OneSpaWorld Holdings Limited (OSW) — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. OneSpaWorld operates health, wellness, fitness and beauty facilities, primarily on cruise ships and at destination resorts, and sells related products. Comparisons with 2021 are heavily affected by the resumption of cruise operations and are not considered meaningful by management.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $162.3m | $43.6m | $377.3m | $58.4m |
| Operating income (loss) | $9.8m | $(12.2)m | $4.4m | $(48.0)m |
| Net income (loss) | $5.9m | $(12.3)m | $55.5m | $(57.6)m |
| Basic EPS | $0.06 | $(0.14) | $0.60 | $(0.64) |
| Operating cash flow | Not separately provided | Not separately provided | $16.9m | $(31.5)m |
- Q3 service revenue was $132.8m and product revenue $29.5m. Nine-month service and product revenue were $307.6m and $69.8m, respectively.
- Operating margin was approximately 6.1% in Q3 and 1.2% for the nine months, compared with approximately negative 27.9% and negative 82.3%, respectively, in 2021.
- Nine-month net income includes a $62.2m gain from the change in fair value of warrant liabilities, a non-cash item. Excluding the warrant-related adjustment used in diluted EPS, nine-month diluted EPS was $0.49; the filing does not present adjusted net income as a separate measure.
- Cash and cash equivalents were $35.2m, with a further $1.9m restricted, at September 30. Current assets were $109.8m and current liabilities $61.9m.
- Total debt principal was $226.2m ($223.0m net of issuance costs), versus $234.5m at December 31, 2021. The revolving facility was undrawn, with $20m available. Weighted stated rates were 6.8% on the first-lien term loan and 10.3% on the second-lien term loan; the company reported compliance with debt covenants.
Material changes and operating trends
- Operations had resumed on 172 cruise ships and at 48 destination resorts by September 30, 2022, versus 78 ships and 45 resorts a year earlier. Management attributes the substantial revenue recovery and return to positive operating cash flow to resumed operations.
- Q3 revenue increased about 272% year over year; nine-month revenue increased about 546%. Operating results also improved, though nine-month operating income remained modest relative to revenue.
- Nine-month cash flow from operations was $16.9m; investing cash outflow was $3.3m, primarily capital expenditures; financing cash outflow was $8.2m, including $7.0m repayment of the revolving facility and $1.3m repayment of term debt. Cash and restricted cash increased $4.3m.
- Interest expense rose to $4.0m in Q3 from $3.2m and to $10.9m for nine months from $9.9m. The company has an interest-rate swap, but exposure to floating rates remains relevant.
- On October 24, 2022, the company repaid $5.0m of second-lien principal; $20.0m remained outstanding afterward. The ATM equity offering agreement was terminated effective August 1, 2022; approximately $10m of its capacity had remained unused.
Outlook, risks and contingencies
- No quantified revenue, earnings or cash-flow guidance is provided. Management said COVID-19 was expected to continue adversely affecting performance through fiscal 2022 and into fiscal 2023, while noting uncertainty about travel demand and the pandemic’s future effects.
- Management concluded available liquidity was sufficient to meet obligations over the next 12 months and comply with debt covenants. Restart-related employee redeployment and other operating costs were expected to increase as cruise partners resumed operations.
- Risks highlighted include renewed COVID-19 disruptions, weaker travel demand or economic conditions, inflation and higher interest rates, fuel-price increases, currency movements, hurricanes, and dependence on cruise and hospitality partners. Management reported no material change to previously disclosed risk factors.
- A foreign tax authority assessed $1.9m related to a VAT matter; the company disputes it and had accrued $1.2m. Restricted cash of $1.9m is held in escrow in connection with a tax-assessment legal proceeding. Management stated it did not expect the matter to have a material adverse effect. Other legal claims are described as ordinary-course matters; no material legal proceedings were listed.
- Adoption of the lease standard was expected to add more than $16m of operating lease assets and liabilities to the balance sheet; the final amount remained under assessment.
- The company identified no material change in internal control over financial reporting and reported effective disclosure controls as of September 30, 2022.
Investor verification points
- Track cruise ship and resort reopenings, guest demand, and whether the strong year-over-year recovery translates into sustained operating profitability and cash generation.
- Separate recurring operating performance from the $62.2m non-cash warrant fair-value gain when assessing nine-month net income and EPS.
- Verify debt balances, interest-rate exposure, covenant compliance and the effects of the October second-lien repayment.
- Monitor unrestricted liquidity, working-capital needs and restart costs, as well as the eventual lease-standard balance-sheet impact.
- Follow the outcome and any changes in accruals or restricted cash related to the disputed VAT assessment.