United Parks & Resorts Inc. quarterly report, Q1 FY2019

Business context and reporting period

This is SeaWorld Entertainment, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2019—not a filing under the “United Parks & Resorts Inc.” name in the request metadata. SeaWorld operated 12 U.S. theme and water parks. Results are highly seasonal: management says roughly two-thirds of annual attendance and revenue typically occur in the second and third quarters, and the company generally records losses in the first and fourth quarters.

Financial performance and liquidity

Attendance rose 3.6% to 3.34 million, while revenue per capita declined 2.0% to $66.04. Admissions revenue fell 0.8% to $128.9 million; admissions per capita fell 4.3% to $38.60. Food, merchandise and other revenue rose 5.2% to $91.7 million, and in-park spending per capita increased 1.5% to $27.44. Operating expenses declined 3.6% to $149.9 million, and selling, general and administrative expenses declined 32.7% to $42.8 million. The operating loss margin improved to approximately 14.2% from 30.5%.

Operating cash flow exceeded the prior-year quarter, primarily reflecting improved operating performance and advance receipts recorded as deferred revenue. Investing cash outflow was $47.9 million, mainly for capital projects and attractions. Financing cash inflow was $28.0 million, primarily from net revolving-credit draws. Cash and cash equivalents were $51.9 million at quarter-end; cash including restricted cash was $52.8 million. Current assets were $172.8 million and current liabilities $424.7 million; management reported a 0.4 working-capital ratio, noting deferred admissions revenue and inventory turnover contribute to the low ratio.

Debt totaled $1.585 billion before discounts and issuance costs, including $65.0 million drawn on the revolving facility. The company had $123.7 million of revolver availability after outstanding letters of credit. It reported a 3.51x total net leverage ratio under its credit agreement and compliance with covenants. After quarter-end, it repaid a net $40.0 million on the revolver. Interest expense increased 4.4% to $20.8 million. Interest-rate swaps fixed the LIBOR component on $1.0 billion of debt through May 2020; management estimated a 100-basis-point LIBOR rise would add about $5.6 million to annual cash interest, assuming average revolver borrowings of $40 million.

Material changes versus the prior comparable period

• Revenue growth was modest, driven by higher attendance and in-park spending, while lower admissions per capita offset some gains. Management cited pass mix, pricing strategy and the timing of Easter and spring break.
• Operating and net losses narrowed substantially. Lower labor costs and cost-saving initiatives contributed; lower legal costs and reduced equity-compensation and separation charges also reduced reported expenses. Q1 2018 included an $8.1 million legal settlement accrual, executive separation costs and approximately $4.5 million of accelerated equity compensation.
• Adjusted EBITDA, a non-GAAP measure defined under the credit agreement, was $16.4 million versus $2.3 million in Q1 2018. Last-twelve-month Adjusted EBITDA was $415.4 million, or $436.8 million after $21.4 million of estimated cost savings for covenant purposes. The credit agreement’s revised definitions allow broader add-backs; this measure is not GAAP earnings.
• Adoption of lease accounting standard ASC 842 on January 1, 2019 added $145.8 million of operating right-of-use assets and $132.2 million of operating lease liabilities. Comparative periods were not recast.

Outlook, commentary, risks and unusual items

Management said existing cash, operating cash flow and available revolver borrowings should meet operating, working-capital and capital-expenditure needs for at least 12 months. The filing provides no specific full-year revenue, earnings or attendance guidance. SeaWorld Abu Dhabi was expected to be completed in 2022, but remains subject to project conditions and there is no assurance it will proceed. The company estimated up to approximately $60 million of remaining commitments under its Sesame Workshop license agreement; it opened Sesame Land at SeaWorld Orlando in March 2019.

Management attributed attendance gains to marketing, pricing, new rides and attractions, and events; unfavorable weather and later Easter and spring-break timing weighed on attendance. Key risks include seasonality, weather and regional disruptions, discretionary spending, competition, labor and operating costs, animal-care regulation and activism, litigation, cybersecurity, substantial leverage, interest rates, and restrictions in debt agreements.

Notable contingencies and developments: the $11.5 million EZPay class-action settlement was finally approved April 29, 2019 and had been accrued at quarter-end. A securities class action had a trial scheduled for September 2019; a consumer matter had a trial scheduled for October 2019. In April 2019, SeaWorld terminated the ZHG agreements for non-payment; Q1 revenue recognized under them was approximately $1.7 million. A new CEO took office February 18, 2019, and the COO resigned effective March 31. After quarter-end, lenders foreclosed on pledged shares held by a ZHG affiliate, and a ZHG-designated director resigned. The company recorded $2.6 million of Q1 restructuring charges, primarily severance.

Important facts for investors to verify

• Confirm that the intended issuer is SeaWorld Entertainment, Inc.; the supplied company name does not match this filing.
• Track attendance, admissions per capita and revenue per capita through the peak-season quarters to assess whether Q1 mix and holiday timing effects reverse.
• Review cash conversion, capital spending and the drivers of deferred revenue; Q1 operating cash flow benefited in part from advance receipts.
• Monitor gross debt, revolver usage, covenant calculations and the assumptions behind permitted EBITDA add-backs and estimated cost savings.
• Follow the securities and consumer litigation, the approved EZPay settlement, and any consequences of the terminated ZHG agreements or pledged-share foreclosure.
• Assess execution and funding needs for planned attractions, Sesame commitments and the conditional Abu Dhabi project.