Business context and reporting period
The filing is SeaWorld Entertainment, Inc.’s Form 10-K for the fiscal year ended December 31, 2017, not a standalone quarterly filing. The company operated 12 U.S. theme parks and hosted 20.8 million visits. The filing name differs from the company name in the request metadata.
Unaudited fourth-quarter results are included below where relevant. Unless otherwise stated, financial amounts are in U.S. dollars; figures are rounded.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Revenue | $1,263.3 million | $1,344.3 million | Down 6.0% |
| Admissions revenue | $765.1 million | $817.8 million | Down 6.4% |
| Food, merchandise and other revenue | $498.3 million | $526.5 million | Down 5.4% |
| Operating income (loss) | $(201.4) million | $59.6 million | Includes 2017 impairment |
| Net income (loss) | $(202.4) million | $(12.5) million | Loss increased |
| Adjusted EBITDA | $300.8 million | $332.0 million | Down 9.4% |
| Cash from operating activities | $192.5 million | $280.4 million | Down $87.9 million |
| Cash capital expenditures | $172.5 million | $160.5 million | Up $12.0 million |
| Interest expense | $78.0 million | $62.7 million | Up 24.5% |
- A $269.3 million non-cash goodwill impairment fully wrote off goodwill for the SeaWorld Orlando reporting unit. The company also recorded a $7.8 million impairment of certain long-lived assets and $5.2 million of restructuring costs.
- Attendance fell 5.5% to 20.8 million. Admission per capita declined 1.0% to $36.79; in-park per capita spending edged up 0.1% to $23.96. Total revenue per capita was $60.74, down 0.6%.
- Operating cash flow less cash capital expenditures was approximately $19.9 million. Cash and cash equivalents were $33.2 million at year-end, versus $69.0 million a year earlier.
- Year-end working capital deficit was $134.7 million. Management cited advance ticket receipts, seasonality and low inventory as factors and expected cash, operating cash flow and available credit to meet needs for at least 12 months.
- Total debt principal was $1,560.0 million ($1,542.3 million net of discounts and issuance costs on the balance sheet). The company reported a 5.08x total net leverage ratio under its credit agreement and compliance with covenants at year-end; the agreement’s maximum permitted ratio was 5.75x. The filing warns that declining performance increases future covenant risk.
- The $210 million revolving facility had $15.0 million drawn and about $175.9 million available after letters of credit at year-end. Subsequent to year-end, the company borrowed another $40 million and repaid $5 million.
- Debt maturities include $554.2 million of Term B-2 loans due in 2020 and $990.8 million of Term B-5 loans due in 2024. About $1.0 billion of debt was effectively fixed through interest-rate swaps; management estimated a 100-basis-point LIBOR increase would add about $5.9 million to annual cash interest, assuming average revolving borrowings of $40 million.
- The quarterly dividend was suspended in September 2016; no dividends were declared in 2017. No program share repurchases occurred in 2017 or 2016.
Fourth-quarter comparison (unaudited)
| Metric | Q4 2017 | Q4 2016 |
|---|---|---|
| Revenue | $265.5 million | $267.6 million |
| Operating loss | $(10.9) million | $(11.5) million |
| Net loss | $(20.4) million | $(11.9) million |
| Loss per share, diluted | $(0.24) | $(0.14) |
Material changes versus prior period
- Revenue fell $81.0 million, primarily due to lower attendance. Management attributed attendance weakness largely to domestic and international declines concentrated in Orlando and San Diego.
- International attendance remained weak: attendance from the United Kingdom declined 21% year over year, and Latin American attendance declined 4% from 2016 and 35% from 2015. Management cited currency strength, Brexit-related uncertainty and competition as contributing factors.
- Hurricane Irma caused closures in Tampa and Orlando; Hurricane Harvey, travel disruption in Texas and weather in Virginia also affected attendance.
- Operating expenses declined 4.7%, including lower labor costs and savings initiatives, but the goodwill charge drove operating results into a substantial loss. Interest expense increased, and the company recorded an $8.1 million loss on debt extinguishment and related write-offs following its March 2017 refinancing.
- The company refinanced debt in March 2017, issuing $998.3 million of Term B-5 loans and replacing its revolving facility. Cash from operating activities declined while capital spending increased.
Outlook, management commentary, risks and unusual items
- Management described its priorities as improving guest experiences, rebuilding attendance through marketing, investing in attractions and controlling costs. It did not provide quantified 2018 revenue or earnings guidance in the supplied filing text.
- Planned 2018 attractions included a new SeaWorld San Diego coaster, a river rapids ride in Orlando, a hybrid coaster at Sesame Place and new water attractions at several parks. The company expected to fund 2018 capital expenditures through operating cash flow.
- Cost actions included eliminating approximately 350 positions in 2017, following approximately 320 positions eliminated in 2016. Management had identified additional potential savings opportunities, but achievement and timing were uncertain.
- Following the 2016 decision to end orca breeding, SeaWorld began new orca encounters in San Diego in 2017. The company cited animal-care regulation, activist activity, public perception and related attendance effects as significant business risks.
- International development remained conditional: SeaWorld Abu Dhabi was expected to open by 2022, subject to further design and other conditions. A January 2018 San Diego hotel venture required lease and government approvals; approval could take up to four years. A second Sesame Place was scheduled to open by mid-2021, with a Sesame Street land planned for Orlando by fall 2022.
- On February 26, 2018, CEO Joel Manby stepped down; John T. Reilly became interim CEO and Yoshikazu Maruyama became Executive Chairman pending appointment of a permanent CEO. The company expected about $6.6 million in severance and $3.2 million in non-cash equity compensation expense in Q1 2018.
- The Tax Cuts and Jobs Act reduced the federal corporate tax rate to 21% effective 2018. Remeasurement of deferred taxes produced a $1.8 million net benefit in 2017; the filing also notes uncertainty about the Act’s implementation and interest-deduction limits.
- Material legal and investigative matters include a securities class action that had been certified, consumer litigation, an EZPay class action with liability decided but damages unresolved, and DOJ and SEC inquiries concerning historical disclosures and securities trading. The company said it intended to defend or cooperate as applicable; outcomes were uncertain.
- Other risks include high leverage and fixed operating costs, competition, weather and seasonality, labor costs, animal health and safety, permits and regulation, and concentrated revenue exposure to Florida, California and Virginia. The company reported effective disclosure controls and effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether attendance and revenue trends improved after 2017, especially at SeaWorld Orlando and San Diego, and whether marketing and new attractions restored demand.
- Adjusted EBITDA performance, operating cash flow after capital spending, cash availability and the company’s ability to service debt and comply with leverage covenants.
- The status and potential financial exposure of the securities, consumer and EZPay litigation and the DOJ and SEC inquiries.
- Whether cost savings were realized without impairing park operations, guest satisfaction or future revenue growth.
- Progress, funding requirements and required approvals for the Abu Dhabi, China-region, San Diego hotel and Sesame Place projects.
- Whether tax benefits and deferred tax assets are realizable, and the effect of the 2018 tax-law changes on cash taxes and interest deductibility.