SeaWorld Entertainment, Inc. — Q1 2014 Form 10-Q
Period: Three months ended March 31, 2014. The filing is by SeaWorld Entertainment, Inc., which operated 11 U.S. theme parks. The statements are unaudited. The company cautions that results are seasonal: it typically earns most revenue in the second and third quarters and records a loss in the first and fourth quarters.
Financial and operating results
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $212.3 million | $238.6 million |
| Operating loss | $59.4 million | $35.9 million |
| Net loss | $49.4 million | $40.4 million |
| Net loss per share, diluted | $0.56 | $0.49 |
| Operating cash flow | $13.0 million | $24.2 million |
| Capital expenditures | $46.8 million | $32.3 million |
| Cash and cash equivalents, at quarter-end | $61.2 million | $59.4 million |
Revenue fell 11.0%; attendance declined 13.0% to 3.045 million guests. Admissions revenue decreased 9.9% to $137.4 million, while food, merchandise and other revenue declined 13.1% to $74.9 million. Admission per capita rose 3.6% to $45.12; in-park spending per capita was nearly flat at $24.60. Total revenue per capita increased to $69.72 from $68.19.
Operating expenses decreased 3.1% to $167.9 million, but rose to 79.1% of revenue from 72.6%. Selling, general and administrative expense increased 12.7% to $45.1 million, or 21.2% of revenue versus 16.8%. Interest expense declined 29.9% to $20.0 million, primarily due to debt repayment and lower borrowing rates after the 2013 IPO. The operating loss widened despite lower total costs, reflecting weaker revenue and a higher SG&A burden.
Liquidity, debt and capital allocation
- At March 31, total debt principal was $1.654 billion: $1.394 billion in Term B-2 loans and $260 million of 11% senior notes. Net reported long-term debt, excluding current maturities, was $1.625 billion. The term loans mature in 2020; the notes mature in 2016.
- The $192.5 million revolving facility was undrawn at quarter-end; approximately $23.5 million of letters of credit left about $169 million available. Subsequent to quarter-end, the company drew $40 million and repaid $25 million.
- Working capital deficit was approximately $114.3 million. Management said cash, operating cash flow and available revolver borrowings would be adequate for capital expenditures, dividends and working capital needs for at least 12 months.
- Cash declined $55.6 million during the quarter. Operating cash flow of $13.0 million and financing outflows of $21.3 million did not cover $47.3 million of investing outflows, principally capital expenditures, which were directed largely to future attractions.
- The company declared a $0.20-per-share quarterly dividend; $17.7 million was paid during the quarter. On May 13, the board declared a $0.21-per-share dividend for payment July 1, subject to the stated record date.
- Debt covenants were reported in compliance at March 31. The company had $1.0 billion of interest-rate swaps designated as cash-flow hedges. Management estimated that a 100-basis-point increase in three-month LIBOR, assuming average revolver borrowings of $40 million, would add about $2.3 million to annual cash interest expense.
Changes, outlook and notable developments
Management attributed lower attendance primarily to Easter and school spring-break timing shifting into the second quarter, adverse Florida precipitation and below-average Texas temperatures. Higher ticket prices and ticket mix lifted admission per capita, while 50th-anniversary marketing and operating costs contributed to higher expenses. The company reported Adjusted EBITDA of negative $15.8 million, compared with positive $11.1 million; this is a non-GAAP measure and should not be treated as a substitute for GAAP results or cash flow.
The filing gives no specific full-year earnings or revenue guidance. Management expects moderate economic improvement to support performance, while emphasizing consumer spending, attendance, guest spending and seasonality as important drivers. The company expects to fund 2014 capital expenditures generally from operating cash flow.
On April 9, 2014, selling stockholders completed a 17.25-million-share secondary offering and received its proceeds; the company sold no shares. Concurrently, the company agreed to repurchase 1.75 million shares for approximately $50.7 million. The company recorded $0.7 million of related offering costs in Q1. These transactions followed a December 2013 secondary offering and a 1.5-million-share company repurchase.
Among disclosed risks, the company cited high leverage, fixed operating costs, consumer demand and weather sensitivity, seasonal operations, animal-related safety and reputational exposure, litigation, and dependence on certain geographic markets. On April 11, 2014, an appeals court denied the company’s appeal of certain OSHA citations related to the 2010 trainer fatality; the decision was not final and remained appealable. Management said known legal matters were not expected to materially adversely affect the company. No material changes to the previously disclosed contractual obligations or risk factors were reported, apart from the described animal-related update.
Important facts for investors to verify
- Whether second-quarter attendance recovered as Easter and spring-break visits shifted out of Q1, and whether the reported weather effects persisted.
- Whether operating margins and cash generation improve as attendance and revenue recover, given the company’s high fixed-cost base and Q1 capital spending.
- Current debt, revolver availability, interest costs and covenant headroom, including the effect of subsequent revolver activity and the $50.7 million share repurchase.
- The outcome and potential consequences of further appeal concerning the OSHA citations, and any effect on operations, safety practices or reputation.
- Whether dividends and planned capital expenditures remain supported by liquidity, particularly given the working capital deficit and substantial leverage.