See accompanying notes to unaudited condensed consolidated financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
Description of the Business
SeaWorld Entertainment, Inc., through its wholly-owned subsidiary, SeaWorld Parks & Entertainment, Inc. (“SEA”) (collectively, the “Company”), owns and operates twelve theme parks within the United States. The Company operates SeaWorld theme parks in Orlando, Florida; San Antonio, Texas; and San Diego, California; and Busch Gardens theme parks in Tampa, Florida; and Williamsburg, Virginia. The Company operates water park attractions in Orlando, Florida (Aquatica); San Antonio, Texas (Aquatica); San Diego, California (Aquatica); Tampa, Florida (Adventure Island); and Williamsburg, Virginia (Water Country USA). The Company also operates a reservations-only theme park in Orlando, Florida (Discovery Cove) and a seasonal park in Langhorne, Pennsylvania (Sesame Place).
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K filed with the SEC. The unaudited condensed consolidated balance sheet as of December 31, 2018 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K.
In the opinion of management, such unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations for the year ending December 31, 2019 or any future period due to the seasonal nature of the Company’s operations. Based upon historical results, the Company typically generates its highest revenues in the second and third quarters of each year and incurs a net loss in the first and fourth quarters, in part because seven of its theme parks are only open for a portion of the year.
The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, including SEA. All intercompany accounts have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates and assumptions include, but are not limited to, the accounting for self-insurance, deferred tax assets and liabilities, deferred revenue, equity compensation and the valuation of goodwill and other indefinite-lived intangible assets. Actual results could differ from those estimates.
Segment Reporting
The Company maintains discrete financial information for each of its twelve theme parks, which is used by the Chief Operating Decision Maker (“CODM”), identified as the Chief Executive Officer, as a basis for allocating resources. Each theme park has been identified as an operating segment and meets the criteria for aggregation due to similar economic characteristics. In addition, all of the theme parks provide similar products and services and share similar processes for delivering services. The theme parks have a high degree of similarity in the workforces and target similar consumer groups. Accordingly, based on these economic and operational similarities and the way the CODM monitors and makes decisions affecting the operations, the Company has concluded that its operating segments may be aggregated and that it has one reportable segment.
Restricted Cash
Restricted cash is recorded in other current assets in the accompanying unaudited condensed consolidated balance sheets. Restricted cash consists primarily of funds received from strategic partners for use in approved marketing and promotional activities.
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands)
|
|
Cash and cash equivalents
|
|
$
|
51,860
|
|
|
$
|
34,073
|
|
Restricted cash, included in other current assets
|
|
|
954
|
|
|
|
934
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
52,814
|
|
|
$
|
35,007
|
|
7
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition
Admissions revenue primarily consists of single-day tickets, annual or season passes or other multi-day or multi-park admission products. For single-day tickets, the Company recognizes revenue at a point in time, upon admission to the park. Annual passes, season passes or other multi-day or multi-park passes allow guests access to specific parks over a specified time period. For these pass and multi-use products, revenue is deferred and recognized over the terms of the admission product based on estimated redemption rates for similar products and is adjusted periodically. The Company estimates a redemption rate using historical and forecasted growth rates and attendance trends by park for similar products. Attendance trends factor in seasonality and are adjusted based on actual trends periodically. Revenue is recognized on a pro-rata basis based on the estimated allocated selling price of the admission product. For multi-day admission products, revenue is allocated based on the number of visits included in the pass and recognized ratably based on each admission into the theme park.
Food, merchandise and other revenue primarily consists of culinary, merchandise and other in-park products and also includes other miscellaneous revenue which is not significant in the periods presented, including revenue related to the Company’s international agreements as discussed below. The Company recognizes revenue for food, merchandise and other in-park products when the related products or services are received by the guests. Certain admission products may also include bundled products at the time of purchase, such as culinary or merchandise items. The Company conducts an analysis of bundled products to identify separate distinct performance obligations that are material in the context of the contract. For those products that are determined to be distinct performance obligations and material in the context of the contract, the Company allocates a portion of the transaction price to each distinct performance obligation using each performance obligation’s standalone price. If the bundled product is related to a pass product and offered over time, revenue will be recognized over time accordingly.
Deferred revenue primarily includes revenue associated with pass products and contract liability balances related to licensing and international agreements collected in advance of the Company’s performance and expected to be recognized in future periods. At both March 31, 2019 and December 31, 2018, $10.0 million is included in other liabilities in the accompanying unaudited condensed consolidated balance sheets related to the Company’s international agreement, as discussed in the following section, which the Company expects to recognize over the term of the respective license agreement beginning when substantially all of the services have been performed, which is expected to be upon opening.
The following table reflects the Company’s deferred revenue balance as of March 31, 2019 and December 31, 2018:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands)
|
|
Deferred revenue, including long-term portion
|
|
$
|
161,253
|
|
|
$
|
111,181
|
|
Less: Deferred revenue, long-term portion, included in other liabilities
|
|
|
10,000
|
|
|
|
10,071
|
|
Deferred revenue, short-term portion
|
|
$
|
151,253
|
|
|
$
|
101,110
|
|
|
|
|
|
|
|
|
|
|
International Agreements
The Company has received $10.0 million in deferred revenue recorded in other liabilities related to a nonrefundable payment received from a partner in connection with a potential project in the Middle East (the “Middle East Project”) to provide certain services pertaining to the planning and design of the Middle East Project, with funding received expected to offset internal expenses. Approximately $4.1 million and $3.8 million of costs incurred related to the Middle East Project are recorded in other assets in the accompanying unaudited condensed consolidated balance sheet as of March 31, 2019 and December 31, 2018, respectively. The Company has recognized an asset for the costs incurred to fulfill the contract as the costs are specifically identifiable, enhance resources that will be used to satisfy performance obligations in the future and are expected to be recovered. The related deferred revenue and expense will begin to be recognized when substantially all of the services have been performed. The Company continually monitors performance on the contract and will make adjustments, if necessary. The Middle East Project is subject to various conditions, including, but not limited to, the parties completing the design development and there is no assurance that the Middle East Project will be completed or advance to the next stages.
In March 2017, the Company entered into a Park Exclusivity and Concept Design Agreement and a Center Concept and Preliminary Design Support Agreement (collectively, the “ZHG Agreements”) with Zhonghong Holding, Co. Ltd. (“Zhonghong Holding”), an affiliate of ZHG Group, to provide design, support and advisory services for various potential projects and grant exclusive rights in China, Taiwan, Hong Kong and Macau through December 2019.
In April 2019, the Company terminated the ZHG Agreements for non-payment of undisputed amounts owed. For the three months ended March 31, 2019 and 2018, the Company recorded approximately $1.7 million and $1.3 million, respectively, in food, merchandise and other revenue in the accompanying unaudited condensed consolidated statements of comprehensive loss related to the ZHG Agreements. See Note 10–Related-Party Transactions for additional disclosures.
8
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. RECENT ACCOUNTING PRONOUNCEMENTS
The Company reviews new accounting pronouncements as they are issued or proposed by the Financial Accounting Standards Board (“FASB”).
Recently Implemented Accounting Standards
On January 1, 2019, the Company adopted Accounting Standards Codification (“ASC”) 842,
Leases.
The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record right of use assets and corresponding lease liabilities on the balance sheet. The new guidance requires the Company to continue to classify leases as either operating or financing, with classification affecting the pattern of expense recognition in the income statement. The Company is also required to disclose qualitative and quantitative information about leasing arrangements to enable financial statement users to assess the amount, timing and uncertainty of cash flows arising from leases. The Company adopted ASC 842 using a modified retrospective method that did not require the prior period information to be restated. ASC 842 also provides a number of optional provisions, known as practical expedients, which companies may elect to adopt to facilitate implementation. The Company elected a package of practical expedients which, among other items, precludes the Company from needing to reassess 1) whether any expired or existing contracts are or contain leases, 2) the lease classification of any expired or existing leases, and 3) initial direct costs for any existing leases. The Company elected not to implement the practical expedient related to hindsight to determine lease terms. Due to the implementation of selected practical expedients, there was no cumulative effect adjustment to beginning retained earnings.
See
Note 7–Leases for additional disclosures.
On January 1, 2019, the Company also adopted the following Accounting Standards Updates (“ASUs”) which had no material impact on its unaudited condensed consolidated financial statements or disclosures:
|
•
|
ASU 2018-09,
Codification Improvements
|
|
•
|
ASU 2018-13,
Fair Value Measurement (Topic 820)
|
|
•
|
ASU
2018
-
15,
Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract
|
|
•
|
ASU 2018-16
,
Derivatives and Hedging—Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes
|
During 2018, the Company adopted the following ASUs:
|
•
|
ASU 2017-12,
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
- This ASU aims to improve reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and simplify the application of the hedge accounting guidance. For cash flow and net investment hedges existing as of the adoption date, the guidance requires a cumulative-effect adjustment as of the beginning of the fiscal year that an entity adopts the amendments; however, the presentation and disclosure guidance should be applied prospectively. The impact of the adoption was not material to the Company’s unaudited condensed consolidated financial statements; as a result, no cumulative effect adjustment to beginning retained earnings was required.
See Note 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 (loss) to accumulated deficit in
the accompanying unaudited condensed consolidated balance sheet and the accompanying unaudited condensed consolidated statements of changes in stockholders’ equity.
|
9
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. LOSS PER SHARE
Loss per share is computed as follows:
|
|
For the Three Months Ended March 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
Net Loss
|
|
|
Shares
|
|
|
Per
Share
Amount
|
|
|
Net Loss
|
|
|
Shares
|
|
|
Per
Share
Amount
|
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Basic loss per share
|
|
$
|
(37,020
|
)
|
|
|
83,354
|
|
|
$
|
(0.44
|
)
|
|
$
|
(62,844
|
)
|
|
|
86,209
|
|
|
$
|
(0.73
|
)
|
|
Effect of dilutive incentive-based awards
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
Diluted loss per share
|
|
$
|
(37,020
|
)
|
|
|
83,354
|
|
|
$
|
(0.44
|
)
|
|
$
|
(62,844
|
)
|
|
|
86,209
|
|
|
$
|
(0.73
|
)
|
|
In accordance with the
Earnings Per Share
Topic of the ASC, basic loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period (excluding treasury stock and unvested restricted stock). Shares of unvested restricted stock are eligible to receive dividends; if any, however, dividend rights will be forfeited if the award does not vest. Accordingly, only vested shares of outstanding restricted stock are included in the calculation of basic earnings per share. The weighted average number of repurchased shares during the period, if any, which are held as treasury stock, are excluded from shares of common stock outstanding.
Diluted loss per share is determined using the treasury stock method based on the dilutive effect of unvested restricted stock and certain shares of common stock that are issuable upon exercise of stock options. There were approximately 1,893,000 and 4,495,000 potentially dilutive shares excluded from the computation of diluted loss per share during the three months ended March 31, 2019 and 2018, respectively, as their effect would have been anti-dilutive due to the Company’s net loss in those periods. The Company’s outstanding performance-vesting restricted awards of approximately 2,295,000 and 2,730,000 as of March 31, 2019 and 2018, respectively, are considered contingently issuable shares and are excluded from the calculation of diluted loss per share until the performance measure criteria is met as of the end of the reporting period.
4. INCOME TAXES
Income tax expense or benefit is recognized based on the Company’s estimated annual effective tax rate which is based upon the tax rate expected for the full calendar year applied to the pretax income or loss of the interim period. The Company’s consolidated effective tax rate for the three months ended March 31, 2019
and 2018 was 29.0% and 27.0%, respectively, and differs from th
e effective statutory federal income tax rate of 21.0% primarily due to state income taxes and other permanent items.
The Company has determined that there are no positions currently taken that would rise to a level requiring an amount to be recorded or disclosed as an unrecognized tax benefit. If such positions do arise, it is the Company’s intent that any interest or penalty amount related to such positions will be recorded as a component of the income tax provision (benefit) in the applicable period.
5. OTHER ACCRUED LIABILITIES
Other accrued liabilities at March 31, 2019 and December 31, 2018, consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands)
|
|
Self-insurance reserve
|
|
$
|
6,895
|
|
|
$
|
6,895
|
|
Accrued property taxes
|
|
|
2,910
|
|
|
|
—
|
|
Accrued interest
|
|
|
1,095
|
|
|
|
490
|
|
Dividends
|
|
|
23
|
|
|
|
84
|
|
Other
|
|
|
18,142
|
|
|
|
15,597
|
|
Total other accrued liabilities
|
|
$
|
29,065
|
|
|
$
|
23,066
|
|
As of March 31, 2019 and December 31, 2018, other liabilities above include $11.5 million related to the EZPay plan legal settlement (see further discussion in Note 11–Commitments and Contingencies).
10
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. LONG-TERM DEBT
Long-term debt, net, as of March 31, 2019 and December 31, 2018 consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands)
|
|
Term B-5 Loans (effective interest rate of 5.50% and 5.52% at
March 31, 2019 and December 31, 2018, respectively)
|
|
$
|
1,519,513
|
|
|
$
|
1,523,389
|
|
Revolving credit facility (effective interest rate of 5.16% and
5.17% at March 31, 2019 and December 31, 2018, respectively)
|
|
|
65,000
|
|
|
|
30,000
|
|
Total long-term debt
|
|
|
1,584,513
|
|
|
|
1,553,389
|
|
Less discounts
|
|
|
(6,100
|
)
|
|
|
(6,564
|
)
|
Less debt issuance costs
|
|
|
(6,206
|
)
|
|
|
(6,641
|
)
|
Less current maturities
|
|
|
(80,505
|
)
|
|
|
(45,505
|
)
|
Total long-term debt, net
|
|
$
|
1,491,702
|
|
|
$
|
1,494,679
|
|
SEA is the borrower under the senior secured credit facilities as amended pursuant to a credit agreement dated as of December 1, 2009, as the same may be amended, restated, supplemented or modified from time to time (the “Senior Secured Credit Facilities”). On October 31, 2018, SEA entered into a refinancing amendment, Amendment No. 9 (the “Amended Credit Agreement”).
Senior Secured Credit Facilities
As of March 31, 2019, the Senior Secured Credit Facilities consisted of $1.52 billion in Term B-5 Loans which will mature on March 31, 2024 and a $210.0 million revolving credit facility (the “Revolving Credit Facility”), of which $65.0 million was outstanding as of March 31, 2019. The outstanding balance on the Revolving Credit Facility was included in current maturities of long-term debt in the accompanying unaudited condensed consolidated balance sheets as of March 31, 2019 and December 31, 2018, due to the Company’s intent to repay the borrowings within the following twelve month period. Subsequent to March 31, 2019, SEA repaid a net of $40.0 million on the Revolving Credit Facility.
The Term B-5 Loans amortize in equal quarterly installments in an aggregate annual amount equal to 1.015% of the original principal amount of the Term B-5 Loans outstanding on the Effective Date, with the balance payable on the final maturity date. SEA may voluntarily repay amounts outstanding under the Senior Secured Credit Facilities at any time without premium or penalty, other than customary “breakage” costs with respect to LIBOR loans. SEA is also required to prepay the outstanding Term B-5 Loans, subject to certain exceptions, under certain circumstances, as defined in the Senior Secured Credit Facilities.
As of March 31, 2019, SEA had approximately $21.3 million of outstanding letters of credit and $65.0 million outstanding on its Revolving Credit Facility leaving $123.7 million available for borrowing.
Restrictive Covenants
The Senior Secured Credit Facilities contain a number of customary negative covenants. Such covenants, among other things, restrict, subject to certain exceptions, the ability of SEA and its restricted subsidiaries to incur additional indebtedness; make guarantees; create liens on assets; enter into sale and leaseback transactions; engage in mergers or consolidations; sell assets; make fundamental changes; pay dividends and distributions or repurchase SEA’s capital stock; make investments, loans and advances, including acquisitions; engage in certain transactions with affiliates; make changes in the nature of the business; and make prepayments of junior debt. All of the net assets of SEA and its consolidated subsidiaries are restricted and there are no unconsolidated subsidiaries of SEA.
The Amended Credit Agreement removed all previous financial covenants on the Term B-5 Loans. The Revolving Credit Facility requires that the Company comply with a springing maximum first lien secured leverage ratio of 6.25x to be tested as of the last day of any fiscal quarter, solely to the extent that on such date the aggregate amount of funded loans and letters of credit (excluding undrawn letters of credit in an amount not to exceed $30.0 million and cash collateralized letters of credit) under the Revolving Credit Facility exceeds an amount equal to 35% of the then outstanding commitments under the Revolving Credit Facility.
As of March 31, 2019, SEA was in compliance with all covenants contained in the documents governing the Senior Secured Credit Facilities.
11
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Senior Secured Credit Fac
ilities 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 restricte
d 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 g
reater 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 greate
r than 4.50 to 1.00 and greater than 4.00 to 1.00, $95.0 million and (4) if the total net leverage ratio on a pro forma basis after giving effect to the payment of any such restricted payment is no greater than 5.00 to 1.00 and greater than 4.50 to 1.00, $
65.0 million.
As of March 31, 2019, the total net leverage ratio as calculated under the Senior Secured Credit Facilities was 3.51 to 1.00, which would result in the Company having approximately $185.0 million available capacity for restricted payments. However, the available capacity for restricted payments is recalculated at the beginning of each quarter, or upon declaration of a restricted payment, as set forth in the credit agreement.
Long-term debt at March 31, 2019 is repayable as follows, and does not include the impact of any future voluntary prepayments. The outstanding balance under the Revolving Credit Facility is included in current maturities of long-term debt in the accompanying unaudited condensed consolidated balance sheet as of March 31, 2019.
Years Ending December 31,
|
|
(In thousands)
|
|
Remainder of 2019
|
|
$
|
76,629
|
|
2020
|
|
|
15,505
|
|
2021
|
|
|
15,505
|
|
2022
|
|
|
15,505
|
|
2023
|
|
|
15,505
|
|
Thereafter
|
|
|
1,445,864
|
|
Total
|
|
$
|
1,584,513
|
|
Interest Rate Swap Agreements
As of March 31, 2019, the Company has five interest rate swap agreements (the “Interest Rate Swap Agreements”) which effectively fix the interest rate on the LIBOR-indexed interest payments associated with $1.0 billion of SEA’s outstanding long-term debt. The Interest Rate Swap Agreements became effective on September 30, 2016; have a total notional amount of $1.0 billion; mature on May 14, 2020; require the Company to pay a weighted-average fixed rate of 2.45% per annum; provide that the Company receives a variable rate of interest based upon the greater of 0.75% or the BBA LIBOR; and have interest settlement dates occurring on the last day of March, June, September and December through maturity.
SEA designated the Interest Rate Swap Agreements above as qualifying cash flow hedge accounting relationships as further discussed in Note 8–Derivative Instruments and Hedging Activities which follows.
Cash paid for interest relating to the Senior Secured Credit Facilities and the Interest Rate Swap Agreements, net of amounts capitalized, as applicable, was $20.1 million and $24.0 million in the three months ended March 31, 2019 and 2018, respectively. Cash paid for interest in the three months ended March 31, 2018, includes $5.1 million relating to the Company’s fourth quarter 2017 interest payable on its Senior Secured Credit Facilities which was paid on January 5, 2018.
7. LEASES
The Company adopted ASC 842,
Leases
, as of January 1, 2019 using the modified retrospective approach and elected the “Comparatives Under 840 Option” allowing the Company to not recast comparative periods in the period of adoption but present those periods under historical requirements of ASC 840. The Company has land, warehouse and office space, and equipment leases which are classified as either operating or financing obligations.
Under the provisions of ASC 842, right to use assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date.
Lease terms may include options to renew when it is reasonably certain that the Company will exercise that option.
Lease expense for lease payments is recognized on a straight-line basis over the term of the operating lease.
12
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The present value of future mi
nimum 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 borr
owing rates on December 31, 2018 for newly recognized operating leases that commenced prior to that date.
The Company applies the incremental borrowing rates at a portfolio level based on lease terms.
The Company has elected not to recognize on the balance sheet leases with an initial and expected term of 12 months or less, instead lease expense is recognized for these short-term leases on a straight-line basis over the lease term. For lease agreements entered into or reassessed upon adoption of ASC 842, the Company has elected to combine lease and non-lease components for each class of underlying asset based on a practical expedient permitted under ASC 842.
Some of the Company’s leases include one or more options to renew, with renewal terms that can extend the lease term from one to 10 years or more. The exercise of lease renewal options is at the Company’s sole discretion. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or a purchase option reasonably certain of exercise.
Certain of the Company’s lease agreements include rental payments based on a percentage of sales over contractual levels and others include rental payments adjusted periodically for inflation. These variable lease payments are typically recognized when the underlying event occurs and are included in operating expenses in the Company's unaudited condensed consolidated statements of comprehensive loss in the same line item as the expense arising from fixed lease payments. The Company’s lease agreements do not contain any material residual value guarantees, material restrictive covenants or material variable lease costs other than those described below related to the Company’s land lease.
The Company has a land lease which consists of a long-term lease with the City of San Diego covering approximately 190 acres, including approximately 17 acres of water in Mission Bay Park, California (the “Premises”). Under the terms of the lease, the Premises must be used as a marine park facility and related uses. In addition, the Company may not operate another marine park facility within a radius of 560 miles from the City of San Diego. The annual rent under the lease is variable and calculated on the basis of a specified percentage of the Company’s gross income from the Premises, or the minimum yearly rent, whichever is greater. The current lease term for the Premises ends in June 2048 with a corresponding lease liability being amortized using an estimated incremental borrowing rate of 8.2%. The minimum yearly rent is adjusted every three years to an amount equal to 80% of the average accounting year rent actually paid for the three previous years. The current minimum yearly rent is approximately $10.4 million, which is subject to adjustment on January 1, 2020. Actual payments may vary from the annual straight-line minimum base rent based on shift of seasonal performance results. Rent payments related to the Premises for the three months ended March 31, 2019 were approximately $1.7 million. Upon adoption of ASC 842, the Company also reclassified a favorable lease asset net balance of $14.0 million related to the Premises from other intangible assets, net, to right of use assets-operating on the accompanying unaudited condensed consolidated balance sheet as of March 31, 2019.
The tables below present the lease balances and their classification on the accompanying unaudited condensed consolidated balance sheets as of March 31, 2019 and December 31, 2018:
|
|
|
|
March 31,
|
|
Leases
|
|
Classification
|
|
2019
|
|
Assets
|
|
|
|
(In thousands)
|
|
Operating leases
|
|
Right of use assets - operating
|
|
$
|
145,807
|
|
Financing leases
|
|
Other assets, net
|
|
|
3,990
|
|
Total lease assets
|
|
|
|
$
|
149,797
|
|
Liabilities
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Operating leases
|
|
Operating lease obligations
|
|
|
4,118
|
|
Financing leases
|
|
Other accrued liabilities
|
|
|
693
|
|
Noncurrent
|
|
|
|
|
|
|
Operating leases
|
|
Long-term operating lease obligations
|
|
|
128,119
|
|
Financing leases
|
|
Other liabilities
|
|
|
3,333
|
|
Total lease liabilities
|
|
|
|
$
|
136,263
|
|
13
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
December 31,
|
|
Leases
|
|
Classification
|
|
2018
|
|
Assets
|
|
|
|
(In thousands)
|
|
Favorable lease asset
|
|
Other intangible assets, net
|
|
$
|
13,961
|
|
Capital leases
|
|
Property and equipment, at cost
|
|
|
3,066
|
|
Capital leases, accumulated depreciation
|
|
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 on the accompanying unaudited condensed consolidated statements of comprehensive loss for the three months ended March 31, 2019:
Lease Cost
|
|
Classification
|
|
(In thousands)
|
|
Operating lease cost
|
|
Operating expenses
|
|
$
|
2,758
|
|
Operating lease cost
|
|
Selling, general and administrative expenses
|
|
|
137
|
|
Financing lease cost
|
|
|
|
|
|
|
Amortization of leased assets
|
|
Depreciation and amortization
|
|
|
184
|
|
Interest on lease liabilities
|
|
Interest expense
|
|
|
40
|
|
Net lease cost
|
|
|
|
$
|
3,119
|
|
In addition to the operating lease costs above, short term rent expense for the three months ended March 31, 2019 was approximately $0.8 million and is included in operating expenses and selling, general and administrative expenses on the accompanying unaudited condensed consolidated statements of comprehensive loss.
The table below presents the Company’s lease maturities as of March 31, 2019:
|
|
Operating leases
|
|
|
|
|
|
Years Ending December 31,
|
|
Land lease
|
|
|
Other operating leases
|
|
|
Total operating leases
|
|
|
Financing leases
|
|
|
|
(In thousands)
|
|
Remainder of 2019
|
|
$
|
7,801
|
|
|
$
|
3,109
|
|
|
$
|
10,910
|
|
|
$
|
622
|
|
2020
|
|
|
10,401
|
|
|
|
3,824
|
|
|
|
14,225
|
|
|
|
825
|
|
2021
|
|
|
10,401
|
|
|
|
3,478
|
|
|
|
13,879
|
|
|
|
332
|
|
2022
|
|
|
10,401
|
|
|
|
2,497
|
|
|
|
12,898
|
|
|
|
208
|
|
2023
|
|
|
10,401
|
|
|
|
1,954
|
|
|
|
12,355
|
|
|
|
204
|
|
2024
|
|
|
10,401
|
|
|
|
1,740
|
|
|
|
12,141
|
|
|
|
201
|
|
Thereafter
|
|
|
244,431
|
|
|
|
2,993
|
|
|
|
247,424
|
|
|
|
2,593
|
|
Total lease payments
|
|
|
304,237
|
|
|
|
19,595
|
|
|
|
323,832
|
|
|
|
4,985
|
|
Less: Imputed Interest
|
|
|
(188,224
|
)
|
|
|
(3,371
|
)
|
|
|
(191,595
|
)
|
|
|
(959
|
)
|
Present value of lease liabilities
|
|
$
|
116,013
|
|
|
$
|
16,224
|
|
|
$
|
132,237
|
|
|
$
|
4,026
|
|
Operating lease payments include approximately $8.2 million related to options to extend lease terms that are reasonably certain of being exercised.
14
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The table belo
w 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 March 31, 2019:
Lease term and discount rate
|
|
|
|
|
Weighted average remaining lease term (years)
|
|
|
|
|
Operating leases
|
|
|
26.41
|
|
Financing leases
|
|
|
14.19
|
|
Weighted average discount rate
|
|
|
|
|
Operating leases
|
|
|
8.10
|
%
|
Financing leases
|
|
|
4.19
|
%
|
The table below presents the cash flows and supplemental information associated with the Company’s leasing activities for the three months ended March 31, 2019:
Other Information
|
|
(In thousands)
|
|
Operating cash flows from operating leases
|
|
$
|
2,764
|
|
Operating cash flows from financing leases
|
|
$
|
40
|
|
Financing cash flows from financing leases
|
|
$
|
168
|
|
Right of use assets obtained in exchange for financing lease obligations
|
|
$
|
1,230
|
|
Right of use assets obtained in exchange for operating lease obligations
|
|
$
|
133,297
|
|
All long-lived assets, including right to 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 March 31, 2019 and December 31, 2018, the Company did not have any derivatives outstanding that were not designated in hedge accounting relationships.
15
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. During the three months ended March 31, 2019 and 2018, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.
As of March 31, 2019, the Company has five Interest Rate Swap Agreements that mature on May 14, 2020, which effectively fix the interest rate on LIBOR-indexed interest payments associated with $1.0 billion of SEA’s outstanding long-term debt.
The interest rate swap agreements are designated as cash flow hedges of interest rate risk. The changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next 12 months, the Company estimates that an additional $0.5 million will be reclassified as a reduction 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 March 31, 2019 and December 31, 2018:
|
|
Asset Derivatives
|
|
|
Asset Derivatives
|
|
|
|
As of March 31, 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 assets
|
|
$
|
301
|
|
|
Other assets
|
|
$
|
3,109
|
|
Total derivatives designated as hedging instruments
|
|
|
|
$
|
301
|
|
|
|
|
$
|
3,109
|
|
Tabular Disclosure of the Effect of Derivative Instruments on the Statements of Comprehensive Loss
The table below presents the pretax effect of the Company’s derivative financial instruments in the unaudited condensed consolidated statements of comprehensive loss for the three months ended March 31, 2019 and 2018:
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Derivatives in Cash Flow Hedging Relationships:
|
|
(In thousands)
|
|
(Loss) gain related to effective portion of derivatives recognized in accumulated other comprehensive loss
|
|
$
|
(1,953
|
)
|
|
$
|
12,116
|
|
Loss related to effective portion of derivatives reclassified from accumulated other comprehensive loss to interest expense
|
|
$
|
(855
|
)
|
|
$
|
(1,851
|
)
|
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.
16
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Changes in Accumulated Other Comprehensive Income (Loss)
The following table reflects the changes in accumulated other comprehensive income (loss) for the three months ended March 31, 2019, net of tax:
Accumulated other comprehensive income (loss)
(In thousands)
:
|
|
|
|
|
|
Income (Losses) on
Cash Flow Hedges
|
|
Accumulated other comprehensive income at December 31, 2018
|
|
|
|
|
|
$
|
2,284
|
|
Other comprehensive loss before reclassifications
|
|
|
(1,435
|
)
|
|
|
|
|
Amounts reclassified from accumulated other comprehensive income to interest expense
|
|
|
(629
|
)
|
|
|
|
|
Unrealized loss on derivatives, net of tax
|
|
|
|
|
|
|
(2,064
|
)
|
Accumulated other comprehensive income at March 31, 2019
|
|
|
|
|
|
$
|
220
|
|
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 March 31, 2019 and December 31, 2018. The fair value of the term loans as of March 31, 2019 and December 31, 2018 approximate their carrying value, excluding unamortized debt issuance costs and discounts, due in part to the variable nature of the underlying interest rates and the frequent intervals at which such interest rates are reset.
There were no transfers between Levels 1, 2 or 3 during the three months ended March 31, 2019. 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 March 31, 2019:
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
for Identical
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Assets and
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Balance at
|
|
|
Liabilities
|
|
|
Inputs
|
|
|
Inputs
|
|
|
March 31,
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
2019
|
|
Assets:
|
(In thousands)
|
|
Derivative financial instruments
(a)
|
$
|
—
|
|
|
$
|
301
|
|
|
$
|
—
|
|
|
$
|
301
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term obligations
(b)
|
$
|
—
|
|
|
$
|
1,584,513
|
|
|
$
|
—
|
|
|
$
|
1,584,513
|
|
17
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(a)
|
Reflected at fair value in the unaudited condensed consolidated balance sheet as other assets of $0.3 million as of March 31, 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 $80.5 million and long-term debt of $1.492 billion as of March 31, 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 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 Zhonghong Zhuoye Group Co., Ltd., who at the time owned approximately 21% of the outstanding shares of the Company.
See Note 1
–
Description of Business and Basis of Presentation for further details.
In April 2019, the Company terminated the ZHG Agreements for non-payment of undisputed amounts owed. For the three months ended March 31, 2019 and 2018, the Company recorded approximately $1.7 million and $1.3 million, respectively, in food, merchandise and other revenue in the accompanying unaudited condensed consolidated statements of comprehensive loss related to the ZHG Agreements.
In a Schedule 13D filed on May 8, 2017, Sun Wise (UK), Co., Ltd, a private limited company incorporated under the laws of England and Wales and an affiliate to the ZHG Group (“SunWise”), reported beneficial ownership of 19,452,063 shares (the “Pledged Shares”) of the Company’s common stock, as well as its pledge of such shares related to certain loan obligations of SunWise. Subsequent to March 31, 2019, Lord Central Opportunity V Limited, as security agent (the “Security Agent”) for 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”), advised the Company that the Lenders have notified SunWise of a default under its loan obligations, the Lenders have foreclosed on the Pledged Shares and, accordingly, the Pledged Shares have been transferred to the name of the Security Agent (the “Transfer”).
11. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
Securities Class Action Lawsuit
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
18
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 mis
leading 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 ti
me 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 M
ay 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 prospectu
ses 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. The trial is currently scheduled for September 10, 2019. The Company believes that the class action lawsuit is without merit and intends to defend the lawsuit vigorously; however, there can be no assurance regarding the ultimate outcome of this lawsuit.
On June 14, 2018, a lawsuit captioned Highfields Capital I LP et el v. SeaWorld Entertainment, Inc. et el, 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. 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.
19
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company filed a motion for summary judgment on October 30, 2017 which the Co
urt 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 indiv
idual restitution in a nominal amount and injunctive relief. Trial is currently scheduled for October 2019. A court-mandated mediation is scheduled for May 17, 2019. 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 these lawsuits.
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. On April 29, 2019, the Court entered an order approving the final settlement. The Company has accrued $11.5 million related to this settlement in other accrued liabilities as of March 31, 2019 and December 31, 2018 on the accompanying unaudited condensed consolidated balance sheet.
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 Fl
orida 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 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 March 31, 2019, the Company estimates the combined remaining obligations for these commitments could be up to approximately $60.0 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.
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.
20
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 adverti
sing 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 relat
ed 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.
Total equity compensation expense was $3.2 million and $7.5 million for the three months ended March 31, 2019 and 2018, respectively. Equity compensation expense for the three months ended March 31, 2018 includes approximately $4.5 million related to certain equity awards which were accelerated to vest in the first quarter of 2018 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. Equity compensation expense is included in selling, general and administrative expenses and in operating expenses in the accompanying unaudited condensed consolidated statements of comprehensive loss.
The activity related to the Company’s time-vesting and performance-vesting awards during the three months ended March 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
Performance-Vesting Restricted shares/units
|
|
|
|
Time-Vesting
Restricted shares/units
|
|
|
Bonus Performance
Restricted units
|
|
|
Long-Term
Incentive
Performance
Restricted shares/units
|
|
|
|
Shares/Units
|
|
|
Weighted
Average
Grant Date
Fair
Value per
Share/Unit
|
|
|
Units
|
|
|
Weighted
Average
Grant Date
Fair
Value per
Unit
|
|
|
Shares/Units
|
|
|
Weighted
Average
Grant Date
Fair
Value per
Share/Unit
|
|
Outstanding at December 31, 2018
|
|
|
901,704
|
|
|
$
|
17.34
|
|
|
|
560,710
|
|
|
$
|
15.06
|
|
|
|
1,155,486
|
|
|
$
|
15.82
|
|
Granted
|
|
|
47,772
|
|
|
$
|
25.70
|
|
|
|
224,928
|
|
|
$
|
25.70
|
|
|
|
1,233,742
|
|
|
$
|
25.70
|
|
Vested
|
|
|
(87,079
|
)
|
|
$
|
17.12
|
|
|
|
(319,868
|
)
|
|
$
|
15.06
|
|
|
|
(27,877
|
)
|
|
$
|
15.24
|
|
Forfeited
|
|
|
(121,518
|
)
|
|
$
|
16.33
|
|
|
|
(246,678
|
)
|
|
$
|
15.32
|
|
|
|
(285,428
|
)
|
|
$
|
18.11
|
|
Outstanding at March 31, 2019
|
|
|
740,879
|
|
|
$
|
18.07
|
|
|
|
219,092
|
|
|
$
|
25.70
|
|
|
|
2,075,923
|
|
|
$
|
21.39
|
|
The activity related to the Company’s stock option awards during the three months ended March 31, 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
|
|
|
430,390
|
|
|
$
|
25.70
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(55,379
|
)
|
|
$
|
19.36
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(8,593
|
)
|
|
$
|
18.52
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(39,928
|
)
|
|
$
|
17.90
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2019
|
|
|
1,091,067
|
|
|
$
|
21.00
|
|
|
|
7.85
|
|
|
$
|
5,188
|
|
Exercisable at March 31, 2019
|
|
|
556,676
|
|
|
$
|
18.28
|
|
|
|
6.47
|
|
|
$
|
4,163
|
|
21
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The weighted average grant date fair value of stock options granted during the three months ended March 31, 2019 was $8.45. Key weighted-average assumptions utilized in the Black-Scholes Option Pricing Model for
stock options granted during the three months ended March 31, 2019 were:
Risk-free interest rate
|
|
|
2.48
|
%
|
Expected volatility
(a)
|
|
|
28.50
|
%
|
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 its Omnibus Incentive Plan (the “Omnibus Incentive Plan”), of which approximately 8,520,000 shares are available for future issuance as of March 31, 2019.
Bonus Performance Restricted Awards
During the three months end March 31, 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 ended 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 three months ended March 31, 2019 and the remaining forfeited in accordance with their terms.
Long-Term Incentive Awards
During the three months ended March 31, 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 three months ended March 31, 2019. The Company does not expect additional Long-Term Incentive Awards to be granted to these employees until the earlier of 2022 or in the year when the Company’s three-year performance goal is achieved, if sooner than fiscal year 2021.
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 are expected to vest following the end of the three-year performance period beginning on January 1, 2019 and ending on December 31, 2021 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.
22
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Long-Term Incentive Time Restricted Units
During the three months ended March 31, 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 three months ended March 31, 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 ratably over the related performance period, 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 March 31, 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 at such subsequent date.
13. STOCKHOLDERS’ EQUITY
As of March 31, 2019, 93,748,617 shares of common stock were issued in the accompanying unaudited condensed consolidated balance sheet, which excludes 627,989 unvested shares of common stock and 2,407,905 unvested restricted stock units held by certain participants in the Company’s equity compensation plans (see Note 12–Equity-Based Compensation) and includes 10,174,589 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, which is the remaining authorization as of March 31, 2019. There were no share repurchases under the Share Repurchase Program during the three months ended March 31, 2019 or 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 months ended March 31, 2019, the Company recorded approximately $2.6 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 loss.
23
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 bus
iness 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 year ended December 31, 2018
, the Company recorded approximately $5.5 million in pre-tax restructuring charges primarily related to severance and other termination benefits, which is included in restructuring and other separation costs in the accompanying unaudited condensed consolid
ated statements of comprehensive loss. The Company will not incur any additional costs associated with the 2018 Restructuring Program as all continuing service obligations were completed as of December 31, 2018.
Related activity for the three months ended March 31, 2019 was as follows:
|
|
2019 Restructuring and other Separation Costs
|
|
|
2018 Restructuring Program
|
|
|
|
(In thousands)
|
|
Liability as of December 31, 2018
|
|
$
|
—
|
|
|
$
|
537
|
|
Costs incurred
|
|
|
2,566
|
|
|
|
—
|
|
Payments made
|
|
|
—
|
|
|
|
(159
|
)
|
Liability as of March 31, 2019
|
|
$
|
2,566
|
|
|
$
|
378
|
|
The remaining liability as of March 31, 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 three months ended March 31, 2018, r
estructuring 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 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 the first quarter of 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 loss for the three months ended March 31, 2018.
Additionally, during the three months ended March 31, 2018, certain unvested 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 non-cash equity compensation expense of approximately $4.5 million during the three months ended March 31, 2018, which is included in selling, general and administrative expenses
in the accompanying unaudited condensed consolidated statements of comprehensive loss. See
Note 12–Equity-Based Compensation for further details.
24