OneSpaWorld Holdings Limited — Fiscal 2018 Form 10-K Summary
Business context and reporting period
OneSpaWorld Holdings Limited, a Bahamian company, operates health, fitness, beauty and wellness centers on cruise ships and at destination resorts. As of December 31, 2018, it served 163 cruise ships and 67 destination resorts. The company reported fiscal-year results for the year ended December 31, 2018, primarily using audited combined financial statements of “OSW Predecessor,” a carve-out of entities formerly under Steiner Leisure.
The Business Combination closed on March 19, 2019, after the reporting period, making OneSpaWorld the ultimate parent of the operating business and enabling its return to the public markets. Historical combined results may not reflect the results of a standalone public company because they include allocated parent costs and parent-managed cash flows.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $540.8 million | $506.7 million | Up 6.7% |
| Service revenue | $410.9 million | $383.7 million | Up 7.1% |
| Product revenue | $129.9 million | $123.0 million | Up 5.6% |
| Income from operations | $48.5 million | $38.3 million | Up 26.7% |
| Operating margin | 9.0% | 7.6% | Expanded 140 basis points |
| Net income | $13.7 million | $33.2 million | Down 58.6% |
| Net margin | 2.5% | 6.6% | Declined |
| Adjusted EBITDA | $58.6 million | $55.9 million | Up 4.9% |
| Unlevered after-tax free cash flow | $52.9 million | $52.8 million | Essentially flat |
| Cash flow from operating activities | $32.4 million | $70.1 million | Down $37.7 million |
| Capital expenditures | $5.0 million | $2.7 million | Up $2.3 million |
Adjusted EBITDA represented a 10.8% margin, compared with 11.0% in 2017. Unlevered after-tax free cash flow conversion was 90.3% of Adjusted EBITDA, compared with 94.4% in 2017. These are non-GAAP measures and should not be viewed as substitutes for GAAP results.
Cash and cash equivalents were $15.3 million at December 31, 2018, compared with $8.7 million at December 31, 2017. Working capital, as defined by the company, was $22.4 million. Total assets were $272.7 million and total liabilities were $400.2 million, resulting in total equity deficit of $127.6 million.
Long-term debt was $352.4 million, net of deferred financing costs, at year-end. The debt was assigned from the parent in January 2018, had a December 2021 maturity, was secured by substantially all company assets and bore interest at LIBOR plus a 7.25% margin at year-end. Interest expense was $34.1 million in 2018, compared with none in 2017. The company stated that it was in compliance with its debt covenants. Separately, the parent repaid and forgave the outstanding debt on March 1, 2019 as a non-cash capital contribution.
Material changes versus prior comparable period
- Revenue growth was driven by six net new shipboard centers, 14 net new destination resort centers, larger and enhanced shipboard facilities, higher prices, higher-value services and product innovation. New centers contributed approximately $20.1 million of 2018 revenue, while pricing contributed $15.3 million and existing-center volume contributed $1.0 million.
- The change in the timetospa.com business model from a standalone e-commerce operation to a post-cruise sales tool reduced 2018 revenue by approximately $2.2 million and limits comparability with prior periods.
- Shipboard productivity improved: average weekly revenue per ship increased 6.0% to $60,421, and revenue per shipboard staff member per day increased 6.3% to $474. Resort productivity declined 12.9% to $13,927 per week, primarily due to renovations, smaller Asian centers and the closure of a large Las Vegas center.
- The 2017 supply agreement with a related-party supplier reduced product costs and improved cost ratios. In 2018, cost of services declined to 85.8% of service revenue from 86.6%, while cost of products declined to 85.3% of product revenue from 87.8%.
- Operating income increased substantially as revenue growth and lower product costs more than offset higher administrative expenses associated with the Business Combination.
- Net income fell sharply because of $34.1 million of interest expense following the assignment of parent-level debt to the company. The lower U.S. federal tax rate under the Tax Cuts and Jobs Act also reduced the tax provision to $1.1 million from $5.3 million.
- Operating cash flow declined primarily because of lower net income and unfavorable working-capital changes, including inventory and payment-term effects. Financing cash outflows declined to $20.6 million from $65.5 million, mainly because distributions to Steiner Leisure decreased.
Guidance, outlook, management commentary and risks
The filing does not provide formal fiscal 2019 earnings or revenue guidance. Management expects growth from cruise-industry capacity expansion, new ships, additional cruise-line contracts, higher-value medi-spa services, pre-booking and pre-payment, targeted marketing, dynamic pricing, expanded retail programs and selective destination-resort growth.
Existing cruise-line partners were expected to add 35 ships and more than 119,000 berths from 2019 through 2023, representing approximately a 25% increase in estimated year-end 2018 berth count. The company also identified new agreements with Virgin Voyages and Celebrity Cruises as sources of future shipboard expansion.
Key risks include substantial dependence on a concentrated customer base, cruise and hospitality demand, contract renewals and termination provisions, minimum payments to cruise lines and resort owners, variable-rate debt, debt covenants, labor and staffing constraints, hurricanes and other disruptions, international regulatory and tax exposure, data privacy and cybersecurity risks, litigation and product liability, foreign exchange movements, and the ability to retain key management and qualified personnel.
Three cruise-line groups accounted for approximately 83.3% of 2018 revenue: Carnival at 48.5%, Royal Caribbean at 21.0% and Norwegian Cruise Line at 13.8%. Minimum contractual payments for 2019 included approximately $122.7 million under cruise-line agreements and $3.4 million under operating leases. Total disclosed contractual obligations were $154.1 million, including $130.7 million of cruise-line commitments and $23.4 million of operating leases.
The company had an income-tax contingency accrual of approximately $3.9 million at December 31, 2018 and disclosed ongoing tax examinations and a disputed foreign tax assessment. It also had approximately $18.2 million of estimated U.S. net operating loss carryforwards, most of which were subject to Section 382 limitations.
Important facts for investors to verify
- Reconcile the 2018 GAAP results with Adjusted EBITDA and unlevered after-tax free cash flow, including all related-party and non-recurring adjustments.
- Assess sustainable leverage and interest burden after the March 2019 debt repayment, including the financing structure and debt balances of the post-Business Combination company.
- Review the standalone-company impact of parent allocations, related-party supply agreements and the transition away from the former timetospa.com business model.
- Monitor customer concentration, contract renewal terms, termination rights and minimum payments, particularly for Carnival, Royal Caribbean and Norwegian Cruise Line.
- Evaluate liquidity against the $126.1 million of 2019 minimum cruise-line and operating-lease commitments and the company’s $15.3 million year-end cash balance.
- Verify the expected timing and economics of new ships, Virgin Voyages and Celebrity Cruises agreements, and the company’s ability to convert planned capacity growth into revenue.
- Review tax contingencies, potential changes to the company’s low effective cash-tax profile and the impact of future land-based expansion.
- Consider that the historical financial statements are combined carve-out statements and may not be directly comparable with future public-company results.