OneSpaWorld Holdings Limited — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited consolidated results; amounts below are U.S. dollars. OneSpaWorld operates health, wellness, fitness and beauty centers, primarily aboard cruise ships, and at destination resorts.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $200.5 million | $127.4 million | $383.0 million | $215.0 million |
| Operating income (loss) | $13.4 million | $1.0 million | $24.6 million | $(5.4) million |
| Net income (loss) | $(3.2) million | $55.9 million | $(19.1) million | $49.6 million |
| Basic and diluted EPS | $(0.03) | $0.61 basic; $0.46 diluted | $(0.20) | $0.54 basic; $0.39 diluted |
| Operating cash flow | Not separately provided | Not separately provided | $27.5 million | $4.4 million |
- Q2 revenue grew 57% year over year; service revenue rose 58% to $163.2 million and product revenue rose 57% to $37.3 million. The filing attributes growth mainly to more ships operating and occupancy of ships in service.
- Average ship count increased to 177 from 144 in Q2; period-end ship count was 183 versus 172. Average weekly revenue per ship increased to $82,149 from $62,686. Average resort count was 51 versus 47.
- Q2 operating margin was approximately 6.7%, compared with 0.8% a year earlier. Cost of services remained 68% of revenue; cost of products declined to 16% from 18%.
- Net results were heavily affected by noncash warrant-liability remeasurement: a $12.2 million loss in Q2 2023 versus a $58.5 million gain in Q2 2022. For the first half, the warrant effect was a $34.1 million loss versus a $61.9 million gain. The company reported improved operating results despite the net loss.
- First-half operating cash flow was $27.5 million; capital expenditures were $2.2 million and financing cash outflow was $28.8 million, primarily reflecting $31.0 million of debt repayments. Cash, cash equivalents and restricted cash totaled $30.0 million at June 30, 2023, down $3.3 million from year-end.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $28.8 million, restricted cash $1.2 million, and current assets $125.2 million. Current liabilities were $73.2 million.
- Debt was $184.6 million gross, or $182.5 million net of issuance costs, all under the first-lien term loan. The $15 million second-lien loan was repaid in full during the first half. The first-lien loan carried a 9.0% rate at June 30 and matures in 2026.
- The $20 million revolving facility was undrawn. Management said it expects sufficient liquidity to meet obligations over the next 12 months and comply with debt covenants; the company reported covenant compliance at quarter-end.
- The company repaid $16 million of first-lien principal and $15 million of second-lien principal in the first half. Interest expense rose to $4.4 million in Q2 and $9.0 million for the half-year, reflecting higher rates and second-lien prepayment penalties, partly offset by lower debt.
Material changes and unusual items
- Operations continued to recover toward normalized levels after the pandemic. First-half revenue increased 78% year over year, with average ship count rising to 175 from 124.
- Warrant exchanges and exercises materially changed the capital structure. In April, holders exchanged about 95% of public warrants and 50% of sponsor warrants for common shares; certain PIPE warrants were also exercised on a cashless basis. Shares outstanding increased to 99.5 million from 93.0 million at December 31, 2022, and non-voting shares converted to voting shares.
- The company transitioned its first-lien debt and interest-rate swap reference benchmark from LIBOR to SOFR. The amendment did not materially affect the financial statements. A swap with a $95.4 million notional amount matures in September 2024; the company expects to reclassify $3.6 million of accumulated hedge income into interest expense within 12 months.
- In May, a selling shareholder completed a secondary offering of 10.32 million shares. The company said related professional fees increased administrative expenses; the filing does not identify this as a company share issuance.
Outlook, risks and contingencies
- No numerical full-year revenue, profit or cash-flow guidance is provided. Management described the business as substantially returned to normalized operations and cited positive operating cash flow and available liquidity.
- The third quarter and holiday periods generally produce the highest revenue yields due to cruise seasonality. Hurricanes, particularly August through October, may disrupt cruise and resort operations.
- Key risks include dependence on cruise and hospitality demand, economic softness, inflation and interest rates, renewed health disruptions, fuel-price increases, currency movements, changing consumer preferences and competition. The company says inflation had not materially harmed results to date.
- A foreign tax authority VAT assessment remains disputed; the company accrued $1.2 million for this matter. Separately, a $4.0 million income-tax contingency relates to foreign exposures; following participation in an Italian tax amnesty program, the matter was settled July 26, 2023, and the company expected to record a decrease in uncertain tax benefits in Q3.
- Management stated that other pending legal matters were not expected, based on current knowledge, to have a material aggregate effect. The filing reports no material changes to previously disclosed risk factors and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether ship count, occupancy and revenue per ship continue to support revenue growth and operating margins.
- How much reported earnings fluctuate with warrant fair-value changes, and the remaining warrant liability ($17.4 million at June 30).
- Debt-service capacity at the 9.0% first-lien rate, scheduled 2026 maturity, and compliance with leverage covenants.
- Cash conversion and working-capital needs as operations expand, including the effect of seasonal revenue and hurricane exposure.
- The Q3 accounting and cash implications of the Italian tax settlement, and the eventual outcome of the separate VAT assessment.