SeaWorld of Earnings Problems

Second of a two-part series

It wasn’t meant to go this way for SeaWorld Entertainment, which operates theme parks like Sesame Place, Busch Gardens and SeaWorld, where Orca-trainer shows have delighted guests for decades.

The private equity firm Blackstone (NYSE:BX) brought the Orlando-based company public in a splashy offering in April 2013, underwritten by the likes of Goldman Sachs and JPMorgan Chase, among others. The company raised an estimated $702 million in the offering, after pricing the shares at the top of the marketed range of $27.

But since then, SeaWorld has become embroiled in a high-stakes fight with the federal government in the  U.S. Court of Appeals. The Department of Labor’s Occupational Safety & Health Administration (OSHA) wants to shut down its SeaWorld unit’s trainer-killer whale interactions, the fallout from the death of a trainer and injuries caused by its killer whales, subject of the recent documentary Blackfish (see part one, SeaWorld of Problems). All  of it is damaging to SeaWorld’s brand.

SeaWorld has since gone into damage control. It now calls Blackfish an “activist” film, that it’s slanted and unfairly doesn’t take into full account SeaWorld’s efforts at educating the public or its rescue and rehabilitation of stranded animals, which it says exceeded 23,000 animals in 2013.

SeaWorld recently pre-announced it expects $1.46 billion in revenue for 2013, noting that attendance hit a record in the fourth quarter. There was no pre-announcement of profit expectations, however. Results are due in March.

The OSHA fight looms large, as well as the music acts that have canceled, including Trace Adkins, Pat Benatar, Willie Nelson, Martina McBride, Heart and the Beach Boys, reports indicate.

That’s because the company needs to grow ticket sales, its main source of revenue, in order to foot a boatload of debt it incurred in its leveraged buyout by the private equity shop Blackstone, which has spun off earnings quality concerns. Blackstone bought SeaWorld from Anheuser-Busch InBev for $2.3 billion in 2009. Today, the company has $1.9 billion in total liabilities. A whopping $1.66 billion of that debt comes due in the next six years or so.

To show it can service this debt, SeaWorld touts an “adjusted” cash flow figure that is much higher than its actual EBITDA cash flow number that companies typically use. Meanwhile, Blackstone quietly unloaded about a third of its stake in SeaWorld Entertainment just this past December.

A look into SeaWorld’s filings reveals the quality of earnings concerns.

Submarined Disclosures

Unlike companies like oil businesses or car makers who disclose product safety problems or media attacks in profit filings, SeaWorld Entertainment’s earnings filings with the Securities and Exchange Commission don’t give much detail about its problems with its killer whales or the fallout from the Blackfish documentary.

Instead, SeaWorld’s quarterly profit filings disclose cursory, boiler plate statements about “incidents or adverse publicity concerning our theme parks” or “animals at our theme parks,” statements that come after warnings about consumer spending and consumer confidence. Its legal risk section only says: “We are subject to various allegations, claims and legal actions arising in the ordinary course of business.”

Investors instead will find details about these issues in other SEC filings for things like stock sales. Here, SeaWorld say it does maintain “strict safety procedures for the protection of our employees and guests,” and that “injuries or death, while rare, have occurred in the past,” noting the 2010 death of trainer Dawn Brancheau and the citations by OSHA.

Specifically, SeaWorld disclosures state: “In connection with this incident (the death of Brancheau), we reviewed and revised our safety protocols and made certain safety-related facility enhancements.”

It adds that Brancheau’s death “continues to be the subject of significant media attention, including television and newspaper coverage, a documentary and a book, as well as discussions in social media.”

SeaWorld also notes: “This incident and similar events that may occur in the future may harm our reputation, reduce attendance and negatively impact our business, financial condition and results of operations.”

Going Public

In buying SeaWorld for $2.3 billion, Blackstone paid $1.01 billion in cash and got the company to take on new debt to fund the remainder. Blackstone tells FOX Business its credit unit counted among the lenders that financed the deal, taking a $100 million piece of a $400 million note that paid around 11% interest.

Before the public offering, SeaWorld posted just $19.1 million in profits for 2011, after a $45.5 million loss in 2010.

However, SeaWorld then became increasingly leveraged. It first booked $1.6 billion in debt in 2010. Its liabilities then shot higher by 29% to $2.2 billion by September 2012 from $1.7 billion in December 2011.

At that time, that $2.2 billion in debt was perched atop a wafer-thin $2.2 million in retained earnings, as well as $458.4 million in stockholders’ equity.

“Significant Leverage”

“We are highly leveraged,” SeaWorld disclosed in a filing, adding that “despite our significant leverage, we may be able to incur significant additional amounts of debt, which could further exacerbate the risks associated with our significant leverage.”

Given the volatile nature of its main source of revenues, ticket sales, SeaWorld is hedging its debt with interest rate derivatives, swaps meant to manage exposure to rate movements, but which can prove costly if managed incorrectly.

Paying Back Blackstone

Before the company went public, a big slug of SeaWorld’s debt went to pay Blackstone dividends and fees in excess of $627 million. The private equity firm confirmed that number.

But after SeaWorld announced it planned to borrow to fund a $500 million dividend payout to investors in early 2012, Moody’s downgraded SeaWorld’s corporate rating and probability of default rating. (Standard & Poor’s recently upgraded the company’s corporate credit rating.)

Blackstone then brought SeaWorld public in April 2013, and began to make money off of the company in the form of advisory and loan fees. The private equity shop also confirmed it recently sold about a third of its holdings in SeaWorld, or about 19.5 million shares, last December, reaping about $585 million. Blackstone easily stands to earn back its cash investment in the company and then some. Today it owns about 43% in SeaWorld, down from about 63% prior.

A Blackstone official says the firm is not worried about the OSHA case: “We’ve been in this investment for more than four years. We have invested significantly in the company, it is growing nicely, earning a nice return. We are not worried about the OSHA case because we believe it is baseless. We think SeaWorld has best-in-class procedures in terms of keeping trainers as safe as can be; obviously these are animals. We’re not concerned.”

Quality of Earnings Concerns

Today, teetering atop its $39 million in retained earnings, and $729 million in stockholders' equity, sits that $1.9 billion in total liabilities, including the $1.6 billion in long-term debt.

To service that huge debt, SeaWorld needs to pump up ticket sales, which rose 4% to $747.6 million in the first nine months of last year, from $715.8 million for the same period a year earlier.

However, SeaWorld’s sales from things like food and merchandise fell to $440.7 million from $444.7 million in the year earlier period. Meanwhile, costs crept up by 6% to $987.6 million for the first nine months of 2013, versus $931.9 million for the same period a year earlier.

Costs are a big reason why SeaWorld has been spilling red ink, $56 million in losses for the first half of last year, nearly 10 times the $6 million in losses for the first half of 2012.

For the nine-month period, which includes the summer touring season, SeaWorld pulled in $63.9 million. That’s down from $86.2 million in the year-earlier period. Operating cash flow also dropped to $276.3 million in the period, down from $302.6 million a year earlier.

“Adjusted” Cash Flow 

SeaWorld, however, touts an inflated cash flow figure based on its own definition of EBITDA (earnings before interest, taxes, depreciation and amortization) that makes the number look better than it is.

SeaWorld’s “adjusted” cash flow chucks back in things like advisory fees paid to Blackstone, costs for equity based compensation, pre-opening costs for Aquatica San Diego, and “non-cash” expenses for things like asset write-offs and gains or losses on foreign currencies (as well as debt refinancing costs in prior versions of its figure).

That created a glowing $392.5 million in “adjusted” cash flow for the first nine months of 2013, better than the $365.7 million “adjusted” cash flow for the same period a year prior.

However, strip out the add-ins, and SeaWorld’s new and improved $392.5 million figure gets knocked down 17% to $330.2 million, less than the comparable $355.1 million without all the extras for the prior period.

There’s also potential dilution. Just prior to going public last April, the company’s board did an eight-for-one stock split, creating more dilution for investors when the company opened for trading.

Former Trainer Defends SeaWorld

For now, the potential game-changer of a fight with OSHA remains high on the radar screen at SeaWorld.

Company spokesman Jacobs points out that a blog called Mice Chat, which gives information on the theme park world, posted an interview with former SeaWorld trainer Bridgette M. Pirtle discussing the death of her colleague Dawn Brancheau and defending SeaWorld.

Pirtle, who is in the film Blackfish, is quoted as saying: ““The truth is that it wasn’t Dawn’s fault. And that was the most important thing to me.” As for the movie, Pirtle says she thought the film maker was “making a movie that was going to be more respectable to the memory of Dawn, more understanding of the unique lives of killer whale trainers, the unique circumstances under which killer whale training is conducted now, and the loss that the current trainers felt and currently feel.”

Pirtle also says: “I’d love to be able to shed a bit (of) light on the dark side of the exploitation and fallacies behind the film Blackfish and its ‘faces.’”

She says: “In the eyes of the film, there is only one acceptable response: Free them all (the Orcas). This is illogical and irresponsible, and any experienced trainer will agree. Even history tells us that reintroduction has not proven successful in the past.”

And Pirtle is quoted saying: “SeaWorld looked into improving the facility with a whale ‘treadmill.’ Seeing the company invest in the animals was something I applauded immediately. This was enrichment. This was exciting and encouraging. And my accolades were heavily criticized by activists who wanted only to mock the action. It’s unfair.”

However, when asked what she would do if she was in charge of SeaWorld, Pirtle replied: “I would end animals for entertainment purposes, and stop the breeding program,” though she said she would still take her children to SeaWorld.