
7,873 |
|
Other, net |
|
565 |
|
|
|
(2,429 |
) |
|
|
760 |
|
|
|
(1,099 |
) |
Total other expense, net |
|
(46,721 |
) |
|
|
(64,042 |
) |
|
|
(190,743 |
) |
|
|
(215,060 |
) |
Income (loss) from continuing operations before income taxes |
|
69,975 |
|
|
|
10,932 |
|
|
|
60,886 |
|
|
|
(109,453 |
) |
Provision (benefit) for income taxes |
|
30,956 |
|
|
|
7,861 |
|
|
|
27,878 |
|
|
|
(5,229 |
) |
Income (loss) from continuing operations |
|
39,019 |
|
|
|
3,071 |
|
|
|
33,008 |
|
|
|
(104,224 |
) |
(Loss) income from discontinued operations, net of tax |
|
(1,736 |
) |
|
|
3,015 |
|
|
|
(8,017 |
) |
|
|
(20,895 |
) |
Net income (loss) |
|
37,283 |
|
|
|
6,086 |
|
|
|
24,991 |
|
|
|
(125,119 |
) |
Net income attributable to noncontrolling interests |
|
720 |
|
|
|
714 |
|
|
|
2,168 |
|
|
|
2,135 |
|
Net income (loss) attributable to Sabre Corporation |
|
36,563 |
|
|
|
5,372 |
|
|
|
22,823 |
|
|
|
(127,254 |
) |
Preferred stock dividends |
|
— |
|
|
|
9,242 |
|
|
|
11,381 |
|
|
|
27,219 |
|
Net income (loss) attributable to common shareholders |
$ |
36,563 |
|
|
$ |
(3,870 |
) |
|
$ |
11,442 |
|
|
$ |
(154,473 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Basic net income (loss) per share attributable to common shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
$ |
0.14 |
|
|
$ |
(0.04 |
) |
|
$ |
0.08 |
|
|
$ |
(0.75 |
) |
(Loss) income from discontinued operations |
|
(0.01 |
) |
|
|
0.02 |
|
|
|
(0.03 |
) |
|
|
(0.12 |
) |
Net income (loss) per common share |
$ |
0.14 |
|
|
$ |
(0.02 |
) |
|
$ |
0.05 |
|
|
$ |
(0.87 |
) |
Diluted net income (loss) per share attributable to common shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
$ |
0.14 |
|
|
$ |
(0.04 |
) |
|
$ |
0.08 |
|
|
$ |
(0.75 |
) |
(Loss) income from discontinued operations |
|
(0.01 |
) |
|
|
0.02 |
|
|
|
(0.03 |
) |
|
|
(0.12 |
) |
Net income (loss) per common share |
$ |
0.13 |
|
|
$ |
(0.02 |
) |
|
$ |
0.05 |
|
|
$ |
(0.87 |
) |
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
264,768 |
|
|
|
178,140 |
|
|
|
229,405 |
|
|
|
178,051 |
|
Diluted |
|
273,330 |
|
|
|
178,140 |
|
|
|
237,994 |
|
|
|
178,051 |
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
Dividends per common share |
$ |
0.09 |
|
|
$ |
— |
|
|
$ |
0.09 |
|
|
$ |
— |
|
(1) Includes amortization of upfront incentive consideration |
$ |
10,388 |
|
|
$ |
9,385 |
|
|
$ |
33,177 |
|
|
$ |
28,736 |
|
(2) Includes stock-based compensation as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
$ |
2,172 |
|
|
$ |
544 |
|
|
$ |
5,618 |
|
|
$ |
816 |
|
Selling, general and administrative |
|
3,300 |
|
|
|
2,142 |
|
|
|
16,816 |
|
|
|
4,630 |
|
See Notes to Consolidated Financial Statements.
1
SABRE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
||||
Net income (loss) |
$ |
37,283 |
|
|
$ |
6,086 |
|
|
$ |
24,991 |
|
|
$ |
(125,119 |
) |
Other comprehensive (loss) income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments (“CTA”): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign CTA gains (losses), net of tax |
|
1,522 |
|
|
|
(612 |
) |
|
|
3,711 |
|
|
|
(276 |
) |
Reclassification adjustment for realized losses on foreign CTA, net of tax |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8,162 |
|
Net change in foreign CTA gains (losses), net of tax |
|
1,522 |
|
|
|
(612 |
) |
|
|
3,711 |
|
|
|
7,886 |
|
Retirement-related benefit plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service credits, net of taxes of $129 and $1,041 for the three months ended September 30, 2014 and 2013, respectively, and $386 and $3,740 for the nine months ended September 30, 2014 and 2013, respectively |
|
(229 |
) |
|
|
(2,405 |
) |
|
|
(686 |
) |
|
|
(6,596 |
) |
Amortization of actuarial losses, net of taxes of $(454) and $(414) for the three months ended September 30, 2014 and 2013, respectively, and $(1,299) and $(1,482) for the nine months ended September 30, 2014 and 2013, respectively |
|
803 |
|
|
|
955 |
|
|
|
2,292 |
|
|
|
2,615 |
|
Total retirement-related benefit plans |
|
574 |
|
|
|
(1,450 |
) |
|
|
1,606 |
|
|
|
(3,981 |
) |
Derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses), net of taxes of $1,096 and $(1,311) for the three months ended September 30, 2014 and 2013, respectively, and $666 and $(484) for the nine months ended September 30, 2014 and 2013, respectively |
|
(3,799 |
) |
|
|
2,752 |
|
|
|
(3,181 |
) |
|
|
564 |
|
Reclassification adjustment for realized losses, net of taxes of $(1,057) and $(1,615) for the three months ended September 30, 2014 and 2013, respectively, and $(2,607) and $(4,079) for the nine months ended September 30, 2014 and 2013, respectively |
|
1,684 |
|
|
|
2,703 |
|
|
|
2,747 |
|
|
|
6,312 |
|
Net change in unrealized (losses) gains on derivatives, net of tax |
|
(2,115 |
) |
|
|
5,455 |
|
|
|
(434 |
) |
|
|
6,876 |
|
Share of other comprehensive income of joint venture |
|
— |
|
|
|
— |
|
|
|
3,420 |
|
|
|
— |
|
Other comprehensive (loss) income |
|
(19 |
) |
|
|
3,393 |
|
|
|
8,303 |
|
|
|
10,781 |
|
Comprehensive income (loss) |
|
37,264 |
|
|
|
9,479 |
|
|
|
33,294 |
|
|
|
(114,338 |
) |
Less: Comprehensive income attributable to noncontrolling interests |
|
(720 |
) |
|
|
(714 |
) |
|
|
(2,168 |
) |
|
|
(2,135 |
) |
Comprehensive income (loss) attributable to Sabre Corporation |
$ |
36,544 |
|
|
$ |
8,765 |
|
|
$ |
31,126 |
|
|
$ |
(116,473 |
) |
See Notes to Consolidated Financial Statements.
2
SABRE CORPORATION
(In thousands, except share amounts)
(Unaudited)
|
September 30, 2014 |
|
|
December 31, 2013 |
|
||
Assets |
|
|
|||||
Current assets |
|
|
|
|
|
|
|
Cash and cash equivalents |
$ |
157,747 |
|
|
$ |
308,236 |
|
Restricted cash |
|
755 |
|
|
|
2,359 |
|
Accounts receivable, net |
|
466,753 |
|
|
|
434,288 |
|
Prepaid expenses and other current assets |
|
56,315 |
|
|
|
53,378 |
|
Current deferred income taxes |
|
39,184 |
|
|
|
41,431 |
|
Other receivables, net |
|
28,902 |
|
|
|
29,511 |
|
Assets of discontinued operations |
|
9,364 |
|
|
|
13,624 |
|
Total current assets |
|
759,020 |
|
|
|
882,827 |
|
Property and equipment, net of accumulated depreciation of $824,146 and $722,916 |
|
526,722 |
|
|
|
498,523 |
|
Investments in joint ventures |
|
142,639 |
|
|
|
132,082 |
|
Goodwill |
|
2,152,590 |
|
|
|
2,138,175 |
|
Trademarks and brandnames, net of accumulated amortization of $554,286 and $545,597 |
|
307,445 |
|
|
|
323,035 |
|
Other intangible assets, net of accumulated amortization of $956,606 and $889,904 |
|
261,581 |
|
|
|
311,523 |
|
Other assets, net |
|
522,397 |
|
|
|
469,543 |
|
Total assets |
$ |
4,672,394 |
|
|
$ |
4,755,708 |
|
|
|
|
|
|
|
|
|
Liabilities, temporary equity and stockholders’ equity (deficit) |
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
Accounts payable |
$ |
129,555 |
|
|
$ |
111,386 |
|
Travel supplier liabilities and related deferred revenue |
|
107,409 |
|
|
|
213,504 |
|
Accrued compensation and related benefits |
|
91,700 |
|
|
|
117,689 |
|
Accrued subscriber incentives |
|
168,019 |
|
|
|
142,767 |
|
Deferred revenues |
|
176,990 |
|
|
|
136,380 |
|
Litigation settlement liability and related deferred revenue |
|
75,409 |
|
|
|
38,920 |
|
Other accrued liabilities |
|
210,196 |
|
|
|
267,867 |
|
Current portion of debt |
|
22,418 |
|
|
|
86,117 |
|
Liabilities of discontinued operations |
|
23,881 |
|
|
|
41,788 |
|
Total current liabilities |
|
1,005,577 |
|
|
|
1,156,418 |
|
Deferred income taxes |
|
8,601 |
|
|
|
10,253 |
|
Other noncurrent liabilities |
|
523,728 |
|
|
|
263,182 |
|
Long-term debt |
|
3,065,440 |
|
|
|
3,643,548 |
|
Commitments and contingencies (Note 14) |
|
|
|
|
|
|
|
Temporary equity |
|
|
|
|
|
|
|
Series A Redeemable Preferred Stock: $0.01 par value; 225,000,000 authorized shares; no shares issued and outstanding at September 30, 2014; 87,229,703 shares issued and 87,184,179 outstanding at December 31, 2013 |
|
— |
|
|
|
634,843 |
|
Stockholders’ equity (deficit) |
|
|
|
|
|
|
|
Common Stock: $0.01 par value; 450,000,000 authorized shares; 265,224,958 and 178,633,409 shares issued, 264,787,572 and 178,491,568 outstanding at September 30, 2014 and December 31, 2013, respectively |
|
2,652 |
|
|
|
1,786 |
|
Additional paid-in capital |
|
1,911,172 |
|
|
|
880,619 |
|
Treasury Stock, at cost, 437,386 shares at September 30, 2014 |
|
(5,297 |
) |
|
|
— |
|
Retained deficit |
|
(1,797,944 |
) |
|
|
(1,785,554 |
) |
Accumulated other comprehensive loss |
|
(41,592 |
) |
|
|
(49,895 |
) |
Noncontrolling interest |
|
57 |
|
|
|
508 |
|
Total stockholders’ equity (deficit) |
|
69,048 |
|
|
|
(952,536 |
) |
Total liabilities, temporary equity and stockholders’ equity (deficit) |
$ |
4,672,394 |
|
|
$ |
4,755,708 |
|
See Notes to Consolidated Financial Statements.
3
SABRE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
Nine Months Ended September 30, |
|
|||||
|
2014 |
|
|
2013 |
|
||
Operating Activities |
|
|
|
|
|
|
|
Net income (loss) |
$ |
24,991 |
|
|
$ |
(125,119 |
) |
Adjustments to reconcile net income (loss) to cash provided by operating activities: |
|
|
|
|
|
|
|
Depreciation and amortization |
|
230,461 |
|
|
|
230,277 |
|
Impairment |
|
— |
|
|
|
138,435 |
|
Restructuring charges |
|
3,247 |
|
|
|
4,089 |
|
Amortization of upfront incentive consideration |
|
33,177 |
|
|
|
28,736 |
|
Litigation related (gains) charges |
|
(6,132 |
) |
|
|
6,117 |
|
Stock-based compensation expense |
|
22,434 |
|
|
|
5,446 |
|
Allowance for doubtful accounts |
|
6,371 |
|
|
|
7,583 |
|
Deferred income taxes |
|
6,232 |
|
|
|
(19,357 |
) |
Joint venture equity income |
|
(9,367 |
) |
|
|
(7,873 |
) |
Dividends received from joint venture investments |
|
2,205 |
|
|
|
— |
|
Amortization of debt issuance costs |
|
4,779 |
|
|
|
5,323 |
|
Debt modification costs |
|
3,290 |
|
|
|
14,003 |
|
Loss on extinguishment of debt |
|
33,538 |
|
|
|
12,181 |
|
Other |
|
3,658 |
|
|
|
(10,210 |
) |
Loss from discontinued operations |
|
8,017 |
|
|
|
20,895 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
Accounts and other receivables |
|
(58,435 |
) |
|
|
(46,394 |
) |
Prepaid expenses and other current assets |
|
(10,612 |
) |
|
|
7,314 |
|
Capitalized implementation costs |
|
(27,602 |
) |
|
|
(48,686 |
) |
Upfront incentive consideration |
|
(31,633 |
) |
|
|
(26,634 |
) |
Other assets |
|
(58,120 |
) |
|
|
(63,389 |
) |
Accrued compensation and related benefits |
|
(23,104 |
) |
|
|
7,361 |
|
Accounts payable and other accrued liabilities |
|
(31,516 |
) |
|
|
109,778 |
|
Pension and other postretirement benefits |
|
(4,200 |
) |
|
|
2,186 |
|
Cash provided by operating activities |
|
121,679 |
|
|
|
252,062 |
|
Investing Activities |
|
|
|
|
|
|
|
Additions to property and equipment |
|
(160,385 |
) |
|
|
(168,744 |
) |
Acquisition, net of cash acquired |
|
(31,799 |
) |
|
|
(30,476 |
) |
Proceeds from sale of business |
|
— |
|
|
|
10,000 |
|
Other investing activities |
|
235 |
|
|
|
— |
|
Cash used in investing activities |
|
(191,949 |
) |
|
|
(189,220 |
) |
Financing Activities |
|
|
|
|
|
|
|
Proceeds of borrowings from lenders |
|
148,307 |
|
|
|
2,540,063 |
|
Payments on borrowings from lenders |
|
(797,028 |
) |
|
|
(2,239,538 |
) |
Proceeds from issuance of common stock in initial public offering, net |
|
672,137 |
|
|
|
— |
|
Prepayment fee and debt modification and issuance costs |
|
(30,490 |
) |
|
|
(19,116 |
) |
Acquisition-related contingent consideration paid |
|
(27,000 |
) |
|
|
— |
|
Dividends paid to common shareholders |
|
(23,831 |
) |
|
|
— |
|
Other financing activities |
|
(1,384 |
) |
|
|
(6,692 |
) |
Cash (used in) provided by financing activities |
|
(59,289 |
) |
|
|
274,717 |
|
Cash Flows from Discontinued Operations |
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
(25,424 |
) |
|
|
6,352 |
|
Net cash provided by investing activities |
|
3,760 |
|
|
|
20,502 |
|
Net cash (used in) provided by discontinued operations |
|
(21,664 |
) |
|
|
26,854 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
734 |
|
|
|
480 |
|
(Decrease) increase in cash and cash equivalents |
|
(150,489 |
) |
|
|
364,893 |
|
Cash and cash equivalents at beginning of period |
|
308,236 |
|
|
|
126,695 |
|
Cash and cash equivalents at end of period |
$ |
157,747 |
|
|
$ |
491,588 |
|
See Notes to Consolidated Financial Statements.
4
SABRE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General Information
Sabre Corporation is a Delaware corporation formed in December 2006. On March 30, 2007, Sabre Corporation acquired Sabre Holdings Corporation (“Sabre Holdings”). Sabre Holdings is the sole subsidiary of Sabre Corporation. Sabre GLBL Inc. is the principal operating subsidiary and sole direct subsidiary of Sabre Holdings. Sabre GLBL Inc. or its direct or indirect subsidiaries conduct all of our businesses. In these consolidated financial statements, references to “Sabre”, the “Company”, “we”, “our”, “ours” and “us” refer to Sabre Corporation and its consolidated subsidiaries unless otherwise stated or the context otherwise requires.
We are a leading technology solutions provider to the global travel and tourism industry. We operate through three business segments: (i) Travel Network, our global travel marketplace for travel suppliers and travel buyers, (ii) Airline and Hospitality Solutions, an extensive suite of travel industry leading software solutions primarily for airlines and hotel properties, and (iii) Travelocity, our portfolio of online consumer travel e-commerce businesses through which we provide travel content and booking functionality primarily for leisure travelers.
Initial Public Offering and Share-based Compensation—On April 23, 2014, we closed our initial public offering of our common stock in which we sold 39,200,000 shares, and on April 25, 2014, the underwriters exercised in full their overallotment option which resulted in the sale of an additional 5,880,000 shares of our common stock. Our shares of common stock were sold at an initial public offering price of $16.00 per share, which generated $672 million of net proceeds from the offering after deducting underwriting discounts and commissions and offering expenses. Upon closing of our initial public offering, we redeemed all of our outstanding shares of Series A Cumulative Preferred Stock in exchange for 40,343,529 shares of our common stock.
We used the net proceeds from this offering to repay (i) $296 million aggregate principal amount of our term loans and (ii) $320 million aggregate principal amount of our senior secured notes due in 2019 at a redemption price of 108.5% of the principal amount, which represents the maximum amount of the contingent call option exercisable in the event of an equity offering (see Note 8, Debt). The term loan prepayment occurred in two installments: the first prepayment of $207 million occurred on April 24, 2014 and the second prepayment of $90 million occurred on April 29, 2014. The redemption of $320 million of our senior secured notes due in 2019 occurred on May 7, 2014. We also used the net proceeds from our offering to pay the $27 million redemption premium and $13 million in accrued but unpaid interest on the senior secured notes due in 2019. We used the remaining portion of the net proceeds from our offering to pay a $21 million fee, in the aggregate, to TPG Global, LLC (“TPG”) and Silver Lake Management Company (“Silver Lake”) pursuant to a management services agreement (the “MSA”), which was thereafter terminated.
On March 20, 2014, our board of directors adopted the Sabre Corporation 2014 Omnibus Incentive Compensation Plan (the “2014 Omnibus Plan”), which permits the grant of cash and equity and equity-based incentive awards. Our employees and the non-employee members of our board of directors and those of our subsidiaries are eligible to receive awards under the 2014 Omnibus Plan. On the effective date of our initial public offering, under the 2014 Omnibus Plan, we granted time-based options to purchase 1,541,627 shares of common stock at an exercise price of $16.68 per share and a total of 2,298,478 shares of performance-based and time-based restricted stock units.
In April 2014, we cancelled all outstanding stock-based awards issued under the Travelocity.com LLC Stock Option Grant Agreements, the Travelocity Equity 2012 Plan and the Sovereign Holdings, Inc. Amended and Restated Stock Incentive Plan for Travelocity’s CEO—Stock Settled SARs with Respect to Travelocity Equity, terminated all related plans and award agreements, and recorded stock compensation expense of $7 million, representing the remaining unrecognized compensation expense of the awards at the cancellation date.
Basis of Presentation—The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position, results of operations and cash flows for the periods indicated. Operating results for the three and nine months ended September 30, 2014 are not necessarily indicative of results that may be expected for any other interim period or for the year ended December 31, 2014. The accompanying interim financial statements should be read in conjunction with our annual audited financial statements and related notes thereto for the year ended December 31, 2013 included in our prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act on April 17, 2014.
We consolidate all of our majority-owned subsidiaries and companies over which we exercise control through majority voting rights. No entities are currently consolidated due to control through operating agreements, financing agreements, or as the primary beneficiary of a variable interest entity.
5
The consolidated financial statements include our accounts after elimination of all significant intercompany balances and transactions.
Use of Estimates—The preparation of these interim financial statements in conformity with GAAP requires that certain amounts be recorded based on estimates and assumptions made by management. Actual results could differ from these estimates and assumptions. Our accounting policies, which include significant estimates and assumptions, include, among other things, estimation of the collectability of accounts receivable, amounts for future cancellations of bookings processed through the Sabre global distribution system (“GDS”), revenue recognition for software development, determination of the fair value of assets and liabilities acquired in a business combination, determination of the fair value of derivatives, the evaluation of the recoverability of the carrying value of intangible assets and goodwill, assumptions utilized in the determination of pension and other postretirement benefit liabilities, assumptions made in the calculation of restructuring liabilities and the evaluation of uncertainties surrounding the calculation of our tax assets and liabilities. These policies are discussed in our annual audited consolidated financial statements and related notes thereto for the year ended December 31, 2013 included in our prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act on April 17, 2014.
2. Acquisitions
On September 11, 2014, we acquired certain assets and liabilities of Genares Worldwide Reservation Services, Ltd. (“Genares”), a provider of central reservation systems, revenue management and marketing solutions to more than 2,300 independent and chain hotel properties worldwide. Under the transaction, we acquired the assets of Genares for cash consideration of $32 million. The operating results of Genares have been included in our consolidated statement of operations and results of operations of our Airline and Hospitality Solutions segment from the date of the acquisition. The assets acquired and liabilities assumed have been recorded in our consolidated balance sheet based on preliminary fair value estimates. The final allocation of the purchase price will be based on a complete evaluation of the assets acquired and liabilities assumed. Accordingly, the information presented in our consolidated balance sheet and elsewhere in this report may differ from the final purchase price allocation. The preliminary allocation of the purchase price includes $14 million to goodwill, which is deductible for tax purposes, $17 million to other intangible assets and $1 million to net assets acquired. The other intangible assets consist primarily of $14 million of acquired customer relationships with a useful life of ten years and $2 million of non-compete agreements with a useful life of five years.
3. Discontinued Operations and Dispositions
We have disposed of or discontinued certain businesses or operations in order to further align Travelocity with its core strategies of focusing on product and customer experiences in profitable locations, and displaying and promoting highly relevant content. We believe these decisions will allow us to reduce our technological complexity by reducing the number of supported business platforms and operations.
Discontinued Operations
The results for the following Travelocity operations are presented in (loss) income from discontinued operations in our consolidated statements of operations:
Holiday Autos—On June 25, 2013, we sold certain assets of our Holiday Autos operations to a third party and, in November 2013, completed the closing of the remainder of the Holiday Autos operations such that it represented a discontinued operation. Holiday Autos was a leisure car hire broker that offered pre-paid, low-cost car rentals in various markets, largely in Europe. In the second quarter of 2013, we recognized an $11 million loss, net of tax, on the sale of Holiday Autos. The loss includes the write-off of $39 million of goodwill and intangible assets attributed to Holiday Autos, with the goodwill portion determined based on Holiday Autos’ relative fair value to the Travelocity Europe reporting unit. The sale provides for us to receive two earn-out payments measured during the 12 month periods ending September 30, 2014 and 2015, totaling up to $12 million, based upon the purchaser exceeding certain booking thresholds as defined in the sale agreement. We recognized $6 million relative to these earn-out provisions and the resulting receivable is reviewed for recovery on a periodic basis. Any earn-out payments received in excess of the $6 million recognized will be recorded as a gain in the period received.
Zuji—In December 2012, we entered into an agreement to sell our shares of Zuji Properties A.V.V. and Zuji Pte Ltd along with its operating subsidiaries (collectively “Zuji”), a Travelocity Asia Pacific-based Online Travel Agency (“OTA”). At that time, the assets were recorded at the lower of the carrying amount or fair value less cost to sell. We recorded an estimated loss on the sale of approximately $14 million, net of tax during 2012. We sold Zuji on March 21, 2013 and recorded an additional $11 million loss on sale, net of tax during the three months ended March 31, 2013. We have continuing cash flows from Zuji due to reciprocal agreements between us and Zuji to provide hotel reservations services over a three year period. The agreements include commissions to be paid to the respective party based on qualifying bookings. The continuing cash flows associated with Zuji were not material to our results of operations for the nine months ended September 30, 2014.
6
Results of Discontinued Operations—We have reported the results of operations of Holiday Autos and Zuji as discontinued operations. As part of the Zuji sale agreement, we had retained the rights to receive refunds of certain disputed income taxes outstanding as of the sale date. During the third quarter of 2014, we received a $2 million tax refund associated with the operations of Zuji prior to its disposal which is included in (benefit) provision for income taxes of discontinued operations. The following table summarizes the results of our discontinued operations (in thousands):
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
||||
Revenue |
$ |
— |
|
|
$ |
12,806 |
|
|
$ |
— |
|
|
$ |
48,549 |
|
Cost of revenue |
|
146 |
|
|
|
2,882 |
|
|
|
1,257 |
|
|
|
14,668 |
|
Selling, general and administrative |
|
680 |
|
|
|
469 |
|
|
|
3,023 |
|
|
|
31,030 |
|
Operating (loss) income |
|
(826 |
) |
|
|
9,455 |
|
|
|
(4,280 |
) |
|
|
2,851 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
(2,559 |
) |
|
|
3,613 |
|
|
|
(5,917 |
) |
|
|
1,493 |
|
Loss on sale of businesses, net |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(27,708 |
) |
Other, net |
|
(392 |
) |
|
|
(4,283 |
) |
|
|
(2,044 |
) |
|
|
(880 |
) |
Total other expense, net |
|
(2,951 |
) |
|
|
(670 |
) |
|
|
(7,961 |
) |
|
|
(27,095 |
) |
(Loss) income from discontinuing operations before income taxes |
|
(3,777 |
) |
|
|
8,785 |
|
|
|
(12,241 |
) |
|
|
(24,244 |
) |
(Benefit) provision for income taxes |
|
(2,041 |
) |
|
|
5,770 |
|
|
|
(4,224 |
) |
|
|
(3,349 |
) |
Net (loss) income from discontinued operations |
$ |
(1,736 |
) |
|
$ |
3,015 |
|
|
$ |
(8,017 |
) |
|
$ |
(20,895 |
) |
Dispositions
Disposition of Certain Assets of Travelocity—In February 2014, as a further step in our restructuring plans for Travelocity, we completed a sale of assets associated with Travelocity Partner Network (“TPN”), a business-to-business private white label website offering, for $10 million in upfront proceeds. Pursuant to the sale agreement, we will receive two annual earn-out payments, totaling up to $10 million, if the purchaser exceeds certain revenue thresholds during the calendar years ending December 31, 2014 and 2015. In connection with the sale, Travelocity entered into a Transition Services Agreement (“TSA”) with the acquirer to provide services to maintain the websites and certain technical and administrative functions for the acquirer until a complete transition occurs or the TSA terminates. Consideration received under both agreements has been allocated to the disposition and the services provided under the TSA; therefore, a significant portion of the upfront proceeds have been deferred, based on fair value of the TSA services. At the time of sale, we recognized no net gain or loss which was comprised of a $3 million loss on disposition, offset by a $3 million receivable for earn-out proceeds. During the third quarter of 2014, we determined that receipt of the earn-out proceeds was no longer probable and therefore fully impaired the receivable. The $3 million loss is included in restructuring charges for the three and nine months ended September 30, 2014 in our consolidated statements of operations.
On June 18, 2013, we completed the sale of certain assets of Travelocity (“TBiz”) operations to a third party for proceeds of $10 million. TBiz provided managed travel services for corporate customers. In the second quarter of 2013, we recognized a pre-tax gain on the sale of TBiz of $1 million which included the write-off of $9 million of goodwill attributed to TBiz based on the relative fair value to the Travelocity North America reporting unit. On an after tax basis, we recognized a loss of $3 million on the sale of TBiz.
4. Restructuring Charges
Travelocity Restructuring—In the third quarter of 2013, we initiated plans to restructure Travelocity, shifting Travelocity in the United States and Canada away from a fixed-cost model to a lower-cost, performance-based shared revenue structure. On August 22, 2013 we entered into an exclusive, long-term strategic marketing agreement with Expedia (“Expedia SMA”), in which Expedia powers the technology platforms for Travelocity’s existing U.S. and Canadian websites, as well as provides Travelocity with access to Expedia’s supply and customer service platforms. In connection with the Expedia SMA, we also entered into a put/call agreement with Expedia (the “Put/Call Agreement”). The Expedia SMA represents a strategic decision to reduce direct costs associated with Travelocity and provide our customers with the benefit of Expedia’s long term investment in its technology platform as well as its supply and customer service platforms. Both parties began development and implementation after signing the Expedia SMA. Substantially all supplier offerings have been migrated to the Expedia platform which has resulted in increased conversion and operational efficiency and has allowed us to shift our focus to Travelocity’s marketing strengths. Based on the terms of the Expedia SMA, Expedia earned an incentive payment of $8 million in January 2014 and an additional $3 million in March 2014. We are amortizing these payments over the non-cancellable term of the Expedia SMA as a reduction to revenue.
Expedia pays us a performance-based marketing fee that varies based on the amount of travel booked through Travelocity-branded websites powered by Expedia under this collaborative arrangement. The marketing fee we receive is recorded as marketing
7
fee revenue and the cost we incur to promote the Travelocity brand and for marketing is recorded as selling, general and administrative expense in our results of operations. Correspondingly, we are winding down certain internal processes, including back office functions, as substantially all transactions have moved from our technology platforms to those of Expedia.
Pursuant to the Put/Call Agreement, Expedia may acquire, or we may sell to Expedia, assets relating to the Travelocity-branded portions of our Travelocity business, which primarily include the assets subject to the Expedia SMA. Our put right may be exercised during the first 24 months of the Expedia SMA only upon the occurrence of certain triggering events primarily relating to implementation, which are outside of our control. The occurrence of these events is not considered probable. During this period, the exercise price of the put right is fixed. After the initial 24 month period, the put right is only exercisable for a limited period of time in 2016 and 2017 at a discount to fair market value as defined in the Put/Call Agreement. The call right held by Expedia is exercisable at any time during the term of the Put/Call Agreement. If the call right is exercised, although we expect the amount paid will be fair value, the call right provides for a floor for a limited time that may be higher than fair value and a ceiling for the duration of the Put/Call Agreement that may be lower than fair value.
In the fourth quarter of 2013, we also initiated a plan to restructure lastminute.com, the European portion of the Travelocity business. This plan involved establishing lastminute.com as a stand-alone operation, separating processes from the North America operations, while adding efficiencies to streamline the European operations. Travelocity continues to be managed as one reportable segment.
During the three months ended September 30, 2014, we recorded restructuring charges of $5 million which includes a $3 million loss on the sale of TPN, $1 million in additional severance costs and $1 million in other costs. During the nine months ended September 30, 2014, we recorded restructuring charges of $2 million which includes a $3 million loss on the sale of TPN, $2 million in additional severance costs and $2 million in other costs, net of adjustments to our original estimates of employee termination benefits of $4 million. The adjustments to our original estimates are primarily the result of certain employees transferring to the acquirer of the TPN business without a required severance payment. We estimate that we will incur additional charges for the remainder of 2014 of approximately $3 million consisting of contract termination and other related costs.
Technology Restructuring—Our corporate expenses include a technology organization that provides development and support activities to our business segments. Costs associated with our technology organization are charged to the business segments primarily based on its usage of development resources. For the year ended December 31, 2013, the majority of costs associated with the technology organization were incurred by Travel Network and Airline and Hospitality Solutions. In the fourth quarter of 2013, we initiated a restructuring plan to simplify our technology organization, better align costs with our current business, reduce our spending on third-party resources, increase focus on product development and reduce our employee base by approximately 350 employees. The majority of this plan was completed in the first half of 2014 and we do not expect to record material charges in 2014 related to this action.
The change in our restructuring accruals, included in other current liabilities, is as follows (in thousands):
|
Employee Termination Benefits |
|
|||||||||
|
Travelocity |
|
|
Technology Organization |
|
|
Total |
|
|||
Balance as of December 31, 2013 |
$ |
17,731 |
|
|
$ |
8,163 |
|
|
$ |
25,894 |
|
Charges |
|
2,102 |
|
|
|
— |
|
|
|
2,102 |
|
Adjustments |
|
(3,938 |
) |
|
|
(914 |
) |
|
|
(4,852 |
) |
Payments |
|
(9,261 |
) |
|
|
(6,877 |
) |
|
|
(16,138 |
) |
Balance as of September 30, 2014 |
$ |
6,634 |
|
|
$ |
372 |
|
|
$ |
7,006 |
|
The charges included in our restructuring accruals do not include items charged directly to expense (e.g., asset impairments) and other periodic costs recognized as incurred, as those items are not reflected in the restructuring reserve in our consolidated balance sheet. Restructuring charges are not allocated to the segments for segment reporting purposes (see Note 15, Segment Information).
5. Equity Method Investments
We have an investment in Abacus International Pte Ltd (“Abacus”) and have entered into a service agreement with Abacus related to data processing services, development labor and other services as requested. The primary revenue generated from Abacus is data processing fees associated with bookings on the Sabre GDS. Development labor and ancillary services are provided upon request. Additionally, in accordance with an agreement with Abacus, we collect booking fees on behalf of Abacus and record a payable, or economic benefit transfer, to Abacus for amounts collected but unremitted at any period end, net of any associated costs we incur.
8
A summary of Abacus’ income statement information is as follows (in thousands):
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
||||
Revenue |
$ |
87,039 |
|
|
$ |
83,237 |
|
|
$ |
263,536 |
|
|
$ |
248,814 |
|
Operating income |
|
12,876 |
|
|
|
15,946 |
|
|
|
42,961 |
|
|
|
41,683 |
|
Net income |
|
10,793 |
|
|
|
8,887 |
|
|
|
34,863 |
|
|
|
30,575 |
|
6. Pension and Other Postretirement Benefit Plans
We sponsor the Sabre Inc. Legacy Pension Plan (“LPP”), which is a tax-qualified defined benefit pension plan for employees meeting certain eligibility requirements. The LPP was amended to freeze pension benefit accruals as of December 31, 2005, so that no additional pension benefits are accrued after that date. We also sponsor a defined benefit pension plan for certain employees in Canada.
We previously provided retiree life insurance benefits to certain employees who retired prior to January 1, 2001, and we subsidized a portion of the cost of retiree medical benefits for certain retirees and eligible employees hired prior to October 1, 2000. In February 2009, we amended our retiree medical plan to reduce the subsidies received by participants by 20% per year over five years, with no further subsidies beginning January 1, 2014. This amendment resulted in $57 million of prior service credit recorded in other comprehensive income that was amortized to operating expense over the remaining term which concluded in December 2013. The following table provides the components of net periodic benefit costs associated with our pension and other postretirement benefit plans for the three and nine months ended September 30, 2014 and 2013 (in thousands):
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
||||
Pension Benefits: |
|
|
|
|
|
||||||||||
Interest cost |
$ |
4,886 |
|
|
$ |
4,483 |
|
|
$ |
14,686 |
|
|
$ |
13,448 |
|
Expected return on plan assets |
|
(5,909 |
) |
|
|
(5,908 |
) |
|
|
(17,959 |
) |
|
|
(17,726 |
) |
Amortization of prior service credit |
|
(358 |
) |
|
|
(359 |
) |
|
|
(1,074 |
) |
|
|
(1,075 |
) |
Amortization of actuarial loss |
|
1,290 |
|
|
|
1,846 |
|
|
|
3,690 |
|
|
|
5,537 |
|
Net periodic (credit) cost |
$ |
(91 |
) |
|
$ |
62 |
|
|
$ |
(657 |
) |
|
$ |
184 |
|
Other Benefits: |
|
|
|
|
|
||||||||||
Interest cost |
|
— |
|
|
|
10 |
|
|
|
2 |
|
|
|
30 |
|
Amortization of prior service credit |
|
— |
|
|
|
(3,087 |
) |
|
|
— |
|
|
|
(9,261 |
) |
Amortization of actuarial gain |
|
(33 |
) |
|
|
(477 |
) |
|
|
(99 |
) |
|
|
(1,439 |
) |
Net periodic credit |
$ |
(33 |
) |
|
$ |
(3,554 |
) |
|
$ |
(97 |
) |
|
$ |
(10,670 |
) |
We made contributions of $4 million to fund our defined benefit pension plans during the nine months ended September 30, 2014. No contributions were made during the nine months ended September 30, 2013. Annual contributions to our defined benefit pension plans in the United States and Canada are based on several factors that may vary from year to year. Thus, past contributions are not always indicative of future contributions. Based on current assumptions, we do not expect to make additional contributions to our defined benefit pension plans for the remainder of 2014.
7. Income Taxes
Our effective tax rates for the nine months ended September 30, 2014 and 2013 were 46% and 5%, respectively. The increase in the effective tax rate for the nine months ended September 30, 2014 as compared to the same period in 2013 was primarily due to the impairment of nondeductible goodwill in the prior year, the amount of current year losses for which no tax benefit can be recognized relative to the amount of pre-tax income and the impact of other discrete items, partially offset by the increase in forecasted earnings in lower tax jurisdictions.
The differences between our effective tax rates and the U.S. federal statutory income tax rate primarily result from our geographic mix of taxable income in various tax jurisdictions as well as the discrete tax items referenced above.
We recognize liabilities when we believe that an uncertain tax position may not be fully sustained upon examination by the tax authorities. This requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. When facts and circumstances change, we reassess these probabilities and record any changes in the consolidated financial statements as
9
appropriate. Our net unrecognized tax benefits, excluding interest and penalties, included in our consolidated balance sheets, were $69 million and $61 million as of September 30, 2014 and December 31, 2013, respectively.
Tax Receivable Agreement
Immediately prior to the closing of our initial public offering, we entered into an income tax receivable agreement (“TRA”) that provides those stockholders and equity award holders that were our stockholders and equity award holders, respectively, immediately prior to the closing of our initial public offering (collectively, the “Existing Stockholders”) the right to receive future payments from us of 85% of the amount of cash savings, if any, in U.S. federal income tax that we and our subsidiaries realize as a result of the utilization of certain tax assets attributable to periods prior to our initial public offering, including federal net operating losses, capital losses and the ability to realize tax amortization of certain intangible assets (collectively, the “Pre-IPO Tax Assets”). We recognized an initial liability of $321 million after considering the valuation allowance of $66 million recorded against the Pre-IPO Tax Assets. The TRA liability was recorded as a reduction to additional paid-in capital and an increase to other noncurrent liabilities. No payments have been made under the TRA during the nine months ended September 30, 2014 and we do not expect material payments to occur prior to 2016. Any payments made under the TRA will be classified as a financing activity in our statement of cash flows.
8. Debt
In April 2014, we completed an initial public offering of our common stock and utilized the net proceeds to repay (i) $296 million aggregate principal amount of our Term Loan C (as defined below) and (ii) $320 million aggregate principal amount of our 2019 Notes (as defined below) at a redemption price of 108.5% of the principal amount, which represents the maximum amount of the contingent call option exercisable in the event of an equity offering. As a result of the prepayments on Term Loan C and the 2019 Notes, we recorded an extinguishment loss of $31 million which includes a $27 million redemption premium on the 2019 Notes.
As of September 30, 2014 and December 31, 2013, our outstanding debt included in our consolidated balance sheets totaled $3,088 million and $3,730 million, respectively, net of unamortized discounts of $15 million and $20 million, respectively. The following table sets forth the face values of our outstanding debt as of September 30, 2014 and December 31, 2013 (in thousands):
|
Rate |
|
|
Maturity |
|
September 30, 2014 |
|
|
December 31, 2013 |
|
|||
Senior secured credit facilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan B |
L + 3.00% |
|
|
February 2019 |
|
$ |
1,743,938 |
|
|
$ |
1,757,250 |
|
|
Incremental term loan facility |
L + 3.00% |
|
|
February 2019 |
|
|
346,500 |
|