OneSpaWorld Holdings Limited — Form 8-K Summary
Reporting period and business context: Filed in connection with the March 19, 2019 closing of OneSpaWorld’s business combination with Haymaker Acquisition Corp. and the acquisition of the OSW Predecessor business from Steiner Leisure. OneSpaWorld operates health and wellness centers on cruise ships and at destination resorts, serving 163 cruise ships and 67 resorts at closing. The filing includes audited OSW Predecessor results for the years ended December 31, 2018, 2017, and 2016, plus unaudited pro forma 2018 information.
Key Financial Metrics
| ($ in thousands, except percentages) | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $540,778 | $506,685 | 6.7% |
| Service revenue | $410,927 | $383,686 | 7.1% |
| Product revenue | $129,851 | $122,999 | 5.6% |
| Income from operations | $48,521 | $38,298 | 26.7% |
| Operating margin | 9.0% | 7.6% | Up 1.4 points |
| Net income | $13,743 | $33,226 | (58.6%) |
| Net margin | 2.5% | 6.6% | Down 4.1 points |
| Adjusted EBITDA | $58,622 | $55,902 | 4.9% |
| Unlevered after-tax free cash flow | $52,913 | $52,774 | 0.3% |
| Cash flow from operating activities | $32,387 | $70,118 | (53.8%) |
| Capital expenditures | $4,983 | $2,683 | 85.7% |
Liquidity and balance sheet: At December 31, 2018, OSW Predecessor reported working capital of $22.4 million, cash of $15.3 million, total assets of $272.7 million, total liabilities of $400.2 million, and a total equity deficit of $127.6 million. Historical debt of $352.4 million was repaid at closing and replaced with new acquisition financing. Pro forma cash was approximately $12.3 million and pro forma long-term debt was approximately $239.1 million, net of deferred financing costs.
Material Transaction and Financing Changes
- The business combination made OneSpaWorld the ultimate parent of Haymaker and OSW Predecessor; the combined company began trading on Nasdaq under the symbol OSW.
- Steiner Leisure received 14.2 million OneSpaWorld shares, 1.5 million warrants, $611.7 million in cash, and rights to receive up to 5.0 million additional shares upon specified events.
- Haymaker public shareholders received 31.7 million OneSpaWorld shares; 1.3 million Haymaker shares were redeemed at closing.
- OneSpaWorld completed a private placement of 17.9 million shares and 3.1 million warrants for gross proceeds of approximately $122.5 million. Steiner Leisure subsequently sold 5.6 million shares for approximately $56.1 million.
- New financing consisted of a $208.5 million first-lien term loan, a revolving facility of up to $20 million, a $5 million delayed-draw facility, and a $25 million second-lien term loan.
- First-lien loans bear interest at LIBOR plus 4.00%, subject to a step-down to 3.75%; second-lien debt bears interest at LIBOR plus 7.50%. The first-lien term loan matures in seven years, the revolving facility in five years, and the second-lien term loan in eight years from March 19, 2019.
- The 2019 Equity Incentive Plan reserves 7.0 million shares for awards.
Changes Versus Prior Period
- Revenue growth reflected six net new shipboard centers, 14 net new destination resort centers, higher pricing, increased guest spending, product innovation, and expanded partner marketing.
- Operating margin improved because cost of services declined to 85.8% of service revenue from 86.6%, and cost of products declined to 85.3% of product revenue from 87.8%, benefiting from the Supply Agreement.
- Net income declined primarily because 2018 included $34.1 million of interest expense related to debt assigned to OSW Predecessor in preparation for the transaction; 2017 had no comparable interest expense.
- Operating cash flow fell by $37.7 million, primarily due to lower net income and unfavorable working-capital changes. Capital expenditures increased due in part to renovation of a destination resort center.
- Destination resort productivity declined 12.9% to $13,927 in average weekly revenue, partly because of renovations, the addition of smaller Asian centers, and the closure of a large Las Vegas center. Shipboard productivity improved.
Outlook, Risks, Contingencies, and Unusual Items
- Management stated that historical liquidity and capital sources were expected to support operations, growth initiatives, and additional public-company costs for at least the next twelve months; the filing does not provide formal revenue or EBITDA guidance.
- The pro forma 2018 results show revenue of $540.8 million, operating income of $34.0 million, net income attributable to the parent of $13.6 million, and pro forma diluted EPS of $0.20. These figures are illustrative and not indicative of future results.
- Preliminary purchase accounting recorded $625.0 million of identifiable intangible assets and $112.0 million of goodwill. The allocation remained subject to change and could materially affect future amortization, depreciation, goodwill, and reported earnings.
- The credit agreements include mandatory prepayments, quarterly amortization, financial and negative covenants, limitations on dividends and additional debt, and customary events of default that could permit acceleration.
- Material operating risks include dependence on the cruise and hospitality industries, seasonality, hurricanes and weather, economic weakness, competition, partner concentration, variable interest rates, regulatory changes, foreign exchange exposure, and the ability to realize expected combination benefits.
- Minimum contractual commitments at December 31, 2018 totaled approximately $154.1 million, including $130.7 million under cruise line agreements and $23.4 million under operating leases.
- Historical OSW Predecessor financial statements are carved-out combined statements with allocations of Steiner Leisure corporate costs; those allocations may not represent costs that would have been incurred as a standalone company.
- OneSpaWorld had not paid cash dividends and stated that any future dividend policy would depend on financial condition, capital needs, tax considerations, and other factors.
Investor Verification Checklist
- Verify the final post-closing debt balances, interest-rate exposure, covenant compliance, and available revolving capacity.
- Reconcile pro forma ownership, including outstanding warrants, deferred shares, the 7.0 million-share equity plan, and potential dilution.
- Review the final purchase-price allocation and subsequent amortization of the $625.0 million of identified intangible assets.
- Assess standalone public-company costs and whether historical cash flow remains representative after separation from Steiner Leisure.
- Evaluate cruise-line and resort concentration, contractual minimum payments, seasonality, hurricane exposure, and destination-center productivity.
- Confirm the impact of the timetospa.com business-model change and the Supply Agreement on comparability of historical results.
- Monitor adoption of revenue-recognition, lease, credit-loss, and other accounting standards, whose eventual effects were not yet clearly quantified in the filing.