10-Q 1 seas-10q_20190331.htm 10-Q seas-10q_20190331.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 March 31, 2019

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 84,198,886 shares of Common Stock, par value $0.01 per share as of May 3, 2019.

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

SEAS

New York Stock Exchange

 

 


 

 

 

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 Loss

 

4

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements 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

 

25

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

34

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

35

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

36

 

 

 

 

 

Item 1A.

 

Risk Factors

 

36

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

36

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

36

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

36

 

 

 

 

 

Item 5.

 

Other Information

 

36

 

 

 

 

 

Item 6.

 

Exhibits

 

37

 

 

Signatures

 

38

 

 

 

 


 

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 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,” “goal” 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, 2018 (the “Annual Report on Form 10-K”), filed with the Securities and Exchange Commission (the “SEC”), 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;

 

activist and other third-party groups and/or media can pressure governmental agencies, vendors, partners, and/or regulators, bring actions in the courts or create negative publicity about us;

 

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 pandemics and epidemics, natural disasters, weather, foreign exchange rates, consumer confidence, travel related concerns, and governmental actions;

 

incidents or adverse publicity concerning our theme parks;

 

a decline in discretionary consumer spending or consumer confidence;

 

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

 

seasonal fluctuations in operating results;

 

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;

 

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 realize the benefits of developments, restructurings, acquisitions or other strategic initiatives, and the impact of the costs associated with such activities;

 

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


 

 

changes in the method for determining LIBOR and the potential replacement of LIBOR may affect our cost of capital;

 

inadequate insurance coverage;

 

inability to purchase or contract with third party manufacturers for rides and attractions;

 

inadequate insurance coverage;

 

environmental regulations, expenditures and liabilities;

 

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

 

delays, restrictions or inability to obtain or maintain permits;

 

financial distress of strategic partners or other counterparties;

 

changes to immigration, foreign trade, investments or other policies;

 

inability to realize the full value of our intangible assets;

 

changes in tax laws;

 

tariffs or other trade restrictions;

 

actions of activist stockholders;

 

the ability of Hill Path Capital LP or other large stockholders to significantly influence our decisions;

 

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)

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

51,860

 

 

$

34,073

 

Accounts receivable, net

 

 

58,692

 

 

 

57,980

 

Inventories

 

 

42,724

 

 

 

35,814

 

Prepaid expenses and other current assets

 

 

19,567

 

 

 

18,700

 

Total current assets

 

 

172,843

 

 

 

146,567

 

Property and equipment, at cost

 

 

3,116,688

 

 

 

3,057,038

 

Accumulated depreciation

 

 

(1,399,115

)

 

 

(1,365,006

)

Property and equipment, net

 

 

1,717,573

 

 

 

1,692,032

 

Goodwill, net

 

 

66,278

 

 

 

66,278

 

Trade names/trademarks, net

 

 

157,975

 

 

 

158,343

 

Other intangible assets, net

 

 

120

 

 

 

14,120

 

Right of use assets-operating

 

 

145,807

 

 

 

 

Deferred tax assets, net

 

 

30,177

 

 

 

23,527

 

Other assets, net

 

 

15,421

 

 

 

14,735

 

Total assets

 

$

2,306,194

 

 

$

2,115,602

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

140,567

 

 

$

120,024

 

Current maturities of long-term debt

 

 

80,505

 

 

 

45,505

 

Operating lease obligations

 

 

4,118

 

 

 

 

Accrued salaries, wages and benefits

 

 

19,228

 

 

 

20,966

 

Deferred revenue

 

 

151,253

 

 

 

101,110

 

Other accrued liabilities

 

 

29,065

 

 

 

23,066

 

Total current liabilities

 

 

424,736

 

 

 

310,671

 

Long-term debt, net of debt issuance costs of $6,206 and $6,641 as of

  March 31, 2019 and December 31, 2018, respectively

 

 

1,491,702

 

 

 

1,494,679

 

Long-term operating lease obligations

 

 

128,119

 

 

 

 

Deferred tax liabilities, net

 

 

 

 

 

10,711

 

Other liabilities

 

 

35,217

 

 

 

34,347

 

Total liabilities

 

 

2,079,774

 

 

 

1,850,408

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value—authorized, 100,000,000 shares, no shares issued

   or outstanding at March 31, 2019 and December 31, 2018

 

 

 

 

 

 

Common stock, $0.01 par value—authorized, 1,000,000,000 shares; 93,748,617 and 93,400,929 shares issued at March 31, 2019 and December 31, 2018, respectively

 

 

937

 

 

 

934

 

Additional paid-in capital

 

 

664,141

 

 

 

663,834

 

Accumulated other comprehensive income

 

 

220

 

 

 

2,284

 

Accumulated deficit

 

 

(185,975

)

 

 

(148,955

)

Treasury stock, at cost (10,174,589 shares at March 31, 2019 and December 31, 2018)

 

 

(252,903

)

 

 

(252,903

)

Total stockholders’ equity

 

 

226,420

 

 

 

265,194

 

Total liabilities and stockholders’ equity

 

$

2,306,194

 

 

$

2,115,602

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

3


 

SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE LOSS

(In thousands, except per share amounts)

 

 

 

For the Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Net revenues:

 

 

 

 

 

 

 

 

Admissions

 

$

128,913

 

 

$

130,003

 

Food, merchandise and other

 

 

91,662

 

 

 

87,163

 

Total revenues

 

 

220,575

 

 

 

217,166

 

Costs and expenses:

 

 

 

 

 

 

 

 

Cost of food, merchandise and other revenues

 

 

17,213

 

 

 

17,051

 

Operating expenses (exclusive of depreciation and amortization shown separately below and includes equity compensation of $1,357 and $1,563 for the three months ended March 31, 2019 and 2018, respectively)

 

 

149,885

 

 

 

155,473

 

Selling, general and administrative expenses (includes equity compensation of $1,841 and $5,982 for the three months ended March 31, 2019 and 2018, respectively)

 

 

42,764

 

 

 

63,524

 

Restructuring and other separation costs

 

 

2,566

 

 

 

8,835

 

Depreciation and amortization

 

 

39,450

 

 

 

38,430

 

Total costs and expenses

 

 

251,878

 

 

 

283,313

 

Operating loss

 

 

(31,303

)

 

 

(66,147

)

Other expense, net

 

 

27

 

 

 

63

 

Interest expense

 

 

20,797

 

 

 

19,913

 

Loss before income taxes

 

 

(52,127

)

 

 

(86,123

)

Benefit from income taxes

 

 

(15,107

)

 

 

(23,279

)

Net loss

 

$

(37,020

)

 

$

(62,844

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

Unrealized (loss) income on derivatives, net of tax

 

 

(2,064

)

 

 

7,491

 

Comprehensive loss

 

$

(39,084

)

 

$

(55,353

)

Loss per share:

 

 

 

 

 

 

 

 

Net loss per share, basic

 

$

(0.44

)

 

$

(0.73

)

Net loss per share, diluted

 

$

(0.44

)

 

$

(0.73

)

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

83,354

 

 

 

86,209

 

Diluted

 

 

83,354

 

 

 

86,209

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

4


 

SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(In thousands, except share amounts)

 

 

 

Shares of

Common

Stock

Issued

 

 

Common

Stock

 

 

Additional

Paid-In

Capital

 

 

Accumulated Deficit

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Treasury

Stock,

at Cost

 

 

Total

Stockholders'

Equity

 

Balance at December 31, 2018

 

 

93,400,929

 

 

$

934

 

 

$

663,834

 

 

$

(148,955

)

 

$

2,284

 

 

$

(252,903

)

 

$

265,194

 

Equity-based compensation

 

 

 

 

 

 

 

 

3,198

 

 

 

 

 

 

 

 

 

 

 

 

3,198

 

Unrealized loss on derivatives, net of tax

   benefit of $744

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,064

)

 

 

 

 

 

(2,064

)

Vesting of restricted shares

 

 

440,646

 

 

 

4

 

 

 

(4

)

 

 

 

 

 

 

 

 

 

 

 

 

Shares withheld for tax withholdings

 

 

(132,886

)

 

 

(1

)

 

 

(3,605

)

 

 

 

 

 

 

 

 

 

 

 

(3,606

)

Exercise of stock options

 

 

39,928

 

 

 

 

 

 

715

 

 

 

 

 

 

 

 

 

 

 

 

715

 

Adjustments to previous dividend declarations

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

3

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(37,020

)

 

 

 

 

 

 

 

 

(37,020

)

Balance at March 31, 2019

 

 

93,748,617

 

 

$

937

 

 

$

664,141

 

 

$

(185,975

)

 

$

220

 

 

$

(252,903

)

 

$

226,420

 

 

 

 

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

 

 

 

 

 

 

 

 

7,545

 

 

 

 

 

 

 

 

 

 

 

 

7,545

 

Unrealized loss on derivatives, net of tax

   expense of $2,774

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,491

 

 

 

 

 

 

7,491

 

Vesting of restricted shares

 

 

360,092

 

 

 

4

 

 

 

(4

)

 

 

 

 

 

 

 

 

 

 

 

 

Shares withheld for tax withholdings

 

 

(108,432

)

 

 

(1

)

 

 

(1,633

)

 

 

 

 

 

 

 

 

 

 

 

(1,634

)

Exercise of stock options

 

 

484

 

 

 

 

 

 

7

 

 

 

 

 

 

 

 

 

 

 

 

7

 

Adjustments to previous dividend declarations

 

 

 

 

 

 

 

 

47

 

 

 

 

 

 

 

 

 

 

 

 

47

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(62,844

)

 

 

 

 

 

 

 

 

(62,844

)

Balance at March 31, 2018

 

 

92,889,547

 

 

$

929

 

 

$

647,286

 

 

$

(256,587

)

 

$

1,321

 

 

$

(154,871

)

 

$

238,078

 

 

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 Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(37,020

)

 

$

(62,844

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

39,450

 

 

 

38,430

 

Amortization of debt issuance costs and discounts

 

 

899

 

 

 

1,157

 

Loss on sale or disposal of assets, net

 

 

45

 

 

 

396

 

Deferred income tax benefit

 

 

(16,606

)

 

 

(23,817

)

Equity-based compensation

 

 

3,198

 

 

 

7,545

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,329

)

 

 

(21,218

)

Inventories

 

 

(6,964

)

 

 

(6,761

)

Prepaid expenses and other current assets

 

 

(628

)

 

 

(3,141

)

Right of use assets-operating

 

 

1,189

 

 

 

 

Accounts payable and accrued expenses

 

 

1,715

 

 

 

16,540

 

Accrued salaries, wages and benefits

 

 

(1,737

)

 

 

5,729

 

Deferred revenue

 

 

51,697

 

 

 

62,162

 

Other accrued liabilities

 

 

5,498

 

 

 

5,879

 

Operating lease obligations

 

 

(1,061

)

 

 

 

Other assets and liabilities

 

 

342

 

 

 

260

 

Net cash provided by operating activities

 

 

37,688

 

 

 

20,317

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(47,937

)

 

 

(45,822

)

Other investing activities

 

 

50

 

 

 

 

Net cash used in investing activities

 

 

(47,887

)

 

 

(45,822

)

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

 

Repayments of long-term debt

 

 

(3,877

)

 

 

(5,927

)

Proceeds from draws on revolving credit facility

 

 

55,000

 

 

 

45,000

 

Repayments of revolving credit facility

 

 

(20,000

)

 

 

(5,000

)

Dividends paid to stockholders

 

 

(58

)

 

 

(287

)

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

 

 

(3,606

)

 

 

(1,634

)

Exercise of stock options

 

 

715

 

 

 

7

 

Other financing activities

 

 

(168

)

 

 

 

Net cash provided by financing activities

 

 

28,006

 

 

 

32,159

 

Change in Cash and Cash Equivalents, including Restricted Cash

 

 

17,807

 

 

 

6,654

 

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

 

 

35,007

 

 

 

33,997

 

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

 

$

52,814

 

 

$

40,651

 

Supplemental Disclosures of Noncash Investing and Financing Activities

 

 

 

 

 

 

 

 

Capital expenditures in accounts payable

 

$

49,620

 

 

$

32,744

 

Dividends declared, but unpaid

 

$

23

 

 

$

136

 

 

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, 2018 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, 2018 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, 2019 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 and liabilities, 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.

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.

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(In thousands)

 

Cash and cash equivalents

 

$

51,860

 

 

$

34,073

 

Restricted cash, included in other current assets

 

 

954

 

 

 

934

 

Total cash, cash equivalents and restricted cash

 

$

52,814

 

 

$

35,007

 

7


SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Revenue Recognition

Admissions revenue primarily consists of single-day tickets, annual or season passes or other multi-day or multi-park admission products.  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.  

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.

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 both March 31, 2019 and December 31, 2018, $10.0 million is included in other liabilities in the accompanying unaudited condensed consolidated balance sheets related 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 Company’s deferred revenue balance as of March 31, 2019 and December 31, 2018:   

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(In thousands)

 

Deferred revenue, including long-term portion

 

$

161,253

 

 

$

111,181

 

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

 

 

10,000

 

 

 

10,071

 

Deferred revenue, short-term portion

 

$

151,253

 

 

$

101,110

 

 

 

 

 

 

 

 

 

 

International Agreements

The Company has 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 $4.1 million and $3.8 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 March 31, 2019 and December 31, 2018, respectively.  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. 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.

In March 2017, the Company entered into a Park Exclusivity and Concept Design Agreement and a Center Concept and Preliminary Design Support Agreement (collectively, the “ZHG Agreements”) with Zhonghong Holding, Co. Ltd. (“Zhonghong Holding”), an affiliate of ZHG Group, to provide design, support and advisory services for various potential projects and grant exclusive rights in China, Taiwan, Hong Kong and Macau through December 2019. In April 2019, the Company terminated the ZHG Agreements for non-payment of undisputed amounts owed. For the three months ended March 31, 2019 and 2018, the Company recorded approximately $1.7 million and $1.3 million, respectively, in food, merchandise and other revenue in the accompanying unaudited condensed consolidated statements of comprehensive loss related to the ZHG Agreements. See Note 10–Related-Party Transactions for additional disclosures.

8


SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

On January 1, 2019, the Company adopted Accounting Standards Codification (“ASC”) 842, Leases.  The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record right of use assets and corresponding lease liabilities on the balance sheet. The new guidance requires the Company to continue to classify leases as either operating or financing, with classification affecting the pattern of expense recognition in the income statement. The Company is 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. The Company adopted ASC 842 using a modified retrospective method that did not require the prior period information to be restated.  ASC 842 also provides a number of optional provisions, known as practical expedients, which companies may elect to adopt to facilitate implementation.  The Company elected a package of 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. The Company elected not to implement the practical expedient related to hindsight to determine lease terms.  Due to the implementation of selected practical expedients, there was no cumulative effect adjustment to beginning retained earnings. See Note 7–Leases for additional disclosures.

On January 1, 2019, the Company also adopted the following Accounting Standards Updates (“ASUs”) which had no material impact on its unaudited condensed consolidated financial statements or disclosures:  

 

ASU 2018-09, Codification Improvements

 

ASU 2018-13, Fair Value Measurement (Topic 820)

 

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

 

ASU 2018-16, Derivatives and Hedging—Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes

During 2018, the Company adopted the following ASUs:

 

ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities - This ASU 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.  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 impact of the adoption was not material to the Company’s unaudited condensed consolidated financial statements; as a result, no cumulative effect adjustment to beginning retained earnings was required. See Note 8Derivative Instruments and Hedging Activities for additional disclosure.  

 

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 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 Company elected to early adopt the ASU on January 1, 2018 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.

9


SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3. LOSS PER SHARE

Loss per share is computed as follows:

 

 

 

For the Three Months Ended March 31,

 

 

 

 

2019

 

 

2018

 

 

 

 

Net Loss

 

 

Shares

 

 

Per

Share

Amount

 

 

Net Loss

 

 

Shares

 

 

Per

Share

Amount

 

 

 

 

(In thousands, except per share amounts)

 

 

Basic loss per share

 

$

(37,020

)

 

 

83,354

 

 

$

(0.44

)

 

$

(62,844

)

 

 

86,209

 

 

$

(0.73

)

 

Effect of dilutive incentive-based awards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted loss per share

 

$

(37,020

)

 

 

83,354

 

 

$

(0.44

)

 

$

(62,844

)

 

 

86,209

 

 

$

(0.73

)

 

 

In accordance with the Earnings Per Share Topic of the ASC, basic loss per share is computed by dividing net 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 outstanding 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.

Diluted loss per share is determined using the treasury stock method based on the dilutive effect of unvested restricted stock and certain shares of common stock that are issuable upon exercise of stock options. There were approximately 1,893,000 and 4,495,000 potentially dilutive shares excluded from the computation of diluted loss per share during the three months ended March 31, 2019 and 2018, respectively, as their effect would have been anti-dilutive due to the Company’s net loss in those periods.  The Company’s outstanding performance-vesting restricted awards of approximately 2,295,000 and 2,730,000 as of March 31, 2019 and 2018, respectively, are considered contingently issuable shares and are excluded from the calculation of diluted 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 months ended March 31, 2019 and 2018 was 29.0% and 27.0%, respectively, and differs from the effective statutory federal income tax rate of 21.0% primarily due to state income taxes and other permanent items.

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.

5. OTHER ACCRUED LIABILITIES

Other accrued liabilities at March 31, 2019 and December 31, 2018, consisted of the following:

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(In thousands)

 

Self-insurance reserve

 

$

6,895

 

 

$

6,895

 

Accrued property taxes

 

 

2,910

 

 

 

 

Accrued interest

 

 

1,095

 

 

 

490

 

Dividends

 

 

23

 

 

 

84

 

Other

 

 

18,142

 

 

 

15,597

 

Total other accrued liabilities

 

$

29,065

 

 

$

23,066

 

 

As of March 31, 2019 and December 31, 2018, other liabilities above include $11.5 million related to the EZPay plan legal settlement (see further discussion in Note 11–Commitments and Contingencies).  

10


SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

6. LONG-TERM DEBT

Long-term debt, net, as of March 31, 2019 and December 31, 2018 consisted of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(In thousands)

 

Term B-5 Loans (effective interest rate of 5.50% and 5.52% at

   March 31, 2019 and December 31, 2018, respectively)

 

$

1,519,513

 

 

$

1,523,389

 

Revolving credit facility (effective interest rate of 5.16% and

   5.17% at March 31, 2019 and December 31, 2018, respectively)

 

 

65,000

 

 

 

30,000

 

Total long-term debt

 

 

1,584,513

 

 

 

1,553,389

 

Less discounts

 

 

(6,100

)

 

 

(6,564

)

Less debt issuance costs

 

 

(6,206

)

 

 

(6,641

)

Less current maturities

 

 

(80,505

)

 

 

(45,505

)

Total long-term debt, net

 

$

1,491,702

 

 

$

1,494,679

 

SEA is the borrower under the senior secured credit facilities as amended pursuant to a 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 October 31, 2018, SEA entered into a refinancing amendment, Amendment No. 9 (the “Amended Credit Agreement”).

Senior Secured Credit Facilities

As of March 31, 2019, the Senior Secured Credit Facilities consisted of $1.52 billion in Term B-5 Loans which will mature on March 31, 2024 and a $210.0 million revolving credit facility (the “Revolving Credit Facility”), of which $65.0 million was outstanding as of March 31, 2019. The outstanding balance on the Revolving Credit Facility was included in current maturities of long-term debt in the accompanying unaudited condensed consolidated balance sheets as of March 31, 2019 and December 31, 2018, due to the Company’s intent to repay the borrowings within the following twelve month period.  Subsequent to March 31, 2019, SEA repaid a net of $40.0 million on the Revolving Credit Facility.

The Term B-5 Loans amortize in equal quarterly installments in an aggregate annual amount equal to 1.015% of the original principal amount of the Term B-5 Loans outstanding on the Effective Date, with the balance payable on the final maturity date. 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 also required to prepay the outstanding Term B-5 Loans, subject to certain exceptions, under certain circumstances, as defined in the Senior Secured Credit Facilities.

As of March 31, 2019, SEA had approximately $21.3 million of outstanding letters of credit and $65.0 million outstanding on its Revolving Credit Facility leaving $123.7 million available for borrowing.

 

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

The Amended Credit Agreement removed all previous financial covenants on the Term B-5 Loans. The Revolving Credit Facility requires that the Company 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 Revolving Credit Facility exceeds an amount equal to 35% of the then outstanding commitments under the Revolving Credit Facility.

As of March 31, 2019, SEA was in compliance with all covenants contained in the documents governing the Senior Secured Credit Facilities.

11


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 March 31, 2019, the total net leverage ratio as calculated under the Senior Secured Credit Facilities was 3.51 to 1.00, which would result in the Company having approximately $185.0 million available capacity for restricted payments.  However, the available capacity for restricted payments is recalculated at the beginning of each quarter, or upon declaration of a restricted payment, as set forth in the credit agreement. 

Long-term debt at March 31, 2019 is repayable as follows, and does not include the impact of any future voluntary prepayments. The outstanding balance under the Revolving Credit Facility is included in current maturities of long-term debt in the accompanying unaudited condensed consolidated balance sheet as of March 31, 2019.

Years Ending December 31,

 

(In thousands)

 

Remainder of 2019

 

$

76,629

 

2020

 

 

15,505

 

2021

 

 

15,505

 

2022

 

 

15,505

 

2023

 

 

15,505

 

Thereafter

 

 

1,445,864

 

Total

 

$

1,584,513

 

Interest Rate Swap Agreements

As of March 31, 2019, the Company has five interest rate swap agreements (the “Interest Rate Swap Agreements”) which effectively fix the interest rate on the 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 March, June, September and December through maturity.

SEA designated the Interest Rate Swap Agreements above as qualifying cash flow hedge accounting relationships as further discussed in Note 8–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 $20.1 million and $24.0 million in the three months ended March 31, 2019 and 2018, respectively. Cash paid for interest in the three months ended March 31, 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.

7. LEASES

The Company adopted ASC 842, Leases, as of January 1, 2019 using the modified retrospective approach and elected the “Comparatives Under 840 Option” allowing the Company to not recast comparative periods in the period of adoption but present those periods under historical requirements of ASC 840.  The Company has land, warehouse and office space, and equipment leases which are classified as either operating or financing obligations.

Under the provisions of ASC 842, right to use assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date.  Lease terms may include options to renew when it is reasonably certain that the Company will exercise that option.  Lease expense for lease payments is recognized on a straight-line basis over the term of the operating lease.

12


SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The present value of future minimum lease payments is calculated using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate, which reflects the rate of interest the Company would pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. As most of the Company’s leases do not provide an implicit rate, the Company uses incremental borrowing rates based on the information available at commencement date in determining the present value of the lease payments. In calculating the incremental borrowing rates, the Company considered recent ratings from credit agencies, recent trading prices on the Company’s debt, and current lease demographic information. The Company used the incremental borrowing rates on December 31, 2018 for newly recognized operating leases that commenced prior to that date. The Company applies the incremental borrowing rates at a portfolio level based on lease terms.

The Company has elected not to recognize on the balance sheet leases with an initial and expected term of 12 months or less, instead lease expense is recognized for these short-term leases on a straight-line basis over the lease term. For lease agreements entered into or reassessed upon adoption of ASC 842, the Company has elected to combine lease and non-lease components for each class of underlying asset based on a practical expedient permitted under ASC 842.

Some of the Company’s leases include one or more options to renew, with renewal terms that can extend the lease term from one to 10 years or more. The exercise of lease renewal options is at the Company’s sole discretion. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or a purchase option reasonably certain of exercise.

Certain of the Company’s lease agreements include rental payments based on a percentage of sales over contractual levels and others include rental payments adjusted periodically for inflation. These variable lease payments are typically recognized when the underlying event occurs and are included in operating expenses in the Company's unaudited condensed consolidated statements of comprehensive loss in the same line item as the expense arising from fixed lease payments. The Company’s lease agreements do not contain any material residual value guarantees, material restrictive covenants or material variable lease costs other than those described below related to the Company’s land lease.

The Company has a land lease which consists of a long-term lease with the City of San Diego covering approximately 190 acres, including approximately 17 acres of water in Mission Bay Park, California (the “Premises”). Under the terms of the lease, the Premises must be used as a marine park facility and related uses. In addition, the Company may not operate another marine park facility within a radius of 560 miles from the City of San Diego. The annual rent under the lease is variable and calculated on the basis of a specified percentage of the Company’s gross income from the Premises, or the minimum yearly rent, whichever is greater. The current lease term for the Premises ends in June 2048 with a corresponding lease liability being amortized using an estimated incremental borrowing rate of 8.2%.  The minimum yearly rent is adjusted every three years to an amount equal to 80% of the average accounting year rent actually paid for the three previous years. The current minimum yearly rent is approximately $10.4 million, which is subject to adjustment on January 1, 2020. Actual payments may vary from the annual straight-line minimum base rent based on shift of seasonal performance results. Rent payments related to the Premises for the three months ended March 31, 2019 were approximately $1.7 million. Upon adoption of ASC 842, the Company also reclassified a favorable lease asset net balance of $14.0 million related to the Premises from other intangible assets, net, to right of use assets-operating on the accompanying unaudited condensed consolidated balance sheet as of March 31, 2019.

The tables below present the lease balances and their classification on the accompanying unaudited condensed consolidated balance sheets as of March 31, 2019 and December 31, 2018:

 

 

 

 

March 31,

 

Leases

 

Classification

 

2019

 

Assets

 

 

 

(In thousands)

 

Operating leases

 

Right of use assets - operating

 

$

145,807

 

Financing leases

 

Other assets, net

 

 

3,990

 

Total lease assets

 

 

 

$

149,797

 

Liabilities

 

 

 

 

 

 

Current

 

 

 

 

 

 

Operating leases

 

Operating lease obligations

 

 

4,118

 

Financing leases

 

Other accrued liabilities

 

 

693

 

Noncurrent

 

 

 

 

 

 

Operating leases

 

Long-term operating lease obligations

 

 

128,119

 

Financing leases

 

Other liabilities

 

 

3,333

 

Total lease liabilities

 

 

 

$

136,263

 

 

13


SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

December 31,

 

Leases

 

Classification

 

2018

 

Assets

 

 

 

(In thousands)

 

Favorable lease asset

 

Other intangible assets, net

 

$

13,961

 

Capital leases

 

Property and equipment, at cost

 

 

3,066

 

Capital leases, accumulated depreciation