UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2019
or
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☐ |
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)
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Delaware |
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27-1220297 |
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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6240 Sea Harbor Drive Orlando, Florida |
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32821 |
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(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code: (407) 226-5011
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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Common Stock, par value $0.01 per share |
SEAS |
New York Stock Exchange |
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.
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Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
☐ |
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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 78,723,283 shares of Common Stock, par value $0.01 per share as of November 1, 2019.
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
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PART I. |
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Item 1. |
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3 |
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Unaudited Condensed Consolidated Statements of Comprehensive Income |
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Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity |
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Notes to Unaudited Condensed Consolidated Financial Statements |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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28 |
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Item 3. |
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40 |
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Item 4. |
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41 |
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PART II. |
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Item 1. |
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42 |
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Item 1A. |
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42 |
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Item 2. |
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44 |
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Item 3. |
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44 |
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Item 4. |
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Item 5. |
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44 |
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Item 6. |
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45 |
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46 |
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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”), 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:
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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; |
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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; |
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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; |
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incidents or adverse publicity concerning our theme parks; |
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a decline in discretionary consumer spending or consumer confidence; |
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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; |
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seasonal fluctuations in operating results; |
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inability to compete effectively in the highly competitive theme park industry; |
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interactions between animals and our employees and our guests at attractions at our theme parks; |
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animal exposure to infectious disease; |
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high fixed cost structure of theme park operations; |
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changing consumer tastes and preferences; |
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cyber security risks and failure to maintain the integrity of internal or guest data; |
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technology interruptions or failures that impair access to our websites or information technology systems; |
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increased labor costs and employee health and welfare benefits; |
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inability to grow our business or fund theme park capital expenditures; |
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adverse litigation judgments or settlements; |
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inability to protect our intellectual property or the infringement on intellectual property rights of others; |
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the loss of licenses and permits required to exhibit animals or the violation of laws and regulations; |
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loss of key personnel; |
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unionization activities or labor disputes; |
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inability to meet workforce needs; |
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inability to realize the benefits of developments, restructurings, acquisitions or other strategic initiatives, and the impact of the costs associated with such activities; |
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inability to maintain certain commercial licenses; |
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restrictions in our debt agreements limiting flexibility in operating our business; |
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inability to retain our current credit ratings; |
1
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our substantial leverage; |
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changes in the method for determining LIBOR and the potential replacement of LIBOR may affect our cost of capital; |
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inadequate insurance coverage; |
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inability to purchase or contract with third party manufacturers for rides and attractions; |
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environmental regulations, expenditures and liabilities; |
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suspension or termination of any of our business licenses, including by legislation at federal, state or local levels; |
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delays, restrictions or inability to obtain or maintain permits; |
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financial distress of strategic partners or other counterparties; |
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changes to immigration, foreign trade, investments or other policies; |
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inability to realize the full value of our intangible assets; |
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changes in tax laws; |
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tariffs or other trade restrictions; |
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actions of activist stockholders; |
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the ability of Hill Path Capital LP to significantly influence our decisions; |
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changes or declines in our stock price, as well as the risk that securities analysts could downgrade our stock or our sector; and |
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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)
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September 30, |
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December 31, |
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2019 |
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2018 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
50,917 |
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$ |
34,073 |
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Accounts receivable, net |
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50,751 |
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57,980 |
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Inventories |
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34,785 |
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35,814 |
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Prepaid expenses and other current assets |
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14,588 |
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18,700 |
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Total current assets |
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151,041 |
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146,567 |
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Property and equipment, at cost |
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3,171,402 |
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3,057,038 |
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Accumulated depreciation |
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(1,453,186 |
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(1,365,006 |
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Property and equipment, net |
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1,718,216 |
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1,692,032 |
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Goodwill, net |
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66,278 |
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66,278 |
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Trade names/trademarks, net |
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157,244 |
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158,343 |
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Right of use assets-operating leases |
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142,538 |
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— |
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Other intangible assets, net |
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526 |
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14,120 |
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Deferred tax assets, net |
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21,161 |
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23,527 |
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Other assets, net |
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13,806 |
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14,735 |
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Total assets |
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$ |
2,270,810 |
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$ |
2,115,602 |
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Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Accounts payable and accrued expenses |
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$ |
119,267 |
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$ |
120,024 |
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Current maturities of long-term debt, including revolving credit facility of $50,000 and $30,000 as of September 30, 2019 and December 31, 2018, respectively |
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65,505 |
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45,505 |
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Operating lease obligations |
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3,914 |
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— |
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Accrued salaries, wages and benefits |
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16,461 |
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20,966 |
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Deferred revenue |
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114,536 |
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101,110 |
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Other accrued liabilities |
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23,912 |
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23,066 |
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Total current liabilities |
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343,595 |
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310,671 |
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Long-term debt, net of debt issuance costs of $5,369 and $6,641 as of September 30, 2019 and December 31, 2018, respectively |
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1,485,672 |
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1,494,679 |
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Long-term operating lease obligations |
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125,290 |
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— |
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Deferred tax liabilities, net |
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46,377 |
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10,711 |
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Other liabilities |
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38,173 |
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34,347 |
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Total liabilities |
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2,039,107 |
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1,850,408 |
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Commitments and contingencies (Note 11) |
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Stockholders’ Equity: |
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Preferred stock, $0.01 par value—authorized, 100,000,000 shares, no shares issued or outstanding at September 30, 2019 and December 31, 2018 |
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— |
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— |
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Common stock, $0.01 par value—authorized, 1,000,000,000 shares; 94,012,743 and 93,400,929 shares issued at September 30, 2019 and December 31, 2018, respectively |
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940 |
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934 |
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Additional paid-in capital |
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671,234 |
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663,834 |
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Accumulated other comprehensive (loss) income |
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(2,272 |
) |
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2,284 |
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Accumulated deficit |
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(35,296 |
) |
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(148,955 |
) |
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Treasury stock, at cost (15,790,463 and 10,174,589 shares at September 30, 2019 and December 31, 2018, respectively) |
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(402,903 |
) |
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(252,903 |
) |
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Total stockholders’ equity |
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231,703 |
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265,194 |
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Total liabilities and stockholders’ equity |
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$ |
2,270,810 |
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$ |
2,115,602 |
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See accompanying notes to unaudited condensed consolidated financial statements.
3
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
(In thousands, except per share amounts)
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For the Three Months Ended |
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For the Nine Months Ended |
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September 30, |
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September 30, |
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2019 |
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2018 |
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2019 |
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2018 |
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Net revenues: |
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Admissions |
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$ |
268,048 |
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$ |
279,873 |
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$ |
624,789 |
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$ |
635,682 |
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Food, merchandise and other |
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205,618 |
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203,302 |
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475,444 |
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456,580 |
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Total revenues |
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473,666 |
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483,175 |
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1,100,233 |
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1,092,262 |
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Costs and expenses: |
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Cost of food, merchandise and other revenues |
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37,843 |
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36,062 |
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|
87,062 |
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|
85,012 |
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Operating expenses (exclusive of depreciation and amortization shown separately below) |
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|
175,634 |
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|
198,781 |
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|
495,917 |
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544,354 |
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Selling, general and administrative expenses |
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64,632 |
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51,549 |
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174,601 |
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|
186,076 |
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Restructuring and other separation costs |
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1,207 |
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3,866 |
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|
|
3,839 |
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16,392 |
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Depreciation and amortization |
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40,822 |
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|
41,187 |
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|
|
120,325 |
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|
|
119,635 |
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Total costs and expenses |
|
|
320,138 |
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|
|
331,445 |
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|
|
881,744 |
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|
|
951,469 |
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Operating income |
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|
153,528 |
|
|
|
151,730 |
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|
|
218,489 |
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|
|
140,793 |
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Other income, net |
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(86 |
) |
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|
(59 |
) |
|
|
(138 |
) |
|
|
(38 |
) |
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Interest expense |
|
|
21,463 |
|
|
|
19,500 |
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|
|
64,063 |
|
|
|
59,974 |
|
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Income before income taxes |
|
|
132,151 |
|
|
|
132,289 |
|
|
|
154,564 |
|
|
|
80,857 |
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Provision for income taxes |
|
|
34,123 |
|
|
|
36,301 |
|
|
|
40,905 |
|
|
|
25,016 |
|
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Net income |
|
$ |
98,028 |
|
|
$ |
95,988 |
|
|
$ |
113,659 |
|
|
$ |
55,841 |
|
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Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Unrealized gain (loss) on derivatives, net of tax |
|
|
374 |
|
|
|
1,149 |
|
|
|
(4,556 |
) |
|
|
11,116 |
|
|
Comprehensive income |
|
$ |
98,402 |
|
|
$ |
97,137 |
|
|
$ |
109,103 |
|
|
$ |
66,957 |
|
|
Earnings per share: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Earnings per share, basic |
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$ |
1.25 |
|
|
$ |
1.11 |
|
|
$ |
1.40 |
|
|
$ |
0.65 |
|
|
Earnings per share, diluted |
|
$ |
1.24 |
|
|
$ |
1.10 |
|
|
$ |
1.39 |
|
|
$ |
0.64 |
|
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
78,164 |
|
|
|
86,616 |
|
|
|
81,003 |
|
|
|
86,410 |
|
|
Diluted |
|
|
78,804 |
|
|
|
87,542 |
|
|
|
81,738 |
|
|
|
87,029 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
4
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(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 |
|
|
Equity-based compensation |
|
|
— |
|
|
|
— |
|
|
|
4,084 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,084 |
|
|
Unrealized loss on derivatives, net of tax benefit of $1,055 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,866 |
) |
|
|
— |
|
|
|
(2,866 |
) |
|
Vesting of restricted shares |
|
|
57,642 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Shares withheld for tax withholdings |
|
|
(12,536 |
) |
|
|
— |
|
|
|
(362 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(362 |
) |
|
Exercise of stock options |
|
|
91,248 |
|
|
|
1 |
|
|
|
1,619 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,620 |
|
|
Adjustments to previous dividend declarations |
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
Repurchase of 5,615,874 treasury shares |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(150,000 |
) |
|
|
(150,000 |
) |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
52,651 |
|
|
|
— |
|
|
|
— |
|
|
|
52,651 |
|
|
Balance at June 30, 2019 |
|
|
93,884,971 |
|
|
$ |
939 |
|
|
$ |
669,482 |
|
|
$ |
(133,324 |
) |
|
$ |
(2,646 |
) |
|
$ |
(402,903 |
) |
|
$ |
131,548 |
|
|
Equity-based compensation |
|
|
— |
|
|
|
— |
|
|
|
1,162 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,162 |
|
|
Unrealized gain on derivatives, net of tax expense of $137 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
374 |
|
|
|
— |
|
|
|
374 |
|
|
Vesting of restricted shares |
|
|
83,697 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Shares withheld for tax withholdings |
|
|
(23,186 |
) |
|
|
(1 |
) |
|
|
(652 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(653 |
) |
|
Exercise of stock options |
|
|
67,261 |
|
|
|
1 |
|
|
|
1,242 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,243 |
|
|
Adjustments to previous dividend declarations |
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
98,028 |
|
|
|
— |
|
|
|
— |
|
|
|
98,028 |
|
|
Balance at September 30, 2019 |
|
|
94,012,743 |
|
|
$ |
940 |
|
|
$ |
671,234 |
|
|
$ |
(35,296 |
) |
|
$ |
(2,272 |
) |
|
$ |
(402,903 |
) |
|
$ |
231,703 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
5
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands, except 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 |
|
|
— |
|
|
|
— |
|
|
|
7,545 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,545 |
|
|
Unrealized gain 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 |
|
|
Equity-based compensation |
|
|
— |
|
|
|
— |
|
|
|
5,892 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,892 |
|
|
Unrealized gain on derivatives, net of tax expense of $918 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,476 |
|
|
|
— |
|
|
|
2,476 |
|
|
Vesting of restricted shares |
|
|
135,114 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Shares withheld for tax withholdings |
|
|
(28,592 |
) |
|
|
— |
|
|
|
(635 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(635 |
) |
|
Exercise of stock options |
|
|
64,106 |
|
|
|
1 |
|
|
|
1,177 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,178 |
|
|
Adjustments to previous dividend declarations |
|
|
— |
|
|
|
— |
|
|
|
(5 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5 |
) |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
22,697 |
|
|
|
— |
|
|
|
— |
|
|
|
22,697 |
|
|
Balance at June 30, 2018 |
|
|
93,060,175 |
|
|
$ |
931 |
|
|
$ |
653,714 |
|
|
$ |
(233,890 |
) |
|
$ |
3,797 |
|
|
$ |
(154,871 |
) |
|
$ |
269,681 |
|
|
Equity-based compensation |
|
|
— |
|
|
|
— |
|
|
|
5,183 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,183 |
|
|
Unrealized gain on derivatives, net of tax expense of $425 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,149 |
|
|
|
— |
|
|
|
1,149 |
|
|
Vesting of restricted shares |
|
|
86,922 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
Shares withheld for tax withholdings |
|
|
(23,758 |
) |
|
|
(1 |
) |
|
|
(672 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(673 |
) |
|
Exercise of stock options |
|
|
111,532 |
|
|
|
1 |
|
|
|
2,005 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,006 |
|
|
Adjustments to previous dividend declarations |
|
|
— |
|
|
|
— |
|
|
|
2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2 |
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
95,988 |
|
|
|
— |
|
|
|
— |
|
|
|
95,988 |
|
|
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.
6
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
For the Nine Months Ended September 30, |
|
|||||
|
|
|
|
2019 |
|
|
2018 |
|
|
|
Cash Flows From Operating Activities: |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
113,659 |
|
|
$ |
55,841 |
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
120,325 |
|
|
|
119,635 |
|
|
Amortization of debt issuance costs and discounts |
|
|
2,622 |
|
|
|
3,460 |
|
|
Loss on impairment or disposal of assets, net |
|
|
3,770 |
|
|
|
12,477 |
|
|
Deferred income tax provision |
|
|
39,705 |
|
|
|
24,478 |
|
|
Equity-based compensation |
|
|
8,444 |
|
|
|
18,620 |
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
5,817 |
|
|
|
(36,806 |
) |
|
Inventories |
|
|
(919 |
) |
|
|
(3,374 |
) |
|
Prepaid expenses and other current assets |
|
|
5,058 |
|
|
|
2,866 |
|
|
Accounts payable and accrued expenses |
|
|
3,775 |
|
|
|
8,649 |
|
|
Accrued salaries, wages and benefits |
|
|
(4,505 |
) |
|
|
10,225 |
|
|
Deferred revenue |
|
|
15,483 |
|
|
|
36,586 |
|
|
Other accrued liabilities |
|
|
109 |
|
|
|
14,902 |
|
|
Right-of-use assets and operating lease obligations |
|
|
370 |
|
|
|
— |
|
|
Other assets and liabilities |
|
|
(30 |
) |
|
|
(101 |
) |
|
Net cash provided by operating activities |
|
|
313,683 |
|
|
|
267,458 |
|
|
Cash Flows From Investing Activities: |
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(152,880 |
) |
|
|
(140,878 |
) |
|
Other investing activities, net |
|
|
24 |
|
|
|
(349 |
) |
|
Net cash used in investing activities |
|
|
(152,856 |
) |
|
|
(141,227 |
) |
|
Cash Flows From Financing Activities: |
|
|
|
|
|
|
|
|
|
Repayments of long-term debt |
|
|
(11,629 |
) |
|
|
(17,780 |
) |
|
Proceeds from draws on revolving credit facility |
|
|
269,000 |
|
|
|
55,000 |
|
|
Repayments of revolving credit facility |
|
|
(249,000 |
) |
|
|
(70,000 |
) |
|
Purchase of treasury stock |
|
|
(150,000 |
) |
|
|
— |
|
|
Payment of tax withholdings on equity-based compensation through shares withheld |
|
|
(4,621 |
) |
|
|
(2,942 |
) |
|
Exercise of stock options |
|
|
3,578 |
|
|
|
3,191 |
|
|
Other financing activities |
|
|
(572 |
) |
|
|
(325 |
) |
|
Net cash used in financing activities |
|
|
(143,244 |
) |
|
|
(32,856 |
) |
|
Change in Cash and Cash Equivalents, including Restricted Cash |
|
|
17,583 |
|
|
|
93,375 |
|
|
Cash and Cash Equivalents, including Restricted Cash—Beginning of period |
|
|
35,007 |
|
|
|
33,997 |
|
|
Cash and Cash Equivalents, including Restricted Cash—End of period |
|
$ |
52,590 |
|
|
$ |
127,372 |
|
|
Supplemental Disclosure of Noncash Investing Activities: |
|
|
|
|
|
|
|
|
|
Capital expenditures in accounts payable |
|
$ |
26,260 |
|
|
$ |
23,125 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
7
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.
8
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, |
|
||
|
|
|
2019 |
|
|
2018 |
|
||
|
|
|
(In thousands) |
|
|||||
|
Cash and cash equivalents |
|
$ |
50,917 |
|
|
$ |
34,073 |
|
|
Restricted cash, included in other current assets |
|
|
1,673 |
|
|
|
934 |
|
|
Total cash, cash equivalents and restricted cash |
|
$ |
52,590 |
|
|
$ |
35,007 |
|
Property and Equipment—Net
During the three and nine months ended September 30, 2019, the Company recorded approximately $1.3 million and $1.9 million, respectively, in fixed asset write-offs. During the three and nine months ended September 30, 2018, the Company recorded approximately $4.2 million and $11.9 million, respectively, in fixed asset write-offs primarily associated with certain rides and equipment.
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 September 30, 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 September 30, 2019 and December 31, 2018:
|
|
|
September 30, |
|
|
December 31, |
|
||
|
|
|
2019 |
|
|
2018 |
|
||
|
|
|
(In thousands) |
|
|||||
|
Deferred revenue, including long-term portion |
|
$ |
125,209 |
|
|
$ |
111,181 |
|
|
Less: Deferred revenue, long-term portion, included in other liabilities |
|
|
10,673 |
|
|
|
10,071 |
|
|
Deferred revenue, short-term portion |
|
$ |
114,536 |
|
|
$ |
101,110 |
|
9
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 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 $4.6 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 sheets as of September 30, 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 Zhonghong Zhuoye Group Co., Ltd. (“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. There were no amounts recorded as revenue related to the ZHG Agreements in the three months ended September 30, 2019. For the nine months ended September 30, 2019, the Company recorded approximately $1.7 million, and for the three and nine months ended September 30, 2018, the Company recorded approximately $1.3 million and $3.8 million, respectively, in food, merchandise and other revenue in the accompanying unaudited condensed consolidated statements of comprehensive income related to the ZHG Agreements. See Note 10–Related-Party Transactions for further details.
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 |
10
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 8–Derivative 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 to accumulated deficit in the accompanying unaudited condensed consolidated balance sheet and the accompanying unaudited condensed consolidated statements of changes in stockholders’ equity. |
3. EARNINGS PER SHARE
Earnings per share is computed as follows:
|
|
|
For the Three Months Ended September 30, |
|
|||||||||||||||||||||
|
|
|
2019 |
|
|
2018 |
|
||||||||||||||||||
|
|
|
Net Income |
|
|
Shares |
|
|
Per Share Amount |
|
|
Net Income |
|
|
Shares |
|
|
Per Share Amount |
|
||||||
|
|
|
(In thousands, except per share amounts) |
|
|||||||||||||||||||||
|
Basic earnings per share |
|
$ |
98,028 |
|
|
|
78,164 |
|
|
$ |
1.25 |
|
|
$ |
95,988 |
|
|
|
86,616 |
|
|
$ |
1.11 |
|
|
Effect of dilutive incentive-based awards |
|
|
|
|
|
|
640 |
|
|
|
|
|
|
|
|
|
|
|
926 |
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
98,028 |
|
|
|
78,804 |
|
|
$ |
1.24 |
|
|
$ |
95,988 |
|
|
|
87,542 |
|
|
$ |
1.10 |
|
|
|
|
For the Nine Months Ended September 30, |
|
|||||||||||||||||||||
|
|
|
2019 |
|
|
2018 |
|
||||||||||||||||||
|
|
|
Net Income |
|
|
Shares |
|
|
Per Share Amount |
|
|
Net Income |
|
|
Shares |
|
|
Per Share Amount |
|
||||||
|
|
|
(In thousands, except per share amounts) |
|
|||||||||||||||||||||
|
Basic earnings per share |
|
$ |
113,659 |
|
|
|
81,003 |
|
|
$ |
1.40 |
|
|
$ |
55,841 |
|
|
|
86,410 |
|
|
$ |
0.65 |
|
|
Effect of dilutive incentive-based awards |
|
|
|
|
|
|
735 |
|
|
|
|
|
|
|
|
|
|
|
619 |
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
113,659 |
|
|
|
81,738 |
|
|
$ |
1.39 |
|
|
$ |
55,841 |
|
|
|
87,029 |
|
|
$ |
0.64 |
|
In accordance with the Earnings Per Share Topic of the ASC, basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period (excluding treasury stock and unvested restricted stock awards). Unvested restricted stock awards 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.
11
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Diluted earnings per share is determined using the treasury stock method based on the dilutive effect of certain unvested restricted stock awards and shares of common stock that are issuable upon exercise of stock options. During the three and nine months ended September 30, 2019, there were approximately 394,000 and 300,000 anti-dilutive shares of common stock excluded from the computation of diluted earnings per share, respectively. 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. The Company’s outstanding performance-vesting restricted awards of approximately 2,085,000 and 1,941,000 as of September 30, 2019 and 2018, respectively, are considered contingently issuable shares and are excluded from the calculation of diluted earnings 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, 2019 was 25.8% and 26.5%, respectively, and differs from the statutory federal income tax rate of 21% primarily due to state income taxes, a valuation allowance adjustment on state net operating loss carryforwards and other permanent items including equity-based compensation. Due to the uncertainty of realizing the benefit from the deferred tax asset recorded for certain state net operating loss carryforwards, the Company has recorded a valuation allowance of approximately $5.3 million and $2.8 million, net of federal tax benefit, on the deferred tax assets related to those state net operating losses as of September 30, 2019 and December 31, 2018, respectively.
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 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 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 September 30, 2019 and December 31, 2018, consisted of the following:
|
|
|
September 30, |
|
|
December 31, |
|
||
|
|
|
2019 |
|
|
2018 |
|
||
|
|
|
(In thousands) |
|
|||||
|
Accrued property taxes |
|
$ |
10,623 |
|
|
$ |
— |
|
|
Self-insurance reserve |
|
|
7,203 |
|
|
|
6,895 |
|
|
Accrued interest |
|
|
620 |
|
|
|
490 |
|
|
Other |
|
|
5,466 |
|
|
|
15,681 |
|
|
Total other accrued liabilities |
|
$ |
23,912 |
|
|
$ |
23,066 |
|
As of December 31, 2018, other liabilities above included $11.5 million related to the EZPay plan lawsuit legal settlement, which was funded during the nine months ended September 30, 2019. See further details in Note 11–Commitments and Contingencies.
12
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. LONG-TERM DEBT
Long-term debt as of September 30, 2019 and December 31, 2018 consisted of the following:
|
|
|
September 30, |
|
|
December 31, |
|
|||
|
|
|
2019 |
|
|
2018 |
|
|||
|
|
|
(In thousands) |
|
||||||
|
Term B-5 Loans (effective interest rate of 5.04% and 5.52% at September 30, 2019 and December 31, 2018, respectively) |
|
$ |
1,511,760 |
|
|
$ |
1,523,389 |
|
|
|
Revolving credit facility (effective interest rate of 4.68% and 5.17% at September 30, 2019 and December 31, 2018, respectively) |
|
|
50,000 |
|
|
|
30,000 |
|
|
|
Total long-term debt |
|
|
1,561,760 |
|
|
|
1,553,389 |
|
|
|
Less: discounts |
|
|
(5,214 |
) |
|
|
(6,564 |
) |
|
|
Less: debt issuance costs |
|
|
(5,369 |
) |
|
|
(6,641 |
) |
|
|
Less: current maturities, including revolving credit facility |
|
|
(65,505 |
) |
|
|
(45,505 |
) |
|
|
Total long-term debt, net |
|
$ |
1,485,672 |
|
|
$ |
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 September 30, 2019, the Senior Secured Credit Facilities consisted of $1.512 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 $50.0 million was outstanding as of September 30, 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 September 30, 2019 and December 31, 2018 due to the Company’s intent to repay the borrowings within the following twelve month period.
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 September 30, 2019, SEA had approximately $20.4 million of outstanding letters of credit and $50.0 million outstanding on its Revolving Credit Facility leaving approximately $139.6 million available for borrowing. Subsequent to September 30, 2019, SEA repaid $10.0 million on 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. 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 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 Revolving Credit Facility exceeds an amount equal to 35% of the then outstanding commitments under the Revolving Credit Facility.
As of September 30, 2019, SEA was in compliance with all covenants contained in the documents governing the Senior Secured Credit Facilities.
13
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, 2019, the total net leverage ratio as calculated under the Senior Secured Credit Facilities was 3.34 to 1.00. 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. During the nine months ended September 30, 2019, the Company used approximately $150.0 million of its available restricted payments capacity for a share repurchase (see Note 10–Related-Party Transactions and Note 13–Stockholders’ Equity for further details).
Long-term debt at September 30, 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 below based on the Company’s intent to repay the borrowings.
|
Years Ending December 31: |
|
(In thousands) |
|
|
|
Remainder of 2019 |
|
$ |
13,878 |
|
|
2020 |
|
|
55,505 |
|
|
2021 |
|
|
15,505 |
|
|
2022 |
|
|
15,505 |
|
|
2023 |
|
|
15,505 |
|
|
Thereafter |
|
|
1,445,862 |
|
|
Total |
|
$ |
1,561,760 |
|
Interest Rate Swap Agreements
As of September 30, 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 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 8–Derivative Instruments and Hedging Activities.
Cash paid for interest relating to the Senior Secured Credit Facilities and the Interest Rate Swap Agreements, net of amounts capitalized, as applicable, was $61.2 million and $61.8 million in the nine months ended September 30, 2019 and 2018, 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.
14
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 of 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.
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 income 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 and nine months ended September 30, 2019 were approximately $3.9 million and $8.6 million, respectively. Upon adoption of ASC 842, the Company also reclassified a favorable lease asset net balance of approximately $14.0 million related to the Premises from other intangible assets, net, to right of use assets-operating in the accompanying unaudited condensed consolidated balance sheet as of September 30, 2019.
15
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The tables below present the lease balances and their classification in the accompanying unaudited condensed consolidated balance sheets as of September 30, 2019 and December 31, 2018:
|
|
|
|
|
September 30, |
|
|
|
|
|
Classification |
|
2019 |
|
|
|
Assets: |
|
|
|
(In thousands) |
|
|
|
Operating leases |
|
Right of use assets - operating |
|
$ |
142,538 |
|
|
Financing leases |
|
Other assets, net |
|
|
3,622 |
|
|
Total lease assets |
|
|
|
$ |
146,160 |
|
|
Liabilities: |
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
Operating leases |
|
Operating lease obligations |
|
$ |
3,914 |
|
|
Financing leases |
|
Other accrued liabilities |
|
|
710 |
|
|
Noncurrent |
|
|
|
|
|
|
|
Operating leases |
|
Long-term operating lease obligations |
|
|
125,290 |
|
|
Financing leases |
|
Other liabilities |
|
|
2,974 |
|
|
Total lease liabilities |
|
|
|
$ |
132,888 |
|
|
|
|
|
|
December 31, |
|
|
|
|
|
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 |
|
Accumulated depreciation |
|
|
(122 |
) |
|
Total lease assets |
|
|
|
$ |
16,905 |
|
|
Liabilities: |
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
Capital leases |
|
Other accrued liabilities |
|
$ |
143 |
|
|
Noncurrent |
|
|
|
|
|
|
|
Capital leases |
|
Other liabilities |
|
|
2,822 |
|
|
Total lease liabilities |
|
|
|
$ |
2,965 |
|
The table below presents the lease costs and their classification in the accompanying unaudited condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2019:
|
|
|
Classification |
|
Three Months Ended September 30, 2019 |
|
|
Nine Months Ended September 30, 2019 |
|
||
|
|
|
|
|
(In thousands) |
|
|||||
|
Operating lease cost |
|
Operating expenses |
|
$ |
4,890 |
|
|
$ |
11,671 |
|
|
Operating lease cost |
|
Selling, general and administrative expenses |
|
|
122 |
|
|
|
395 |
|
|
Financing lease cost |
|
|
|
|
|
|
|
|
|
|
|
Amortization of leased assets |
|
Depreciation and amortization |
|
|
184 |
|
|
|
552 |
|
|
Interest on lease liabilities |
|
Interest expense |
|
|
35 |
|
|
|
112 |
|
|
Net lease cost |
|
|
|
$ |
5,231 |
|
|
$ |
12,730 |
|
In addition to the operating lease costs above, short term rent expense for the three and nine months ended September 30, 2019 was approximately $1.1 million and $3.0 million, respectively, and is included in operating expenses and selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of comprehensive income.
16
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The table below presents the Company’s lease maturities as of September 30, 2019:
|
|
|
Operating leases |
|
|
|
|
|
|||||||||
|
Years Ending December 31, |
|
Land lease |
|
|
Other operating leases |
|
|
Total operating leases |
|
|
Financing leases |
|
||||
|
|
|
(In thousands) |
|
|||||||||||||
|
Remainder of 2019 |
|
$ |
2,600 |
|
|
$ |
932 |
|
|
$ |
3,532 |
|
|
$ |
207 |
|
|
2020 |
|
|
10,401 |
|
|
|
3,619 |
|
|
|
14,020 |
|
|
|
825 |
|
|
2021 |
|
|
10,401 |
|
|
|
3,270 |
|
|
|
13,671 |
|
|
|
332 |
|
|
2022 |
|
|
10,401 |
|
|
|
2,273 |
|
|
|
12,674 |
|
|
|
208 |
|
|
2023 |
|
|
10,401 |
|
|
|
1,729 |
|
|
|
12,130 |
|
|
|
204 |
|
|
2024 |
|
|
10,401 |
|
|
|
1,572 |
|
|
|
11,973 |
|
|
|
201 |
|
|
Thereafter |
|
|
244,431 |
|
|
|
2,993 |
|
|
|
247,424 |
|
|
|
2,593 |
|
|
Total lease payments |
|
|
299,036 |
|
|
|
16,388 |
|
|
|
315,424 |
|
|
|
4,570 |
|
|
Less: Imputed interest |
|
|
(183,512 |
) |
|
|
(2,708 |
) |
|
|
(186,220 |
) |
|
|
(886 |
) |
|
Present value of lease liabilities |
|
$ |
115,524 |
|
|
$ |
13,680 |
|
|
$ |
129,204 |
|
|
$ |
3,684 |
|
Operating lease payments include approximately $7.2 million related to options to extend lease terms that are reasonably certain of being exercised.
The table below presents the future minimum lease payments for long-term non-cancellable operating and financing leases under ASC 840 as of December 31, 2018:
|
Years Ending December 31, |
|
Operating leases |
|
|
Financing leases |
|
||
|
|
|
(In thousands) |
|
|||||
|
2019 |
|
$ |
16,578 |
|
|
$ |
231 |
|
|
2020 |
|
|
14,179 |
|
|
|
226 |
|
|
2021 |
|
|
13,111 |
|
|
|
220 |
|
|
2022 |
|
|
11,416 |
|
|
|
208 |
|
|
2023 |
|
|
10,479 |
|
|
|
204 |
|
|
Thereafter |
|
|
265,234 |
|
|
|
2,794 |
|
|
Total lease payments |
|
$ |
330,997 |
|
|
|
3,883 |
|
|
Less: Interest |
|
|
|
|
|
|
(918 |
) |
|
Total principal payable on financing leases |
|
|
|
|
|
$ |
2,965 |
|
The table below presents the weighted average remaining lease terms and applicable discount rates as of September 30, 2019:
|
|
|
|
|
|
|
Weighted average remaining lease term (years): |
|
|
|
|
|
Operating leases |
|
|
26.32 |
|
|
Financing leases |
|
|
14.55 |
|
|
Weighted average discount rate: |
|
|
|
|
|
Operating leases |
|
|
8.11 |
% |
|
Financing leases |
|
|
3.60 |
% |
The table below presents the cash flows and supplemental information associated with the Company’s leasing activities for the nine months ended September 30, 2019:
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities: |
|
(In thousands) |
|
|
|
Operating cash flows from operating leases |
|
$ |
11,738 |
|
|
Operating cash flows from financing leases |
|
$ |
112 |
|
|
Financing cash flows from financing leases |
|
$ |
511 |
|
|
Right of use assets obtained in exchange for lease obligations: |
|
|
|
|
|
Financing leases |
|
$ |
1,230 |
|
|
Operating leases |
|
$ |
133,297 |
|
17
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
All long-lived assets, including right of use assets associated with leases, are reviewed for impairment upon the occurrence of events or changes in circumstances that would indicate that the carrying value of the assets may not be recoverable. The measurement of an impairment loss to be recognized is based upon the difference between the estimated fair value and the carrying amounts of the assets. Fair value is generally determined based upon a discounted cash flow analysis.
8. 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, 2019 and December 31, 2018, the Company did not have any derivatives outstanding that were not designated in hedge accounting relationships.
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, 2019 and 2018, such derivatives were used to hedge the variable cash flows associated with existing variable-rate 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 (loss) income and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in accumulated other comprehensive (loss) income 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 $3.1 million will be reclassified as an increase to interest expense.
Tabular Disclosure of Fair Values of Derivative Instruments on the Balance Sheet
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the unaudited condensed consolidated balance sheets as of September 30, 2019 and December 31, 2018:
|
|
|
Liability Derivatives |
|
|
Asset Derivatives |
|
||||||
|
|
|
As of September 30, 2019 |
|
|
As of December 31, 2018 |
|
||||||
|
|
|
Balance Sheet Location |
|
Fair Value |
|
|
Balance Sheet Location |
|
Fair Value |
|
||
|
Derivatives designated as hedging instruments: |
|
(In thousands) |
|
|||||||||
|
Interest rate swap agreements |
|
Other liabilities |
|
$ |
3,109 |
|
|
Other assets |
|
$ |
3,109 |
|
Tabular Disclosure of the Effect of Derivative Instruments on the Statements of Comprehensive Income
The table below presents the pretax effect of the Company’s derivative financial instruments on the unaudited condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2019 and 2018:
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
|
Derivatives in Cash Flow Hedging Relationships: |
|
(In thousands) |
|
|||||||||||||
|
Gain (loss) recognized in accumulated other comprehensive (loss) income |
|
$ |
187 |
|
|
$ |
1,875 |
|
|
$ |
(5,338 |
) |
|
$ |
17,768 |
|
|
Gain (loss) reclassified from accumulated other comprehensive (loss) income to interest expense |
|
$ |
324 |
|
|
$ |
(301 |
) |
|
$ |
(880 |
) |
|
$ |
(2,535 |
) |
18
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Credit Risk-Related Contingent Features
The Company has agreements with each of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. As of September 30, 2019, the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $3.2 million. As of September 30, 2019, the Company has posted no collateral related to these agreements. If the Company had breached any of these provisions at September 30, 2019, it could have been required to settle its obligations under the agreements at their termination value of $3.2 million.
Changes in Accumulated Other Comprehensive (Loss) Income
The following table reflects the changes in accumulated other comprehensive (loss) income, net of tax for the nine months ended September 30, 2019:
|
|
|
Losses on Cash Flow Hedges |
|
|||||
|
Accumulated other comprehensive (loss) income: |
|
(In thousands) |
|
|||||
|
Accumulated other comprehensive income at December 31, 2018 |
|
|
|
|
|
$ |
2,284 |
|
|
Other comprehensive loss before reclassifications |
|
|
(3,911 |
) |
|
|
|
|
|
Amounts reclassified from accumulated other comprehensive (loss) income to interest expense |
|
|
(645 |
) |
|
|
|
|
|
Unrealized loss on derivatives, net of tax |
|
|
|
|
|
|
(4,556 |
) |
|
Accumulated other comprehensive loss at September 30, 2019 |
|
|
|
|
|
$ |
(2,272 |
) |
9. FAIR VALUE MEASUREMENTS
Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement is required to be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, fair value accounting standards establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity. The standard describes three levels of inputs that may be used to measure fair value:
Level 1 – Quoted prices for identical instruments in active markets.
Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
The Company has determined that the majority of the inputs used to value its derivative financial instruments using the income approach fall within Level 2 of the fair value hierarchy. The Company uses readily available market data to value its derivatives, such as interest rate curves and discount factors. ASC 820, Fair Value Measurement, also requires consideration of credit risk in the valuation. The Company uses a potential future exposure model to estimate this credit valuation adjustment (“CVA”). The inputs to the CVA are largely based on observable market data, with the exception of certain assumptions regarding credit worthiness which make the CVA a Level 3 input. Based on the magnitude of the CVA, it is not considered a significant input and the derivatives are classified as Level 2. Of the Company’s long-term obligations, the Term B-5 Loans are classified in Level 2 of the fair value hierarchy as of September 30, 2019 and December 31, 2018. The fair value of the term loans as of September 30, 2019 and December 31, 2018 approximate their carrying value, excluding unamortized debt issuance costs and discounts, due to the variable nature of the underlying interest rates and the frequent intervals at which such interest rates are reset.
19
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
There were no transfers between Levels 1, 2 or 3 during the three and nine months ended September 30, 2019. The Company did not have any assets measured on a recurring basis at fair value as of September 30, 2019. The following table presents the Company’s estimated fair value measurements and related classifications for liabilities measured on a recurring basis as of September 30, 2019:
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets |
|
|
Significant |
|
|
|
|
|
|
|
|
|
||
|
|
for Identical |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|||
|
|
Assets and |
|
|
Observable |
|
|
Unobservable |
|
|
Balance at |
|
||||
|
|
Liabilities |
|
|
Inputs |
|
|
Inputs |
|
|
September 30, |
|
||||
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
2019 |
|
||||
|
Liabilities: |
(In thousands) |
|
|||||||||||||
|
Derivative financial instruments (a) |
$ |
— |
|
|
$ |
3,109 |
|
|
$ |
— |
|
|
$ |
3,109 |
|
|
Long-term obligations (b) |
$ |
— |
|
|
$ |
1,561,760 |
|
|
$ |
— |
|
|
$ |
1,561,760 |
|
|
(a) |
Reflected at fair value in the unaudited condensed consolidated balance sheet as other liabilities of $3.1 million as of September 30, 2019. |
|
(b) |
Reflected at carrying value, net of unamortized debt issuance costs and discounts, in the unaudited condensed consolidated balance sheet as current maturities of long-term debt of $65.5 million and long-term debt of $1.486 billion as of September 30, 2019. |
There were no transfers between Levels 1, 2 or 3 during the year ended December 31, 2018. The following table presents the Company’s estimated fair value measurements and related classifications for assets and liabilities measured on a recurring basis as of December 31, 2018:
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets |
|
|
Significant |
|
|
|
|
|
|
|
|
|
||
|
|
for Identical |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|||
|
|
Assets and |
|
|
Observable |
|
|
Unobservable |
|
|
Balance at |
|
||||
|
|
Liabilities |
|
|
Inputs |
|
|
Inputs |
|
|
December 31, |
|
||||
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
2018 |
|
||||
|
Assets: |
(In thousands) |
|
|||||||||||||
|
Derivative financial instruments (a) |
$ |
— |
|
|
$ |
3,109 |
|
|
$ |
— |
|
|
$ |
3,109 |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term obligations (b) |
$ |
— |
|
|
$ |
1,553,389 |
|
|
$ |
— |
|
|
$ |
1,553,389 |
|
|
(a) |
Reflected at fair value in the unaudited condensed consolidated balance sheet as other assets of $3.1 million as of December 31, 2018. |
|
(b) |
Reflected at carrying value, net of unamortized debt issuance costs and discounts, in the unaudited condensed consolidated balance sheet as current maturities of long-term debt of $45.5 million and long-term debt of $1.495 billion as of December 31, 2018. |
10. RELATED-PARTY TRANSACTIONS
On March 24, 2017, the Company entered into the ZHG Agreements with Zhonghong Holding, an affiliate of ZHG Group, who at the time owned approximately 21% of the outstanding shares of the Company. In April 2019, the Company terminated the ZHG Agreements for non-payment of undisputed amounts owed. See Note 1–Description of Business and Basis of Presentation for further details including amounts recorded as revenue related to the ZHG Agreements.
As previously disclosed, Sun Wise (UK), Co., Ltd, an affiliate to the ZHG Group (“Sun Wise”), previously held beneficial ownership of 19,452,063 shares (the “Pledged Shares”) of the Company’s common stock. Sun Wise had pledged such shares in connection with certain loan obligations of Sun Wise. Sun Wise subsequently defaulted on such loan obligations and, as a result, PA Eminent Opportunity VI Limited (a controlled affiliate of PAG (f/k/a Pacific Alliance Group)) and China Huarong International Holdings Limited (together, the “Lenders”) foreclosed on the Pledged Shares and, accordingly, the Pledged Shares were transferred to Lord Central Opportunity V Limited, (the “Security Agent”), as security agent for the Lenders on May 3, 2019.
20
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On May 27, 2019, the Security Agent entered into a share repurchase agreement with the Company pursuant to which the Security Agent agreed to sell and the Company agreed to purchase 5,615,874 of the Pledged Shares held by the Security Agent at a price per share equal to $26.71 (the “SEAS Repurchase”) for a total cost of approximately $150.0 million. The SEAS Repurchase closed on May 30, 2019.
On May 27, 2019, the Security Agent also entered into a stock purchase agreement with Hill Path Capital LP (“Hill Path”) and certain of its affiliates pursuant to which the Security Agent agreed to sell and certain affiliates of Hill Path agreed to purchase, in the aggregate, 13,214,000 of the Pledged Shares held by the Security Agent at a price per share equal to $26.71 (the “HP Purchase”). The purchase closed on May 30, 2019, at which time, Hill Path’s ownership percentage increased to 34.6%.
Also on May 27, 2019, in connection with the HP Purchase, the Company concurrently entered into a stockholders agreement, a registration rights agreement and an undertaking agreement with Hill Path (the “HP Agreements”). Under the HP Agreements, the Company agreed to appoint up to three Hill Path director designees to its Board of Directors and Hill Path agreed to certain customary standstill obligations, restrictions regarding the manner of sale of shares, and equal treatment for any change in control transaction. In addition, Hill Path agreed that shares held in excess of 24.9% generally would be voted consistent with the Board’s recommendations or consistent with the shares voted by the Company’s other stockholders. The Company also agreed to reimburse Hill Path for up to $250,000 of their expenses in connection with the HP Agreements. During the nine months ended September 30, 2019, the Company reimbursed Hill Path for $250,000 in expenses incurred.
See Note 13–Stockholder’s Equity for further details.
11. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
Securities Class Action Lawsuits
On September 9, 2014, a purported stockholder class action lawsuit consisting of purchasers of the Company’s common stock during the periods between April 18, 2013 to August 13, 2014, captioned Baker v. SeaWorld Entertainment, Inc., et al., Case No. 14-CV-02129-MMA (KSC), was filed in the U.S. District Court for the Southern District of California against the Company, the Chairman of the Company’s Board, certain of its executive officers and Blackstone. On February 27, 2015, Court-appointed Lead Plaintiffs, Pensionskassen For Børne- Og Ungdomspædagoger and Arkansas Public Employees Retirement System, together with additional plaintiffs, Oklahoma City Employee Retirement System and Pembroke Pines Firefighters and Police Officers Pension Fund (collectively, “Plaintiffs”), filed an amended complaint against the Company, the Chairman of the Company’s Board, certain of its directors, certain of its executive officers, Blackstone, and underwriters of the initial public offering and secondary public offerings. The amended complaint alleges, among other things, that the prospectus and registration statements filed contained materially false and misleading information in violation of the federal securities laws and seeks unspecified compensatory damages and other relief. Plaintiffs contend that defendants knew or were reckless in not knowing that Blackfish was impacting SeaWorld’s business at the time of each public statement. On May 29, 2015, the Company and the other defendants filed motions to dismiss the amended complaint. On March 31, 2016, the Court granted the motions to dismiss the amended complaint, in its entirety, without prejudice. On May 31, 2016, Plaintiffs filed a second amended consolidated class action complaint (“Second Amended Complaint”), which, among other things, no longer names the Company’s Board or underwriters as defendants and no longer brings claims based on the prospectuses and registration statements. On September 30, 2016, the Court denied the renewed motion to dismiss the Second Amended Complaint.
On May 19, 2017, Plaintiffs filed a motion for class certification, which the Court granted on November 29, 2017. On December 13, 2017, Defendants filed a petition for permission to appeal the Court’s class certification order with the United States Court of Appeals for the Ninth Circuit, which was denied on June 28, 2018. Discovery is now complete and, on April 15, 2019, Defendants filed a motion for summary judgment. Also on April 15, 2019, Defendants filed motions to exclude each of Plaintiffs’ three expert witnesses and Plaintiffs filed motions to exclude two of Defendants’ expert witnesses. On November 6, 2019 the Court issued a ruling on the Defendant’s motion for summary judgment and the parties’ motions to exclude, denying most of the motions, including that for summary judgment. The trial has been scheduled to begin on February 18, 2020. The Company believes that the lawsuit is without merit and intends to defend the lawsuit vigorously; however, there can be no assurance regarding the ultimate outcome of this lawsuit.
21
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On June 14, 2018, a lawsuit captioned Highfields Capital I LP et al v. SeaWorld Entertainment, Inc. et al, Case No. 3:18-cv-01276-L-BLM, was filed in the United States District Court in the Southern District of California against the Company and certain of the Company’s former and present executive officers (collectively, the “Defendants”). The plaintiffs, which are investment funds managed by a common adviser (collectively, the “Plaintiffs”) allege, among other things, that the Defendants made false and misleading statements, in violation of the federal securities laws and Florida common law, regarding the impact of the documentary Blackfish on SeaWorld’s business. The complaint further alleges that such statements were made to induce Plaintiffs to purchase common stock of the Company at artificially-inflated prices and that Plaintiffs suffered investment losses as a result. The Plaintiffs are seeking unspecified compensatory damages and other relief. On October 19, 2018, Defendants moved for partial dismissal of the complaint. On February 7, 2019, the Court granted Defendants’ motion and dismissed Plaintiffs’ Florida state law claims as well as federal securities law claims based on the Company’s second quarter 2013 earnings statements. On May 1, 2019, Defendants filed their answer to Plaintiffs’ complaint. On July 1, 2019, the parties filed a joint motion for a stay of all proceedings in the case pending the resolution of the motion for summary judgment filed by Defendants in the related securities class action captioned Baker v. SeaWorld Entertainment, Inc., et al. described above. The Company believes that the lawsuit is without merit and intends to defend the lawsuit vigorously; however, there can be no assurance regarding the ultimate outcome of this lawsuit.
Shareholder Derivative Lawsuit
On December 8, 2014, a putative derivative lawsuit captioned Kistenmacher v. Atchison, et al., Civil Action No. 10437, was filed in the Court of Chancery of the State of Delaware against, among others, the Chairman of the Company’s Board, certain of the Company’s executive officers, directors and shareholders, and Blackstone. The Company is a “Nominal Defendant” in the lawsuit.
On March 30, 2015, the plaintiff filed an amended complaint against the same set of defendants. The amended complaint alleges, among other things, that the defendants breached their fiduciary duties, aided and abetted breaches of fiduciary duties, violated Florida Blue Sky laws and were unjustly enriched by (i) including materially false and misleading information in the prospectus and registration statements; and (ii) causing the Company to repurchase certain shares of its common stock from certain shareholders at an alleged artificially inflated price. The Company does not maintain any direct exposure to loss in connection with this shareholder derivative lawsuit as the lawsuit does not assert any claims against the Company. The Company’s status as a “Nominal Defendant” in the action reflects the fact that the lawsuit is maintained by the named plaintiff on behalf of the Company and that the plaintiff seeks damages on the Company’s behalf. The case is currently stayed in favor of the securities class action captioned Baker v. SeaWorld Entertainment, Inc., et al. described above.
Consumer Lawsuit
On April 13, 2015, a purported class action was filed in the Superior Court of the State of California for the City and County of San Francisco against SeaWorld Parks & Entertainment, Inc., captioned Marc Anderson, et. al., v. SeaWorld Parks & Entertainment, Inc. Civil Case No. 15-cv-02172-JSW, (the “Anderson Matter”). The putative class consisted of all consumers within California who, within the past four years, purchased tickets to SeaWorld San Diego. The complaint (as amended) alleges causes of action under the California False Advertising Law, California Unfair Competition Law and California CLRA. Plaintiffs’ claims are based on their allegations that the Company misrepresented the physical living conditions and care and treatment of its orcas, resulting in confusion or misunderstanding among ticket and orca plush purchasers with intent to deceive and mislead the plaintiffs and purported class members. The complaint seeks restitution, equitable relief, attorneys’ fees and costs. Based on plaintiffs’ definition of the class, the amount in controversy could have exceeded $5.0 million assuming the class became certified. The liability exposure is speculative though. On May 14, 2015, the Company removed the case to the United States District Court for the Northern District of California.
The Company filed a motion for summary judgment on October 30, 2017 which the Court granted in part and denied in part. On May 23, 2018, the plaintiffs represented to the Court that they will not file a motion for class certification. The case is no longer a class action. All three named plaintiffs continue to have claims for individual restitution in a nominal amount and injunctive relief. The Court bifurcated the trial of the case into two phases: the Plaintiffs’ standing to sue and the merits of their claims. The standing trial is scheduled for March 9, 2020, after which the Court will determine if there needs to be a trial on the merits which currently is scheduled for April 27, 2020.
Pre-trial motions and mediation proceedings are continuing. The Company believes that the lawsuit is without merit and intends to defend the lawsuit vigorously; however, there can be no assurance regarding the ultimate outcome of this lawsuit.
22
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
EZPay Plan Class Action Lawsuit
On December 3, 2014, a purported class action lawsuit was filed in the United States District Court for the Middle District of Florida, Tampa Division against SeaWorld Parks & Entertainment, Inc. The case, captioned Jason Herman, Joey Kratt, and Christina Lancaster, as individuals and on behalf of all others similarly situated, v. SeaWorld Parks & Entertainment, Inc. Case No. 8:14-cv-03028-MSS-JSS, was certified as a class action in 2018. The Court certified a class action on two claims for relief -- breach of contract and violation of federal Electronic Funds Transfer Act, 15 U.S.C. section 1693 et seq. on behalf of three individual plaintiffs and two classes: (i) individuals in the states of Florida, Texas, Virginia and California who paid for an annual pass through EZ pay in “less than twelve months,” had their passes automatically renewed and did not use the renewed passes after the first year or were not issued a full refund of payments made after the twelfth payment; and (ii) all of these same individuals who used debit cards.
In April 2018, the Company reached a preliminary agreement in principle to settle this matter for a payment of $11.5 million into a common fund, plus certain administrative costs and expenses associated with the proposed settlement. At a fairness hearing held April 18, 2019, the Court approved the settlement. On April 29, 2019, the Court entered an order approving the final settlement. The Company has funded the $11.5 million settlement and is working with a class action administrator to facilitate the settlement in accordance with the terms of the settlement agreement.
Other Matters
The Company is a party to various other claims and legal proceedings arising in the normal course of business. In addition, from time to time the Company is subject to audits, inspections and investigations by, or receives requests for information from, various federal and state regulatory agencies, including, but not limited to, the U.S. Department of Agriculture’s Animal and Plant Health Inspection Service (“APHIS”), the U.S. Department of Labor’s Occupational Safety and Health Administration (“OSHA”), the California Occupational Safety and Health Administration (“Cal-OSHA”), the Florida Fish & Wildlife Commission (“FWC”), the Equal Employment Opportunity Commission (“EEOC”), the Internal Revenue Service (“IRS”) the U.S. Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”).
Other than those matters discussed above, from time to time, various parties also bring other lawsuits against the Company. Matters where an unfavorable outcome to the Company is probable and which can be reasonably estimated are accrued. Such accruals, which are not material for any period presented, are based on information known about the matters, the Company’s estimate of the outcomes of such matters, and the Company’s experience in contesting, litigating and settling similar matters. Matters that are considered reasonably possible to result in a material loss are not accrued for, but an estimate of the possible loss or range of loss is disclosed, if such amount or range can be determined. At this time, management does not expect any such known claims, legal proceedings or regulatory matters to have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
License Commitments
On May 16, 2017, SEA entered into a License Agreement (the “License Agreement”) with Sesame Workshop (“Sesame”), a New York not-for-profit corporation. SEA’s principal commitments pursuant to the License Agreement include: (i) opening a new Sesame Place theme park (“Standalone Park”) no later than mid-2021 in a location to be determined; (ii) building a new Sesame Land in SeaWorld Orlando by fall 2022; (iii) investing in minimum annual capital and marketing thresholds; and (iv) providing support for agreed upon sponsorship and charitable initiatives. As of September 30, 2019, the Company estimates the combined remaining obligations for these commitments could be up to approximately $55.0 million over the remaining term of the agreement. After the opening of the second Standalone Park (counting the existing Sesame Place Standalone Park in Langhorne, Pennsylvania), SEA will have the option to build additional Standalone Parks in the Sesame Territory within agreed upon timelines. The License Agreement has an initial term through December 31, 2031, with an automatic additional 15 year extension plus a five year option added to the term of the License Agreement from December 31st of the year of each new Standalone Park opening. On March 27, 2019, the Company opened a new Sesame Land in SeaWorld Orlando. On October 21, 2019, the Company announced that it will open its second Sesame Place Standalone Park in San Diego in spring 2021. Sesame Place San Diego will be located on the site of the current Aquatica San Diego. While construction will begin in the fall of 2019, it is not expected to impact Aquatica San Diego’s operating schedule in 2020.
Pursuant to the License Agreement with Sesame Workshop, the Company pays a specified annual license fee, as well as a specified royalty based on revenues earned in connection with sales of licensed products, all food and beverage items utilizing the licensed elements and any events utilizing such elements if a separate fee is paid for such event.
23
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Anheuser-Busch, Incorporated has granted the Company a perpetual, exclusive, worldwide, royalty-free license to use the Busch Gardens trademark and certain related domain names in connection with the operation, marketing, promotion and advertising of certain of the Company’s theme parks, as well as in connection with the production, use, distribution and sale of merchandise sold in connection with such theme parks. Under the license, the Company is required to indemnify ABI against losses related to the use of the marks.
12. EQUITY-BASED COMPENSATION
In accordance with ASC 718, Compensation-Stock Compensation, the Company measures the cost of employee services rendered in exchange for share-based compensation based upon the grant date fair market value. The cost is recognized over the requisite service period, which is generally the vesting period unless service or performance conditions require otherwise. The Company recognizes the impact of forfeitures as they occur. The Company has granted stock options, time-vesting restricted shares and units and performance-vesting restricted shares and units.
Equity compensation expense is included in operating expenses and in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of comprehensive income as follows:
|
|
|
For the Three Months Ended September 30, |
|
|
For the Nine Months Ended September 30, |
|
||||||||||
|
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
|
|
|
(In thousands) |
|
|||||||||||||
|
Equity compensation expense included in operating expenses |
|
$ |
654 |
|
|
$ |
2,119 |
|
|
$ |
2,687 |
|
|
$ |
6,350 |
|
|
Equity compensation expense included in selling, general and administrative expenses |
|
|
508 |
|
|
|
3,064 |
|
|
|
5,757 |
|
|
|
12,270 |
|
|
Total equity compensation expense |
|
$ |
1,162 |
|
|
$ |
5,183 |
|
|
$ |
8,444 |
|
|
$ |
18,620 |
|
Equity compensation expense included in selling, general and administrative expenses for the nine months ended September 30, 2018, includes approximately $5.5 million related to certain equity awards which were accelerated to vest in connection with the departure of certain executives as required by their respective employment agreements (see Note 14–Restructuring and Other Separation Costs for further details).
The activity related to the Company’s time-vesting and performance-vesting awards during the nine months ended September 30, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Performance-Vesting Restricted Awards |
|
|||||||||||||
|
|
|
Time-Vesting Restricted Awards |
|
|
Bonus Performance Restricted Awards |
|
|
Long-Term Incentive Performance Restricted Awards |
|
|||||||||||||||
|
|
|
Shares/Units |
|
|
Weighted Average Grant Date Fair Value per Award |
|
|
Units |
|
|
Weighted Average Grant Date Fair Value per Award |
|
|
Shares/Units |
|
|
Weighted Average Grant Date Fair Value per Award |
|
||||||
|
Outstanding at December 31, 2018 |
|
|
901,704 |
|
|
$ |
17.34 |
|
|
|
560,710 |
|
|
$ |
15.06 |
|
|
|
1,155,486 |
|
|
$ |
15.82 |
|
|
Granted |
|
|
84,179 |
|
|
$ |
27.68 |
|
|
|
229,180 |
|
|
$ |
25.81 |
|
|
|
1,281,234 |
|
|
$ |
25.92 |
|
|
Vested |
|
|
(201,122 |
) |
|
$ |
17.41 |
|
|
|
(327,004 |
) |
|
$ |
15.06 |
|
|
|
(53,859 |
) |
|
$ |
15.64 |
|
|
Forfeited |
|
|
(172,585 |
) |
|
$ |
15.41 |
|
|
|
(265,638 |
) |
|
$ |
16.34 |
|
|
|
(495,384 |
) |
|
$ |
19.33 |
|
|
Outstanding at September 30, 2019 |
|
|
612,176 |
|
|
$ |
19.28 |
|
|
|
197,248 |
|
|
$ |
25.83 |
|
|
|
1,887,477 |
|
|
$ |
21.76 |
|
24
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The activity related to the Company’s stock option awards during the nine months ended September 30, 2019 is as follows:
|
|
|
Options |
|
|
Weighted Average Exercise Price |
|
|
Weighted Average Remaining Contractual Life (in years) |
|
|
Aggregate Intrinsic Value (in thousands) |
|
||||
|
Outstanding at December 31, 2018 |
|
|
764,577 |
|
|
$ |
18.05 |
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
449,326 |
|
|
$ |
25.95 |
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(109,251 |
) |
|
$ |
21.38 |
|
|
|
|
|
|
|
|
|
|
Expired |
|
|
(8,593 |
) |
|
$ |
18.52 |
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(198,437 |
) |
|
$ |
18.03 |
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2019 |
|
|
897,622 |
|
|
$ |
21.60 |
|
|
|
7.55 |
|
|
$ |
4,336 |
|
|
Exercisable at September 30, 2019 |
|
|
411,309 |
|
|
$ |
18.27 |
|
|
|
5.97 |
|
|
$ |
3,309 |
|
The weighted average grant date fair value of stock options granted during the nine months ended September 30, 2019 was $8.62. Key weighted-average assumptions utilized in the Black-Scholes Option Pricing Model for stock options granted during the nine months ended September 30, 2019 were:
|
Risk-free interest rate |
|
|
1.52 |
% |
|
Expected volatility (a) |
|
|
38.82 |
% |
|
Expected dividend yield |
|
|
0.00 |
% |
|
Expected life (years) (b) |
|
|
6.00 |
|
|
(a) |
Due to the Company’s limited history as a public company, the volatility for the Company’s stock at the date of each grant was estimated using the average volatility calculated for a peer group, which is based upon daily price observations over the estimated term of options granted. |
|
(b) |
The expected life was estimated using the simplified method, as the Company does not have sufficient historical exercise data due to the limited period of time its common stock has been publicly traded. |
Omnibus Incentive Plan
The Company has reserved 15,000,000 shares of common stock for issuance under the Omnibus Incentive Plan (the “Omnibus Incentive Plan”), of which approximately 8,750,000 shares are available for future issuance as of September 30, 2019.
Bonus Performance Restricted Awards
During the nine months ended September 30, 2019, the Company granted performance-vesting restricted units (the “Bonus Performance Restricted Units”) in accordance with its annual bonus plan for 2019 (the “2019 Bonus Plan”). The 2019 Bonus Plan provides for bonus awards payable 50% in cash and 50% in Bonus Performance Restricted Units and is based upon the Company’s achievement of specified performance goals, as defined by the 2019 Bonus Plan, with respect to the year ending December 31, 2019 (the “Fiscal 2019”). The total number of units eligible to vest into shares of stock is based on the level of achievement of the targets for Fiscal 2019 which ranges from 0% (if below threshold performance) up to 200% (at or above maximum performance).
The Company also had an annual bonus plan for the fiscal year ended December 31, 2018 (“Fiscal 2018”), under which certain employees were eligible to vest in Bonus Performance Restricted Units based upon the Company’s achievement of certain performance goals with respect to Fiscal 2018. Based on the Company’s actual Fiscal 2018 results, a portion of these Bonus Performance Restricted Units vested in the nine months ended September 30, 2019 and the remaining forfeited in accordance with their terms.
Long-Term Incentive Awards
During the nine months ended September 30, 2019, the Company granted long-term incentive plan awards for 2019 (the “2019 Long-Term Incentive Grant”) which were comprised of nonqualified stock options (the “Long-Term Incentive Options”) and performance-vesting restricted units (the “Long-Term Incentive Performance Restricted Units”) (collectively, the “Long-Term Incentive Awards”). Long-Term Incentive Awards for 2019, 2020 and 2021 combined were granted to certain employees during the nine months ended September 30, 2019.
25
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Long-Term Incentive Options
Long-Term Incentive Options vest over three years, with one-third vesting on each anniversary of the date of grant, subject to continued employment through the applicable vesting date. Equity compensation expense for these options is recognized using the straight line method.
Long-Term Incentive Performance Restricted Units
The Long-Term Incentive Performance Restricted Units have a three-year performance period beginning on January 1, 2019 and ending on December 31, 2021 and vest based upon the Company’s achievement of specified performance goals for Fiscal 2021, as defined by the 2019 Long-Term Incentive Grant. The total number of Long-Term Incentive Performance Restricted Units eligible to vest will be based on the level of achievement of the performance goals and ranges from 0% (if below threshold performance) up to 100% (for target or above performance). Upon achievement of the performance goals, only 50% of the award for a given level of performance will vest, with the remaining 50% subject to a one-year performance test period. The goal achieved must be met again or exceeded the next fiscal year before the remaining units are earned.
Long-Term Incentive Time Restricted Units
During the nine months ended September 30, 2019, the Company also granted time-restricted units which vest over three years to certain employees, with one-third vesting on each anniversary of the date of grant, subject to continued employment through the applicable vesting date. Equity compensation expense is recognized using the straight line method.
Other
The Company also has outstanding long-term incentive time restricted shares, long-term incentive performance restricted shares and long-term incentive options granted under previous long-term incentive plan grants. During the nine months ended September 30, 2019, a portion of the previously granted long-term incentive performance restricted shares related to completed performance periods vested, with the remainder forfeiting in accordance with their terms. The remaining outstanding long-term incentive performance restricted shares are eligible to vest based upon the Company’s achievement of pre-established performance goals for the respective performance period, as defined.
The Company recognizes equity compensation expense for its performance-vesting restricted awards if the performance condition is probable of being achieved. Based on the Company’s progress towards its respective performance goals, a portion of its performance-vesting restricted awards are considered probable of vesting as of September 30, 2019; therefore, equity compensation expense has been recorded accordingly. If the probability of vesting related to these awards changes in a subsequent period, all equity compensation expense related to those awards that would have been recorded over the requisite service period had the awards been considered probable at the new percentage from inception, will be recorded as a cumulative catch-up or adjustment at such subsequent date.
On October 3, 2019, in connection with its regular review of compensation matters, the Compensation Committee of the Board of Directors, approved certain equity awards designed to recognize employees for their contribution and continued expected contribution to the Company and its goals. A portion of the awards were in the form of time-vesting restricted stock units that will vest 50% on each of the first two anniversaries of the grant date, subject to the recipient’s continued employment on each such vesting date. Performance-vesting restricted units were also granted which will be earned based on achievement of specific financial metrics.
13. STOCKHOLDERS’ EQUITY
As of September 30, 2019, 94,012,743 shares of common stock were issued in the accompanying unaudited condensed consolidated balance sheet, which excludes 503,598 unvested shares of common stock and 2,193,303 unvested restricted stock units held by certain participants in the Company’s equity compensation plans (see Note 12–Equity-Based Compensation) and includes 15,790,463 shares of treasury stock held by the Company.
Share Repurchase Program
The Board had previously authorized a share repurchase program of up to $250.0 million of the Company’s common stock (the “Share Repurchase Program”). Under the Share Repurchase Program, the Company is authorized to repurchase shares through open market purchases, privately-negotiated transactions or otherwise in accordance with applicable federal securities laws, including through Rule 10b5-1 trading plans and under Rule 10b-18 of the Exchange Act. Through December 31, 2018, the Company had repurchased an aggregate of $158.0 million under the Share Repurchase Program. On February 22, 2019, the Board approved a replenishment to the Share Repurchase Program bringing the total amount available for future purchases back up to $250.0 million.
26
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
During the nine months ended September 30, 2019, the Company completed a share repurchase of 5,615,874 shares (see discussion relating to the SEAS Repurchase in Note 10–Related Party Transactions for further details). On August 2, 2019, the Board approved a replenishment to the Share Repurchase Program of $150.0 million, bringing the total amount authorized for future share repurchases back up to $250.0 million. There were no share repurchases under the Share Repurchase Program during the three months ended September 30, 2019 or the three and nine months ended September 30, 2018.
The Share Repurchase Program has no time limit and may be suspended or discontinued completely at any time. The number of shares to be purchased and the timing of purchases will be based on the Company’s trading windows and available liquidity, general business and market conditions, and other factors, including legal requirements, debt covenant restrictions and alternative investment opportunities.
14. RESTRUCTURING AND OTHER SEPARATION COSTS
The Company is committed to continuous improvement and regularly evaluates operations to ensure it is properly organized for performance and efficiency. As a result, during the three and nine months ended September 30, 2019, the Company recorded approximately $1.2 million and $3.8 million, respectively, in pre-tax charges primarily consisting of severance and other termination benefits related to positions eliminated in 2019, which is included in restructuring and other separation costs in the accompanying unaudited condensed consolidated statements of comprehensive income.
In August 2018, the Company announced a restructuring program (the “2018 Restructuring Program”) focused on reducing costs, improving operating margins and streamlining its management structure to create efficiencies and better align with its strategic business objectives. The 2018 Restructuring Program involved the elimination of approximately 125 positions during the third quarter of 2018 across the Company’s theme parks and its corporate headquarters. As a result, during the nine months ended September 30, 2018, the Company recorded approximately $5.5 million in pre-tax restructuring charges primarily related to severance and other termination benefits, of which, $3.8 million was incurred during the three months ended September 30, 2018, which is included in restructuring and other separation costs in the accompanying unaudited condensed consolidated statements of comprehensive income. The Company will not incur any additional costs associated with the 2018 Restructuring Program in 2019 as all continuing service obligations were completed as of December 31, 2018.
Related activity for the nine months ended September 30, 2019 was as follows:
|
|
|
2019 Restructuring and other Separation Costs |
|
|
2018 Restructuring Program |
|
||
|
|
|
(In thousands) |
|
|||||
|
Liability as of December 31, 2018 |
|
$ |
— |
|
|
$ |
537 |
|
|
Costs incurred |
|
|
3,839 |
|
|
|
— |
|
|
Payments made |
|
|
(2,669 |
) |
|
|
(537 |
) |
|
Liability as of September 30, 2019 |
|
$ |
1,170 |
|
|
$ |
— |
|
The remaining liability as of September 30, 2019 relates to restructuring and other related costs to be paid as contractually obligated by December 31, 2019 and is included in accrued salaries, wages and benefits in the accompanying unaudited condensed consolidated balance sheet.
Other
For the nine months ended September 30, 2018, restructuring and other separation costs also includes severance and other employment expenses for certain executives who separated from the Company during 2018. In particular, on February 27, 2018, the Company announced that its then President and Chief Executive Officer (the “Former CEO”) had stepped down from his position and resigned as a member of the Board. In connection with his departure, the Former CEO received a lump sum cash payment of approximately $6.7 million in severance-related benefits, in accordance with his employment agreement. Certain other executives who separated from the Company during 2018 also received severance-related benefits in accordance with the terms of their respective employment agreements or relevant company plan, as applicable. These severance expenses are included in restructuring and other separation costs in the accompanying unaudited condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2018.
Additionally, during the nine months ended September 30, 2018, certain equity awards were accelerated to vest in connection with the departure of specific executives as required by their respective employment agreements. As a result, the Company recorded incremental non-cash equity compensation expense during the nine months ended September 30, 2018 related to these awards, which is included in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of comprehensive income. See Note 12–Equity-Based Compensation for further details.
27
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion contains management’s discussion and analysis of our financial condition and results of operations and should be read together with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion should also be read in conjunction with our consolidated financial statements and related notes thereto, and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended December 31, 2018. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs and involve numerous risks and uncertainties, including, but not limited to, those described in the “Risk Factors” section of our Annual Report on Form 10-K, 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. Actual results may differ materially from those contained in any forward-looking statements. You should carefully read “Special Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q.
Business Overview
We are a leading theme park and entertainment company providing experiences that matter and inspiring guests to protect animals and the wild wonders of our world. We own or license a portfolio of recognized brands, including SeaWorld, Busch Gardens, Aquatica, Discovery Cove, Sesame Place and Sea Rescue. Over our more than 55-year history, we have developed a diversified portfolio of 12 highly differentiated theme parks and water parks that are grouped in key markets across the United States. Many of our parks showcase our one-of-a-kind zoological collection and feature a diverse array of thrill and family rides, shows, educational demonstrations and/or other attractions with broad demographic appeal which deliver memorable experiences and a strong value proposition for our guests.
Principal Factors and Trends Affecting Our Results of Operations
Revenues
Our revenues are driven primarily by attendance in our theme parks and the level of per capita spending for admission and per capita spending for culinary, merchandise and other in-park products. We define attendance as the number of guest visits. Attendance drives admissions revenue as well as total in-park spending. Admissions revenue primarily consists of single-day tickets, annual or season passes (collectively referred to as season passes) or other multi-day or multi-park admission products.
Total revenue per capita, defined as total revenue divided by total attendance, consists of admission per capita and in-park per capita spending:
|
|
• |
Admission Per Capita. We calculate admission per capita as total admissions revenue divided by total attendance. Admission per capita is primarily driven by ticket pricing, the admissions product mix and the park attendance mix, among other factors. The admissions product mix, also referred to as the visitation mix, is defined as the mix of attendance by ticket category such as single day, multi-day, annual passes or complimentary tickets and the park attendance mix is defined as the mix of theme parks visited. The mix of guests (such as local or tourists) can also impact visitation mix as tourists generally purchase higher admission per capita products. The mix of theme parks visited can impact admission per capita based on the theme park’s respective pricing which on average is lower for our water parks compared to our other theme parks. |
|
|
• |
In-Park Per Capita Spending. We calculate in-park per capita spending as total food, merchandise and other revenue divided by total attendance. Food, merchandise and other revenue primarily consists of culinary, merchandise and other in-park products and also includes other miscellaneous revenue not necessarily generated in our parks, which is not significant in the periods presented, including revenue related to our international agreements. In-park per capita spending is primarily driven by pricing changes, penetration levels (percentage of guests purchasing), new product offerings, the mix of guests and the mix of in-park spending, among other factors. |
See further discussion in the “Results of Operations” section which follows. For other factors affecting our revenues, see the “Risk Factors” section of our Annual Report on Form 10-K, 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.
Attendance
The level of attendance in our theme parks is a function of many factors, including affordability, the opening of new attractions and shows, competitive offerings, weather, fluctuations in foreign exchange rates and global and regional economic conditions, travel patterns of both our domestic and international guests, marketing and sales efforts, awareness and type of ticket and park offerings, consumer confidence and external perceptions of our brands and reputation, among other factors beyond our control. Attendance patterns on a quarterly basis have significant seasonality, driven by the timing of holidays, school vacations, calendar shifts in the number of weekend days in a quarter and weather conditions; in addition, seven of our theme parks are seasonal and only open for part of the year.
28
We believe attendance in recent years was impacted by a variety of factors at some of our parks, including the external perceptions of our brands and reputation, which have also impacted relationships with some of our business partners, including certain ticket resellers that have terminated relationships with us and other zoological-themed attractions. Given current results, we do not believe these factors have had a significant impact on our performance; however, we continuously monitor our external perceptions, making strategic marketing and sales adjustments, as necessary, to address these or any other items that could impact attendance.
For other factors affecting our attendance, see the “Risk Factors” section of our Annual Report on Form 10-K, 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.
Costs and Expenses
The principal costs of our operations are employee wages and benefits, advertising, maintenance, animal care, utilities and insurance. Factors that affect our costs and expenses include competitive wage pressures including minimum wage legislation, commodity prices, costs for construction, repairs and maintenance, other inflationary pressures and attendance levels, among other factors.
We continue to focus on reducing costs, improving operating margins and streamlining our management structure to create efficiencies to better align with our strategic business objectives. We remain committed to continuous improvement and regularly evaluate operations to ensure we are properly organized for performance and efficiency. As part of these ongoing efforts, during the nine months ended September 30, 2019, we recorded approximately $3.8 million in pre-tax charges primarily consisting of severance and other termination benefits related to positions eliminated in 2019, which is included in restructuring and other separation costs in the accompanying unaudited condensed consolidated statements of comprehensive income included elsewhere in this Quarterly Report on Form 10-Q. For the nine months ended September 30, 2018, restructuring and other separation costs of $16.4 million also includes severance and other employment expenses for certain executives who separated from the Company during 2018. See Note 14–Restructuring and Other Separation Costs to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details.
For other factors affecting our costs and expenses, see the “Risk Factors” section of our Annual Report on Form 10-K, 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.
Seasonality
The theme park industry is seasonal in nature. Historically, we generate the highest revenues in the second and third quarters of each year, in part because seven of our theme parks are only open for a portion of the year. Approximately two-thirds of our attendance and revenues are generated in the second and third quarters of the year and we typically incur a net loss in the first and fourth quarters. The percent mix of revenues by quarter is relatively constant each year, but revenues can shift between the first and second quarters due to the timing of Easter and spring break holidays and between the first and fourth quarters due to the timing of holiday breaks around Christmas and New Year. Even for our five theme parks open year-round, attendance patterns have significant seasonality, driven by holidays, school vacations and weather conditions.
Recent Developments
On October 21, 2019, we announced that we will open our second Sesame Place standalone park in San Diego in spring 2021. Sesame Place San Diego will be located on the site of the current Aquatica San Diego. While construction will begin in the fall of 2019, it is not expected to impact Aquatica San Diego’s operating schedule in 2020. For more details, refer to Note 11–Commitments and Contingencies to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
In May 2019, we entered into a share repurchase agreement to purchase approximately 5.6 million of our common stock at a price per share equal to $26.71 (the “SEAS Repurchase”). Also on May 27, 2019, Hill Path Capital LP (“Hill Path”) and certain of its affiliates entered into a stock purchase agreement to purchase, in the aggregate, approximately 13.2 million shares of our common stock (the “HP Purchase”). The purchase closed on May 30, 2019, at which time, Hill Path’s ownership percentage increased to 34.6%.
For further details on these transactions, refer to Note 10–Related Party Transactions and Note 13–Stockholders’ Equity to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, and “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. Also see our Current Reports on Form 8-K, filed with the SEC on May 6, 2019, May 28, 2019 and May 30, 2019.
29
Leadership Changes
On November 7, 2019, we announced that our Board of Directors (the “Board”) appointed Sergio D. Rivera to serve as our Chief Executive Officer (“CEO”). In addition, the Board increased the size of the Board from seven to nine directors and elected Mr. Rivera and Neha Jogani Narang to serve as directors of the Company. Mr. Rivera will assume his CEO role and director role and Ms. Narang will assume her director role effective November 11, 2019 (the “Effective Date”). In connection with the appointment of Mr. Rivera as CEO, Marc G. Swanson, who has been serving as our Interim Chief Executive Officer, will resume his previous role of Chief Financial Officer and Treasurer and Elizabeth C. Gulacsy, who has been serving as our Interim Chief Financial Officer and Treasurer in addition to her role as our Chief Accounting Officer, will cease to serve as our Interim Chief Financial Officer and Treasurer, in each case effective on the Effective Date. Ms. Gulacsy will continue to serve as our Chief Accounting Officer.
In February 2019, our Board appointed Gustavo (“Gus”) Antorcha to serve as our Chief Executive Officer and John T. Reilly to serve as our Chief Operating Officer. Effective on March 31, 2019, Mr. Reilly resigned from his position of Chief Operating Officer. In September 2019, Mr. Antorcha resigned from his position of Chief Executive Officer and resigned as a member of our Board. As a result, the Board appointed Marc G. Swanson, our Chief Financial Officer and Treasurer, to serve as Interim Chief Executive Officer and Elizabeth C. Gulacsy, our Chief Accounting Officer, to serve as Interim Chief Financial Officer and Treasurer in addition to her role of Chief Accounting Officer. Mr. Antorcha was not entitled to any severance benefits in connection with his departure and forfeited his outstanding equity awards.
On February 26, 2018, Joel K. Manby (the “Former CEO”) stepped down from his position as our President and Chief Executive Officer and resigned as a member of our Board. In connection with his departure, the Former CEO received severance-related benefits in accordance with his employment agreement dated March 16, 2015. Certain other executives who separated during 2018 also received severance-related benefits in accordance with the terms of their respective employment agreements or relevant company plan, as applicable. These expenses are included in restructuring and other separation costs for nine months ended September 30, 2018 in the accompanying unaudited condensed consolidated statements of comprehensive income included elsewhere in this Quarterly Report on Form 10-Q.
Additionally, certain equity awards were accelerated to vest in 2018 in connection with the departure of specific executives as required by their respective employment agreements. As a result, we recorded incremental non-cash equity compensation expense related to these awards, which is included in selling, general and administrative expenses for the nine months ended September 30, 2018 in the accompanying unaudited condensed consolidated statements of comprehensive income. See Note 14–Restructuring and Other Separation Costs and Note 12–Equity-Based Compensation in our notes to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
International Development Strategy
We believe that in addition to the growth potential that exists domestically, our brands can also have significant appeal in certain international markets. We continue to make progress in our partnership with Miral Asset Management LLC to develop SeaWorld Abu Dhabi, a first-of-its-kind marine life themed park on Yas Island (the “Middle East Project”). As part of this partnership, we are providing certain services pertaining to the planning and design of the Middle East Project, with funding received from our partner in the Middle East expected to offset our internal expenses. Construction has begun and SeaWorld Abu Dhabi is expected to be completed in 2022. 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 stage.
As previously disclosed, in March 2017, we 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, we terminated the ZHG Agreements for non-payment of undisputed amounts owed. There were no amounts recorded as revenue related to the ZHG Agreements in the three months ended September 30, 2019. For the nine months ended September 30, 2019, we recorded approximately $1.7 million, and for the three and nine months ended September 30, 2018, we recorded approximately $1.3 million and $3.8 million, respectively, in food, merchandise and other revenue in the accompanying unaudited condensed consolidated statements of comprehensive income related to the ZHG Agreements. See further details in Note 1–Description of the Business and Basis of Presentation and Note 10–Related Party Transactions in our notes to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
For a discussion of certain risks associated with our international development strategy, see the “Risk Factors” section of our Annual Report on Form 10-K, 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.
30
Results of Operations
The following discussion provides an analysis of our operating results for the three and nine months ended September 30, 2019 and 2018. This data should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q.
Comparison of the Three Months Ended September 30, 2019 and 2018
The following table presents key operating and financial information for the three months ended September 30, 2019 and 2018:
|
|
|
For the Three Months Ended |
|
|
|
|
|
|
|
|
|
|||||
|
|
|
September 30, |
|
|
Variance |
|
||||||||||
|
|
|
2019 |
|
|
2018 |
|
|
$ |
|
|
% |
|
||||
|
Summary Financial Data: |
|
(In thousands, except per capita data) |
|
|||||||||||||
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Admissions |
|
$ |
268,048 |
|
|
$ |
279,873 |
|
|
$ |
(11,825 |
) |
|
|
(4.2 |
%) |
|
Food, merchandise and other |
|
|
205,618 |
|
|
|
203,302 |
|
|
|
2,316 |
|
|
|
1.1 |
% |
|
Total revenues |
|
|
473,666 |
|
|
|
483,175 |
|
|
|
(9,509 |
) |
|
|
(2.0 |
%) |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of food, merchandise and other revenues |
|
|
37,843 |
|
|
|
36,062 |
|
|
|
1,781 |
|
|
|
4.9 |
% |
|
Operating expenses (exclusive of depreciation and amortization shown separately below) |
|
|
175,634 |
|
|
|
198,781 |
|
|
|
(23,147 |
) |
|
|
(11.6 |
%) |
|
Selling, general and administrative expenses |
|
|
64,632 |
|
|
|
51,549 |
|
|
|
13,083 |
|
|
|
25.4 |
% |
|
Restructuring and other separation costs |
|
|
1,207 |
|
|
|
3,866 |
|
|
|
(2,659 |
) |
|
|
(68.8 |
%) |
|
Depreciation and amortization |
|
|
40,822 |
|
|
|
41,187 |
|
|
|
(365 |
) |
|
|
(0.9 |
%) |
|
Total costs and expenses |
|
|
320,138 |
|
|
|
331,445 |
|
|
|
(11,307 |
) |
|
|
(3.4 |
%) |
|
Operating income |
|
|
153,528 |
|
|
|
151,730 |
|
|
|
1,798 |
|
|
|
1.2 |
% |
|
Other income, net |
|
|
(86 |
) |
|
|
(59 |
) |
|
|
(27 |
) |
|
|
(45.8 |
%) |
|
Interest expense |
|
|
21,463 |
|
|
|
19,500 |
|
|
|
1,963 |
|
|
|
10.1 |
% |
|
Income before income taxes |
|
|
132,151 |
|
|
|
132,289 |
|
|
|
(138 |
) |
|
|
(0.1 |
%) |
|
Provision for income taxes |
|
|
34,123 |
|
|
|
36,301 |
|
|
|
(2,178 |
) |
|
|
(6.0 |
%) |
|
Net income |
|
$ |
98,028 |
|
|
$ |
95,988 |
|
|
$ |
2,040 |
|
|
|
2.1 |
% |
|
Other data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attendance |
|
|
8,123 |
|
|
|
8,344 |
|
|
|
(221 |
) |
|
|
(2.6 |
%) |
|
Total revenue per capita |
|
$ |
58.31 |
|
|
$ |
57.91 |
|
|
$ |
0.40 |
|
|
|
0.7 |
% |
|
Admission per capita |
|
$ |
33.00 |
|
|
$ |
33.54 |
|
|
$ |
(0.54 |
) |
|
|
(1.6 |
%) |
|
In-park per capita spending |
|
$ |
25.31 |
|
|
$ |
24.37 |
|
|
$ |
0.94 |
|
|
|
3.9 |
% |
Admissions revenue. Admissions revenue for the three months ended September 30, 2019 decreased $11.8 million, or 4.2%, to $268.0 million as compared to $279.9 million for the three months ended September 30, 2018. The decline in admissions revenue was primarily a result of a decrease in attendance of approximately 221,000 guests, or 2.6%, along with a decrease in admission per capita. We believe the decrease in attendance during the quarter largely results from unfavorable weather, which included the impacts from rain and Hurricane Dorian, and a calendar shift related to one less peak summer weekend day when compared to the prior year quarter. We estimate the combined impact from adverse weather and the calendar shift was a decline of approximately 330,000 guests, of which we estimate over 90,000 relates to the impact of Hurricane Dorian. Attendance at our Florida parks over Labor Day weekend was impacted by Hurricane Dorian, due to its related impact on travel and visitation plans and park operating hours. Admission per capita decreased by 1.6% to $33.00 for the three months ended September 30, 2019 compared to $33.54 in the comparable prior year quarter. Admission per capita decreased primarily due to the continued implementation of our targeted promotions and pricing strategies, partially offset by price increases on certain products.
Food, merchandise and other revenue. Food, merchandise and other revenue for the three months ended September 30, 2019 increased $2.3 million, or 1.1%, to $205.6 million as compared to $203.3 million for the three months ended September 30, 2018. The increase results from an improvement in in-park per capita spending which was largely offset by the decrease in attendance. In-park per capita spending increased by 3.9% to $25.31 in the third quarter of 2019 compared to $24.37 in the third quarter of 2018. In-park per capita spending improved primarily due to pricing initiatives and increased sales of in-park products.
Costs of food, merchandise and other revenues. Costs of food, merchandise and other revenues for the three months ended September 30, 2019 increased by $1.8 million, or 4.9%, to $37.8 million as compared to $36.1 million for the three months ended September 30, 2018. These costs represent 18.4% and 17.7% of the related revenue earned for the three months ended September 30, 2019 and 2018, respectively.
31
Operating expenses. Operating expenses for the three months ended September 30, 2019 decreased by $23.1 million, or 11.6%, to $175.6 million as compared to $198.8 million for the three months ended September 30, 2018. The decline in operating expenses primarily relates to a reduction in labor costs, primarily as a result of our focus on cost efficiencies, and a decrease in non-cash asset write-offs. Operating expenses were 37.1% of total revenues for the three months ended September 30, 2019 compared to 41.1% for the three months ended September 30, 2018.
Selling, general and administrative expenses. Selling, general and administrative expenses for the three months ended September 30, 2019 increased $13.1 million, or 25.4%, to $64.6 million as compared to $51.5 million for the three months ended September 30, 2018 largely due to approximately $9.5 million in marketing overspend and the timing of certain expenses. The overspend in marketing was due to less disciplined management of certain marketing related costs during the quarter. As a percentage of total revenue, selling, general and administrative expenses were 13.6% for the three months ended September 30, 2019 compared to 10.7% for the three months ended September 30, 2018.
Restructuring and other separation costs. Restructuring and other separation costs for the three months ended September 30, 2019 primarily relates to severance and other expenses for positions which were eliminated in 2019. Restructuring and other separation costs for the three months ended September 30, 2018 primarily relates to severance and other employment expenses related to the 2018 Restructuring Program. See Note 14–Restructuring and Other Separation Costs in our notes to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Depreciation and amortization. Depreciation and amortization expense for the three months ended September 30, 2019 was relatively flat at $40.8 million as compared to $41.2 million for the three months ended September 30, 2018.
Interest expense. Interest expense for the three months ended September 30, 2019 increased $2.0 million, or 10.1%, to $21.5 million as compared to $19.5 million for the three months ended September 30, 2018. The increase primarily relates to the impact of Amendment No. 9 to our Senior Secured Credit Facilities entered into on October 31, 2018 and increased LIBOR rates as well as a higher outstanding balance on our Revolving Credit Facility during the three months ended September 30, 2019. See Note 6–Long-Term Debt in our notes to the unaudited condensed consolidated financial statements and the “Our Indebtedness” section which follows for further details on our long-term debt.
Provision for income taxes. The provision for income taxes in the three months ended September 30, 2019 was $34.1 million compared to $36.3 million for the three months ended September 30, 2018. Our consolidated effective tax rate was 25.8% for the three months ended September 30, 2019 compared to 27.4% for the three months ended September 30, 2018. The effective tax rate decreased primarily due to permanent items related to a nondeductible legal settlement and equity-based compensation.
32
Comparison of the Nine Months Ended September 30, 2019 and 2018
The following table presents key operating and financial information for the nine months ended September 30, 2019 and 2018:
|
|
|
For the Nine Months Ended |
|
|
|
|
|
|
|
|
|
|||||
|
|
|
September 30, |
|
|
Variance |
|
||||||||||
|
|
|
2019 |
|
|
2018 |
|
|
$ |
|
|
% |
|
||||
|
Summary Financial Data: |
|
(In thousands, except per capita data) |
|
|||||||||||||
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Admissions |
|
$ |
624,789 |
|
|
$ |
635,682 |
|
|
$ |
(10,893 |
) |
|
|
(1.7 |
%) |
|
Food, merchandise and other |
|
|
475,444 |
|
|
|
456,580 |
|
|
|
18,864 |
|
|
|
4.1 |
% |
|
Total revenues |
|
|
1,100,233 |
|
|
|
1,092,262 |
|
|
|
7,971 |
|
|
|
0.7 |
% |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of food, merchandise and other revenues |
|
|
87,062 |
|
|
|
85,012 |
|
|
|
2,050 |
|
|
|
2.4 |
% |
|
Operating expenses (exclusive of depreciation and amortization shown separately below) |
|
|
495,917 |
|
|
|
544,354 |
|
|
|
(48,437 |
) |
|
|
(8.9 |
%) |
|
Selling, general and administrative expenses |
|
|
174,601 |
|
|
|
186,076 |
|
|
|
(11,475 |
) |
|
|
(6.2 |
%) |
|
Restructuring and other separation costs |
|
|
3,839 |
|
|
|
16,392 |
|
|
|
(12,553 |
) |
|
|
(76.6 |
%) |
|
Depreciation and amortization |
|
|
120,325 |
|
|
|
119,635 |
|
|
|
690 |
|
|
|
0.6 |
% |
|
Total costs and expenses |
|
|
881,744 |
|
|
|
951,469 |
|
|
|
(69,725 |
) |
|
|
(7.3 |
%) |
|
Operating income |
|
|
218,489 |
|
|
|
140,793 |
|
|
|
77,696 |
|
|
|
55.2 |
% |
|
Other income, net |
|
|
(138 |
) |
|
|
(38 |
) |
|
|
(100 |
) |
|
NM |
|
|
|
Interest expense |
|
|
64,063 |
|
|
|
59,974 |
|
|
|
4,089 |
|
|
|
6.8 |
% |
|
Income before income taxes |
|
|
154,564 |
|
|
|
80,857 |
|
|
|
73,707 |
|
|
|
91.2 |
% |
|
Provision for income taxes |
|
|
40,905 |
|
|
|
25,016 |
|
|
|
15,889 |
|
|
|
63.5 |
% |
|
Net income |
|
$ |
113,659 |
|
|
$ |
55,841 |
|
|
$ |
57,818 |
|
|
|
103.5 |
% |
|
Other data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attendance |
|
|
17,925 |
|
|
|
17,982 |
|
|
|
(57 |
) |
|
|
(0.3 |
%) |
|
Total revenue per capita |
|
$ |
61.38 |
|
|
$ |
60.74 |
|
|
$ |
0.64 |
|
|
|
1.1 |
% |
|
Admission per capita |
|
$ |
34.86 |
|
|
$ |
35.35 |
|
|
$ |
(0.49 |
) |
|
|
(1.4 |
%) |
|
In-park per capita spending |
|
$ |
26.52 |
|
|
$ |
25.39 |
|
|
$ |
1.13 |
|
|
|
4.5 |
% |
NM-Not Meaningful.
Admissions revenue. Admissions revenue for the nine months ended September 30, 2019 decreased $10.9 million, or 1.7%, to $624.8 million as compared to $635.7 million for the nine months ended September 30, 2018. The decline in admissions revenue was primarily a result of a decrease in admission per capita when compared to the first nine months of 2018 and was also impacted by a decrease in attendance of approximately 57,000 guests, or 0.3%. We estimate that Hurricane Dorian over Labor Day weekend negatively impacted attendance by more than 90,000 guests. Admission per capita decreased by 1.4% to $34.86 for the nine months ended September 30, 2019 compared to $35.35 for the nine months ended September 30, 2018. This decrease was more than offset by an increase in in-park per capita spending as discussed below. Admission per capita decreased primarily due to the continued implementation of targeted promotions and pricing strategies, partially offset by price increases on certain products in the first nine months of 2019 compared to the prior year period. We believe the decline in attendance was primarily related to unfavorable weather, particularly in the third quarter and in June, partially offset by a combination of factors including the positive reception of our new rides and compelling attractions and events and enhanced overall marketing and communication initiatives.
Food, merchandise and other revenue. Food, merchandise and other revenue for the nine months ended September 30, 2019 increased $18.9 million, or 4.1%, to $475.4 million as compared to $456.6 million for the nine months ended September 30, 2018. The increase results from an increase in in-park per capita spending partially offset by the decline in attendance. In-park per capita spending increased by 4.5% to $26.52 for the nine months ended September 30, 2019 compared to $25.39 for the nine months ended September 30, 2018. In-park per capita spending improved primarily due to pricing initiatives and increased sales of in-park products.
Costs of food, merchandise and other revenues. Costs of food, merchandise and other revenues for the nine months ended September 30, 2019 increased $2.1 million, or 2.4%, to $87.1 million as compared to $85.0 million for the nine months ended September 30, 2018. These costs represent 18.3% and 18.6% of the related revenue earned for the nine months ended September 30, 2019 and 2018, respectively.
33
Operating expenses. Operating expenses for the nine months ended September 30, 2019 decreased by $48.4 million, or 8.9%, to $495.9 million as compared to $544.4 million for the nine months ended September 30, 2018. The decline in operating expenses primarily relates to a reduction in labor costs primarily as a result of our focus on cost efficiencies and a decrease in non-cash asset write-offs. Operating expenses were 45.1% of total revenues for the nine months ended September 30, 2019 compared to 49.8% for the nine months ended September 30, 2018.
Selling, general and administrative expenses. Selling, general and administrative expenses for the nine months ended September 30, 2019 decreased $11.5 million, or 6.2%, to $174.6 million as compared to $186.1 million for the nine months ended September 30, 2018. The decrease in selling, general and administrative expenses primarily relates to the following: (i) a decrease in legal costs largely related to a legal settlement accrual of $8.1 million recorded in the first quarter of 2018 and a settlement of $4.0 million recorded in the second quarter of 2018; (ii) a decrease of $6.5 million in non-cash equity compensation expense, primarily related to equity awards which were accelerated to vest in the first quarter of 2018 in connection with the departure of certain executives; and (iii) a decline in salary and other related costs due in part to cost savings initiatives (see Note 11–Commitments and Contingencies and Note 12–Equity-Based Compensation in our notes to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details). These factors were partially offset by an increase in marketing costs, particularly in the third quarter as well as other expenses associated with the previously disclosed transfer of shares and HP Agreements (see Note 10–Related Party Transactions and Note 13–Stockholders’ Equity in our notes to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details). As a percentage of total revenue, selling, general and administrative expenses were 15.9% for the nine months ended September 30, 2019 compared to 17.0% for the nine months ended September 30, 2018.
Restructuring and other separation costs. Restructuring and other separation costs for the nine months ended September 30, 2019 primarily relates to severance and other expenses for positions which were eliminated in 2019. Restructuring and other separation costs for the nine months ended September 30, 2018 also includes severance and other employment expenses for our Former CEO and includes severance and other employment expenses for other employees whose employment terminated during 2018, including costs associated with the 2018 Restructuring Program. See Note 14–Restructuring and Other Separation Costs in our notes to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details.
Depreciation and amortization. Depreciation and amortization expense for the nine months ended September 30, 2019 increased $0.7 million, or 0.6%, to $120.3 million as compared to $119.6 million for the nine months ended September 30, 2018.
Interest expense. Interest expense for the nine months ended September 30, 2019 increased $4.1 million, or 6.8%, to $64.1 million as compared to $60.0 million for the nine months ended September 30, 2018. The increase primarily relates to the impact of Amendment No. 9 to our Senior Secured Credit Facilities entered into on October 31, 2018 and increased LIBOR rates, as well as a higher outstanding balance on our Revolving Credit Facility during the nine months ended September 30, 2019, partially offset by the impact of interest rate swap agreements. See Note 6–Long-Term Debt in our notes to the unaudited condensed consolidated financial statements and the “Our Indebtedness” section which follows for further details.
Provision for income taxes. The provision for income taxes for the nine months ended September 30, 2019 was $40.9 million compared to $25.0 million for the nine months ended September 30, 2018. Our consolidated effective tax rate was 26.5% for the nine months ended September 30, 2019 compared to 30.9% for the nine months ended September 30, 2018. The effective tax rate decreased primarily due to permanent items related to a nondeductible legal settlement and equity-based compensation, partially offset by changes to the valuation allowance on state net operating loss carryforwards. See Note 4–Income Taxes in our notes to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details.
Liquidity and Capital Resources
Overview
Our principal sources of liquidity are cash generated from operations, funds from borrowings and existing cash on hand. Our principal uses of cash include the funding of working capital obligations, debt service, investments in theme parks (including capital projects), and share repurchases. As of September 30, 2019, we had a working capital ratio (defined as current assets divided by current liabilities) of 0.4, due in part to a significant deferred revenue balance from revenues paid in advance for our theme park admissions products and high turnover of in-park products that results in a limited inventory balance. We typically operate with a working capital ratio less than 1 and we expect that we will continue to do so in the future. Our cash flow from operations, along with our revolving credit facilities, have allowed us to meet our liquidity needs.
34
As market conditions warrant and subject to our contractual restrictions and liquidity position, we, our affiliates and/or our stockholders, may from time to time purchase our outstanding equity and/or debt securities, including our outstanding bank loans in privately negotiated or open market transactions, by tender offer or otherwise. Any such purchases may be funded by incurring new debt, including additional borrowings under the Senior Secured Credit Facilities. Any new debt may also be secured debt. We may also use available cash on our balance sheet. The amounts involved in any such transactions, individually or in the aggregate, may be material. Further, since some of our debt may trade at a discount to the face amount among current or future syndicate members, any such purchases may result in our acquiring and retiring a substantial amount of any particular series, with the attendant reduction in the trading liquidity of any such series. Depending on conditions in the credit and capital markets and other factors, we will, from time to time, consider other financing transactions, the proceeds of which could be used to refinance our indebtedness or for other purposes.
Share Repurchases
Our Board had previously authorized a share repurchase program of up to $250.0 million of our common stock (the “Share Repurchase Program”). Under the Share Repurchase Program, we are authorized to repurchase shares through open market purchases, privately-negotiated transactions or otherwise in accordance with applicable federal securities laws, including through Rule 10b5-1 trading plans and under Rule 10b-18 of the Exchange Act. The Share Repurchase Program has no time limit and may be suspended or discontinued completely at any time.
Through December 31, 2018, we had repurchased an aggregate of $158.0 million under the Share Repurchase Program. On February 22, 2019, our Board authorized a replenishment to the Share Repurchase Program bringing the total amount authorized for future share repurchases back up to $250.0 million. During the nine months ended September 30, 2019, we completed a share repurchase of 5,615,874 shares for an aggregate total of $150.0 million. On August 2, 2019, our Board approved a replenishment to the Share Repurchase Program of $150.0 million, bringing the total amount authorized for future share repurchases back up to $250.0 million. There were no share repurchases under the Share Repurchase Program during the three months ended September 30, 2019 or the three and nine months ended September 30, 2018.
Our Senior Secured Credit Facilities contain negative covenants that, among other things, restrict our ability for future share repurchases. 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. See Note 6–Long-Term Debt to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details. The number of shares to be purchased and the timing of purchases will be based on our trading windows or as set forth in an adopted 10b5-1 plan, if any, and available liquidity, general business and market conditions and other factors, including legal requirements and alternative opportunities.
See Note 10–Related Party Transactions and Note 13–Stockholders’ Equity in our notes to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details.
Other
As of September 30, 2019, we have 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 outstanding long-term debt. The Interest Rate Swap Agreements have a total notional amount of $1.0 billion and mature on May 14, 2020. See Note 6–Long-Term Debt and Note 8–Derivative Instruments and Hedging Activities to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details.
We believe that existing cash and cash equivalents, cash flow from operations, and available borrowings under our revolving credit facility will be adequate to meet the capital expenditures and working capital requirements of our operations for at least the next 12 months.
The following table presents a summary of our cash flows provided by (used in) operating, investing, and financing activities for the periods indicated:
|
|
|
For the Nine Months Ended September 30, |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
|
|
(Unaudited, in thousands) |
|
|||||
|
Net cash provided by operating activities |
|
$ |
313,683 |
|
|
$ |
267,458 |
|
|
Net cash used in investing activities |
|
|
(152,856 |
) |
|
|
(141,227 |
) |
|
Net cash used in financing activities |
|
|
(143,244 |
) |
|
|
(32,856 |
) |
|
Net increase in cash and cash equivalents, including restricted cash |
|
$ |
17,583 |
|
|
$ |
93,375 |
|
Cash Flows from Operating Activities
Net cash provided by operating activities was $313.7 million during the nine months ended September 30, 2019 as compared to $267.5 million during the nine months ended September 30, 2018. The increase in net cash provided by operating activities was primarily impacted by improved operating performance and changes in working capital.
35
Cash Flows from Investing Activities
Investing activities consist principally of capital investments we make in our theme parks for future attractions and infrastructure. Net cash used in investing activities during the nine months ended September 30, 2019 consisted primarily of capital expenditures of $152.9 million largely related to future attractions. Net cash used in investing activities during the nine months ended September 30, 2018 consisted primarily of $140.9 million of capital expenditures largely related to attractions that opened in 2018.
The following table presents detail of our capital expenditures for the periods indicated:
|
|
|
For the Nine Months Ended September 30, |
|
|
|||||
|
|
|
2019 |
|
|
2018 |
|
|
||
|
Capital Expenditures: |
|
(Unaudited, in thousands) |
|
|
|||||
|
Core(a) |
|
$ |
137,053 |
|
|
$ |
139,247 |
|
|
|
Expansion/ROI projects(b) |
|
|
15,827 |
|
|
|
1,631 |
|
|
|
Capital expenditures, total |
|
$ |
152,880 |
|
|
$ |
140,878 |
|
|
|
(a) |
Reflects capital expenditures for park rides, attractions and maintenance activities. |
|
(b) |
Reflects capital expenditures for park expansion, new properties, and revenue and/or expense return on investment (“ROI”) projects. |
The amount of our capital expenditures may be affected by general economic and financial conditions, among other things, including restrictions imposed by our borrowing arrangements. We generally expect to fund our capital expenditures through our operating cash flow.
Cash Flows from Financing Activities
Net cash used in financing activities during the nine months ended September 30, 2019 results primarily from $150.0 million used to repurchase shares and repayments of $11.6 million on our long-term debt, partially offset by a net draw on our revolving credit facility of $20.0 million. Net cash used in financing activities during the nine months ended September 30, 2018 results primarily from net repayments of $15.0 million on our revolving credit facility and $17.8 million on our long-term debt. See Note 6–Long-term Debt, Note 10–Related Party Transactions and Note 13–Stockholders’ Equity in our notes to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details.
Our Indebtedness
We are a holding company and conduct our operations through our subsidiaries, which have incurred or guaranteed indebtedness as described below.
Senior Secured Credit Facilities
SeaWorld Parks & Entertainment, Inc. (“SEA”) is the borrower under our senior secured credit facilities (the “Senior Secured Credit Facilities”) pursuant to a credit agreement dated as of December 1, 2009, by and among SEA, as borrower, Bank of America, N.A., as administrative agent, collateral agent, letter of credit issuer and swing line lender and the other agents and lenders party thereto, as the same may be amended, restated, supplemented or modified from time to time. On October 31, 2018, SEA entered into a refinancing amendment, Amendment No. 9 with SEA as the borrower, JPMorgan Chase Bank, N.A., as successor administrative agent, successor collateral agent, L/C issuer and swing line lender and the other agents and lenders from time to time (the “Amended Credit Agreement”), to the existing Senior Secured Credit Facilities.
As of September 30, 2019, our Senior Secured Credit Facilities consisted of $1.512 billion in Term B-5 Loans which will mature on March 31, 2024, along with a $210.0 million Revolving Credit Facility, of which $50.0 million was drawn upon as of September 30, 2019. Additionally, as of September 30, 2019, SEA had approximately $20.4 million of outstanding letters of credit, leaving approximately $139.6 million available for borrowing under the Revolving Credit Facility. Subsequent to September 30, 2019, SEA repaid $10.0 million on the Revolving Credit Facility.
See Note 6–Long-Term Debt in our notes to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details concerning our long-term debt.
Covenant Compliance
The Amended Credit Agreement removed all previous financial covenants on the Term B-5 Loans. The 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 Revolving Credit Facility exceeds an amount equal to 35% of the then outstanding commitments under the Revolving Credit Facility. As of September 30, 2019, SEA was in compliance with all covenants contained in the documents governing the Senior Secured Credit Facilities.
36
Additionally, the definition of Adjusted EBITDA was amended to include the following items which had previously been added back on a limited basis: (i) add-backs of certain unusual items on a pre-tax basis which were previously added back on an after-tax basis only and (ii) unlimited add-backs primarily related to business optimization, development and strategic initiative costs which were previously limited to $15.0 million in any fiscal year. The Amended Credit Agreement also replaced the previous $10.0 million limitation on estimated cost savings with a limitation of 25% of the latest twelve months Adjusted EBITDA, calculated before estimated cost savings and increased the realization limit for estimated cost savings, operating expense reductions and synergies to 18 months.
As of September 30, 2019, the total leverage ratio as calculated under our Senior Secured Credit Facilities was 3.34 to 1.00. Our total leverage ratio is calculated by dividing total net debt by the last twelve months Adjusted EBITDA plus $14.9 million in estimated cost savings which have been identified based on certain specified actions we have taken, including restructurings and cost savings initiatives.
See Note 6–Long-Term Debt to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details.
Adjusted EBITDA
Under the credit agreement governing the Senior Secured Credit Facilities, our ability to engage in activities such as incurring additional indebtedness, making investments, refinancing certain indebtedness, paying dividends and entering into certain merger transactions is governed, in part, by our ability to satisfy tests based on “Adjusted EBITDA”. The Senior Secured Credit Facilities defines “Adjusted EBITDA” as net income before interest expense, income tax expense, depreciation and amortization, as further adjusted to exclude certain unusual, non-cash, and other items permitted in calculating covenant compliance under the Senior Secured Credit Facilities. Adjusted EBITDA as defined in the Senior Secured Credit Facilities is consistent with our reported Adjusted EBITDA. We believe that the presentation of Adjusted EBITDA is appropriate as it eliminates the effect of certain non-cash and other items not necessarily indicative of a company’s underlying operating performance. The presentation of Adjusted EBITDA provides additional information to investors about the calculation of, and compliance with, certain financial covenants and other relevant metrics in the credit agreement governing the Senior Secured Credit Facilities. Adjusted EBITDA is a material component of these covenants. We use Adjusted EBITDA in connection with certain components of our executive compensation program. In addition, investors, lenders, financial analysts and rating agencies have historically used EBITDA related measures in our industry, along with other measures, to estimate the value of a company, to make informed investment decisions and to evaluate companies in the industry.
Adjusted EBITDA is not a recognized term under accounting principles generally accepted in the United States of America (“GAAP”), should not be considered in isolation or as a substitute for a measure of our financial performance prepared in accordance with GAAP and is not indicative of income from operations as determined under GAAP. Adjusted EBITDA and other non-GAAP financial measures have limitations which should be considered before using these measures to evaluate our financial performance. Adjusted EBITDA, as presented by us, may not be comparable to similarly titled measures of other companies due to varying methods of calculation.
37
The following table reconciles Adjusted EBITDA, as defined in the Amended Credit Agreement, to net income for the periods indicated:
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
UNAUDITED RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
|
|
|
For the Three Months Ended September 30, |
|
|
For the Nine Months Ended September 30, |
|
|
Last Twelve Months Ended September 30, |
|
|
|||||||||||
|
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
|||||
|
|
|
(Unaudited, in thousands) |
|
|
|
|
|
|
|||||||||||||
|
Net income |
|
$ |
98,028 |
|
|
$ |
95,988 |
|
|
$ |
113,659 |
|
|
$ |
55,841 |
|
|
$ |
102,606 |
|
|
|
Provision for income taxes |
|
|
34,123 |
|
|
|
36,301 |
|
|
|
40,905 |
|
|
|
25,016 |
|
|
|
33,804 |
|
|
|
Loss on early extinguishment of debt and write-off of discounts and debt issuance costs (a) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8,150 |
|
|
|
Interest expense |
|
|
21,463 |
|
|
|
19,500 |
|
|
|
64,063 |
|
|
|
59,974 |
|
|
|
85,003 |
|
|
|
Depreciation and amortization |
|
|
40,822 |
|
|
|
41,187 |
|
|
|
120,325 |
|
|
|
119,635 |
|
|
|
161,645 |
|
|
|
Equity-based compensation expense (b) |
|
|
1,162 |
|
|
|
5,183 |
|
|
|
8,444 |
|
|
|
18,620 |
|
|
|
11,976 |
|
|
|
Loss on impairment or disposal of assets and certain non-cash expenses(c) |
|
|
1,425 |
|
|
|
4,222 |
|
|
|
2,217 |
|
|
|
11,873 |
|
|
|
9,206 |
|
|
|
Business optimization, development and strategic initiative costs (d) |
|
|
9,270 |
|
|
|
7,670 |
|
|
|
18,262 |
|
|
|
26,604 |
|
|
|
21,118 |
|
|
|
Certain transaction and investment costs and other taxes (e) |
|
|
468 |
|
|
|
2,890 |
|
|
|
4,930 |
|
|
|
3,305 |
|
|
|
4,978 |
|
|
|
Other adjusting items (f) |
|
|
136 |
|
|
|
(544 |
) |
|
|
182 |
|
|
|
15,808 |
|
|
|
(896 |
) |
|
|
Adjusted EBITDA (g) |
|
$ |
206,897 |
|
|
$ |
212,397 |
|
|
$ |
372,987 |
|
|
$ |
336,676 |
|
|
$ |
437,590 |
|
|
|
Items added back to Adjusted EBITDA, after cost savings, as defined in the Amended Credit Agreement: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated cost savings (h) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,900 |
|
|
|
Adjusted EBITDA, after cost savings (i) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
452,490 |
|
|
Prior to the Amended Credit Agreement, the credit agreement governing our Senior Secured Credit Facilities limited the amount of certain add-backs as described in footnotes (d) and (f) below. The Adjusted EBITDA for all periods above reflects the current definitions in the Amended Credit Agreement. The following table reconciles the Adjusted EBITDA calculation as previously defined prior to the Amended Credit Agreement to the Adjusted EBITDA calculation as defined in the Amended Credit Agreement. This table is presented as supplemental information only:
|
|
|
For the Three Months Ended September 30, 2018 |
|
|
For the Nine Months Ended September 30, 2018 |
|
||
|
|
|
(Unaudited, in thousands) |
|
|||||
|
Adjusted EBITDA (as previously defined) |
|
$ |
204,852 |
|
|
$ |
322,354 |
|
|
Certain expenses over previous credit agreement limit (d) |
|
|
7,670 |
|
|
|
11,604 |
|
|
Taxes related to other adjusting items not previously added back (f) |
|
|
(125 |
) |
|
|
2,718 |
|
|
Adjusted EBITDA (as defined in the Amended Credit Agreement) |
|
$ |
212,397 |
|
|
$ |
336,676 |
|
|
(a) |
Reflects the write-off of $8.2 million in debt issuance costs incurred on the Term B-5 Loans during the twelve months ended September 30, 2019. |
|
(b) |
Reflects non-cash equity compensation expenses associated with the grants of equity compensation. For the nine months ended September 30, 2018, includes approximately $5.5 million related to equity awards which were accelerated to vest in connection with the departure of certain executives, as required by their respective employment agreements (see Note 12–Equity-Based Compensation in our notes to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details). |
|
(c) |
Reflects primarily non-cash expenses related to miscellaneous fixed asset disposals and impairments. For the three and nine months ended September 30, 2018 and for the twelve months ended September 30, 2019, primarily reflects asset write-offs related to certain rides and equipment which were removed from service. |
38
|
(d) |
For the three and nine months ended September 30, 2019, reflects business optimization, development and other strategic initiative costs primarily related to: (i) $6.5 million and $12.5 million, respectively, of third party consulting costs and (ii) $1.2 million and $3.8 million, respectively, of severance and other employment costs primarily associated with positions eliminated. |
For the three and nine months ended September 30, 2018, reflects business optimization, development and other strategic initiative costs primarily related to: (i) $3.9 million and $16.4 million, respectively, of severance and other employment costs which, for the three months ended September 30, 2018 primarily relates to the 2018 Restructuring Program and for the nine months ended September 30, 2018 primarily relates to costs associated with the departure of certain executives during 2018; (ii) $3.6 million and $8.9 million, respectively, of third party consulting costs; and (iii) $0.2 million and $1.3 million, respectively, of product and intellectual property development costs.
For the twelve months ended September 30, 2019, reflects business optimization, development and other strategic initiative costs primarily related to: (i) $14.3 million of third party consulting costs and (ii) $4.8 million of severance and other employment costs primarily associated with positions eliminated.
See Note 14–Restructuring and Other Separation Costs in our notes to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details.
Prior to the Amended Credit Agreement, due to limitations under the credit agreement governing our Senior Secured Credit Facilities, the amount which we were able to add back to Adjusted EBITDA for these costs, was limited to $15.0 million in any fiscal year.
|
(e) |
For the nine and twelve months ended September 30, 2019, includes approximately $4.3 million relating to expenses associated with the previously disclosed transfer of shares and HP Agreements (See Note 10–Related Party Transactions and Note 13–Stockholders’ Equity in our notes to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details). For the three and nine months ended September 30, 2018, reflects primarily a loss of approximately $2.8 million relating to expenses incurred and fees associated with the termination of an agreement. |
|
(f) |
Reflects the impact of expenses, net of insurance recoveries and adjustments, incurred primarily related to certain legal matters, which we are permitted to exclude under the credit agreement governing our Senior Secured Credit Facilities due to the unusual nature of the items. For the three and nine months ended September 30, 2018, includes approximately $1.5 million of insurance recoveries received related to these legal matters. For the nine months ended September 30, 2018, also includes $12.1 million related to legal settlements. See Note 11–Commitments and Contingencies in our notes to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details. |
Prior to the Amended Credit Agreement, these items were excluded on an after-tax basis only.
|
(g) |
Adjusted EBITDA is defined as net income (loss) before income tax expense, interest expense, depreciation and amortization, as further adjusted to exclude certain non-cash, and other items permitted in calculating covenant compliance under the credit agreement governing our Senior Secured Credit Facilities. Prior to the Amended Credit Agreement, the credit agreement governing our Senior Secured Credit Facilities limited the amount of certain add-backs as described in footnotes (d) and (f) above. |
|
(h) |
The Senior Secured Credit Facilities permits our calculation of certain covenants to be based on Adjusted EBITDA, as defined above, for the last twelve month period further adjusted for net annualized estimated savings we expect to realize over the following 18 month period related to certain specified actions, including restructurings and cost savings initiatives. These estimated savings are calculated net of the amount of actual benefits realized during such period. These estimated savings are a non-GAAP Adjusted EBITDA add-back item only as defined in the Amended Credit Agreement and does not impact our reported GAAP net income (loss). The Amended Credit Agreement limits the amount of such estimated savings which may be reflected to 25% of Adjusted EBITDA, calculated for the last twelve months before the impact of these estimated cost savings. Prior to the Amended Credit Agreement, the credit agreement limited the amount of such estimated savings which could be reflected in the calculation of Adjusted EBITDA to $10.0 million for any four consecutive fiscal quarters calculated as the amount we expected to realize over the following twelve month period. |
|
(i) |
The Senior Secured Credit Facilities permits our calculation of certain covenants to be based on Adjusted EBITDA, as defined above, for the last twelve month period further adjusted for net annualized estimated savings as described in footnote (h) above. |
39
Contractual Obligations
Other than net borrowings under our Revolving Credit Facility, there have been no material changes outside of the ordinary course of business in our contractual obligations from those previously disclosed in our Annual Report on Form 10-K.
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities, revenues and expenses, and disclosure of contingencies during the reporting period. Significant estimates and assumptions include the valuation and useful lives of long-lived tangible and intangible assets, the valuation of goodwill and other indefinite-lived intangible assets, the accounting for income taxes, the accounting for self-insurance and revenue recognition. Actual results could differ from those estimates. The critical accounting estimates associated with these policies are described in our Annual Report on Form 10-K under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These critical accounting policies include impairment of long-lived assets, goodwill and other indefinite-lived intangible assets, accounting for income taxes, self-insurance reserves, and revenue recognition. There have been no material changes to our significant accounting policies as compared to the significant accounting policies described in our Annual Report on Form 10-K, filed on March 1, 2019.
Off-Balance Sheet Arrangements
We had no material off-balance sheet arrangements as of September 30, 2019.
Recently Issued Financial Accounting Standards
Refer to Note 2–Recent Accounting Pronouncements in our notes to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Inflation
The impact of inflation has affected, and will continue to affect, our operations significantly. Our costs of food, merchandise and other revenues are influenced by inflation and fluctuations in global commodity prices. In addition, costs for construction, repairs and maintenance are all subject to inflationary pressures.
Interest Rate Risk
We are exposed to market risks from fluctuations in interest rates, and to a lesser extent on currency exchange rates, from time to time, on imported rides and equipment. The objective of our financial risk management is to reduce the potential negative impact of interest rate and foreign currency exchange rate fluctuations to acceptable levels. We do not acquire market risk sensitive instruments for trading purposes.
We manage interest rate risk through the use of a combination of fixed-rate long-term debt and interest rate swaps that fix a portion of our variable-rate long-term debt.
The changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive (loss) income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in accumulated other comprehensive (loss) income related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt. During the next 12 months, our estimate is that an additional $3.1 million will be reclassified as an increase to interest expense.
After considering the impact of interest rate swap agreements, at September 30, 2019, approximately $1.0 billion of our outstanding long-term debt represents fixed-rate debt and approximately $511.8 million represents variable-rate debt. Assuming an average balance on our revolving credit borrowings of approximately $40.0 million, a hypothetical 100 bps increase in one month LIBOR on our variable-rate debt would lead to an increase of approximately $5.5 million in annual cash interest costs due to the impact of our fixed-rate swap agreements.
40
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Regulations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), require public companies, including us, to maintain “disclosure controls and procedures,” which are defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required or necessary disclosures. In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. Our principal executive officer and principal financial officer have concluded, based on the evaluation of the effectiveness of the disclosure controls and procedures by our management as of the end of the fiscal quarter covered by this Quarterly Report, that our disclosure controls and procedures were effective to accomplish their objectives at a reasonable assurance level.
Changes in Internal Control over Financial Reporting
Regulations under the Exchange Act require public companies, including our Company, to evaluate any change in our “internal control over financial reporting” as such term is defined in Rule 13a-15(f) and Rule 15d-15(f) of the Exchange Act. Effective on January 1, 2019, we adopted Accounting Standards Codification (“ASC”) 842, Leases, which resulted in recording lease liabilities and right-of-use assets on our unaudited condensed consolidated balance sheet. As a result of this adoption, we implemented changes to our internal control activities and processes related to our lease commitments. These changes included implementing a new lease management software, establishing certain controls over financial reporting relating to leases and revising existing lease accounting policies and procedures. See Note 2–Recent Accounting Pronouncements and Note 7–Leases in our notes to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. There have been no other changes in our internal control over financial reporting during the fiscal quarter covered by this Quarterly Report that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
41
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
See Note 11–Commitments and Contingencies under the caption “Legal Proceedings” in our notes to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details concerning our legal proceedings.
Item 1A. Risk Factors
There have been no material changes to the risk factors set forth in Item 1A. to Part I of our Annual Report on Form 10-K, as filed on March 1, 2019, except as noted below and except to the extent factual information disclosed elsewhere in this Quarterly Report on Form 10-Q relates to such risk factors.
Technology interruptions or failures that impair access to our websites or information technology systems could adversely affect our business or operations.
The satisfactory performance, reliability and availability of our web sites and our infrastructure are critical to the conduct of our business. Any system interruptions that result in the unavailability or slowness of our websites could impact our ability to market or sell admissions or other products which could adversely affect our results of operations and/or result in negative publicity. We have in the past experienced, or may in the future experience, temporary system interruptions for a variety of reasons, including security incidents, viruses, telecommunication and other network failures, power failures, programming errors, undetected bugs, design faults, data corruption, denial-of-service attacks, legacy systems, poor scalability or network overload from an overwhelming number of traffic trying to reach our websites at the same time. Even a disruption as brief as a few minutes could have a negative impact on our online activities and could result in a loss of revenue. For example, our websites recently experienced slow performance and unavailability for some guests. Although these issues were short-lived and did not have a material impact to our results of operations, prolonged or repeat system interruptions and network failures could adversely impact our operations as a significant portion of our admissions revenues are from ticket purchases made online.
Additionally, damage, failures or interruptions to our information technology systems may require a significant investment to update, remediate or replace with alternate systems, and we may suffer interruptions in our operations as a result. In addition, costs and potential problems and interruptions associated with the implementation of new or upgraded systems and technology or with maintenance or adequate support of existing systems could also disrupt or reduce the efficiency of our operations and/or result in negative publicity. Any material interruptions or failures in our systems, including those that may result from our failure to adequately develop, implement and maintain a robust disaster recovery plan and backup systems could severely affect our ability to conduct normal business operations and, as a result, could adversely affect our business operations and financial performance.
We may not realize the benefits of developments, restructurings, acquisitions or other strategic initiatives.
Our business strategy may include selective expansion, both domestically and internationally, through acquisitions of assets or other strategic initiatives, such as joint ventures, that allow us to profitably expand our business and leverage our brands. For example, in 2016 we announced our partnership with Miral Asset Management LLC to develop SeaWorld Abu Dhabi, a first-of-its-kind marine life themed park on Yas Island. In addition, on March 24, 2017, we entered into a Park Exclusivity and Concept Design Agreement and a Center Concept & Preliminary Design Support Agreement with an affiliate of ZHG Group to provide design, support and advisory services for various potential projects and granting exclusive rights in China, Taiwan, Hong Kong and Macau. These agreements were terminated in April 2019 as a result of the contract party’s defaulting on the payment of required amounts under these agreements. There is no assurance that the Miral partnership or our other strategic initiatives will be successful.
Any international transactions and partnerships are subject to additional risks, including foreign and U.S. regulations on the import and export of animals, the impact of economic fluctuations in economies outside of the United States, difficulties and costs of staffing and managing foreign operations due to distance, language and cultural differences, as well as political instability and lesser degree of legal protection in certain jurisdictions, currency exchange fluctuations and potentially adverse tax consequences of overseas operations. In addition, the success of any acquisition depends on effective integration of acquired businesses and assets into our operations, which is subject to risks and uncertainties, including realization of anticipated synergies and cost savings, the ability to retain and attract personnel, the diversion of management’s attention from other business concerns, and undisclosed or potential legal liabilities of acquired businesses or assets.
42
We are executing on a strategic plan to grow revenue and Adjusted EBITDA and, from time to time, identify and execute on cost reduction opportunities and take other actions designed to achieve operational efficiencies and process improvements. For example, we are in the process of evaluating and streamlining our organizational structure. There is no assurance that we will be able to achieve and/or sustain the cost savings, grow our business, realize or sustain operational efficiencies or achieve other benefits that we may initially expect. In addition, such actions may result in various one-time costs and temporary operational inefficiencies and could negatively impact business and employment relationships during transitional periods. See further discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Quarterly report on Form 10-Q.
Affiliates of Hill Path Capital LP will be able to significantly influence our decisions and their interests may conflict with ours or yours in the future.
On May 27, 2019, Hill Path Capital LP and certain of its affiliates (“Hill Path”) agreed to purchase in the aggregate, 13,214,000 shares of our common stock (the “HP Purchase”). As described more fully in our Form 8-K dated May 27, 2019, we concurrently entered into the Stockholders Agreement, the Registration Rights Agreement and the Undertaking Agreement (collectively, the “HP Agreements”) with Hill Path in connection with the HP Purchase. On May 29, 2019, Hill Path filed with the SEC a Schedule 13D/A (the “Schedule 13D/A”) reporting that such persons had accumulated a total of 27,205,306 shares of our common stock, which represents approximately 34.6% of our total outstanding shares of common stock as of July 31, 2019. In addition, the Hill Path Schedule 13D filed on May 1, 2017, as amended states, among other things, that Hill Path may suggest changes in our business, operations, capital structure, capital allocation, corporate governance and other strategic matters.
Under the HP Agreements, we agreed to appoint up to three Hill Path director designees (“Hill Path Designees”) to our Board of Directors of which two directors may be affiliated with Hill Path and, subject to the independence standards of the New York Stock Exchange, there shall be one Hill Path Designee on each committee of the Board, as determined by Hill Path and subject to the approval of the Nominating and Corporate Governance Committee. Scott Ross, founder of Hill Path, James Chambers, a Partner at Hill Path, and Charles Koppelman, who is independent, are the Hill Path Designees. Scott Ross currently serves as Chairman of the Board and Chairman of the Compensation Committee and also serves on the Nominating and Corporate Governance Committee and the Revenue Committee. James Chambers serves as Chairman of the Nominating and Corporate Governance Committee and also serves on the Compensation Committee and the Revenue Committee.
For so long as Hill Path Designees remain on our Board, Hill Path will have influence with respect to our management, business plans and policies, including the appointment and removal of our officers, and nominees for director. In addition, for so long as Hill Path continues to own a significant percentage of our stock, Hill Path will be able to influence the composition of our Board of Directors and the approval of actions requiring stockholder approval. For example, for so long as Hill Path continues to own a significant percentage of our stock, Hill Path may be able to influence whether or not a change of control of our Company or a change in the composition of our Board of Directors occurs. The concentration of ownership could deprive you of an opportunity to receive a premium for your shares of common stock as part of a sale of our Company and ultimately might affect the market price of our common stock.
43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company had no unregistered sales of equity securities during the third quarter of 2019. The following table sets forth information with respect to shares of our common stock purchased by the Company during the periods indicated:
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Period Beginning |
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Period Ended |
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Total Number of Shares Purchased(1) |
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|
Average Price Paid per Share |
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|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
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Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs(2) |
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||||
|
July 1, 2019 |
|
July 30, 2019 |
|
|
3,024 |
|
|
$ |
29.07 |
|
|
|
— |
|
|
$ |
100,000,000 |
|
|
August 1, 2019 |
|
August 31, 2019 |
|
|
19,097 |
|
|
$ |
27.98 |
|
|
|
— |
|
|
|
250,000,000 |
|
|
September 1, 2019 |
|
September 30, 2019 |
|
|
1,065 |
|
|
$ |
27.49 |
|
|
|
— |
|
|
|
250,000,000 |
|
|
|
|
|
|
|
23,186 |
|
|
|
|
|
|
|
— |
|
|
$ |
250,000,000 |
|
|
|
(1) |
All purchases were made pursuant to the Company’s Omnibus Incentive Plan, under which participants may satisfy tax withholding obligations incurred upon the vesting of restricted stock by requesting that the Company withholds shares with a value equal to the amount of the withholding obligation. |
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|
(2) |
The Company’s Board of Directors previously authorized a share repurchase program of up to $250.0 million of its common stock (the “Share Repurchase Program”). Under the Share Repurchase Program, the Company is authorized to repurchase shares through open market purchases, privately-negotiated transactions or otherwise in accordance with applicable federal securities laws, including through Rule 10b5-1 trading plans and under Rule 10b-18 of the Exchange Act. On August 2, 2019, the Board approved a replenishment to the Share Repurchase Program of $150.0 million, bringing the total amount available for future purchases back up to $250.0 million. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Rule 10b5-1 Plans
Our policy governing transactions in our securities by our directors, officers and employees permits such persons to adopt stock trading plans pursuant to Rule 10b5-1 promulgated by the SEC under the Exchange Act. Our directors, officers and employees have in the past and may from time to time establish such stock trading plans. We do not undertake any obligation to disclose, or to update or revise any disclosure regarding, any such plans and specifically do not undertake to disclose the adoption, amendment, termination or expiration of any such plans.
44
Item 6. Exhibits
The following is a list of all exhibits filed or furnished as part of this report:
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
45
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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SEAWORLD ENTERTAINMENT, INC. |
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(Registrant) |
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Date: November 7, 2019 |
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By: /s/ Elizabeth C. Gulacsy |
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Elizabeth C. Gulacsy |
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|
Chief Accounting Officer and Interim Chief Financial Officer and Treasurer |
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(Principal Accounting Officer and Principal Financial Officer) |
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46
Exhibit 10.1
RESTRICTED STOCK UNIT GRANT NOTICE
UNDER THE
SeaWorld Entertainment, Inc.
2017 OMNIBUS INCENTIVE PLAN
(2019 Time-Based Restricted Stock Units)
SeaWorld Entertainment, Inc., a Delaware corporation (the “Company”), pursuant to its 2017 Omnibus Incentive Plan, as it may be amended and restated from time to time (the “Plan”), hereby grants to the Participant set forth below, the number of Restricted Stock Units set forth below. The Restricted Stock Units are subject to all of the terms and conditions as set forth herein, in the Restricted Stock Unit Agreement (attached hereto or previously provided to the Participant in connection with a prior grant), and in the Plan, all of which are incorporated herein in their entirety. Capitalized terms not otherwise defined herein shall have the meaning set forth in the Plan.
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Participant: |
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|
Date of Grant: |
October 2, 2019 |
Number of
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Restricted Stock Units: |
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|
Vesting Schedule: |
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THE UNDERSIGNED PARTICIPANT ACKNOWLEDGES RECEIPT OF THIS RESTRICTED STOCK UNIT GRANT NOTICE, THE RESTRICTED STOCK UNIT AGREEMENT AND THE PLAN, AND, AS AN EXPRESS CONDITION TO THE GRANT OF RESTRICTED STOCK UNITS HEREUNDER, AGREES TO BE BOUND BY THE TERMS OF THIS RESTRICTED STOCK UNIT GRANT NOTICE, THE RESTRICTED STOCK UNIT AGREEMENT AND THE PLAN.
SeaWorld Entertainment, Inc.Participant1
________________________________________________________________
By:Sherri Nadeau
Title: Chief Human Resources Officer
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|
|
1 |
To the extent that the Company has established, either itself or through a third-party plan administrator, the ability to accept this award electronically, such acceptance shall constitute the Participant’s signature hereof. |
[Signature Page to Restricted Stock Unit Award]
RESTRICTED STOCK UNIT AGREEMENT
UNDER THE
SeaWorld Entertainment, Inc.
2017 Omnibus INCENTIVE PLAN
Pursuant to the Restricted Stock Unit Grant Notice (the “Grant Notice”) delivered to the Participant (as defined in the Grant Notice), and subject to the terms of this Restricted Stock Unit Agreement (this “Restricted Stock Unit Agreement”) and the SeaWorld Entertainment, Inc. 2017 Omnibus Incentive Plan, as it may be amended and restated from time to time (the “Plan”), SeaWorld Entertainment, Inc., a Delaware corporation, (the “Company”) and the Participant agree as follows. Capitalized terms not otherwise defined herein shall have the same meaning as set forth in the Plan.
1. Grant of Restricted Stock Units. Subject to the terms and conditions set forth herein and in the Plan, the Company hereby grants to the Participant the number of Restricted Stock Units provided in the Grant Notice (with each Restricted Stock Unit representing an unfunded, unsecured right to receive one share of Common Stock). The Company may make one or more additional grants of Restricted Stock Units to the Participant under this Restricted Stock Unit Agreement by providing the Participant with a new Grant Notice, which may also include any terms and conditions differing from this Restricted Stock Unit Agreement to the extent provided therein. The Company reserves all rights with respect to the granting of additional Restricted Stock Units hereunder and makes no implied promise to grant additional Restricted Stock Units.
2. Vesting. Subject to the conditions contained herein and in the Plan, the Restricted Stock Units shall vest as provided in the Grant Notice.
3. Settlement of Restricted Stock Units. The provisions of Section 9(d)(ii) of the Plan are incorporated herein by reference and made a part hereof and, in accordance therewith, any vested Restricted Stock Units shall be settled in shares of Common Stock as soon as reasonably practicable (and, in any event, by the fifteenth day of the third month following the expiration of the applicable Restricted Period). With respect to any Restricted Stock Unit, the period of time on and prior to the applicable vesting date in which such Restricted Stock Unit is subject to vesting shall be its Restricted Period. Notwithstanding anything in this Restricted Stock Unit Agreement to the contrary, the Company shall have no obligation to issue or transfer any shares of Common Stock as contemplated by this Restricted Stock Unit Agreement unless and until such issuance or transfer complies with all relevant provisions of law and the requirements of any stock exchange on which the Company’s shares of Common Stock are listed for trading.
4. Treatment of Restricted Stock Units Upon Termination.
(a) The provisions of Section 9(b) of the Plan are incorporated herein by reference and made a part hereof. In the event of the Participant’s Termination (A) by the Company other than for Cause [or by the Participant for Good Reason (as defined below), in each case]2, within the twelve (12) months immediately following a Change in Control the outstanding Restricted Stock Units shall become fully vested and the restrictions thereon shall immediately lapse as of the date of such Termination or (B) due to death or Disability a number of Restricted Stock Units equal to (x) the number of Restricted Stock Units subject to the Grant Notice that would have vested on the next vesting date as if there was no Termination multiplied by fraction (x) the numerator of which is equal to the number of completed months that have
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|
|
2 |
Applies only to senior leadership team |
1
elapsed from the last vesting date (or Date of Grant, if no vesting date has occurred) through the date of such Termination and (y) the denominator of which is equal to 12.
(b) If the Participant undergoes a Termination other than under circumstances described in Section 4(a), then all unvested shares of Restricted Stock Units shall be forfeited to the Company by the Participant for no consideration as of the date of such Termination.
[(c) “Good Reason” shall mean without Participant’s consent, (i) a material diminution in Participant’s title, duties, or responsibilities, (ii) a material reduction in Participant’s base salary (other than an across the board reduction, applicable to other senior executives of the Company), or (iii) the relocation of Participant’s principal place of employment by more than fifty (50) miles from the Participant’s current location; provided that the Participant must provide the Company fifteen (15) days’ written notice setting forth in reasonable specificity the event that constitutes Good Reason, which written notice, to be effective, must be provided to the Company within sixty (60) days of the Participant’s knowledge (whether actual or constructive, including, without limitation, knowledge that Executive would have reasonably obtained after making due and appropriate inquiry) of such event. During such fifteen (15) day notice period, the Company shall have a cure right (if curable), and if not cured within such period, the Participant’s termination will be effective upon the expiration of such cure period.]3
5. Company; Participant.
(a) The term “Company” as used in this Restricted Stock Unit Agreement with reference to employment shall include the Company and its Subsidiaries.
(b) Whenever the word “Participant” is used in any provision of this Restricted Stock Unit Agreement under circumstances where the provision should logically be construed to apply to the executors, the administrators, or the person or persons to whom the Restricted Stock Units may be transferred by will or by the laws of descent and distribution, the word “Participant” shall be deemed to include such person or persons.
6. Non-Transferability. The Restricted Stock Units are not transferable by the Participant (unless such transfer is specifically required pursuant to a domestic relations order or by applicable law) except to Permitted Transferees in accordance with Section 15(b) of the Plan. Except as otherwise provided herein, no assignment or transfer of the Restricted Stock Units, or of the rights represented thereby, whether voluntary or involuntary, by operation of law or otherwise, shall vest in the assignee or transferee any interest or right herein whatsoever, but immediately upon such assignment or transfer the Restricted Stock Units shall terminate and become of no further effect.
7. Rights as Stockholder; Dividend Equivalents. The Participant shall have no rights as a stockholder with respect to any share of Common Stock underlying a Restricted Stock Unit (including no rights with respect to voting or to receive dividends or dividend equivalents) unless and until the Participant shall have become the holder of record or the beneficial owner of such Common Stock, and no adjustment shall be made for dividends or distributions or other rights in respect of such share of Common Stock for which the record date is prior to the date upon which the Participant shall become the holder of record or the beneficial owner thereof. The Restricted Stock Units shall be entitled to be credited with dividend equivalent payments upon the payment by the Company of dividends on shares of Common Stock. Such dividend equivalents will be provided in shares of Common Stock having a Fair Market Value on the date that the Restricted Stock Units are settled equal to the amount of such applicable dividends, and shall be
|
|
|
3 |
Only applies to senior leadership team |
2
payable at the same time as the Restricted Stock Units are settled in accordance with Section 3 above. In the event that any Restricted Stock Unit is forfeited by its terms, the Participant shall have no right to dividend equivalent payments in respect of such forfeited Restricted Stock Units.
8. Tax Withholding. The provisions of Section 15(d) of the Plan are incorporated herein by reference and made a part hereof.
9. Notice. Every notice or other communication relating to this Restricted Stock Unit Agreement between the Company and the Participant shall be in writing, and shall be mailed to or delivered to the party for whom it is intended at such address as may from time to time be designated by such party in a notice mailed or delivered to the other party as herein provided; provided that, unless and until some other address be so designated, all notices or communications by the Participant to the Company shall be mailed or delivered to the Company at its principal executive office, to the attention of the Corporate Secretary, and all notices or communications by the Company to the Participant may be given to the Participant personally or may be mailed to the Participant at the Participant’s last known address, as reflected in the Company’s records. Notwithstanding the above, all notices and communications between the Participant and any third-party plan administrator shall be mailed, delivered, transmitted or sent in accordance with the procedures established by such third-party plan administrator and communicated to the Participant from time to time.
10. No Right to Continued Service. This Restricted Stock Unit Agreement does not confer upon the Participant any right to continue as an employee or service provider to the Service Recipient or any other member of the Company Group.
11. Binding Effect. This Restricted Stock Unit Agreement shall be binding upon the heirs, executors, administrators and successors of the parties hereto.
12. Waiver and Amendments. Except as otherwise set forth in Section 14 of the Plan, any waiver, alteration, amendment or modification of any of the terms of this Restricted Stock Unit Agreement shall be valid only if made in writing and signed by the parties hereto; provided, however, that any such waiver, alteration, amendment or modification is consented to on the Company’s behalf by the Committee. No waiver by either of the parties hereto of their rights hereunder shall be deemed to constitute a waiver with respect to any subsequent occurrences or transactions hereunder unless such waiver specifically states that it is to be construed as a continuing waiver.
13. Clawback/Repayment. This Restricted Stock Unit Agreement shall be subject to reduction, cancellation, forfeiture or recoupment to the extent necessary to comply with (i) any clawback, forfeiture or other similar policy adopted by the Board or the Committee and as in effect from time to time; and (ii) applicable law. In addition, if the Participant receives any amount in excess of what the Participant should have received under the terms of this Restricted Stock Unit Agreement for any reason (including, without limitation, by reason of a financial restatement, mistake in calculations or other administrative error), then the Participant shall be required to repay any such excess amount to the Company.
14. Restrictive Covenants; Detrimental Activity.
(a) Participant acknowledges and recognizes the highly competitive nature of the businesses of the Company and its Affiliates and accordingly agrees, in his or her capacity as an equity (and/or equity-based Award) holder in the Company, to the provisions of Appendix A to this Restricted Stock Unit Agreement (the “Restrictive Covenants”). Participant acknowledges and agrees that the Company’s remedies at law for a breach or threatened breach of any of the provisions of Section 1 of Appendix A (or a material breach or material threatened breach of any of the provisions of Section 2 of
3
Appendix A of this Restricted Stock Unit Agreement) would be inadequate and the Company would suffer irreparable damages as a result of such breach or threatened breach. In recognition of this fact, Participant agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, the Company, without posting any bond, shall be entitled to cease making any payments or providing any benefit otherwise required by this Restricted Stock Unit Agreement and obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available. Notwithstanding the foregoing and Appendix A, the provisions of Section 1(a)(i), (ii), (iii) and (iv)(B) of Appendix A shall not apply to the Participant if Participant’s principal place of employment is located in the State of California. The Restricted Stock Units granted hereunder shall be subject to Participant’s continued compliance with such restrictions. For the avoidance of doubt, the Restrictive Covenants contained in this Restricted Stock Unit Agreement are in addition to, and not in lieu of, any other restrictive covenants or similar covenants or agreements between the Participant and the Company or any of its Affiliates.
(b) Notwithstanding anything to the contrary contained herein or in the Plan, if the Participant has engaged in or engages in any Detrimental Activity, as determined by the Committee (including, without limitation, a breach of any of the covenants contained in Appendix A to this Restricted Stock Unit Agreement), then the Committee may, in its sole discretion, take actions permitted under the Plan, including, but not limited to: (i) cancelling any and all Restricted Stock Units, or (ii) requiring that the Participant forfeit any gain realized on the vesting of the Restricted Stock Units, and repay such gain to the Company.
15. Right to Offset. The provisions of Section 15(x) of the Plan are incorporated herein by reference and made a part hereof.
16. Governing Law. This Restricted Stock Unit Agreement shall be construed and interpreted in accordance with the internal laws of the State of Delaware, without regard to the principles of conflicts of law thereof. Notwithstanding anything contained in this Restricted Stock Unit Agreement, the Grant Notice or the Plan to the contrary, if any suit or claim is instituted by the Participant or the Company relating to this Restricted Stock Unit Agreement, the Grant Notice or the Plan, the Participant hereby submits to the exclusive jurisdiction of and venue in the courts of Delaware. THE PARTICIPANT IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY SUIT, ACTION OR OTHER PROCEEDING INSTITUTED BY OR AGAINST SUCH PARTICIPANT IN RESPECT OF THE PARTICIPANT’S RIGHTS OR OBLIGATIONS HEREUNDER.
17. Plan. The terms and provisions of the Plan are incorporated herein by reference. In the event of a conflict or inconsistency between the terms and provisions of the Plan and the provisions of this Restricted Stock Unit Agreement (including the Grant Notice), the Plan shall govern and control.
18. Section 409A. It is intended that the Restricted Stock Units granted hereunder shall be exempt from Section 409A of the Code pursuant to the “short-term deferral” rule applicable to such section, as set forth in the regulations or other guidance published by the Internal Revenue Service thereunder.
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Restrictive Covenants
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Non-Competition; Non-Solicitation; Non-Disparagement. |
(a)Participant acknowledges and recognizes the highly competitive nature of the businesses of the Company and its Affiliates and accordingly agrees as follows:
(i)During Participant’s employment with the Company or its Subsidiaries (the “Employment Term”) and for a period of two years following the date Participant ceases to be employed by the Company or its Subsidiaries (the “Restricted Period”), Participant will not, whether on Participant’s own behalf or on behalf of or in conjunction with any person, firm, partnership, joint venture, association, corporation or other business organization, entity or enterprise whatsoever (“Person”), directly or indirectly solicit or assist in soliciting in competition with the Restricted Group in the Business, the business of any then current or prospective client or customer with whom Participant (or Participant’s direct reports) had personal contact or dealings on behalf of the Company during the one-year period preceding Participant’s termination of employment.
(ii)During the Restricted Period, Participant will not directly or indirectly:
(A)engage in the Business in any geographical area that is within 300 miles of any geographical area where the Restricted Group engages in the Business, including the greater metropolitan areas of Orlando, Florida, Tampa, Florida, San Diego, California, Chula Vista, California, San Antonio, Texas, Williamsburg, Virginia and Philadelphia/Langhorne, Pennsylvania;
(B)enter the employ of, or render any services to, a Core Competitor, except where such employment or services do not relate in any manner to the Business;
(C)acquire a financial interest in, or otherwise become actively involved with, any Person engaged in the Business, directly or indirectly, as an individual, partner, shareholder, officer, director, principal, agent, trustee or consultant; or
(D)intentionally and adversely interfere with, or attempt to adversely interfere with, business relationships between the members of the Restricted Group and any of their clients, customers, suppliers, partners, members or investors.
(iii)Notwithstanding anything to the contrary in this Appendix A, Participant may, directly or indirectly own, solely as an investment, securities of any Person engaged in a Business (including, without limitation, a Core Competitor) which are publicly traded on a national or regional stock exchange or on the over-the-counter market if Participant (i) is not a controlling person of, or a member of a group which controls, such person and (ii) does not, directly or indirectly, own 2% or more of any class of securities of such Person.
(iv)During the Restricted Period, Participant will not, whether on Participant’s own behalf or on behalf of or in conjunction with any Person, directly or indirectly:
(A)solicit or encourage any employee of the Restricted Group to leave the employment of the Restricted Group;
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(B)hire any executive-level employee who was employed by the Restricted Group as of the date of Participant’s termination of employment with the Company or who left the employment of the Restricted Group coincident with, or within one year prior to or after, the termination of Participant’s employment with the Company; or
(C)encourage any material consultant of the Restricted Group to cease working with the Restricted Group.
(ii)For purposes of this Appendix A:
(A)“Restricted Group” shall mean, collectively, the Company and its Subsidiaries and, to the extent engaged in the Business, their respective Affiliates.
(B)“Business” shall mean, collectively, the location-based entertainment business and the entertainment and theme park business.
(C)“Core Competitor” shall mean Walt Disney Parks and Resorts, Universal Parks and Resorts, Six Flags, Inc., Cedar Fair Entertainment Company and Merlin Entertainments Group Ltd., Herschend Family Entertainment, Parques Reunidos and each of their respective Affiliates.
(b)Non-Disparagement. Participant will not at any time (whether during or after Participant’s Employment Term) make public or private statements or public or private comments intended to be (or having the effect of being) of defamatory or disparaging nature regarding (including, without limitation, any statements or comments, whether in person, radio, television, film, social media or otherwise, that are (i) likely to be harmful to the business, business reputation or personal reputation of and (ii) for, on behalf of or in association with any trade, industry, activist or other advocacy group that has, at any time, made adverse or critical statements in relation to) the Company or any of its Subsidiaries or Affiliates or any of their respective businesses, shareholders, members, partners, employees, agents, officers, directors or contractors (it being understood that comments made in Participant’s good faith performance of Participant’s duties hereunder shall not be deemed disparaging or defamatory for purposes of this paragraph). Notwithstanding anything in this section 1(c), the Participant shall be permitted to (x) provide a reasonable and truthful response to or statement to defend Participant against any public statement made by the Company that is incorrect or disparages such person, to the extent necessary to correct or refute such public statement and (y) provide truthful testimony in any legal proceeding or process.
(c)It is expressly understood and agreed that although Participant and the Company consider the restrictions contained in this Section 1 to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Appendix A is an unenforceable restriction against Participant, the provisions of this Appendix A shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restriction contained in this Appendix A is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein.
(d)The period of time during which the provisions of this Section 1 shall be in effect shall be extended by the length of time during which Participant is in breach of the terms hereof as determined by any court of competent jurisdiction on the Company’s application for injunctive relief.
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(e)The provisions of Section 1 hereof shall survive the termination of Participant’s employment for any reason, including but not limited to, any termination other than for Cause (except as otherwise set forth in Section 1 hereof).
(f)The provisions of Section 1(a)(i), (ii), (iii) and (iv)(B) hereof shall not apply if Participant’s principal place of employment is in the state of California.
2.Confidentiality; Intellectual Property.
(a)Confidentiality.
(i)Participant will not at any time (whether during or after Participant’s Employment Term) (x) retain or use for the benefit, purposes or account of Participant or any other Person; or (y) disclose, divulge, reveal, communicate, share, transfer or provide access to any Person outside the Company (other than its professional advisers who are bound by confidentiality obligations or otherwise in performance of Participant’s duties under Participant’s employment and pursuant to customary industry practice), any non-public, proprietary or confidential information —including without limitation trade secrets, know-how, research and development, software, databases, inventions, processes, formulae, technology, designs and other intellectual property, information concerning finances, investments, profits, pricing, costs, products, services, vendors, customers, clients, partners, investors, personnel, compensation, recruiting, training, advertising, sales, marketing, promotions, government and regulatory activities and approvals, safety, zoological and/or animal training or care practices, protocols, policies or procedures — concerning the past, current or future business, activities and operations of the Company, its Subsidiaries or Affiliates and/or any third party that has disclosed or provided any of same to the Company on a confidential basis (“Confidential Information”) without the prior written authorization of the Board.
(ii)“Confidential Information” shall not include any information that is (a) generally known to the industry or the public other than as a result of Participant’s breach of this covenant; (b) made legitimately available to Participant by a third party without breach of any confidentiality obligation of which Participant has knowledge; or (c) required by law to be disclosed; provided that with respect to subsection (c) Participant shall give prompt written notice to the Company of such requirement, disclose no more information than is so required, and reasonably cooperate with any attempts by the Company to obtain a protective order or similar treatment.
(iii)Except as required by law, Participant will not disclose to anyone, other than Participant’s family (it being understood that, in this Restricted Stock Unit Agreement, the term “family” refers to Participant, Participant’s spouse, children, parents and spouse’s parents) and advisors, the existence or contents of this Restricted Stock Unit Agreement; provided that Participant may disclose to any prospective future employer the provisions of this Appendix A. This Section 2(a)(iii) shall terminate if the Company publicly discloses a copy of this Restricted Stock Unit Agreement (or, if the Company publicly discloses summaries or excerpts of this Restricted Stock Unit Agreement, to the extent so disclosed).
(iv)Upon termination of Participant’s employment with the Company for any reason, Participant shall (x) cease and not thereafter commence use of any Confidential Information or intellectual property (including without limitation, any patent, invention, copyright, trade secret, trademark, trade name, logo, domain name or other source indicator) owned or used by the Company, its Subsidiaries or Affiliates; and (y) immediately destroy, delete, or return to the
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Company, at the Company’s option, all originals and copies in any form or medium (including memoranda, books, papers, plans, computer files, letters and other data) in Participant’s possession or control (including any of the foregoing stored or located in Participant’s office, home, laptop or other computer, whether or not Company property) that contain Confidential Information, except that Participant may retain only those portions of any personal notes, notebooks and diaries that do not contain any Confidential Information.
(v)Nothing in this Restricted Stock Unit Agreement shall prohibit or impede Participant from communicating, cooperating, or filing a complaint with any U.S. federal, state, or local governmental or law enforcement branch, agency, or entity (collectively, a “Governmental Entity”) with respect to possible violations of any U.S. federal, state, or local law or regulation, or otherwise making disclosures to any Governmental Entity, in each case, that are protected under the whistleblower provisions of any such law or regulation, provided that in each case such communications and disclosures are consistent with applicable law. Participant understands and acknowledges that an individual shall not be held criminally or civilly liable under any Federal or State trade secret law for the disclosure of a trade secret that is made (i) in confidence to a Federal, State, or local government official or to an attorney solely for the purpose of reporting or investigating a suspected violation of law, or (ii) in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal. Participant understands and acknowledges further that an individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual files any document containing the trade secret under seal, and does not disclose the trade secret, except pursuant to court order. Moreover, Participant is not required to give prior notice to (or get prior authorization from) the Company regarding any such communication or disclosure. Notwithstanding the foregoing, under no circumstance will Participant be authorized to disclose any information covered by attorney-client privilege or attorney work product of any member of the Company Group without prior written consent of Company’s General Counsel or other officer designated by the Company.
(b)Intellectual Property.
(i)If Participant has created, invented, designed, developed, contributed to or improved any works of authorship, inventions, intellectual property, materials, documents or other work product (including without limitation, research, reports, software, databases, systems, applications, presentations, textual works, content, or audiovisual materials) (“Works”), either alone or with third parties, prior to Participant’s employment by the Company, that are relevant to or implicated by such employment (“Prior Works”), Participant hereby grants the Company a perpetual, non-exclusive, royalty-free, worldwide, assignable, sublicensable license under all rights and intellectual property rights (including rights under patent, industrial property, copyright, trademark, trade secret, unfair competition and related laws) therein for all purposes in connection with the Company’s current and future business.
(ii)If Participant creates, invents, designs, develops, contributes to or improves any Works, either alone or with third parties, at any time during Participant’s employment by the Company and within the scope of such employment and with the use of any the Company resources (“Company Works”), Participant shall promptly and fully disclose same to the Company and hereby irrevocably assigns, transfers and conveys, to the maximum extent permitted by applicable law, all rights and intellectual property rights therein (including rights under patent, industrial property, copyright, trademark, trade secret, unfair competition and
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related laws) to the Company to the extent ownership of any such rights does not vest originally in the Company.
(iii)Participant shall take all reasonably requested actions and execute all reasonably requested documents (including any licenses or assignments required by a government contract) at the Company’s expense (but without further remuneration) to assist the Company in validating, maintaining, protecting, enforcing, perfecting, recording, patenting or registering any of the Company’s rights in the Prior Works and Company Works. If the Company is unable for any other reason, after reasonable attempt, to secure Participant’s signature on any document for this purpose, then Participant hereby irrevocably designates and appoints the Company and its duly authorized officers and agents as Participant’s agent and attorney in fact, to act for and in Participant’s behalf and stead to execute any documents and to do all other lawfully permitted acts required in connection with the foregoing.
(iv)Participant shall not improperly use for the benefit of, bring to any premises of, divulge, disclose, communicate, reveal, transfer or provide access to, or share with the Company any confidential, proprietary or non-public information or intellectual property relating to a former employer or other third party without the prior written permission of such third party. Participant shall comply with all relevant policies and guidelines of the Company that are from time to time previously disclosed to Participant, including regarding the protection of Confidential Information and intellectual property and potential conflicts of interest. Participant acknowledges that the Company may amend any such policies and guidelines from time to time, and that Participant remains at all times bound by their most current version from time to time previously disclosed to Participant.
(v)The provisions of Section 2 hereof shall survive the termination of Participant’s employment for any reason (except as otherwise set forth in Section 2(a)(iii) hereof).
3.Permitted Disclosure. Nothing in this Appendix A shall prohibit or impede a Participant from communicating, cooperating or filing a complaint with any United States federal, state or local governmental or law enforcement branch, agency or entity (collectively, a “Governmental Entity”) with respect to possible violations of any United States federal, state or local law or regulation, or otherwise making disclosures to any Governmental Entity, in each case, that are protected under the whistleblower provisions of any such law or regulation, provided that in each case such communications and disclosures are consistent with applicable law. Each Participant understands and acknowledges that (i) an individual shall not be held criminally or civilly liable under any U.S. federal or state trade secret law for the disclosure of a trade secret that is made (A) in confidence to a U.S. federal, state, or local government official or to an attorney solely for the purpose of reporting or investigating a suspected violation of law, or (B) in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal, and (ii) an individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual files any document containing the trade secret under seal, and does not disclose the trade secret, except pursuant to court order. A Participant does not need to give prior notice to (or get prior authorization from) the Company regarding any such communication or disclosure. Except as otherwise provided in this paragraph or under applicable law, under no circumstance is a Participant authorized to disclose any information covered by attorney-client privilege or attorney work product or trade secrets of any member of the Company Group without prior written consent of the Company’s Board of Directors or other officer designed by the Company’s Board of Directors.
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Exhibit 31.1
CERTIFICATION OF PERIODIC REPORT UNDER SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Marc G. Swanson, certify that:
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1. |
I have reviewed this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019 of SeaWorld Entertainment, Inc.; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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Date: November 7, 2019 |
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Signature: |
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/s/ Marc G. Swanson |
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Marc G. Swanson |
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Interim Chief Executive Officer |
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(Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION OF PERIODIC REPORT UNDER SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Elizabeth C. Gulacsy, certify that:
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1. |
I have reviewed this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019 of SeaWorld Entertainment, Inc.; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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Date: November 7, 2019 |
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Signature: |
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/s/ Elizabeth C. Gulacsy |
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Elizabeth C. Gulacsy |
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Chief Accounting Officer and Interim Chief Financial Officer and Treasurer |
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(Principal Accounting Officer and Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of SeaWorld Entertainment, Inc. (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2019 filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Marc G. Swanson, Interim Chief Executive Officer of the Company, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
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The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the periods presented therein. |
Date: November 7, 2019
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/s/ Marc G. Swanson |
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Marc G. Swanson |
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Interim Chief Executive Officer |
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(Principal Executive Officer) |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of SeaWorld Entertainment, Inc. (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2019 filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Elizabeth C. Gulacsy, Chief Accounting Officer and Interim Chief Financial Officer and Treasurer of the Company, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
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The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the periods presented therein. |
Date: November 7, 2019
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/s/ Elizabeth C. Gulacsy |
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Elizabeth C. Gulacsy |
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Chief Accounting Officer and Interim Chief Financial Officer and Treasurer |
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(Principal Accounting Officer and Principal Financial Officer) |