OneSpaWorld Holdings Limited — Q2 2019 Form 10-Q
Reporting period: Three months ended June 30, 2019. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless noted. OneSpaWorld operates health, wellness, fitness and beauty centers and sells related products on cruise ships and at destination resorts.
Business context and reporting period
The company completed its business combination on March 19, 2019. The Q2 2019 results are Successor results, while Q2 2018 results are Predecessor results. Acquisition accounting and the resulting capital structure make the periods not fully comparable. The balance sheet and cash flow discussion also reflects the acquisition and financing transactions.
At quarter end, OneSpaWorld operated on 164 cruise ships and at 70 destination resorts. Management reported more than 80% market share in the outsourced maritime health and wellness market.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Change / context |
|---|---|---|---|
| Revenue | $140.4 | $135.4 | Up 3.7% |
| Service revenue | $107.3 | $102.8 | Up 4.3% |
| Product revenue | $33.1 | $32.6 | Up 1.8% |
| Operating income | $8.1 | $12.4 | Operating margin about 5.8%, versus 9.2% |
| Net income | $4.6 | $3.7 | Net income attributable to common shareholders was $3.6 versus $2.7 |
| EPS | $0.06 basic; $0.05 diluted | Loss of $0.31 per share | 2019 diluted weighted-average shares: 72.0 million |
Q2 cost of services was $90.6 million, or 84.5% of service revenue, compared with 85.7% a year earlier. Cost of products was $28.6 million, or 86.3% of product revenue, compared with 84.6%. Administrative expense increased to $4.3 million from $2.8 million; intangible amortization increased to $4.5 million from $0.9 million.
Liquidity and debt at June 30: Cash was $14.4 million; current assets were $85.9 million and current liabilities $46.0 million. Debt borrowings totaled $240.9 million before $6.6 million of unamortized financing costs; reported debt net of those costs was $234.3 million, including $2.1 million current and $232.2 million long-term. The $20 million revolving facility had $7.9 million drawn. The company reported $647.6 million of total equity.
Cash flow: For the Successor period from March 20 through June 30, operating cash flow was negative $24.8 million and capital expenditures were $1.2 million. Investing cash flow was negative $671.3 million, including $670.0 million for the acquisition. Financing cash flow was positive $709.1 million, primarily from share issuance, business-combination proceeds and new debt. Cash ended the period at $14.4 million.
Material changes versus comparable periods
- Revenue increased with six net new shipboard centers, larger and enhanced shipboard facilities, and greater collaboration with cruise partners. Average weekly revenue per ship was $61,317 versus $61,150.
- Average weekly revenue per destination resort center fell 15% to $12,292, which management attributed mainly to a greater proportion of managed centers that produce less revenue per facility.
- Operating income declined despite revenue growth, partly reflecting higher administrative costs, public-company expenses, acquisition-related purchase accounting and increased amortization of newly valued intangible assets.
- Interest expense was lower than Q2 2018, at $4.3 million versus $8.8 million, following refinancing in connection with the business combination.
- Balance-sheet assets rose to $929.9 million, including $628.2 million of net intangible assets and $182.1 million of goodwill, largely reflecting acquisition accounting.
Outlook, risks, contingencies and unusual items
- Management stated that available liquidity and capital should be sufficient to fund operations and the growth strategy for at least the next 12 months. No quantified earnings or revenue guidance was provided.
- Management cited cruise and hospitality demand, economic and geopolitical conditions, consumer discretionary spending, competition, currency movements (especially the U.S. dollar against sterling and the euro), and hurricanes as risks. The third quarter and holiday periods are generally stronger; hurricane exposure is greatest from August through October.
- The company’s new credit facilities have variable LIBOR-based rates: generally LIBOR plus 4.00% on first-lien borrowing and LIBOR plus 7.50% on second-lien borrowing. The revolving facility has a financial covenant; the agreements also impose debt, lien, dividend and other restrictions.
- The acquisition purchase-price allocation remained provisional. The company recorded $633.3 million of identifiable intangible assets and $182.1 million of goodwill; valuations, tax items and goodwill allocation remained subject to refinement.
- The company corrected immaterial errors identified in its March 2019 Successor-period financial statements. The corrections reduced additional paid-in capital by $24.1 million and total equity by $23.5 million at June 30, and did not affect previously reported income statements or cash at March 31.
- Unusual compensation included $20.4 million of stock-based compensation from options fully vested upon grant, and $26.3 million of predecessor change-in-control payments. The filing reported no legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Track operating margin and whether revenue growth converts into improved operating income after higher public-company and amortization costs.
- Monitor resort-center productivity, new ship and resort additions, and the mix of managed versus other centers.
- Review cash generation and working-capital needs; Successor-period operating cash flow was negative $24.8 million.
- Assess leverage, variable-rate interest exposure, covenant headroom and remaining revolver availability.
- Follow completion of the provisional acquisition valuation and any further purchase-accounting adjustments.
- Consider dilution from outstanding warrants, options and deferred shares; deferred shares are contingent on specified events, including the share-price threshold described in the filing.