SeaWorld Entertainment, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. The filing’s registrant is SeaWorld Entertainment, Inc.; the request metadata names United Parks & Resorts Inc.
Business context and reporting period
The company operated 12 U.S. theme and water parks, including SeaWorld, Busch Gardens, Aquatica, Discovery Cove and Sesame Place. Results are seasonal: the company typically generates its highest revenues in the second and third quarters. Amounts below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $473.7 | $483.2 | $1,100.2 | $1,092.3 |
| Operating income | $153.5 | $151.7 | $218.5 | $140.8 |
| Operating margin | 32.4% | 31.4% | 19.9% | 12.9% |
| Net income | $98.0 | $96.0 | $113.7 | $55.8 |
| Diluted EPS | $1.24 | $1.10 | $1.39 | $0.64 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $313.7 | $267.5 |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $152.9 | $140.9 |
Q3 revenue fell 2.0%; attendance declined 2.6% to 8.123 million, while total revenue per guest rose 0.7% to $58.31. Admission revenue per guest declined 1.6% to $33.00, partly offset by a 3.9% increase in in-park spending to $25.31. Nine-month revenue increased 0.7% with attendance down 0.3%; in-park spending per guest rose 4.5%.
For the nine months, operating expenses declined 8.9% and SG&A declined 6.2%, contributing to higher operating income. Q3 operating expenses fell 11.6%, but SG&A rose 25.4%, including about $9.5 million of marketing overspend and timing-related costs. Interest expense increased 6.8% for the nine months to $64.1 million. The effective tax rate was 26.5% for the nine months versus 30.9% in 2018.
Financial position, liquidity and capital allocation
- At September 30, 2019, cash and cash equivalents were $50.9 million; working capital was $151.0 million against current liabilities of $343.6 million, a 0.4 current ratio. Management said the company typically operates below 1.0 because of advance ticket receipts and its business model.
- Total debt was $1.562 billion, including $50 million drawn on a $210 million revolving facility. About $139.6 million remained available after letters of credit. The Term B-5 loans mature in March 2024; the company reported a 3.34x total net leverage ratio under its credit agreement and compliance with covenants.
- Operating cash flow less capital expenditures was approximately $160.8 million for the nine months. Financing cash outflow was $143.2 million, including the $150 million share repurchase. Cash, including restricted cash, increased $17.6 million to $52.6 million.
- Interest-rate swaps fixed the rate on $1.0 billion of debt through May 2020. Management estimated that a 100-basis-point LIBOR increase would add about $5.5 million in annual cash interest, assuming average revolver borrowings of $40 million.
- Management said cash, operating cash flow and available revolver borrowings were expected to meet working-capital and capital expenditure needs for at least the next 12 months. The company repurchased 5.6 million shares for $150 million in May; the board later replenished the authorization to $250 million.
Changes, outlook, risks and unusual items
- Operating factors: Management attributed Q3 attendance weakness primarily to unfavorable weather, Hurricane Dorian and one fewer peak-summer weekend day. It estimated weather and calendar effects reduced Q3 attendance by about 330,000 guests, including more than 90,000 associated with Dorian. Pricing promotions reduced admission per guest, while pricing initiatives and product sales lifted in-park spending.
- Costs and non-GAAP measure: The company cited labor efficiencies and fewer non-cash asset write-offs as drivers of lower operating expenses. Nine-month Adjusted EBITDA, as defined under the credit agreement, was $373.0 million; the covenant calculation included $14.9 million of estimated cost savings, producing $452.5 million. These are non-GAAP figures and include permitted adjustments.
- Projects and commitments: SeaWorld Abu Dhabi was under construction and expected to be completed in 2022, subject to project conditions. The company terminated its China-related ZHG agreements in April 2019 for non-payment. It announced after quarter-end that Sesame Place San Diego would open in spring 2021, with construction planned on the Aquatica San Diego site; management said Aquatica’s 2020 schedule was not expected to be affected. Remaining Sesame Workshop commitments could total up to approximately $55 million.
- Management and governance: The CEO resigned in September 2019; on November 7 the board appointed Sergio Rivera as CEO, effective November 11. Hill Path’s ownership rose to 34.6% following its May share purchase, and agreements provide for up to three Hill Path director designees.
- Legal and other exposures: The EZPay class-action settlement of $11.5 million was approved and funded in 2019. In a securities class action, a November 6, 2019 court ruling denied most motions, including summary judgment; trial was scheduled for February 2020. The company said it intended to defend the matter and could not assure the outcome. It also disclosed other pending litigation and regulatory matters, while stating it did not expect known matters to materially adversely affect consolidated results or cash flows.
- Key risks: Attendance and spending are exposed to weather, seasonality, consumer confidence, travel disruption, competition and brand perceptions. The filing also highlights substantial leverage, fixed operating costs, animal regulation and activist scrutiny, labor costs, litigation, cybersecurity and website interruptions, international project execution, and Hill Path’s influence. No specific full-year financial guidance was provided.
Most important facts for investors to verify
- Whether attendance, admission pricing and per-guest spending trends persist beyond this seasonal quarter, and how much Q3 weakness was attributable to weather and calendar effects.
- Whether the stated cost efficiencies are sustainable, given the Q3 marketing overspend and management’s broader restructuring and consulting costs.
- Debt repayment capacity, covenant definitions and reliance on estimated cost savings in the reported leverage and Adjusted EBITDA calculations.
- Capital spending needs and the economics, timing and execution risks of SeaWorld Abu Dhabi and Sesame Place San Diego, including the disclosed Sesame commitments.
- Developments in the securities litigation, leadership transition and Hill Path governance arrangements.