United Parks & Resorts (then SeaWorld Entertainment, Inc.) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. The filing is for SeaWorld Entertainment, Inc.; it describes a U.S. portfolio of 12 theme parks and reports one aggregated operating segment. Financial statements are unaudited. Amounts below are in U.S. dollars; financial figures are in millions unless noted.
Financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $496.0 | $504.8 | $789.4 | $775.5 |
| Operating income | $155.4 | $178.0 | $167.2 | $188.0 |
| Operating margin | 31.3% | 35.3% | 21.2% | 24.2% |
| Net income | $87.1 | $116.6 | $70.6 | $107.6 |
| Net margin | 17.5% | 23.1% | 8.9% | 13.9% |
| Diluted EPS | $1.35 | $1.62 | $1.09 | $1.45 |
| Adjusted EBITDA (non-GAAP) | $224.2 | $234.4 | $296.7 | $300.4 |
- Q2 operating drivers: Attendance declined 2.0% to 6.139 million. Revenue per capita rose 0.3% to $80.80; admissions per capita was essentially flat at $43.96, while in-park spending increased 0.6% to $36.84.
- Six-month operating drivers: Attendance declined 1.5% to 9.517 million, while revenue per capita rose 3.4% to $82.94, reflecting higher pricing and international-services revenue.
- Cash flow: First-half operating cash flow was $234.9 million, down from $299.6 million. Capital expenditures were $145.6 million, up from $101.0 million; operating cash flow less capital expenditures was $89.3 million versus $198.6 million. Cash interest paid increased to $71.6 million from $48.6 million.
- Liquidity: Cash was $146.7 million at June 30, versus $79.2 million at year-end 2022. The company reported a 0.7 working-capital ratio, noting that advance ticket sales and inventory turnover commonly keep it below 1. Management said cash, operating cash flow and available revolver borrowings should cover needs for at least 12 months.
- Debt: Total principal debt was $2.132 billion, compared with $2.138 billion at year-end; net debt after cash was approximately $1.985 billion. The $1.179 billion Term B balance has variable-rate exposure. The $390 million revolver had no borrowings and $371.6 million available after letters of credit. The company reported a 2.61x net total leverage ratio under its debt agreements and compliance with covenants.
Changes versus prior comparable periods
- Q2 revenue fell 1.7%, operating income fell 12.7%, and net income fell 25.3% year over year. First-half revenue rose 1.8%, but operating income declined 11.1% and net income declined 34.4%.
- Management attributed attendance weakness primarily to adverse weather across most markets, including heat, cold, rain and effects associated with Canadian wildfires. Pricing lifted per-capita spending, partly offsetting lower attendance.
- Interest expense rose 37.8% in Q2 and 40.6% in the first half, primarily due to higher rates on variable-rate debt. Operating and SG&A expenses also increased; management cited labor and legal/contractual costs, self-insurance adjustments, marketing and strategic consulting costs.
- Share repurchases were substantially lower than in first-half 2022: $13.9 million in first-half 2023 versus $454.8 million. Approximately $42.4 million remained authorized at June 30, 2023.
Outlook, risks and unusual items
- No specific revenue, earnings or attendance guidance was provided. Results are seasonal, typically strongest in the second and third quarters; management cautioned that interim results are not necessarily indicative of full-year results.
- Management cited continuing wage and labor-availability pressures, higher interest rates, inflation, supply-chain disruption and ride availability issues. It described cost reduction, labor optimization, pricing and revenue initiatives as ongoing priorities.
- As of June 30, about $1.2 billion of debt was variable-rate. A hypothetical 100-basis-point increase in Adjusted Term SOFR was estimated to raise annual interest expense by $11.8 million with no revolver borrowings, or $15.7 million assuming $390 million of revolver borrowings.
- Disclosure controls and procedures were deemed ineffective because of an unremediated material weakness involving policies and procedures for Board-management engagement and related control environment matters. Management reported remediation actions in progress and stated the weakness was not considered remediated.
- The Sesame Workshop arbitration panel awarded royalties, interest and costs; amounts were accrued, and the company was considering legal options. The filing also describes an appeal in a former-employee equity dispute and a putative discrimination class action; management said it did not expect material losses from these matters.
- After quarter-end, the company canceled a proposed Term Loan repricing due to unfavorable market conditions. It also issued a conditional notice to redeem $227.5 million of 8.75% secured notes on August 31, 2023, subject to completion of satisfactory financing.
- Other notable items include $8.8 million of nonrecurring strategic-initiative consulting costs in the first half and increased contractual liabilities associated with prior temporary COVID-19 park closures. The company said it had no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether attendance and guest spending recover from weather-related weakness, and whether pricing continues to offset attendance declines.
- How labor, insurance, legal/closure-related costs and strategic consulting expenses affect future margins and cash flow.
- Variable-rate borrowing exposure, refinancing plans for the 2025 secured notes, and the status of the conditional redemption and canceled repricing.
- Progress and testing of remediation for the disclosed material weakness in internal control over financial reporting.
- Developments in the Sesame Workshop arbitration, former-employee appeal and putative class action, including any changes to accrued amounts or assessed exposure.
- Capital spending, share repurchases and liquidity relative to seasonal operating needs and debt-service obligations.