10-Q 1 seas-10q_20180930.htm 10-Q seas-10q_20180930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to            

Commission File Number: 001-35883

 

SeaWorld Entertainment, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

27-1220297

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

9205 South Park Center Loop, Suite 400

Orlando, Florida 32819

(Address of principal executive offices) (Zip Code)

(407) 226-5011

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The registrant had outstanding 87,781,171 shares of Common Stock, par value $0.01 per share as of November 1, 2018.

 

 


SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

 

 

 

Page No.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

1

 

 

 

 

 

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Unaudited Condensed Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Balance Sheets

 

3

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)

 

4

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity

 

5

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows

 

6

 

 

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

7

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

27

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

39

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

40

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

41

 

 

 

 

 

Item 1A.

 

Risk Factors

 

41

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

44

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

44

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

44

 

 

 

 

 

Item 5.

 

Other Information

 

44

 

 

 

 

 

Item 6.

 

Exhibits

 

45

 

 

 

 

 

 

 

Signatures

 

46

 

 

 


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-Q may contain “forward-looking statements” within the meaning of the federal securities laws. All statements, other than statements of historical facts, including statements concerning our plans, objectives, goals, beliefs, business strategies, future events, business conditions, our results of operations, financial position and our business outlook, business trends and other information, may be forward-looking statements. Words such as “might,” “will,” “may,” “should,” “estimates,” “expects,” “continues,” “contemplates,” “anticipates,” “projects,” “plans,” “potential,” “predicts,” “intends,” “believes,” “forecasts,” “future,” “targeted” and variations of such words or similar expressions are intended to identify forward-looking statements. The forward-looking statements are not historical facts, and are based upon our current expectations, beliefs, estimates and projections, and various assumptions, many of which, by their nature, are inherently uncertain and beyond our control. Our expectations, beliefs, estimates and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs, estimates and projections will result or be achieved and actual results may vary materially from what is expressed in or indicated by the forward-looking statements.

There are a number of risks, uncertainties and other important factors, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. Such risks, uncertainties and other important factors that could cause actual results to differ include, among others, the risks, uncertainties and factors set forth under “Item 1A.  Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (the “Annual Report on Form 10-K”), filed with the Securities and Exchange Commission (the “SEC”), and under “Part II, Item 1A., Risk Factors” in this Quarterly Report on Form 10-Q, as such risk factors may be updated from time to time in our periodic filings with the SEC, including this report, and are accessible on the SEC’s website at www.sec.gov, including the following:

 

complex federal and state regulations governing the treatment of animals, which can change, and claims and lawsuits and attempts to generate negative publicity associated with our business by activist groups;

 

various factors beyond our control adversely affecting attendance and guest spending at our theme parks, including the potential spread of travel-related health concerns including, but not limited to, pandemics and epidemics such as Ebola, Zika, Influenza H1N1, avian bird flu, SARS and MERS;

 

incidents or adverse publicity concerning our theme parks;

 

a decline in discretionary consumer spending or consumer confidence;

 

significant portion of revenues generated in the States of Florida (and the Orlando market), California and Virginia and any risks affecting such markets, such as natural disasters, severe weather and travel-related disruptions or incidents;

 

seasonal fluctuations;

 

inability to compete effectively in the highly competitive theme park industry;

 

interactions between animals and our employees and our guests at attractions at our theme parks;

 

animal exposure to infectious disease;

 

high fixed cost structure of theme park operations;

 

changing consumer tastes and preferences;

 

cyber security risks and failure to maintain the integrity of internal or guest data;

 

increased labor costs and employee health and welfare benefits;

 

inability to grow our business or fund theme park capital expenditures;

 

adverse litigation judgments or settlements as well as risks relating to audits, inspections and investigations by, or requests for information from, various federal and state regulatory agencies;

 

inability to protect our intellectual property or the infringement on intellectual property rights of others;

 

the loss of licenses and permits required to exhibit animals or the violation of laws and regulations;

 

loss of key personnel;

 

unionization activities or labor disputes;

 

inability to meet workforce needs;

 

inability to maintain certain commercial licenses;

 

restrictions in our debt agreements limiting flexibility in operating our business;

 

inability to retain our current credit ratings;

 

our substantial leverage;

1


 

inability to realize the benefits of acquisitions, restructurings or other strategic initiatives;

 

inability to maintain sufficient insurance coverage;

 

inability to purchase or contract with third party manufacturers for rides and attractions and the impact of the costs associated with such activities, including delays in attraction openings;

 

inability to realize the full value of our intangible assets;

 

environmental regulations, expenditures and liabilities;

 

suspension or termination of any of our business licenses, including by legislation at federal, state or local levels;

 

delays or restrictions in obtaining permits;

 

policies of the U.S. president and his administration;

 

actions of activist stockholders;

 

the ability of Hill Path Capital LP to significantly influence our decisions;

 

the ability of affiliates of Zhonghong Zhuoye Group Co., Ltd. to significantly influence our decisions;

 

financial distress experienced by our strategic partners or other counterparties could have an adverse impact on us;

 

changes or declines in our stock price, as well as the risk that securities analysts could downgrade our stock or our sector; and

 

risks associated with our capital allocation plans and share repurchases, including the risk that our share repurchase program could increase volatility and fail to enhance stockholder value.

We caution you that the risks, uncertainties and other factors referenced above may not contain all of the risks, uncertainties and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. There can be no assurance that (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors’ likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct or (iv) our strategy, which is based in part on this analysis, will be successful. All forward-looking statements in this Quarterly Report on Form 10-Q apply only as of the date of this Quarterly Report on Form 10-Q or as of the date they were made or as otherwise specified herein and, except as required by applicable law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future developments or otherwise.

All references to “we,” “us,” “our,” “Company” or “SeaWorld” in this Quarterly Report on Form 10-Q mean SeaWorld Entertainment, Inc., its subsidiaries and affiliates. 

Website and Social Media Disclosure

We use our websites (www.seaworldentertainment.com and www.seaworldinvestors.com) and our corporate Twitter account (@SeaWorld) as channels of distribution of Company information.  The information we post through these channels may be deemed material.  Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts.  In addition, you may automatically receive e-mail alerts and other information about SeaWorld when you enroll your e-mail address by visiting the “E-mail Alerts” section of our website at www.seaworldinvestors.com. The contents of our website and social media channels are not, however, a part of this Quarterly Report on Form 10-Q.

Trademarks, Service Marks and Trade Names

We own or have rights to use a number of registered and common law trademarks, service marks and trade names in connection with our business in the United States and in certain foreign jurisdictions, including SeaWorld Entertainment, SeaWorld Parks & Entertainment, SeaWorld®, Shamu®, Busch Gardens®, Aquatica®, Discovery Cove®, Sea Rescue® and other names and marks that identify our theme parks, characters, rides, attractions and other businesses. In addition, we have certain rights to use Sesame Street® marks, characters and related indicia through our license agreement with Sesame Workshop.

Solely for convenience, the trademarks, service marks, and trade names referred to hereafter in this Quarterly Report on Form 10-Q are without the ® and ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks, and trade names. This Quarterly Report on Form 10-Q may contain additional trademarks, service marks and trade names of others, which are the property of their respective owners. All trademarks, service marks and trade names appearing in this Quarterly Report on Form 10-Q are, to our knowledge, the property of their respective owners.

2


PART I — FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

125,669

 

 

$

33,178

 

Accounts receivable, net

 

 

66,842

 

 

 

38,400

 

Inventories

 

 

34,782

 

 

 

30,887

 

Prepaid expenses and other current assets

 

 

14,328

 

 

 

16,310

 

Total current assets

 

 

241,621

 

 

 

118,775

 

Property and equipment, at cost

 

 

3,069,523

 

 

 

2,952,074

 

Accumulated depreciation

 

 

(1,380,764

)

 

 

(1,276,833

)

Property and equipment, net

 

 

1,688,759

 

 

 

1,675,241

 

Goodwill, net

 

 

66,278

 

 

 

66,278

 

Trade names/trademarks, net

 

 

158,706

 

 

 

159,802

 

Other intangible assets, net

 

 

14,287

 

 

 

14,896

 

Deferred tax assets, net

 

 

22,813

 

 

 

32,820

 

Other assets

 

 

19,513

 

 

 

17,970

 

Total assets

 

$

2,211,977

 

 

$

2,085,782

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

107,721

 

 

$

100,573

 

Current maturities of long-term debt

 

 

23,707

 

 

 

38,707

 

Accrued salaries, wages and benefits

 

 

24,779

 

 

 

14,554

 

Deferred revenue

 

 

108,021

 

 

 

79,554

 

Dividends payable

 

 

101

 

 

 

470

 

Other accrued liabilities

 

 

34,553

 

 

 

19,612

 

Total current liabilities

 

 

298,882

 

 

 

253,470

 

Long-term debt, net of debt issuance costs of $6,939 and $9,045 as of September 30, 2018 and December 31, 2017, respectively

 

 

1,489,289

 

 

 

1,503,609

 

Deferred tax liabilities, net

 

 

18,584

 

 

 

 

Other liabilities

 

 

31,886

 

 

 

41,237

 

Total liabilities

 

 

1,838,641

 

 

 

1,798,316

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value—authorized, 100,000,000 shares, no shares issued or outstanding at September 30, 2018 and December 31, 2017

 

 

 

 

 

 

Common stock, $0.01 par value—authorized, 1,000,000,000 shares; 93,234,871 and 92,637,403 shares issued at September 30, 2018 and December 31, 2017, respectively

 

 

932

 

 

 

926

 

Additional paid-in capital

 

 

660,231

 

 

 

641,324

 

Accumulated other comprehensive income (loss)

 

 

4,946

 

 

 

(5,076

)

Accumulated deficit

 

 

(137,902

)

 

 

(194,837

)

Treasury stock, at cost (6,519,773 shares at September 30, 2018 and December 31,

   2017)

 

 

(154,871

)

 

 

(154,871

)

Total stockholders’ equity

 

 

373,336

 

 

 

287,466

 

Total liabilities and stockholders’ equity

 

$

2,211,977

 

 

$

2,085,782

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

3


SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share amounts)

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Admissions

 

$

279,873

 

 

$

264,967

 

 

$

635,682

 

 

$

605,007

 

Food, merchandise and other

 

 

203,302

 

 

 

172,745

 

 

 

456,580

 

 

 

392,812

 

Total revenues

 

 

483,175

 

 

 

437,712

 

 

 

1,092,262

 

 

 

997,819

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of food, merchandise and other revenues

 

 

36,062

 

 

 

31,988

 

 

 

85,012

 

 

 

75,532

 

Operating expenses (exclusive of depreciation and amortization shown separately below and includes equity compensation of $2,119 and $976 for the three months ended September 30, 2018 and 2017, respectively, and $6,350 and $5,830 for the nine months ended September 30, 2018 and 2017, respectively)

 

 

198,781

 

 

 

194,802

 

 

 

544,354

 

 

 

541,395

 

Selling, general and administrative (includes equity compensation of $3,064 and $2,269 for the three months ended September 30, 2018 and 2017, respectively, and $12,270 and $13,435 for the nine months ended September 30, 2018 and 2017, respectively)

 

 

51,549

 

 

 

54,770

 

 

 

186,076

 

 

 

176,340

 

Goodwill impairment charges

 

 

 

 

 

 

 

 

 

 

 

269,332

 

Restructuring and other separation costs

 

 

3,866

 

 

 

5,100

 

 

 

16,392

 

 

 

5,100

 

Depreciation and amortization

 

 

41,187

 

 

 

42,230

 

 

 

119,635

 

 

 

120,597

 

Total costs and expenses

 

 

331,445

 

 

 

328,890

 

 

 

951,469

 

 

 

1,188,296

 

Operating income (loss)

 

 

151,730

 

 

 

108,822

 

 

 

140,793

 

 

 

(190,477

)

Other income, net

 

 

(59

)

 

 

(108

)

 

 

(38

)

 

 

(111

)

Interest expense

 

 

19,500

 

 

 

20,160

 

 

 

59,974

 

 

 

57,873

 

Loss on early extinguishment of debt and write-off of discounts and debt issuance costs

 

 

 

 

 

 

 

 

 

 

 

8,143

 

   Income (loss) before income taxes

 

 

132,289

 

 

 

88,770

 

 

 

80,857

 

 

 

(256,382

)

Provision for (benefit from) income taxes

 

 

36,301

 

 

 

33,736

 

 

 

25,016

 

 

 

(74,437

)

Net income (loss)

 

$

95,988

 

 

$

55,034

 

 

$

55,841

 

 

$

(181,945

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on derivatives, net of tax

 

 

1,149

 

 

 

2,006

 

 

 

11,116

 

 

 

3,704

 

Comprehensive income (loss)

 

$

97,137

 

 

$

57,040

 

 

$

66,957

 

 

$

(178,241

)

  Income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share, basic

 

$

1.11

 

 

$

0.64

 

 

$

0.65

 

 

$

(2.12

)

Net income (loss) per share, diluted

 

$

1.10

 

 

$

0.64

 

 

$

0.64

 

 

$

(2.12

)

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

86,616

 

 

 

86,012

 

 

 

86,410

 

 

 

85,712

 

Diluted

 

 

87,542

 

 

 

86,284

 

 

 

87,029

 

 

 

85,712

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

4


SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018

(In thousands, except per share and share amounts)

 

 

 

Shares of

Common

Stock

Issued

 

 

Common

Stock

 

 

Additional

Paid-In

Capital

 

 

Accumulated Deficit

 

 

Accumulated

Other

Comprehensive

(Loss) Income

 

 

Treasury

Stock,

at Cost

 

 

Total

Stockholders'

Equity

 

Balance at December 31, 2017

 

 

92,637,403

 

 

$

926

 

 

$

641,324

 

 

$

(194,837

)

 

$

(5,076

)

 

$

(154,871

)

 

$

287,466

 

Impact of adoption of ASU 2018-02

 

 

 

 

 

 

 

 

 

 

 

1,094

 

 

 

(1,094

)

 

 

 

 

 

 

Equity-based compensation

 

 

 

 

 

 

 

 

18,620

 

 

 

 

 

 

 

 

 

 

 

 

18,620

 

Unrealized gain on derivatives, net of tax expense of $4,117

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,116

 

 

 

 

 

 

11,116

 

Vesting of restricted shares

 

 

582,128

 

 

 

6

 

 

 

(6

)

 

 

 

 

 

 

 

 

 

 

 

 

Shares withheld for tax withholdings

 

 

(160,782

)

 

 

(2

)

 

 

(2,940

)

 

 

 

 

 

 

 

 

 

 

 

(2,942

)

Exercise of stock options

 

 

176,122

 

 

 

2

 

 

 

3,189

 

 

 

 

 

 

 

 

 

 

 

 

3,191

 

Adjustments to previous dividend declarations

 

 

 

 

 

 

 

 

44

 

 

 

 

 

 

 

 

 

 

 

 

44

 

Net income

 

 

 

 

 

 

 

 

 

 

 

55,841

 

 

 

 

 

 

 

 

 

55,841

 

Balance at September 30, 2018

 

 

93,234,871

 

 

$

932

 

 

$

660,231

 

 

$

(137,902

)

 

$

4,946

 

 

$

(154,871

)

 

$

373,336

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

5


SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

For the Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

55,841

 

 

$

(181,945

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Goodwill impairment charges

 

 

 

 

 

269,332

 

Depreciation and amortization

 

 

119,635

 

 

 

120,597

 

Amortization of debt issuance costs and discounts

 

 

3,460

 

 

 

3,611

 

Loss on early extinguishment of debt and write-off of discounts and debt issuance costs

 

 

 

 

 

8,143

 

Loss on sale or disposal of assets, net

 

 

12,477

 

 

 

9,353

 

Deferred benefit from income tax

 

 

24,478

 

 

 

(74,437

)

Equity-based compensation

 

 

18,620

 

 

 

19,265

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(36,806

)

 

 

(17,448

)

Inventories

 

 

(3,374

)

 

 

(4,233

)

Prepaid expenses and other current assets

 

 

2,866

 

 

 

6,452

 

Accounts payable and accrued expenses

 

 

8,649

 

 

 

5,327

 

Accrued salaries, wages and benefits

 

 

10,225

 

 

 

1,406

 

Deferred revenue

 

 

36,586

 

 

 

19,867

 

Other accrued liabilities

 

 

14,902

 

 

 

(451

)

Other assets and liabilities

 

 

(101

)

 

 

2,940

 

Net cash provided by operating activities

 

 

267,458

 

 

 

187,779

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(140,878

)

 

 

(139,638

)

Other investing activities

 

 

(349

)

 

 

1,515

 

Net cash used in investing activities

 

 

(141,227

)

 

 

(138,123

)

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of debt

 

 

 

 

 

998,306

 

Repayments of long-term debt

 

 

(17,780

)

 

 

(1,020,983

)

Proceeds from draw on revolving credit facility

 

 

55,000

 

 

 

80,649

 

Repayments of revolving credit facility

 

 

(70,000

)

 

 

(105,000

)

Debt issuance costs

 

 

 

 

 

(15,390

)

Dividends paid to stockholders

 

 

(325

)

 

 

(1,535

)

Payment of tax withholdings on equity-based compensation through shares withheld

 

 

(2,942

)

 

 

(1,613

)

Exercise of stock options

 

 

3,191

 

 

 

11

 

Net cash used in financing activities

 

 

(32,856

)

 

 

(65,555

)

Change in Cash and Cash Equivalents, including Restricted Cash

 

 

93,375

 

 

 

(15,899

)

Cash and Cash Equivalents, including Restricted Cash—Beginning of period

 

 

33,997

 

 

 

69,378

 

Cash and Cash Equivalents, including Restricted Cash—End of period

 

$

127,372

 

 

$

53,479

 

Supplemental Disclosures of Noncash Investing and Financing Activities

 

 

 

 

 

 

 

 

Capital expenditures in accounts payable

 

$

23,125

 

 

$

19,835

 

Dividends declared, but unpaid

 

$

101

 

 

$

505

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

6


SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION

Description of the Business

SeaWorld Entertainment, Inc., through its wholly-owned subsidiary, SeaWorld Parks & Entertainment, Inc. (“SEA”) (collectively, the “Company”), owns and operates twelve theme parks within the United States. The Company operates SeaWorld theme parks in Orlando, Florida; San Antonio, Texas; and San Diego, California, and Busch Gardens theme parks in Tampa, Florida; and Williamsburg, Virginia. The Company operates water park attractions in Orlando, Florida (Aquatica); San Antonio, Texas (Aquatica); San Diego, California (Aquatica); Tampa, Florida (Adventure Island); and Williamsburg, Virginia (Water Country USA). The Company also operates a reservations-only theme park in Orlando, Florida (Discovery Cove) and a seasonal park in Langhorne, Pennsylvania (Sesame Place).

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K filed with the SEC.  The unaudited condensed consolidated balance sheet as of December 31, 2017 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K.

In the opinion of management, such unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations for the year ending December 31, 2018 or any future period due to the seasonal nature of the Company’s operations.  Based upon historical results, the Company typically generates its highest revenues in the second and third quarters of each year and incurs a net loss in the first and fourth quarters, in part because seven of its theme parks are only open for a portion of the year.

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, including SEA. All intercompany accounts have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates and assumptions include, but are not limited to, the accounting for self-insurance, deferred tax assets, deferred revenue, equity compensation and the valuation of goodwill and other indefinite-lived intangible assets.  Actual results could differ from those estimates.

Segment Reporting

The Company maintains discrete financial information for each of its twelve theme parks, which is used by the Chief Operating Decision Maker (“CODM”), identified as the Chief Executive Officer, as a basis for allocating resources. Each theme park has been identified as an operating segment and meets the criteria for aggregation due to similar economic characteristics. In addition, all of the theme parks provide similar products and services and share similar processes for delivering services. The theme parks have a high degree of similarity in the workforces and target similar consumer groups. Accordingly, based on these economic and operational similarities and the way the CODM monitors and makes decisions affecting the operations, the Company has concluded that its operating segments may be aggregated and that it has one reportable segment.

7

 


SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Restricted Cash

Restricted cash is recorded in other current assets in the accompanying unaudited condensed consolidated balance sheets. Restricted cash consists primarily of funds received from strategic partners for use in approved marketing and promotional activities.

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Cash and cash equivalents

 

$

125,669

 

 

$

33,178

 

Restricted cash, included in other current assets

 

 

1,703

 

 

 

819

 

Total cash, cash equivalents and restricted cash

 

$

127,372

 

 

$

33,997

 

Revenue Recognition

Effective January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”), Topic 606, Revenue from Contracts with Customers, using the modified retrospective transition method. The adoption of ASC 606 did not have a material impact on the Company’s existing or new contracts as of January 1, 2018; therefore, no cumulative adjustment to beginning retained earnings was required as a result of adoption.

ASC 606 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To determine revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps: (i) identify the contracts with customers; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when or as the company satisfies the performance obligations. ASC 606 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. Total revenues in the accompanying unaudited condensed consolidated statements of comprehensive income (loss) are presented net of sales-related taxes collected from guests and remitted or payable to government taxing authorities.

Admissions Revenue

Admissions revenue primarily consists of single-day tickets, annual or season passes or other multi-day or multi-park admission products.  As allowed by the practical expedient available to public companies under ASC 606, admission products with similar characteristics are analyzed using a portfolio approach for each separate park as the Company expects that the effects on the consolidated financial statements of applying this guidance to the portfolio does not differ materially from applying the guidance to individual contracts within the portfolio. For single-day tickets, the Company recognizes revenue at a point in time, upon admission to the park.  Annual passes, season passes or other multi-day or multi-park passes allow guests access to specific parks over a specified time period. For these pass and multi-use products, revenue is deferred and recognized over the terms of the admission product based on estimated redemption rates for similar products and is adjusted periodically. The Company estimates a redemption rate using historical and forecasted growth rates and attendance trends by park for similar products.  Attendance trends factor in seasonality and are adjusted based on actual trends periodically. Revenue is recognized on a pro-rata basis based on the estimated allocated selling price of the admission product. For multi-day admission products, revenue is allocated based on the number of visits included in the pass and recognized ratably based on each admission into the theme park.  

The Company has also entered into agreements with certain external theme park, zoo and other attraction operators to jointly market and sell single and multi-use admission products. These joint products allow admission to both a Company park and an external park, zoo or other attraction. The agreements with the external partners specify the allocation of revenue to the Company from any jointly sold products. Whether the Company or the external partner sells the product, the Company’s portion of revenue is deferred until the first time the product is redeemed at one of its parks and recognized over its related use in a manner consistent with the Company’s own admission products.

Additionally, the Company barters theme park admission products and sponsorship opportunities for advertising, employee recognition awards, and various other services. The fair value of the products or services is recognized into admissions revenue and related expenses at the time of the exchange and approximates the estimated fair value first of the goods or services provided then received, whichever is more readily determinable. Amounts included within admissions revenue with an offset to either selling, general and administrative expenses or operating expenses in the accompanying unaudited condensed consolidated statements of comprehensive income (loss) related to bartered ticket transactions were $4.3 million and $12.9 million, respectively, for the three and nine months ended September 30, 2018, and $4.2 million and $15.2 million, respectively, for the three and nine months ended September 30, 2017.

8


SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Deferred revenue primarily includes revenue associated with pass products and contract liability balances related to licensing and international agreements collected in advance of the Company’s performance and expected to be recognized in future periods. At September 30, 2018, $10.6 million is included in other liabilities in the accompanying unaudited condensed consolidated balance sheets related to the long-term portion of deferred revenue, of which $10.0 million relates to the Company’s international agreement, as discussed in the following section, which the Company expects to recognize over the term of the respective license agreement beginning when substantially all of the services have been performed, which is expected to be upon opening.  

The following table reflects the changes in deferred revenue for the nine months ended September 30, 2018 and 2017:   

 

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Deferred revenue, including long-term portion as of January 1,

 

$

90,437

 

 

$

89,400

 

Additions

 

 

749,321

 

 

 

674,171

 

Revenue recognized during the period

 

 

(717,912

)

 

 

(650,804

)

Other adjustments

 

 

(3,187

)

 

 

(8,296

)

Deferred revenue, including long-term portion as of September 30,

 

 

118,659

 

 

 

104,471

 

Less: Deferred revenue, long-term portion, included in other liabilities

 

 

10,638

 

 

 

10,548

 

Deferred revenue, short-term portion as of September 30,

 

$

108,021

 

 

$

93,923

 

 

In accordance with the practical expedient available to public companies under ASC 606, the Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed. Additionally, the Company generally expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general and administrative expenses.

Food, Merchandise and Other Revenue

Food, merchandise and other revenue primarily consists of culinary, merchandise and other in-park products and also includes other miscellaneous revenue which is not significant in the periods presented, including revenue related to the Company’s international agreements as discussed below.  The Company recognizes revenue for food, merchandise and other in-park products when the related products or services are received by the guests.  Certain admission products may also include bundled products at the time of purchase, such as culinary or merchandise items.  The Company conducts an analysis of bundled products to identify separate distinct performance obligations that are material in the context of the contract. For those products that are determined to be distinct performance obligations and material in the context of the contract, the Company allocates a portion of the transaction price to each distinct performance obligation using each performance obligation’s standalone price.  If the bundled product is related to a pass product and offered over time, revenue will be recognized over time accordingly.

International Agreements

In March 2017, the Company entered into a Park Exclusivity and Concept Design Agreement (the “ECDA”) and a Center Concept and Preliminary Design Support Agreement (the “CDSA”) (collectively, the “ZHG Agreements”) with an affiliate of Zhonghong Zhuoye Group Co., Ltd. (“ZHG Group”), a related party, to provide design, support and advisory services for various potential projects and grant exclusive rights in China, Taiwan, Hong Kong and Macau (the “Territory”). The Company analyzed the ZHG Agreements under ASC 606 and determined that the agreements should be combined for accounting purposes and the respective performance obligations should be combined into a single performance obligation which meets the criteria to be recognized over time.  Additionally, the services related to the agreements are provided ratably over the contract term, as such, the Company recognizes revenue under the ZHG Agreements on a straight line basis over the contractual term of the agreements including approximately $1.3 million and $3.8 million in the three and nine months ended September 30, 2018, respectively, which is included in food, merchandise and other revenue in the accompanying unaudited condensed consolidated statements of comprehensive income (loss). See further discussion in Note 9–Related Party Transactions.

9


SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The Company has also received $10.0 million in deferred revenue recorded in other liabilities related to a nonrefundable payment received from a partner in connection with a potential project in the Middle East (the “Middle East Project”) to provide certain services pertaining to the planning and design of the Middle East Project, with funding received expected to offset internal expenses.  Approximately $3.6 million of costs incurred related to the Middle East Project are recorded in other assets in the accompanying unaudited condensed consolidated balance sheet as of September 30, 2018.  The Company has recognized an asset for the costs incurred to fulfill the contract as the costs are specifically identifiable, enhance resources that will be used to satisfy performance obligations in the future and are expected to be recovered. The related deferred revenue and expense will begin to be recognized when substantially all of the services have been performed, which is expected to be upon opening of the park. The Company continually monitors performance on the contract and will make adjustments, if necessary. The Middle East Project is subject to various conditions, including, but not limited to, the parties completing the design development and there is no assurance that the Middle East Project will be completed or advance to the next stages.

Goodwill and Other Indefinite-Lived Intangible Assets

Goodwill and other indefinite-lived intangible assets are not amortized, but instead reviewed for impairment at least annually on December 1, and as of an interim date should factors or indicators become apparent that would require an interim test, with ongoing recoverability based on applicable reporting unit overall financial performance and consideration of significant events or changes in the overall business environment or macroeconomic conditions. Such events or changes in the overall business environment could include, but are not limited to, significant negative trends or unanticipated changes in the competitive or macroeconomic environment.

As of June 30, 2017, the Company determined a triggering event occurred that required an interim goodwill impairment test for its SeaWorld Orlando reporting unit. Based on the test results, the Company concluded that the SeaWorld Orlando reporting unit’s goodwill as of June 30, 2017 was fully impaired and recorded a non-cash goodwill impairment charge of $269.3 million in its unaudited condensed consolidated statement of comprehensive income (loss) during the nine months ended September 30, 2017. Fair value for the SeaWorld Orlando reporting unit was determined using the income approach and represented a Level 3 fair value measurement measured on a non-recurring basis in the fair value hierarchy due to the Company’s use of internal projections and unobservable measurement inputs.  The remaining goodwill balance of $66.3 million as of September 30, 2018 and December 31, 2017 on the accompanying unaudited condensed consolidated balance sheets relates to the Company’s Discovery Cove reporting unit.

2. RECENT ACCOUNTING PRONOUNCEMENTS

The Company reviews new accounting pronouncements as they are issued or proposed by the Financial Accounting Standards Board (“FASB”).

Recently Implemented Accounting Standards

In February 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.  This ASU gives companies the option to reclassify to retained earnings any tax effects related to items in accumulated other comprehensive income or loss that are stranded due to the Tax Cuts and Jobs Act (the “Tax Act”). Companies are able to early adopt this ASU in any interim or annual period for which financial statements have not yet been issued and apply it either (1) in the period of adoption or (2) retrospectively to each period in which the income tax effects of the Tax Act related to items in accumulated other comprehensive income or loss are recognized. When adopted, the ASU requires all entities to make new disclosures, regardless of whether they elect to reclassify stranded amounts. Companies are required to disclose whether or not they elected to reclassify the tax effects related to the Tax Act as well as their policy for releasing income tax effects from accumulated other comprehensive income or loss.  The guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual reporting periods with early adoption permitted. On January 1, 2018, the Company elected to early adopt the ASU and applied the amendments in the period of adoption. As a result, the Company reclassified $1.1 million of “stranded” tax effects of the Tax Act from accumulated other comprehensive income (loss) to accumulated deficit in the accompanying unaudited condensed consolidated balance sheet and the accompanying unaudited condensed consolidated statements of changes in stockholders’ equity.  See Note 7Derivative Instruments and Hedging Activities for additional disclosure.    

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 aims to improve reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and simplify the application of the hedge accounting guidance.  This ASU is effective for fiscal years beginning after December 15, 2018 and interim periods within those annual reporting periods with early adoption permitted. For cash flow and net investment hedges existing as of the adoption date, the guidance requires a cumulative-effect adjustment as of the beginning of the fiscal year that an entity adopts the amendments; however, the presentation and disclosure guidance should be applied prospectively. The Company adopted ASU 2017-12 during the second quarter of 2018. The impact of the adoption was not material to the Company’s unaudited condensed consolidated financial statements; as a result, no

10


SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

cumulative effect adjustment to beginning retained earnings was required. See Note 7Derivative Instruments and Hedging Activities for additional disclosure.  

In May 2017, the FASB issued ASU 2017-09, Compensation–Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU was issued to provide clarity and reduce diversity in practice regarding the application of guidance on the modification of equity awards. The guidance is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual reporting periods with early adoption permitted and should be applied prospectively to an award modified on or after the adoption date. The Company adopted this standard on January 1, 2018. The adoption of ASU 2017-17 did not have a material impact on the Company’s unaudited condensed consolidated financial statements as the Company historically has accounted for all modifications in accordance with Topic 718 and has not been subject to the exception described under this ASU.

In November 2016, the FASB issued ASU 2016-18, Restricted Cash–a Consensus of the FASB Emerging Issues Task Force. This ASU requires companies to include restricted cash balances with cash and cash equivalent balances in the statement of cash flows. The guidance is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual reporting periods with early adoption permitted, and should be applied using a retrospective transition method. The Company adopted this standard on January 1, 2018 using the retrospective transition method.  The adoption of ASU 2016-18 decreased net cash used in investing activities and increased cash, cash equivalents and restricted cash by $0.7 million when compared to the previously reported amounts in the accompanying unaudited condensed consolidated statement of cash flows for the nine months ended September 30, 2017.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 simplifies the income tax accounting of intra-entity transfers of an asset other than inventory by requiring an entity to recognize the income tax effect when the transfer occurs. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods and early adoption is permitted. The Company adopted this standard on January 1, 2018 using a modified retrospective transition method. The adoption of ASU 2016-16 did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. This ASU provides guidance on the presentation and classification of eight specific cash flow issues that previously resulted in diversity in practice. The ASU is effective for annual periods beginning after December 15, 2017 and interim periods therein. The Company adopted this standard on January 1, 2018 using a retrospective transition method to each period presented. The adoption of ASU 2016-15 did not have a material impact on the Company’s unaudited condensed consolidated statements of cash flows.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition. Under this ASU and subsequently issued amendments, revenue is recognized at the time a good or service is transferred to a customer for the amount of consideration expected to be received. Entities may use a full retrospective approach or report the cumulative effect as of the date of adoption. The Company adopted this standard and subsequently issued amendments on January 1, 2018, using the modified retrospective transition method. The adoption of ASU 2014-09 and its subsequently issued amendments did not have a material impact on the Company’s existing or new contracts as of January 1, 2018; therefore, no cumulative adjustment to beginning retained earnings was required as a result of adoption. See Note 1 “Description of the Business and Basis of Presentation” subtopic “Revenue Recognition” for additional disclosure.

Recently Issued Accounting Standards

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).  The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use (“ROU”) assets and corresponding lease liabilities on the balance sheet. The new guidance will require the Company to continue to classify leases as either operating or financing, with classification affecting the pattern of expense recognition in the income statement. Accounting by lessors will remain largely unchanged from current U.S. GAAP. Lessees and lessors are also required to disclose qualitative and quantitative information about leasing arrangements to enable financial statement users to assess the amount, timing and uncertainty of cash flows arising from leases. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, and ASU 2018-11, Leases (Topic 842) Targeted Improvements.  ASU 2018-10 clarifies how to apply certain aspects of ASU 2016-02. ASU 2018-11 provides entities the option of recognizing the cumulative effect of applying the new standard as an adjustment to beginning retained earnings in the year of adoption while continuing to present all prior periods under previous lease accounting guidance. These ASUs will be effective for annual periods beginning after December 15, 2018, and interim periods therein with early adoption permitted.  The Company plans on adopting these ASU’s (collectively, “ASC 842”) as of January 1, 2019.  The new standard also provides a number of optional provisions, known as practical expedients, which companies may elect to adopt to facilitate implementation. The Company expects to elect these practical expedients which, among other items, precludes the Company from needing to reassess 1) whether any expired or existing contracts are or contain leases, 2) the lease classification of any expired or existing leases, and 3) initial direct costs for any existing leases.

11


SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The Company has been closely monitoring developments related to ASC 842 and continues to evaluate its impact on accounting and disclosure requirements.  The Company is currently finalizing an internal assessment and review of its existing lease arrangements.  Based on the results of this internal review to date, the Company expects its San Diego land lease, among other operating leases, to be recorded as right-of-use assets with corresponding lease liabilities, which are expected to have material effect on the Company’s consolidated balance sheet.  The Company does not expect the adoption of these ASUs to have a material effect on its consolidated statements of comprehensive income (loss) or cash flows.  For more information regarding the Company’s commitments under long-term operating leases requiring annual minimum lease payments, refer to Note 15Commitments and Contingencies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

In July 2018, the FASB issued ASU 2018-09, Codification Improvements, which clarifies, corrects and makes minor improvements to a wide variety of topics in the ASC. The amendments make the ASC easier to understand and apply by eliminating inconsistencies and providing clarifications. The transition and effective dates are based on the facts and circumstances of each amendment, with some amendments becoming effective upon issuance of the ASU, and others becoming effective for annual periods beginning after December 15, 2018. Included in this ASU are amendments to ASC 718-740, Compensation - Stock Compensation - Income Taxes, which clarify that an entity should recognize excess tax benefits in the period in which the amount of deduction is determined.  The Company is evaluating the effect of the amendments within ASU 2018-09, but does not expect a material impact on the Company's financial position or results of operations.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract.  This ASU generally aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use.  The ASU also adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud computing arrangements.  ASU 2018-15 is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, with early adoption permitted. The amendments in this ASU can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is evaluating the effect of adopting this new accounting guidance, but does not expect adoption will have a material impact on the Company’s financial position or results of operations.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). The ASU eliminates certain disclosures related to the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. The ASU adds new disclosure requirements for Level 3 measurements. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted for any eliminated or modified disclosures. The Company is evaluating the effect of adopting this new accounting guidance, but does not expect adoption will have a material impact on the Company's disclosures.

3. EARNINGS (LOSS) PER SHARE

Earnings (loss) per share is computed as follows:

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

Net

Income

 

 

Shares

 

 

Per

Share

Amount

 

 

Net

Income

 

 

Shares

 

 

Per

Share

Amount

 

 

Net Income

 

 

Shares

 

 

Per

Share

Amount

 

 

Net

Loss

 

 

Shares

 

 

Per

Share

Amount

 

 

 

(In thousands, except per share amounts)

 

Basic earnings (loss) per share

 

$

95,988

 

 

 

86,616

 

 

$

1.11

 

 

$

55,034

 

 

 

86,012

 

 

$

0.64

 

 

$

55,841

 

 

 

86,410

 

 

$

0.65

 

 

$

(181,945

)

 

 

85,712

 

 

$

(2.12

)

Effect of dilutive incentive-based awards

 

 

 

 

 

 

926

 

 

 

 

 

 

 

 

 

 

 

272

 

 

 

 

 

 

 

 

 

 

 

619

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share

 

$

95,988

 

 

 

87,542

 

 

$

1.10

 

 

$

55,034

 

 

 

86,284

 

 

$

0.64

 

 

$

55,841

 

 

 

87,029

 

 

$

0.64

 

 

$

(181,945

)

 

 

85,712

 

 

$

(2.12

)

 

In accordance with the Earnings Per Share Topic of the ASC, basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period (excluding treasury stock and unvested restricted stock). Shares of unvested restricted stock are eligible to receive dividends, if any; however, dividend rights will be forfeited if the award does not vest.  Accordingly, only vested shares of formerly restricted stock are included in the calculation of basic earnings per share. The weighted average number of repurchased shares during the period, if any, which are held as treasury stock, are excluded from shares of common stock outstanding.

12


SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Diluted earnings (loss) per share is determined using the treasury stock method based on the dilutive effect of unvested restricted shares, restricted stock units and certain shares of common stock that are issuable upon exercise of stock options. There were no anti-dilutive shares of common stock excluded from the computation of diluted earnings per share during the three months ended September 30, 2018 and for the nine months ended September 30, 2018, there were approximately 1,736,000 anti-dilutive shares of common stock excluded from the computation of diluted earnings per share.  During the three months ended September 30, 2017, there were approximately 4,180,000 anti-dilutive shares of common stock excluded from the computation of diluted earnings per share.  During the nine months ended September 30, 2017, there were approximately 5,137,000 potentially dilutive shares excluded from the computation of diluted loss per share, as their effect would have been anti-dilutive due to the Company’s net loss in that period.  The Company’s outstanding performance-vesting restricted awards of approximately 1,941,000 and 2,475,000 as of September 30, 2018 and 2017, respectively, are considered contingently issuable shares and are excluded from the calculation of diluted earnings (loss) per share until the performance measure criteria is met as of the end of the reporting period.  

4. INCOME TAXES

Income tax expense or benefit is recognized based on the Company’s estimated annual effective tax rate which is based upon the tax rate expected for the full calendar year applied to the pretax income or loss of the interim period. The Company’s consolidated effective tax rate for the three and nine months ended September 30, 2018 was 27.4% and 30.9%, respectively, and differs from the recently enacted statutory federal income tax rate of 21% primarily due to state income taxes and other permanent items including a nondeductible legal settlement and equity-based compensation.  The Company’s consolidated effective tax rate for the three and nine months ended September 30, 2017 was 38.0% and 29.0%, respectively, and differs from the previously effective statutory federal income tax rate of 35% primarily due to state income taxes and other permanent items, including nondeductible goodwill impairment and equity-based compensation.  

The Company has determined that there are no positions currently taken that would rise to a level requiring an amount to be recorded or disclosed as an unrecognized tax benefit. If such positions do arise, it is the Company’s intent that any interest or penalty amount related to such positions will be recorded as a component of the income tax provision (benefit) in the applicable period.

On December 22, 2017, the United States enacted the Tax Act which makes significant modifications to the provisions of the Internal Revenue Code, including but not limited to a corporate tax rate decrease from 35% to 21% effective January 1, 2018.  The Company has calculated the impact of the Tax Act in accordance with its current interpretation and available guidance, particularly as it relates to the future deductibility of executive compensation items and state conformity to the Tax Act.

5. OTHER ACCRUED LIABILITIES

Other accrued liabilities at September 30, 2018 and December 31, 2017, consisted of the following:

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Accrued property taxes

 

$

10,639

 

 

$

1,280

 

Accrued interest

 

 

1,045

 

 

 

6,078

 

Self-insurance reserve

 

 

7,123

 

 

 

7,084

 

Other

 

 

15,746

 

 

 

5,170

 

Total other accrued expenses

 

$

34,553

 

 

$

19,612

 

As of September 30, 2018, other liabilities above include $11.5 million related to the EZPay plan lawsuit legal settlement, further described in Note 10–Commitments and Contingencies.  As of December 31, 2017, accrued interest above included $5.1 million relating to the Company’s fourth quarter 2017 interest payable on its Term B-2 Loans, which was paid on January 5, 2018.  

13


SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

6. LONG-TERM DEBT

Long-term debt as of September 30, 2018 and December 31, 2017 consisted of the following:

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Term B-5 Loans (effective interest rate of 5.24% and 4.69% at September 30, 2018 and December 31, 2017, respectively)

 

$

983,331

 

 

$

990,819

 

Term B-2 Loans (effective interest rate of 4.49% and 3.94% at September 30, 2018 and December 31, 2017, respectively)

 

 

543,935

 

 

 

554,227

 

Revolving credit facility (effective interest rate of 4.24% at December 31, 2017)

 

 

 

 

 

15,000

 

Total long-term debt

 

 

1,527,266

 

 

 

1,560,046

 

Less discounts

 

 

(7,331

)

 

 

(8,685

)

Less debt issuance costs

 

 

(6,939

)

 

 

(9,045

)

Less current maturities

 

 

(23,707

)

 

 

(38,707

)

Total long-term debt, net

 

$

1,489,289

 

 

$

1,503,609

 

 

SEA is the borrower under the senior secured credit facilities, as amended pursuant to a credit agreement (the “Existing Credit Agreement”) dated as of December 1, 2009, as the same may be amended, restated, supplemented or modified from time to time (the “Senior Secured Credit Facilities”).  

On March 31, 2017, SEA entered into a refinancing amendment, Amendment No. 8 (the “Amendment No. 8”), to its Existing Credit Agreement.  In connection with the Amendment No. 8, SEA borrowed $998.3 million of additional term loans (the “Term B-5 Loans”) of which the proceeds, along with cash on hand, were used to redeem all of the then outstanding principal of the Term B-3 loans (the “Term B-3 Loans”), with a principal amount equal to $244.7 million and a portion of the outstanding principal of the Term B-2 loans (the “Term B-2 Loans”), with a principal amount equal to $753.6 million, and pay other fees, costs and expenses in connection with the Amendment No. 8 and related transactions. Additionally, pursuant to the Amendment No. 8, SEA terminated the existing revolving credit commitments and replaced them with a new tranche of revolving credit commitments with an aggregate commitment amount of $210.0 million (the “Revolving Credit Facility”).

In connection with the issuance of the Term B-5 Loans as a result of Amendment No. 8, SEA recorded a discount of $5.0 million and debt issuance costs of $0.04 million during the nine months ended September 30, 2017. Additionally, SEA wrote-off debt issuance costs of $8.0 million, which is included in loss on early extinguishment of debt and write-off of discounts and debt issuances costs in the accompanying unaudited condensed consolidated statements of comprehensive income (loss) during the nine months ended September 30, 2017. See discussion in the Senior Secured Credit Facilities section which follows for further information.

Debt issuance costs and discounts are amortized to interest expense using the effective interest method over the term of the related debt and are included in long-term debt, net, in the accompanying unaudited condensed consolidated balance sheets. Unamortized debt issuance costs and discounts for the Term B-5 Loans, Term B-2 Loans and Revolving Credit Facility were $10.4 million, $2.2 million and $1.6 million, respectively, at September 30, 2018. Unamortized debt issuance costs and discounts for the Term B-5 Loans, Term B-2 Loans and Revolving Credit Facility were $11.9 million, $3.3 million and $2.5 million, respectively, at December 31, 2017.

On October 31, 2018, SEA entered into another refinancing amendment, Amendment No. 9 (the “Amended Credit Agreement”), to its Existing Credit Agreement.  In connection with the Amended Credit Agreement, SEA borrowed $543.9 million of additional term loans (the “Additional Term B-5 Loans”) of which the proceeds, along with cash on hand, were used to redeem all of the then outstanding principal of the Term B-2 Loans, with a principal amount equal to $543.9 million, and pay other fees, costs and expenses in connection with the Amended Credit Agreement and related transactions.  Additionally, pursuant to the Amended Credit Agreement, SEA terminated the existing revolving credit commitments and replaced them with a new tranche of revolving credit commitments with an aggregate commitment amount of $210.0 million (the “New Revolving Credit Facility”) with a maturity date of October 31, 2023.  

As of September 30, 2018, SEA was in compliance with all covenants contained in the documents governing the Senior Secured Credit Facilities.

14


SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Senior Secured Credit Facilities

As of September 30, 2018, prior to the Amended Credit Agreement, the Senior Secured Credit Facilities consisted of $983.3 million in Term B-5 Loans which will mature on March 31, 2024, $543.9 million in Term B-2 Loans which would have matured on May 14, 2020, and the $210.0 million Revolving Credit Facility, which was not drawn upon as of September 30, 2018.  The outstanding balance under the Revolving Credit Facility was included in current maturities of long-term debt in the accompanying unaudited condensed consolidated balance sheet as of December 31, 2017 due to the Company’s intent to repay the borrowings within the following twelve month period.

Prior to the Amended Credit Agreement, the Term B-5 Loans amortized in equal quarterly installments in an aggregate annual amount equal to approximately 1.0% of the original principal amount of the Term B-5 Loans on March 31, 2017, with the balance due on the final maturity date of March 31, 2024. SEA may voluntarily repay amounts outstanding under the Senior Secured Credit Facilities at any time without premium or penalty, other than customary “breakage” costs with respect to LIBOR loans.

SEA is required to prepay the outstanding Term B-5 Loans, subject to certain exceptions, with

 

(i)

50% of SEA’s annual “excess cash flow” (with step-downs to 25% and 0%, as applicable, based upon achievement by SEA of a certain secured net leverage ratio), subject to certain exceptions;

 

(ii)

100% of the net cash proceeds of certain non-ordinary course asset sales or other dispositions subject to reinvestment rights and certain exceptions; and

 

(iii)

100% of the net cash proceeds of any incurrence of debt by SEA or any of its restricted subsidiaries, other than debt permitted to be incurred or issued under the Senior Secured Credit Facilities.

Notwithstanding any of the foregoing, each lender of term loans has the right to reject its pro rata share of mandatory prepayments described above, in which case SEA may retain the amounts so rejected. The foregoing mandatory prepayments will be applied pro rata to installments of term loans in direct order of maturity. During the first quarter of 2017, the Company made a mandatory prepayment of approximately $6.3 million based on its excess cash flow calculation as of December 31, 2016. Approximately $3.5 million of the mandatory prepayment was accepted by the lenders and applied ratably to the Term B-2 and Term B-3 Loans prior to the Amendment No. 8 on March 31, 2017, and the remainder of $2.8 million was applied as a voluntary prepayment to the Term B-2 Loans in the quarter ended June 30, 2017. There were no mandatory prepayments made during the three or nine months ended September 30, 2018.

As of September 30, 2018, SEA had approximately $21.3 million of outstanding letters of credit, leaving approximately $188.7 million available for borrowing under the Revolving Credit Facility.

Restrictive Covenants

The Senior Secured Credit Facilities contain a number of customary negative covenants. Such covenants, among other things, restrict, subject to certain exceptions, the ability of SEA and its restricted subsidiaries to incur additional indebtedness; make guarantees; create liens on assets; enter into sale and leaseback transactions; engage in mergers or consolidations; sell assets; make fundamental changes; pay dividends and distributions or repurchase SEA’s capital stock; make investments, loans and advances, including acquisitions; engage in certain transactions with affiliates; make changes in the nature of the business; and make prepayments of junior debt.

The Senior Secured Credit Facilities prior to the Amended Credit Agreement also contained covenants requiring SEA to limit annual capital expenditures, and maintain a maximum total net leverage ratio and a minimum interest coverage ratio. Following SEA’s entry into the Amended Credit Agreement, such financial covenants on the Term B-5 Loans were removed.  The New Revolving Credit Facility requires that SEA comply with a springing maximum first lien secured leverage ratio of 6.25x to be tested as of the last day of any fiscal quarter, solely to the extent that on such date the aggregate amount of funded loans and letters of credit (excluding undrawn letters of credit in an amount not to exceed $30.0 million and cash collateralized letters of credit) under the New Revolving Credit Facility exceeds an amount equal to 35% of the then outstanding commitments under the New Revolving Credit Facility.

All of the net assets of SEA and its consolidated subsidiaries are restricted and there are no unconsolidated subsidiaries of SEA.

15


SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The Senior Secured Credit Facilities permit restricted payments in an aggregate amount per annum equal to the sum of (A) $25.0 million plus (B) an amount, if any, equal to (1) if the total net leverage ratio on a pro forma basis after giving effect to the payment of any such restricted payment, is no greater than 3.50 to 1.00, an unlimited amount, (2) if the total net leverage ratio on a pro forma basis after giving effect to the payment of any such restricted payment is no greater than 4.00 to 1.00 and greater than 3.50 to 1.00, the greater of (a) $95.0 million and (b) 7.50% of Market Capitalization (as defined in the Senior Secured Credit Facilities), (3) if the total net leverage ratio on a pro forma basis after giving effect to the payment of any such restricted payment is no greater than 4.50 to 1.00 and greater than 4.00 to 1.00, $95.0 million and (4) if the total net leverage ratio on a pro forma basis after giving effect to the payment of any such restricted payment is no greater than 5.00 to 1.00 and greater than 4.50 to 1.00, $65.0 million.

As of September 30, 2018, the total net leverage ratio as calculated under the Senior Secured Credit Facilities was 3.40 to 1.00.  The amount available for dividend declarations, share repurchases and certain other restricted payments under the covenant restrictions in the debt agreements adjusts at the beginning of each quarter, as set forth above.  

Long-term debt as of September 30, 2018 is repayable as follows, not including the impact of the Amended Credit Agreement or any future voluntary prepayments:

Years Ending December 31:

 

(In thousands)

 

2018

 

$

5,927

 

2019

 

 

23,707

 

2020

 

 

536,763

 

2021

 

 

9,983

 

2022

 

 

9,983

 

Thereafter

 

 

940,903

 

Total

 

$

1,527,266

 

Interest Rate Swap Agreements

As of September 30, 2018, the Company has five interest rate swap agreements (the “Interest Rate Swap Agreements”) which effectively fix the interest rate on LIBOR-indexed interest payments associated with $1.0 billion of SEA’s outstanding long-term debt. The Interest Rate Swap Agreements became effective on September 30, 2016; have a total notional amount of $1.0 billion; mature on May 14, 2020; require the Company to pay a weighted-average fixed rate of 2.45% per annum; provide that the Company receives a variable rate of interest based upon the greater of 0.75% or the BBA LIBOR; and have interest settlement dates occurring on the last day of September, December, March and June through maturity.

SEA designated the Interest Rate Swap Agreements above as qualifying cash flow hedge accounting relationships as further discussed in Note 7–Derivative Instruments and Hedging Activities which follows.

Cash paid for interest relating to the Senior Secured Credit Facilities and the Interest Rate Swap Agreements, net of amounts capitalized, as applicable was $61.8 million and $67.3 million in the nine months ended September 30, 2018 and 2017, respectively. Cash paid for interest in the nine months ended September 30, 2018 includes $5.1 million relating to the Company’s fourth quarter 2017 interest payable on its Senior Secured Credit Facilities which was paid on January 5, 2018. Cash paid for interest in the nine months ended September 30, 2017 includes $12.9 million relating to the Company’s fourth quarter 2016 interest payable on its Senior Secured Credit Facilities which was paid on January 3, 2017.

7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk primarily by managing the amount, sources and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings. The Company does not speculate using derivative instruments.

As of September 30, 2018 and December 31, 2017, the Company did not have any derivatives outstanding that were not designated in hedge accounting relationships.

16


SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. During the three and nine months ended September 30, 2018 and 2017, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.

As of September 30, 2018, the Company has five Interest Rate Swap Agreements that mature on May 14, 2020, which effectively fix the interest rate on LIBOR-indexed interest payments associated with $1.0 billion of SEA’s outstanding long-term debt.  

The interest rate swap agreements are designated as cash flow hedges of interest rate risk. The changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next 12 months, the Company estimates that an additional $2.8 million will be reclassified as interest income.

Tabular Disclosure of Fair Values of Derivative Instruments on the Balance Sheet