SeaWorld Entertainment, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The filing identifies the registrant as SeaWorld Entertainment, Inc.; the “United Parks & Resorts Inc.” name in the request does not match the filing’s registrant. Amounts below are in U.S. dollars unless noted.
Business context
The company operated 12 U.S. theme and water parks as one reportable segment. Operations are seasonal: the second and third quarters typically generate the most revenue, and seven parks operate for only part of the year.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $391.9m | $373.8m | $609.1m | $560.1m |
| Operating income (loss) | $55.2m | ($222.6m) | ($10.9m) | ($299.3m) |
| Net income (loss) | $22.7m | ($175.9m) | ($40.1m) | ($237.0m) |
| Adjusted EBITDA | $117.6m | $104.2m | $117.5m | $73.9m |
| Operating cash flow | Not separately stated for the quarter | $126.8m | $88.3m | |
| Capital expenditures | Not separately stated for the quarter | $97.4m | $103.2m |
Q2 operating margin was approximately 14.1% and net margin approximately 5.8%. First-half operating and net margins were approximately negative 1.8% and negative 6.6%, respectively. Adjusted EBITDA is a non-GAAP measure; the filing cautions it should not be viewed as a substitute for GAAP results.
Q2 attendance grew 4.8% to 6.414 million; first-half attendance increased 8.0% to 9.638 million. Q2 revenue per capita was $61.10, up 0.1%; admissions per capita fell 4.2% to $35.21, while in-park spending per capita rose 6.5% to $25.90. For the first half, revenue per capita increased 0.7% to $63.20; admissions per capita fell 3.1%, while in-park spending per capita increased 6.6%.
At June 30, cash and cash equivalents were $33.5m and restricted cash was $1.3m. Current assets were $163.1m against current liabilities of $368.0m; the company reported a 0.4 working capital ratio and said this is typical for its business, partly because of deferred admissions revenue. Total debt principal was $1.533bn, including $23.7m current maturities; the revolving facility was undrawn, with $188.7m available after letters of credit. The company was compliant with debt covenants. Its credit-agreement total net leverage ratio was 4.35x.
Material changes versus the prior comparable period
- Q2 revenue rose 4.9%, driven by increased attendance and in-park spending; first-half revenue rose 8.7%.
- Q2 returned to profitability from a prior-year loss, but the comparison is heavily affected by the $269.3m goodwill impairment recorded in Q2 2017. First-half losses also narrowed substantially, with the prior-year comparison affected by that impairment and an $8.1m debt-refinancing write-off.
- First-half operating cash flow increased $38.5m to $126.8m, which management attributed primarily to improved operating performance. Capital spending declined to $97.4m from $103.2m.
- First-half interest expense increased 7.3% to $40.5m, reflecting higher LIBOR and the prior refinancing, partly offset by interest-rate swaps. Swaps fixed the LIBOR component on $1.0bn of debt through May 2020.
- Q2 operating expenses included $7.3m in noncash asset write-offs, primarily rides and equipment. First-half restructuring and separation costs were $12.5m, including CEO and other executive separation costs and the new restructuring program.
Outlook, management commentary, risks and unusual items
- Management said first-half attendance improvement reflected pricing strategies, marketing initiatives, and new rides, attractions and events; unfavorable weather and earlier Easter timing partly offset Q2 attendance.
- Management stated that cash, operating cash flow and available revolver borrowings should be adequate for capital expenditure and working-capital needs for at least the next 12 months. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
- The company said it had achieved a previously targeted $40m cost-optimization program and, in August 2018, identified $50m in cost-savings opportunities. A restructuring announced after quarter-end targeted approximately 125 positions; the company expected a further $4.0m of pretax charges in Q3, after $1.8m recorded for the program in Q2.
- Legal and regulatory matters include an $11.5m proposed EZPay class-action settlement, subject to court approval; a $4.0m estimated liability for a proposed SEC settlement following a Wells notice, subject to SEC approval; and securities and consumer litigation. The company said outcomes could differ and that certain proceedings remain unresolved.
- The company disclosed financial distress reported for an affiliate of ZHG Group, a related party and strategic partner, creating potential counterparty and collection risk. It recognized $2.5m of ZHG agreement revenue in the first half and reported a $1.5m receivable at June 30.
- The Middle East park development remained conditional, with no assurance it would proceed; $10.0m of partner funding was deferred and $3.5m of related costs were recorded as an asset. A Sesame Workshop license includes commitments that could total up to approximately $105m over the agreement’s remaining term.
- Other principal risks include seasonality and weather, discretionary spending, reputation and animal-related scrutiny, legal and regulatory exposure, high leverage, interest-rate changes, and dependence on key U.S. markets. Management reported disclosure controls were effective and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether attendance growth and higher in-park spending persist, and whether lower admission per capita affects future revenue and margins.
- How much of reported EBITDA improvement reflects sustainable operations versus add-backs and unusual items; review the filing’s non-GAAP reconciliation and covenant calculation.
- Debt repayment capacity, the 2020 Term B-2 maturity, covenant headroom, and exposure to higher interest rates despite swaps.
- Final terms and approvals for the SEC and EZPay settlements, and developments in the securities and consumer lawsuits.
- Collectability of amounts due from ZHG-related counterparties and whether the Middle East project advances; monitor spending obligations under the Sesame license.
- Execution and realized savings from the announced cost initiatives, including expected restructuring charges, and the condition of rides and other assets following write-offs.