SeaWorld Entertainment, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The filing is for SeaWorld Entertainment, Inc. (now associated with the United Parks & Resorts name in the request metadata). Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted. Theme-park operations are seasonal, with the second and third quarters typically strongest.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $483.2 | $437.7 | $1,092.3 | $997.8 |
| Operating income (loss) | $151.7 | $108.8 | $140.8 | $(190.5) |
| Net income (loss) | $96.0 | $55.0 | $55.8 | $(181.9) |
| Diluted EPS | $1.10 | $0.64 | $0.64 | $(2.12) |
| Operating cash flow | Not separately provided | Not separately provided | $267.5 | $187.8 |
| Capital expenditures | Not separately provided | Not separately provided | $140.9 | $139.6 |
- Q3 revenue rose 10.4%; operating income increased 39.4%. Operating margin was approximately 31.4%, versus 24.9% a year earlier.
- For the nine months, revenue rose 9.5%. The swing to operating and net income largely reflects the prior-year $269.3 million SeaWorld Orlando goodwill impairment and the prior-year $8.1 million debt-extinguishment charge.
- Attendance increased 9.7% in Q3 to 8.34 million and 8.7% for the nine months to 17.98 million. Q3 total revenue per guest was $57.91, up 0.7%; admission per guest fell 3.7% to $33.54 while in-park spending per guest rose 7.4% to $24.37. Nine-month total revenue per guest increased 0.7% to $60.74.
- Nine-month net cash provided by operations less capital expenditures was approximately $126.6 million. Cash and cash equivalents were $125.7 million at September 30, up from $33.2 million at year-end 2017; total cash including restricted cash was $127.4 million.
Debt and liquidity
- At September 30, total debt principal was $1.527 billion, including $23.7 million of current maturities; reported long-term debt, net, was $1.489 billion. The company had no revolving-credit borrowings and approximately $188.7 million available under its $210 million facility, after letters of credit.
- Working capital was negative, with a current ratio of 0.8; management said this is typical for the business, partly because of advance ticket receipts and limited inventory. Management expected cash, operating cash flow and revolving-credit availability to cover needs for at least 12 months.
- Net leverage under the credit agreement was 3.40x. The company reported covenant compliance at quarter-end. Five interest-rate swaps fixed rates on $1.0 billion of debt through May 2020; management estimated a 100-basis-point LIBOR increase would add about $5.7 million to annual cash interest, assuming average revolving borrowings of $40 million.
- Subsequent event: On October 31, 2018, the company refinanced the $543.9 million Term B-2 balance with additional Term B-5 loans and replaced its revolving facility with a new $210 million facility maturing in October 2023. The amendment removed financial covenants on Term B-5 loans and introduced a springing leverage test for the revolver.
Changes, outlook and notable items
- Management attributed attendance growth to pricing strategies, marketing and communications initiatives, and favorable reception of new rides, attractions and events; unfavorable weather partly offset nine-month gains. Lower admission per guest was more than offset by higher in-park spending.
- The company said it had identified and was executing on $50 million in cost-saving opportunities and was seeking additional savings. A restructuring announced in August eliminated approximately 125 positions; nine-month restructuring and separation costs were $16.4 million, including former-CEO severance and other executive departures. No formal revenue or earnings guidance is stated in the provided filing text.
- Q3 operating expenses included $2.8 million related to terminating the San Diego Hotel Project agreement. The company recorded a $4.0 million SEC civil penalty in SG&A; the settlement was approved September 24, 2018. It also accrued $11.5 million for a proposed EZPay class-action settlement, subject to court approval.
- Material uncertainties include ongoing securities litigation scheduled for trial in 2019, other consumer litigation, animal-welfare regulation and activism, weather and seasonality, discretionary spending, high fixed costs, labor and construction costs, and counterparty risk. The filing specifically cited financial distress at an affiliate of ZHG, a significant shareholder and counterparty. The Middle East park project remained conditional, with no assurance it would proceed; management expected completion by 2022.
- Future commitments include Sesame-related park, capital and marketing obligations estimated at up to approximately $90 million over the remaining agreement term. The company planned to open Sesame Land at SeaWorld Orlando in spring 2019. Adoption of lease accounting in 2019 was expected to materially increase balance-sheet assets and liabilities, particularly due to the San Diego land lease; no material income-statement or cash-flow effect was expected.
Most important facts for investors to verify
- Whether attendance and in-park spending growth persist, and whether admission-per-guest declines continue to offset those gains.
- The quality and repeatability of operating cash flow and cost savings, including the distinction between reported results and credit-agreement Adjusted EBITDA, which includes permitted add-backs and estimated savings.
- The post-refinancing debt terms, interest exposure, covenant headroom and capacity for dividends or repurchases; the company made no program repurchases during the period and had about $190 million of authorization remaining.
- Final court approval and total costs of the EZPay settlement, outcomes of securities and consumer litigation, and any further regulatory or legal liabilities.
- Progress and funding/counterparty risks for the Middle East and ZHG projects, planned Sesame investments, and the balance-sheet effect of lease-accounting adoption.