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
(In thousands, except share and per share amounts)
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. Prior to its initial public offering in April 2013, the Company was owned by ten limited partnerships (the “Partnerships” or the “Seller”), ultimately owned by affiliates of The Blackstone Group L.P. (“Blackstone”) and certain co-investors.
On
May 8, 2017
an
affiliate of Zhonghong Zhuoye Group Co., Ltd. (“ZHG Group”), Sun Wise (UK) Co., LTD (“ZHG” or “Buyer”) acquired approximately 21% of the outstanding shares of common stock of the Company (the “Sale”) from Seller, pursuant to a Stock Purchase Agreement between ZHG and Seller (the “Stock Purchase Agreement”).
See further discussion in Note 9–Related-Party Transactions and Note 12–Stockholders’ Equity.
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 offering interaction with marine animals 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, 2016 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, 2016 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, 2017 or any future period due to the seasonal nature of the Company’s operations. Based upon historical results, the Company typically generates its highest revenues in the second and third quarters of each year and incurs a net loss in the first and fourth quarters, in part because seven of its theme parks are only open for a portion of the year.
The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, including SEA. All intercompany accounts have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates and assumptions include, but are not limited to, the accounting for self-insurance, deferred tax assets, deferred revenue, equity compensation and the valuation of goodwill and other indefinite-lived intangible assets. Actual results could differ from those estimates.
Segment Reporting
The Company maintains discrete financial information for each of its twelve theme parks, which is used by the Chief Operating Decision Maker (“CODM”), identified as the Chief Executive Officer, as a basis for allocating resources. Each theme park has been identified as an operating segment and meets the criteria for aggregation due to similar economic characteristics. In addition, all of the theme parks provide similar products and services and share similar processes for delivering services. The theme parks have a high degree of similarity in the workforces and target similar consumer groups. Accordingly, based on these economic and operational similarities and the way the CODM monitors and makes decisions affecting the operations, the Company has concluded that its operating segments may be aggregated and that it has one reportable segment.
7
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Property and Equipment—Net
During the three months ended September 30, 2017, following a contractual dispute, the Company amended an existing agreement relating to the use of certain animals. As a result of this amendment, which reduced the expected future cash flows related to the agreement, the Company recognized an impairment loss of approximately $7,800 which is included in operating expenses in the accompanying unaudited condensed consolidated statement of comprehensive income (loss) for the three and nine months ended September 30, 2017. See further discussion in the “
Impairment of Long-Lived Assets”
section which follows.
During the first quarter of 2016, the Company made a decision to remove deep-water lifting floors from the orca habitats at each of its three SeaWorld theme parks. As a result, during the nine months ended September 30, 2016, the Company recorded approximately $33,700 of accelerated depreciation related to the disposal of these lifting floors, which is included in depreciation and amortization expense in the unaudited condensed consolidated statements of comprehensive income (loss). During the nine months ended September 30, 2016, the Company also recorded approximately $6,400 in asset write-offs, which is included in operating expenses in the accompanying unaudited condensed consolidated statement of comprehensive income (loss), associated with its previously disclosed orca habitat expansion (the “Blue World Project”) as the Company made a decision to not move forward with the Blue World Project as originally designed and planned.
Revenue Recognition
The Company recognizes revenue upon admission into a park for single day tickets and when products are received by customers for merchandise, culinary or other in-park spending. For season passes and other multi-use admission products, deferred revenue is recorded and the related revenue is recognized over the terms of the admission product and its estimated usage. Deferred revenue includes a current and long-term portion and is included in deferred revenue and other liabilities, respectively, in the accompanying unaudited condensed consolidated balance sheets. As of September 30, 2017 and December 31, 2016, other liabilities also includes $10,000 in deferred revenue related to nonrefundable funds 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 $2,900 of costs incurred related to the Middle East Project are recorded in other assets in the accompanying unaudited condensed consolidated balance sheet as of September 30, 2017. 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.
On March 24, 2017, the Company entered into a Park Exclusivity and Concept Design Agreement (the “ECDA”) and a Center Concept & Preliminary Design Support Agreement (the “CDSA”) (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 granting exclusive rights in China, Taiwan, Hong Kong and Macau (the “Territory”).
Under the terms of the ECDA, the Company will work with Zhonghong Holding and a top theme park design company, to create and produce concept designs and development analysis for theme parks, water parks and interactive parks in the Territory. Under the terms of the CDSA, the Company will provide guidance, support, input, and expertise relating to the initial strategic planning, concept and preliminary design of Zhonghong Holding’s family entertainment and other similar centers. The Company recognizes revenue under the ZHG Agreements on a straight line basis over the contractual term of the agreement including approximately $2,600 in the nine months ended September 30, 2017.
See further discussion in Note 9–Related-Party Transactions.
The Company has also entered into agreements with certain external theme park, zoo and other attraction operators to jointly market and sell single and multi-use admission products. These joint products allow admission to both a Company park and an external park, zoo or other attraction. The agreements with the external partners specify the allocation of revenue to the Company from any jointly sold products. Whether the Company or the external partner sells the product, the Company’s portion of revenue is deferred until the first time the product is redeemed at one of its parks and recognized over its related use in a manner consistent with the Company’s own admission products. The Company barters theme park admission products and sponsorship opportunities for advertising, employee recognition awards, and various other services. The fair value of the products or services is recognized into admissions revenue and related expenses at the time of the exchange and approximates the estimated fair value of the goods or services received or provided, whichever is more readily determinable.
Goodwill and Other Indefinite-Lived Intangible Assets
Goodwill and other indefinite-lived intangible assets are not amortized, but instead reviewed for impairment at least annually on December 1, and as of an interim date should factors or indicators become apparent that would require an interim test, with ongoing recoverability based on applicable reporting unit overall financial performance and consideration of significant events or changes in the overall business environment or macroeconomic conditions. Such events or changes in the overall business environment could include, but are not limited to, significant negative trends or unanticipated changes in the competitive or macroeconomic environment.
8
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
As of January 1,
2017, the Company elected to adopt Accounting Standards Update (“ASU”) 2017-04,
Intangible–Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,
for any interim or annual goodwill impairment tests. See further discussion in Note 2
–Recent Accounting Pronouncements.
In assessing goodwill for impairment, the Company may choose to initially evaluate qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company considers several factors, including macroeconomic conditions, industry and market conditions, overall financial performance of the reporting unit, changes in management, strategy or customers, and relevant reporting unit specific events such as a change in the carrying amount of net assets, a more-likely-than-not expectation of selling or disposing all, or a portion, of a reporting unit, and the testing of recoverability of a significant asset group within a reporting unit. If the qualitative assessment is not conclusive, then a quantitative impairment analysis for goodwill is performed at the reporting unit level. The Company may also choose to perform this quantitative impairment analysis instead of the qualitative analysis. The quantitative impairment analysis compares the fair value of the reporting unit, determined using the income and/or market approach, to its recorded amount. If the recorded amount exceeds the fair value, then a goodwill impairment charge is recorded for the difference up to the recorded amount of goodwill.
The determination of fair value in the Company’s goodwill impairment analysis is based on an estimate of fair value for each reporting unit utilizing known and estimated inputs at the evaluation date. Some of those inputs include, but are not limited to, estimates of future revenue and expense growth, estimated market multiples, expected capital expenditures, income tax rates, and costs of invested capital.
Due to financial performance particularly late in the second quarter of 2017 at the Company’s SeaWorld Orlando park, driven primarily by a decline in U.S. domestic and international attendance at the park, the Company determined a triggering event occurred that required an interim goodwill impairment test for its SeaWorld Orlando reporting unit as of June 30, 2017. Based on financial performance and the resulting impact on projections of future cash flows for this reporting unit, the Company concluded that the reporting unit’s goodwill was fully impaired and recorded a non-cash goodwill impairment charge of $269,332 in its unaudited condensed consolidated statement of comprehensive income (loss) during the nine months ended September 30, 2017. Fair value for the SeaWorld Orlando reporting unit was determined using the income approach and represents a Level 3 fair value measurement measured on a non-recurring basis in the fair value hierarchy due to the Company’s use of internal projections and unobservable measurement inputs.
The changes in the carrying amount of goodwill for the nine months ended September 30, 2017 are as follows:
|
|
SeaWorld Orlando
|
|
|
Discovery Cove
|
|
|
Total
|
|
Gross carrying amount at December 31, 2016
|
|
$
|
269,332
|
|
|
$
|
66,278
|
|
|
$
|
335,610
|
|
Accumulated impairment loss at December 31, 2016
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net carrying amount at December 31, 2016
|
|
|
269,332
|
|
|
|
66,278
|
|
|
|
335,610
|
|
Goodwill impairment charge
|
|
|
(269,332
|
)
|
|
|
—
|
|
|
|
(269,332
|
)
|
Net carrying amount at September 30, 2017
|
|
$
|
—
|
|
|
$
|
66,278
|
|
|
$
|
66,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The remaining goodwill balance of $66,278 as of September 30, 2017 on the accompanying unaudited condensed consolidated balance sheets relates to the Company’s Discovery Cove reporting unit. The Company determined that an interim impairment test of its Discovery Cove reporting unit was not necessary during 2017 as a triggering event had not occurred for this reporting unit and the estimated fair value as of December 1, 2016, the most recent annual impairment test for this reporting unit, substantially exceeded its carrying value.
The Company’s other indefinite-lived intangible assets consist of certain trade names/trademarks and other intangible assets which, after considering legal, regulatory, contractual, and other competitive and economic factors, are determined to have indefinite lives and are valued annually using the relief from royalty method. Significant estimates required in this valuation method include estimated future revenues impacted by the trade names/trademarks, royalty rate by park, and appropriate discount rates. Projections are based on management’s best estimates given recent financial performance, market trends, strategic plans, brand awareness, operating characteristics by park, and other available information. As of June 30, 2017, based on financial performance, an interim impairment assessment of certain trade names/trademarks with a combined balance of $93,000 related to the SeaWorld brand was performed and the Company calculated that the estimated fair value of the trade names/trademarks exceeded their carrying values by 12% to 19%. Based on these assessments, the Company determined there was no impairment as the estimated fair values of these trade names/trademarks were in excess of their carrying values.
9
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Given the curren
t macroeconomic environment and the uncertainties regarding the related impact on financial performance, there can be no assurance that the estimates and assumptions made for purposes of the interim impairment testing will prove to be accurate predictions
of the future. If the Company’s assumptions particularly concerning its SeaWorld brand reporting units, including its projections of future cash flows and financial performance, assumed royalty rates, as well as the economic outlook are not achieved, the C
ompany may be required to record impairment charges on its indefinite-lived intangible assets in future periods, whether in connection with the Company’s next annual impairment testing in the fourth quarter of 2017, or on an interim basis, if any such chan
ge constitutes a triggering event outside of the quarter when the Company regularly performs its annual indefinite-lived intangible assets impairment test. It is not possible at this time to determine if any such additional future impairment charge would r
esult or, if it does,
whether such charge would be material.
Impairment of Long-Lived Assets
All long-lived assets 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. An impairment loss may be recognized when estimated undiscounted future cash flows expected to result from the use of the asset, including disposition, are less than the carrying value of the asset. The measurement of the impairment loss to be recognized is based upon the difference between the fair value and the carrying amounts of the assets. Fair value is generally determined based upon a discounted cash flow analysis. In order to determine if an asset has been impaired, assets are grouped and tested at the lowest level for which identifiable independent cash flows are available (generally a theme park).
During the three months ended June 30, 2017, the Company considered the goodwill impairment of its SeaWorld Orlando reporting unit as an indicator of impairment related to the long-lived assets associated with this park. Accordingly, these assets were evaluated for impairment prior to completing the goodwill impairment analysis and the Company concluded that no impairment of other long-lived assets had occurred for its SeaWorld Orlando park as of June 30, 2017.
As discussed in the “
Property and Equipment
–
Net”
section above, during the three months ended September 30, 2017, following a contractual dispute, the Company amended an existing agreement relating to the use of certain animals. As a result of this amendment, which reduced the expected future cash flows related to the agreement, the Company recognized an impairment loss of approximately $7,800 which is included in operating expenses in the accompanying unaudited condensed consolidated statement of comprehensive income (loss) for the three and nine months ended September 30, 2017.
2. RECENT ACCOUNTING PRONOUNCEMENTS
The Company reviews new accounting pronouncements as they are issued or proposed by the Financial Accounting Standards Board (“FASB”).
Recently Implemented Accounting Standards
In January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-04,
Intangible–Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. This ASU removes step two from the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment charge would now be determined based on the comparison of the fair value of a reporting unit to its carrying value, not to exceed the carrying amount of goodwill. This guidance is effective starting with a company’s interim or annual goodwill impairment tests in fiscal years beginning after December 15, 2019 and must be applied on a prospective basis. Early adoption is permitted for interim or annual impairment tests performed after January 1, 2017. The Company elected to adopt ASU 2017-04 as of January 1, 2017 and followed this guidance during its interim impairment test performed during the second quarter of 2017. See Note 1–Description of the Business and Basis of Presentation for further discussion.
In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting.
This ASU simplifies several aspects of the accounting for share-based payment transactions (Topic 718) including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as the classification of related amounts within the statement of cash flows and the classification of awards as either equity or liabilities. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. The Company adopted this ASU effective January 1, 2017. ASU 2016-09 requires a policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur. The Company elected to change its policy to recognize the impact of forfeitures as they occur and determined the cumulative impact of this change was not material as of January 1, 2017. ASU 2016-09 also requires cash paid by an employer when directly withholding shares for tax withholding purposes to be classified as a financing activity and excess tax benefits to be classified as an operating activity in the accompanying unaudited condensed consolidated statement of cash flows, which does not differ from the Company’s historical treatment of these items. Additionally, ASU 2016-09 requires the tax effects of exercised or vested awards to be treated as discrete items in the reporting period in which they occur, which was applied prospectively, beginning January 1, 2017 by the Company.
10
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Recently Issued Accounting Standards
In August 2017, the FASB issued ASU 2017-12,
Derivatives and Hedging (Topic 815)–Targeted Improvements to Accounting for Hedging Activities
. ASU 2017-12 aims to improve reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and simplify the application of the hedge accounting guidance. This ASU is effective for fiscal years beginning after December 15, 2018 and interim periods within those annual reporting periods with early adoption permitted. For cash flow and net investment hedges existing as of the adoption date, the guidance requires a cumulative-effect adjustment as of the beginning of the fiscal year that an entity adopts the amendments; however, the presentation and disclosure guidance should be applied prospectively. The Company is currently assessing the impact of this ASU to its unaudited condensed consolidated financial statements and does not expect a material impact. However, the new ASU may impact the Company’s presentation and disclosures.
In May 2017, the FASB issued ASU 2017-09,
Compensation–Stock Compensation (Topic 718): Scope of Modification Accounting.
This ASU was issued to provide clarity and reduce diversity in practice regarding the application of guidance on the modification of equity awards. The ASU states that an entity should account for the effects of a modification unless all of the following are met: the fair value, vesting conditions and the classification of the instrument as equity or liability of the modified award is the same as that of the original award immediately before such award is modified. The guidance is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual reporting periods with early adoption permitted and should be applied prospectively to an award modified on or after the adoption date. The Company plans to adopt this ASU prospectively but does not expect a material impact upon adoption to its unaudited condensed consolidated financial statements as the Company historically has accounted for all modifications in accordance with Topic 718 and has not been subject to the exception described under this ASU.
In November 2016, the FASB issued ASU 2016-18,
Restricted Cash–a Consensus of the FASB Emerging Issues Task Force
. This ASU aims to reduce the diversity in practice of the presentation of changes or transfers in restricted cash flows on the statement of cash flows. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling beginning and ending total amounts on the statement of cash flows for the period. The guidance is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual reporting periods with early adoption permitted and should be applied using a retrospective transition method. The Company plans to adopt this ASU using a retrospective transition method but does not expect a material impact upon adoption to its unaudited condensed consolidated statements of cash flows or unaudited condensed consolidated balance sheets.
In October 2016, the FASB issued ASU 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
. ASU 2016-16 simplifies the income tax accounting of intra-entity transfers of an asset other than inventory by requiring an entity to recognize the income tax effect when the transfer occurs. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods and early adoption is permitted. The Company does not expect a material impact upon adoption of this ASU on its unaudited condensed consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
Classification of Certain Cash Receipts and Cash Payments.
This ASU provides guidance on the presentation and classification of eight specific cash flow issues that previously resulted in diversity in practice. The ASU will be effective for annual periods beginning after December 15, 2017 and interim periods therein, with early adoption permitted and should be applied using a retrospective transition method. The Company has not yet adopted this ASU but does not expect a material impact to its unaudited condensed consolidated statements of cash flows.
In February 2016, the FASB issued ASU 2016-02,
Leases
. This ASU establishes a new lease accounting model that, for many companies, eliminates the concept of operating leases and requires entities to record lease assets and lease liabilities on the balance sheet for certain types of leases. Under this ASU, an entity is required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. Lessees and lessors are 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 ASU will be effective for annual periods beginning after December 15, 2018, and interim periods therein. Early adoption will be permitted for all entities. The provisions of the ASU are to be applied using a modified retrospective approach. The Company has not yet adopted this ASU and is currently evaluating the impact of this ASU on its unaudited condensed consolidated financial statements. Upon adoption of this ASU, the Company expects its San Diego land lease, among other operating leases, to be recorded as a right-of-use asset with a corresponding lease liability.
11
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
, which supersedes the revenue recognition requirements in Topic 605,
Revenue Recognition
. This A
SU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also r
equires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfil
l a contract. In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,
which defers the effective date to annual reporting periods beginning after December 15, 2017 using one of two tra
nsition methods, either retrospective or a modified retrospective transition method which calculates a cumulative-effect adjustment as of the date of adoption, with earlier adoption permitted for annual periods beginning after December 15, 2016. During 201
6, the FASB issued four updates to the revenue recognition guidance (Topic 606), ASU 2016-08,
Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net),
ASU 2016-10,
Identifying Performance Obligations and Licensing
, ASU 2016-12,
Narrow-Scope Improvements and Practical Expedients
and ASU 2016-20,
Technical Corrections and Improvements.
The Company plans to adopt this guidance in the first quarter of 2018 using a modified retrospective transition method; however, it does not expect
a cumulative effect adjustment, if any, to be material.
The Company has been closely monitoring developments related to this new standard and continues to evaluate its impact on accounting and disclosure requirements as well as on its licensing and intern
ational agreements.
The Company has completed an assessment of its key revenue streams as they relate to the new standard. In particular, the Company analyzed the potential impact of the new standard on its accounting for annual and season pass products, multi-day pass products and other promotional ticket offerings which at times are sold with entitlements or other bundled products. Based on its analysis to date, the Company does not expect significant changes to its current accounting policies and practices to apply the requirements under the new standard. The Company does not anticipate a material impact on the timing of revenue recognition upon adoption nor on the classification of revenue. The Company does expect an impact on revenue recognition disclosures which will include additional detail on the methods used to recognize revenue and how the methods are applied as well as significant assumptions used to allocate the transaction price and estimate the standalone selling price of promised goods or services.
3. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is computed as follows (in thousands, except per share data):
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
Net
Income
|
|
|
Shares
|
|
|
Per
Share
Amount
|
|
|
Net
Income
|
|
|
Shares
|
|
|
Per
Share
Amount
|
|
|
Net
Loss
|
|
|
Shares
|
|
|
Per
Share
Amount
|
|
|
Net
Loss
|
|
|
Shares
|
|
|
Per
Share
Amount
|
|
Basic earnings (loss) per share
|
|
$
|
55,034
|
|
|
|
86,012
|
|
|
$
|
0.64
|
|
|
$
|
65,655
|
|
|
|
85,290
|
|
|
$
|
0.77
|
|
|
$
|
(181,945
|
)
|
|
|
85,712
|
|
|
$
|
(2.12
|
)
|
|
$
|
(626
|
)
|
|
|
84,787
|
|
|
$
|
(0.01
|
)
|
Effect of dilutive incentive-based awards
|
|
|
|
|
|
|
272
|
|
|
|
|
|
|
|
|
|
|
|
157
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
55,034
|
|
|
|
86,284
|
|
|
$
|
0.64
|
|
|
$
|
65,655
|
|
|
|
85,447
|
|
|
$
|
0.77
|
|
|
$
|
(181,945
|
)
|
|
|
85,712
|
|
|
$
|
(2.12
|
)
|
|
$
|
(626
|
)
|
|
|
84,787
|
|
|
$
|
(0.01
|
)
|
In accordance with the
Earnings Per Share
Topic of the Accounting Standards Codification (“ASC”), basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period (excluding treasury stock and unvested restricted stock). The shares of unvested restricted stock are eligible to receive dividends; 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 earnings (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. The Company’s outstanding performance-vesting restricted share awards 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. During the three months ended September 30, 2017 and 2016, there were approximately 4,180,000 and 4,374,000 anti-dilutive shares of common stock, respectively, excluded from the computation of diluted earnings per share. During the nine months ended September 30, 2017 and 2016, the Company excluded potentially dilutive shares of approximately 5,137,000 and 4,811,000, respectively, as their effect would have been anti-dilutive due to the Company’s net loss during those periods.
12
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
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, 2017
was 38.0% and 29.0%, respectively. The income tax rate for the three months ended September 30, 2017 differs from the statutory federal income tax rate primarily due to state income taxes. The income tax rate for the nine months ended September 30, 2017 differs from the statutory federal income tax rate primarily due to nondeductible goodwill impairment and equity-based compensation recorded in the second quarter of 2017. The Company’s consolidated effective tax rate for the three and nine months ended September 30, 2016 was 52.2% and 102.3%, respectively. The income tax rate for the three months ended September 30, 2016 differs from th
e statutory federal income tax rate primarily due to the impacts of permanent items on the limited pretax income projected for the year. The income tax rate for the nine months ended September 30, 2016 differs from the statutory federal income rate primarily due to equity-based compensation that was recorded in the first quarter of 2016 due to certain performance-vesting restricted shares which vested on April 1, 2016 (see further discussion in Note 11–Equity- Based Compensation), and state income taxes.
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.
During the three months ended June 30, 2017, an ownership shift of more than 50 percent as defined by the Internal Revenue Code (“IRC”) Section 382 occurred. The Company determined that, while an ownership shift occurred and limits were determined under Section 382 and the regulations and guidance thereunder, the applicable limits would not impair the value or anticipated use of the Company’s federal and state net operating losses. Although realization is not assured, management believes it is more likely than not that any limitation under IRC Section 382 will not impair the realizability of the deferred income tax assets related to federal and state tax net operating loss carryforwards.
On October 18, 2017, the Pennsylvania Supreme Court held in Nextel Communications of Mid-Atlantic, Inc. v. Commonwealth that the net loss carryover deduction allowed for purposes of the Pennsylvania corporate net income tax violates the Uniformity Clause of the Pennsylvania Constitution. As a result the current law in Pennsylvania that places a fixed dollar limitation on the net loss carryover deduction was struck down, while retaining a percentage limitation on the net loss carryover deduction.
The Company has assessed the impact of this case on available positive and negative evidence to determine whether sufficient future taxable income in Pennsylvania will be generated to permit use of the existing deferred tax assets related to Pennsylvania net loss carryover. Based on this evaluation, the Company has determined that in the fourth quarter of 2017 a valuation allowance of approximately $3,400 will be recorded to recognize only the portion of the deferred tax asset related to the Pennsylvania net loss carryover that is more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if negative evidence is no longer present due to changes in the tax law in Pennsylvania.
5. OTHER ACCRUED EXPENSES
Other accrued expenses at September 30, 2017 and December 31, 2016, consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Accrued property taxes
|
|
$
|
11,229
|
|
|
$
|
2,193
|
|
Accrued interest
|
|
|
558
|
|
|
|
13,631
|
|
Self-insurance reserve
|
|
|
7,184
|
|
|
|
7,191
|
|
Other
|
|
|
4,519
|
|
|
|
395
|
|
Total other accrued expenses
|
|
$
|
23,490
|
|
|
$
|
23,410
|
|
As of December 31, 2016, accrued interest above includes $12,904 relating to the Company’s fourth quarter 2016 interest payable on its Term B-2 Loans, Term B-3 Loans and Terminated Revolving Credit Facility, which was paid on January 3, 2017. See further discussion in Note 6–Long-Term Debt.
13
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
6. LONG-TERM DEBT
Long-term debt as of September 30, 2017 and December 31, 2016 consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Term B-5 Loans (effective interest rate of 4.33% at September 30, 2017)
|
|
$
|
993,314
|
|
|
$
|
—
|
|
Term B-2 Loans (effective interest rate of 3.58% and 3.26% at September 30, 2017 and
December 31, 2016, respectively)
|
|
|
557,658
|
|
|
|
1,327,850
|
|
Term B-3 Loans (effective interest rate of 4.33% at December 31, 2016)
|
|
|
—
|
|
|
|
245,800
|
|
Revolving credit facility
|
|
|
—
|
|
|
|
24,351
|
|
Total long-term debt
|
|
|
1,550,972
|
|
|
|
1,598,001
|
|
Less discounts
|
|
|
(9,165
|
)
|
|
|
(5,517
|
)
|
Less debt issuance costs
|
|
|
(9,766
|
)
|
|
|
(9,702
|
)
|
Less current maturities
|
|
|
(23,707
|
)
|
|
|
(51,713
|
)
|
Total long-term debt, net
|
|
$
|
1,508,334
|
|
|
$
|
1,531,069
|
|
SEA is the borrower under the senior secured credit facilities, as amended pursuant to a credit agreement (the “Existing Credit Agreement”) dated as of December 1, 2009, as the same may be amended, restated, supplemented or modified from time to time (the “Senior Secured Credit Facilities”). On March 31, 2017, SEA entered into a refinancing amendment, Amendment No. 8 (the “Amendment”), to its Existing Credit Agreement. In connection with the Amendment, SEA borrowed $998,306 of additional term loans (the “Term B-5 Loans”) of which the proceeds, along with cash on hand, were used to redeem all of the then outstanding principal of the Term B-3 loans (the “Term B-3 Loans”), with a principal amount equal to $244,713 and a portion of the outstanding principal of the Term B-2 loans (the “Term B-2 Loans”), with a principal amount equal to $753,593, and pay other fees, costs and expenses in connection with the Amendment and related transactions. Additionally, pursuant to the Amendment, SEA terminated the existing revolving credit commitments (the “Terminated Revolving Credit Facility”) and replaced them with a new tranche with an aggregate commitment amount of $210,000 (the “New Revolving Credit Facility”).
In connection with the issuance of the Term B-5 Loans, SEA recorded a discount of $4,992 and debt issuance costs of $44 during the nine months ended September 30, 2017. Additionally, SEA wrote-off debt issuance costs of $7,987, which is included in loss on early extinguishment of debt and write-off of discounts and debt issuances costs in the accompanying unaudited condensed consolidated statements of comprehensive income (loss) during the nine months ended September 30, 2017. Such loss on early extinguishment of debt and write-off of discounts and debt issuance costs also includes $33 related to a write-off of discounts and debt issuance costs resulting from a mandatory prepayment of debt on March 30, 2017 and $123 related to a write-off of discounts and debt issuance costs resulting from a voluntary prepayment of debt during the nine months ended September 30, 2017. See discussion in the
Senior Secured Credit Facilities
section which follows for further information.
Debt issuance costs and discounts are amortized to interest expense using the effective interest method over the term of the related debt and are included in long-term debt, net, in the accompanying unaudited condensed consolidated balance sheets.
Senior Secured Credit Facilities
As of September 30, 2017, the Senior Secured Credit Facilities consisted of $557,658 in Term B-2 Loans which will mature on May 14, 2020, $993,314 in Term B-5 Loans which will mature on March 31, 2024 and a $210,000 New Revolving Credit Facility, which was not drawn upon as of September 30, 2017. The New Revolving Credit Facility will mature on the earlier of (a) March 31, 2022 and (b) the 91st day prior to the earlier of (1) the maturity of the Term B-2 Loans with an aggregate principal amount greater than $50,000 and (2) the maturity date of any indebtedness incurred to refinance the Term B-2 loans with an aggregate principal amount greater than $50,000. The outstanding balance under the Terminated Revolving Credit Facility was included in current maturities of long-term debt in the accompanying unaudited condensed consolidated balance sheet as of December 31, 2016 due to the Company’s intent to repay the borrowings within the following twelve month period.
The Term B-2 Loans amortize in equal quarterly installments in an aggregate annual amount equal to 1.0% of the original principal amount of the Term B-2 Loans on May 14, 2013, with the balance due on the final maturity date of May 14, 2020. Beginning with the fiscal quarter ended June 30, 2017, the Term B-5 Loans amortize in equal quarterly installments in an aggregate annual amount equal to 1.0% of the original principal amount of the Term B-5 Loans on March 31, 2017, with the balance due on the final maturity date of March 31, 2024. SEA may voluntarily repay amounts outstanding under the Senior Secured Credit Facilities at any time without premium or penalty, other than a prepayment premium on voluntary prepayments of the Term B-5 Loans in connection with certain repricing transactions on or prior to September 30, 2017 and customary “breakage” costs with respect to LIBOR loans.
14
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
SEA is required to prepay the outstanding Term B-2 Loans and Term B-5 Loans, subject to certain exceptions, with
|
(i)
|
50% of SEA’s annual “excess cash flow” (with step-downs to 25% and 0%, as applicable, based upon achievement by SEA of a certain secured net leverage ratio), subject to certain exceptions;
|
|
(ii)
|
100% of the net cash proceeds of certain non-ordinary course asset sales or other dispositions subject to reinvestment rights and certain exceptions; and
|
|
(iii)
|
100% of the net cash proceeds of any incurrence of debt by SEA or any of its restricted subsidiaries, other than debt permitted to be incurred or issued under the Senior Secured Credit Facilities.
|
Notwithstanding any of the foregoing, each lender of term loans has the right to reject its pro rata share of mandatory prepayments described above, in which case SEA may retain the amounts so rejected. The foregoing mandatory prepayments will be applied pro rata to installments of term loans in direct order of maturity. During the first quarter of 2017, the Company made a mandatory prepayment of approximately $6,300 based on its excess cash flow calculation as of December 31, 2016. Approximately $3,500 of the mandatory prepayment was accepted by the lenders and applied ratably to the Term B-2 and Term B-3 Loans prior to the Amendment on March 31, 2017, and the remainder of $2,800 was applied as a voluntary prepayment to the Term B-2 Loans in the three months ended June 30, 2017.
SEA may also increase and/or add one or more incremental term loan facilities to the Senior Secured Credit Facilities and/or increase commitments under the New Revolving Credit Facility in an aggregate principal amount of up to $350,000. SEA may also incur additional incremental term loans provided that, among other things, on a pro forma basis after giving effect to the incurrence of such incremental term loans, the First Lien Secured Leverage Ratio, as defined in the Senior Secured Credit Facilities, is no greater than 3.50 to 1.00.
The obligations under the Senior Secured Credit Facilities are fully, unconditionally and irrevocably guaranteed by the Company, any subsidiary of the Company that directly or indirectly owns 100% of the issued and outstanding equity interests of SEA, and, subject to certain exceptions, each of SEA’s existing and future material domestic wholly-owned subsidiaries. The Senior Secured Credit Facilities are collateralized by first priority or equivalent security interests, subject to certain exceptions, in (i) all the capital stock of, or other equity interests in, SEA and substantially all of SEA’s direct or indirect material wholly-owned domestic subsidiaries and 65% of the capital stock of, or other equity interests in, any “first tier” foreign subsidiaries and (ii) certain tangible and intangible assets of SEA and the Company.
Term B-5 Loans
The Term B-5 Loans were initially borrowed in an aggregate principal amount of $998,306 on March 31, 2017 in connection with the Amendment. Borrowings of Term B-5 Loans under the Senior Secured Credit Facilities bear interest, at SEA’s option, at a rate equal to an applicable margin over either (a) a base rate determined by reference to the higher of (1) the rate of interest in effect for such day as publicly announced from time to time by Bank of America, N.A. as its “prime rate” and (2) the federal funds rate plus 1/2 of 1% or (b) a LIBOR rate determined by reference to the British Bankers Association (“BBA”) LIBOR Rate, or the successor thereto if the BBA is no longer making a LIBOR rate available for the interest period relevant to such borrowing. The Term B-5 Loans applicable margin must be adjusted for any Incremental Term Loan (as defined in the Senior Secured Credit Facilities) margin that is more than 50 basis points per annum greater so that the Term B-5 Loans margin is not less than the Incremental Term Loan margin by more than 50 basis points. The applicable margin for the Term B-5 Loans is 2.00%, in the case of base rate loans, and 3.00%, in the case of LIBOR rate loans, subject to a base rate floor of 1.75% and a LIBOR floor of 0.75%.
Term B-2 Loans
The Term B-2 Loans were initially borrowed in an aggregate principal amount of $1,405,000. Borrowings under the Senior Secured Credit Facilities bear interest, at SEA’s option, at a rate equal to a margin over either (a) a base rate determined by reference to the higher of (1) the rate of interest in effect for such day as publicly announced from time to time by Bank of America, N.A. as its “prime rate” and (2) the federal funds effective rate plus 1/2 of 1% or (b) a LIBOR rate based on the BBA LIBOR rate, or the successor thereto if the BBA is no longer making a LIBOR rate available, for the interest period relevant to such borrowing. The applicable margin for the Term B-2 Loans is 1.25%, in the case of base rate loans, and 2.25%, in the case of LIBOR rate loans, subject to a base rate floor of 1.75% and a LIBOR floor of 0.75%. The applicable margin for the Term B-2 Loans (under either a base rate or LIBOR rate) is subject to one 25 basis point step-down upon achievement by SEA of a total net leverage ratio equal to or less than 3.25 to 1.00.
15
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
New Revolving Credit Facility
Borrowings of loans in the New Revolving Credit Facility under the Senior Secured Credit Facilities bear interest at a rate equal to an applicable margin over either, at SEA’s option, (a) a base rate determined by reference to the higher of the rate of interest in effect for such day as publicly announced from time to time by Bank of America, N.A. as its “prime rate”, in each case, plus an applicable margin equal to 1.75% and (2) the federal funds rate plus 1/2 of 1% or (b) a LIBOR rate based on the BBA LIBOR rate or the successor thereto if the BBA is no longer making a LIBOR rate available, for the interest period relevant to such borrowing (provided in no event shall such LIBOR rate with respect to the borrowings be less than 0.0% per annum). The applicable margin for borrowings under the New Revolving Credit Facility is 1.75%, in the case of base rate loans, and 2.75%, in the case of LIBOR rate loans. The applicable margin for borrowings under the New Revolving Credit Facility are subject to one 25 basis point step-down upon achievement by SEA of certain corporate credit ratings.
In addition to paying interest on outstanding principal under the Senior Secured Credit Facilities, SEA is required to pay a commitment fee to the lenders under the New Revolving Credit Facility in respect of the unutilized commitments thereunder at a rate of 0.50% per annum. SEA is also required to pay customary letter of credit fees.
As of September 30, 2017, SEA had approximately $19,050 of outstanding letters of credit leaving $190,950 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 capital expenditures; make guarantees; create liens on assets; enter into sale and leaseback transactions; engage in mergers or consolidations; sell assets; make fundamental changes; pay dividends and distributions or repurchase SEA’s capital stock; make investments, loans and advances, including acquisitions; engage in certain transactions with affiliates; make changes in the nature of the business; and make prepayments of junior debt. The Senior Secured Credit Facilities also contain covenants requiring SEA to maintain specified maximum annual capital expenditures, a maximum total net leverage ratio and a minimum interest coverage ratio. All of the net assets of SEA and its consolidated subsidiaries are restricted and there are no unconsolidated subsidiaries of SEA.
The Company’s ability to comply with these and other provisions of its existing debt agreements is dependent on its future performance, which is subject to many factors, some of which are beyond the Company’s control. Although the Company is currently in compliance with its debt covenants, its declining performance has resulted in leverage ratios closer to the ratios established in its debt agreements. As a result, there is an increased risk regarding future compliance should the Company’s operating performance continue to deteriorate. The breach of any of these covenants or non-compliance with any of the financial ratios and tests could result in an event of default under the existing debt agreements, which, if not cured or waived, could result in acceleration of the related debt and the acceleration of debt under other instruments evidencing indebtedness that may contain cross-acceleration or cross-default provisions.
The Senior Secured Credit Facilities permit restricted payments in an aggregate amount per annum equal to the sum of (A) $25,000 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) $95,000 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, $95,000 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, $65,000.
As of September 30, 2017, the total net leverage ratio as calculated under the Senior Secured Credit Facilities was
4.93
to 1.00, which results in the Company having a $90,000 capacity for restricted payments in 2017, provided that the total net leverage ratio does not exceed 5.75 to 1.00, measured quarterly on a pro forma basis after giving effect to any such restricted payment. However, the amount available for share repurchases and certain other restricted payments under the covenant restrictions in the debt agreements adjusts at the beginning of each quarter, as set forth above.
As of September 30, 2017, SEA was in compliance with all covenants contained in the documents governing the Senior Secured Credit Facilities.
16
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Long-term debt as of September 30, 2017 is repayable as follows:
Years Ending December 31,
|
|
|
|
|
2017
|
|
$
|
5,926
|
|
2018
|
|
|
23,707
|
|
2019
|
|
|
23,707
|
|
2020
|
|
|
536,763
|
|
2021
|
|
|
9,983
|
|
Thereafter
|
|
|
950,886
|
|
Total
|
|
$
|
1,550,972
|
|
Interest Rate Swap Agreements
As of September 30, 2017, the Company has five interest rate swap agreements (“the Interest Rate Swap Agreements”) which effectively fix the interest rate on the three month LIBOR-indexed interest payments associated with $1,000,000 of SEA’s outstanding long-term debt. The Interest Rate Swap Agreements became effective on September 30, 2016; have a total notional amount of $1,000,000; mature on May 14, 2020; require the Company to pay a weighted-average fixed rate of 2.45% per annum; the Company receives a variable rate of interest based upon the greater of 0.75% or the three month BBA LIBOR; and have interest settlement dates occurring on the last day of September, December, March and June through maturity.
SEA designated the Interest Rate Swap Agreements above as qualifying cash flow hedge accounting relationships as further discussed in Note 7–Derivative Instruments and Hedging Activities that follows.
Cash paid for interest relating to the Senior Secured Credit Facilities and the Interest Rate Swap Agreements was $69,408 and $42,521 in the nine months ended September 30, 2017 and 2016, respectively.
Cash paid for interest in the nine months ended September 30, 2017 includes $12,904 relating to the Company’s fourth quarter 2016 interest payable on its Senior Secured Credit Facilities which was paid on January 3, 2017.
7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk primarily by managing the amount, sources and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings. The Company does not speculate using derivative instruments.
As of September 30, 2017 and December 31, 2016, 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, 2017 and 2016, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. On September 30, 2016, the Company’s four Interest Rate Swap Agreements with a combined notional value of $1,250,000 matured in accordance with their terms and the five interest rate forward swap agreements with a combined notional value of $1,000,000 became effective. The interest rate swap agreements were designated as cash flow hedges of interest rate risk.
17
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
The effective portion of changes in the fair value of derivative
s designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive loss and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the chang
e in fair value of the derivatives is recognized directly in earnings. During the three and nine months ended September 30, 2017, there was no ineffectiveness on cash flow hedges. During the three and nine months ended September 30, 2016, an immaterial los
s related to the ineffective portion was recognized in other expense (income), net, on the accompanying unaudited condensed consolidated statements of comprehensive income (loss). Amounts reported in accumulated other comprehensive loss related to derivati
ves 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 $9,037 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, 2017 and December 31, 2016:
|
|
Liability Derivatives
|
|
|
Liability Derivatives
|
|
|
|
As of September 30, 2017
|
|
|
As of December 31, 2016
|
|
|
|
Balance Sheet
Location
|
|
Fair Value
|
|
|
Balance Sheet
Location
|
|
Fair Value
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
|
Other liabilities
|
|
$
|
16,639
|
|
|
Other liabilities
|
|
$
|
22,808
|
|
Total derivatives designated as hedging instruments
|
|
|
|
$
|
16,639
|
|
|
|
|
$
|
22,808
|
|
Tabular Disclosure of the Effect of Derivative Instruments on the Statements of Comprehensive Income (Loss):
The table below presents the pretax effect of the Company’s derivative financial instruments on the unaudited condensed consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, 2017 and 2016:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Derivatives in Cash Flow Hedging Relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) related to effective portion of derivatives recognized in accumulated other comprehensive loss
|
|
$
|
6,298
|
|
|
$
|
1,612
|
|
|
$
|
16,066
|
|
|
$
|
(25,276
|
)
|
(Loss) gain related to effective portion of derivatives reclassified from accumulated other comprehensive loss to interest expense
|
|
$
|
(2,957
|
)
|
|
$
|
880
|
|
|
$
|
(9,897
|
)
|
|
$
|
2,546
|
|
Loss related to ineffective portion of derivatives recognized in other (income) expense, net
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
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, 2017, 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 $17,336. As of September 30, 2017, the Company has posted no collateral related to these agreements. If the Company had breached any of these provisions at September 30, 2017, it could have been required to settle its obligations under the agreements at their termination value of $17,336.
18
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Changes in Accumulated Other Comprehensive Loss
The following table reflects the changes in accumulated other comprehensive loss for the nine months ended September 30, 2017, net of tax:
Accumulated other comprehensive loss:
|
|
(Losses) Gains on
Cash Flow Hedges
|
|
Accumulated other comprehensive loss at December 31, 2016
|
|
$
|
(13,694
|
)
|
Other comprehensive income before reclassifications
|
|
|
9,646
|
|
Amounts reclassified from accumulated other comprehensive loss to interest expense
|
|
|
(5,942
|
)
|
Unrealized gain on derivatives, net of tax
|
|
|
3,704
|
|
Accumulated other comprehensive loss at September 30, 2017
|
|
$
|
(9,990
|
)
|
8. 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-2 Loans and Term B-5 Loans are classified in Level 2 of the fair value hierarchy as of September 30, 2017 and the Term B-2 and Term B-3 Loans were classified in Level 2 of the fair value hierarchy as of December 31, 2016. The fair value of the term loans as of September 30, 2017 and December 31, 2016 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.
There were no transfers between Levels 1, 2 or 3 during the three and nine months ended September 30, 2017. The Company did not have any assets measured on a recurring basis at fair value as of September 30, 2017. 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, 2017:
|
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)
|
|
|
2017
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
(a)
|
$
|
—
|
|
|
$
|
16,639
|
|
|
$
|
—
|
|
|
$
|
16,639
|
|
Long-term obligations
(b)
|
$
|
—
|
|
|
$
|
1,550,972
|
|
|
$
|
—
|
|
|
$
|
1,550,972
|
|
(a)
|
Reflected at fair value in the unaudited condensed consolidated balance sheet as other liabilities of $16,639.
|
(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 $23,707 and long-term debt of $1,508,334 as of September 30, 2017.
|
19
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
There wer
e no transfers between Levels 1, 2 or 3 during the year ended December 31, 2016. The Company did not have any assets measured on a recurring basis at fair value as of December 31, 2016. The following table presents the Company’s estimated fair value measur
ements and related classifications for liabilities measured on a recurring basis as of December 31, 2016:
|
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)
|
|
|
2016
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
(a)
|
$
|
—
|
|
|
$
|
22,808
|
|
|
$
|
—
|
|
|
$
|
22,808
|
|
Long-term obligations
(b)
|
$
|
—
|
|
|
$
|
1,598,001
|
|
|
$
|
—
|
|
|
$
|
1,598,001
|
|
(a)
|
Reflected at fair value in the unaudited condensed consolidated balance sheet as other liabilities of $22,808.
|
(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 $51,713 and long-term debt of $1,531,069 as of December 31, 2016.
|
9. RELATED-PARTY TRANSACTIONS
ZHG Agreements
In connection with the Sale, which closed on May 8, 2017, during the nine months ended September 30, 2017, Sellers reimbursed the Company for approximately $4,000 of related costs and expenses incurred by the Company.
On March 24, 2017, the Company entered into the ZHG Agreements with Zhonghong Holding, an affiliate of ZHG Group. In exchange for providing services under the ZHG Agreements, the Company is expected to receive fees as well as a travel stipend per year through 2019.
The Company recognizes revenue under the ZHG Agreements on a straight line basis over the contractual term of the agreements. Revenue recognized in the nine months ended September 30, 2017 was approximately $2,600 related to these agreements.
See further discussion regarding the Sale in Note 1–Description of the Business and Basis of Presentation
and Note 12–Stockholders’ Equity.
Debt and Interest Payments
As of December 31, 2016, approximately $25,000 aggregate principal amount of Term B-2 Loans were owned by affiliates of Blackstone. The Company makes voluntary and mandatory principal repayments as well as periodic principal and interest payments on such debt in accordance with its terms from time to time. There were no debt amounts owned by affiliates of the Company as of September 30, 2017. See Note 6–Long-Term Debt for further discussion.
10. COMMITMENTS AND CONTINGENCIES
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 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. On June 29, 2016, the remaining defendants filed a motion to dismiss the Second Amended Complaint. On September 30, 2016, the Court denied the motion to dismiss. On October 28, 2016, defendants filed their Answer to the Second Amended Complaint. Written discovery has been propounded by both sides but no depositions have been scheduled to date.
20
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
On March 2, 2017, following a case management conference held on March 1, 2017, the Court entered a
scheduling order, which provided that fact discovery be completed by October 20, 2017. The scheduling order also provided deadlines for expert discovery and other pretrial deadlines, with a trial date of September 18, 2018. On March 6, 2017, the Court en
tered an amended scheduling order providing that Plaintiff must file its motion for class certification by May 19, 2017. On March 31, 2017, Plaintiffs filed a motion to compel discovery against the Company and Blackstone. A hearing on the motion was held
on April 18, 2017. Following the hearing, Plaintiff’s motion was granted in part and denied in part. On May 19, 2017, Plaintiffs filed their motion for class certification and on July 27, 2017 defendants filed a brief in opposition to the motion, and a h
earing on the motion is set for November 13, 2017. On August 25, 2017, the United States filed a motion to intervene and partially stay discovery and, on September 6, the Court stayed depositions through November 30. On September 8, 2017, the Court enter
ed an order modifying the scheduling order, which provided, among other things, that fact discovery be completed by January 22, 2018. On September 11, 2017, the Court issued an order further revising the schedule and set a trial date for December 4, 2018.
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.
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. On May 21, 2015, the defendants filed a motion to stay the lawsuit pending resolution of the Company’s securities class action lawsuit. On September 21, 2015, the Court granted the motion and ordered that the derivative action to be stayed in favor of the securities class action captioned Baker v. SeaWorld Entertainment, Inc., et al., Case No. 14-CV-02129-MMA (KSC). On March 15, 2017, plaintiff moved to lift the stay entered by the court on September 21, 2015. Defendants filed a brief in opposition to plaintiff’s motion on May 23, 2017. On September 12, 2017, following oral argument, the Court denied plaintiff’s motion.
Consumer Class Action Lawsuits
On March 25, 2015, a purported class action was filed in the United States District Court for the Southern District of California against the Company, captioned Holly Hall v. SeaWorld Entertainment, Inc., Case No. 3:15-cv-00600-CAB-RBB (the “Hall Matter”). The complaint identifies three putative classes consisting of all consumers nationwide who at any time during the four-year period preceding the filing of the original complaint, purchased an admission ticket, a membership or a SeaWorld “experience” that includes an “orca experience” from the SeaWorld amusement park in San Diego, California, Orlando, Florida or San Antonio, Texas respectively. The complaint alleges causes of action under California Unfair Competition Law, California Consumers Legal Remedies Act (“CLRA”), California False Advertising Law, California Deceit statute, Florida Unfair and Deceptive Trade Practices Act, Texas Deceptive Trade Practices Act, as well as claims for Unjust Enrichment. 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 purchasers, and omitted material facts regarding its orcas with intent to deceive and mislead the plaintiff and purported class members. The complaint further alleges that the specific misrepresentations heard and relied upon by Holly Hall in purchasing her SeaWorld tickets concerned the circumstances surrounding the death of a SeaWorld trainer. The complaint seeks actual damages, equitable relief, attorney’s fees and costs. Plaintiffs claim that the amount in controversy exceeds $5,000, but the liability exposure is speculative until the size of the class is determined (if certification is granted at all).
21
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
In addition, four other purported class actions were filed aga
inst the Company and its affiliates. The first three actions were filed on April 9, 2015, April 16, 2015 and April 17, 2015, respectively, in the following federal courts: (i) the United States District Court for the Middle District of Florida, captioned
Joyce Kuhl v. SeaWorld LLC et al., 6:15-cv-00574-ACC-GJK (the “Kuhl Matter”), (ii) the United States District Court for the Southern District of California, captioned Jessica Gaab, et. al. v. SeaWorld Entertainment, Inc., Case No. 15:cv-842-CAB-RBB (the “G
aab Matter”), and (iii) the United States District Court for the Western District of Texas, captioned Elaine Salazar Browne v. SeaWorld of Texas LLC et al., 5:15-cv-00301-XR (the “Browne Matter”). On May 1, 2015, the Kuhl Matter and Browne Matter were vol
untarily dismissed without prejudice by the respective plaintiffs. On May 7, 2015, plaintiffs Kuhl and Browne re-filed their claims, along with a new plaintiff, Valerie Simo, in the United States District Court for the Southern District of California in a
n action captioned Valerie Simo et al. v. SeaWorld Entertainment, Inc., Case No. 15: cv-1022-CAB-RBB (the “Simo Matter”). All four of these cases, in essence, reiterate the claims made and relief sought in the Hall Matter.
On August 7, 2015, the Gaab Matter and Simo Matter were consolidated with the Hall Matter, and the plaintiffs filed a First Consolidated Amended Complaint (“FAC”) on August 21, 2015. The FAC pursued the same seven causes of action as the original Hall complaint, and added a request for punitive damages pursuant to the California CLRA.
The Company moved to dismiss the FAC in its entirety, and its motion was granted on December 24, 2015. The United States District Court for the Southern District of California granted dismissal with prejudice as to the California CLRA claim, the portion of California Unfair Competition Law claim premised on the CLRA claim, all claims for injunctive relief, and on all California claims premised solely on alleged omissions by the Company. The United States District Court for the Southern District of California granted leave to amend as to the remainder of the complaint. On January 25, 2016, plaintiffs filed their Second Consolidated Amended Complaint (“SAC”). The SAC pursues the same causes of action as the FAC, except for the California CLRA, which, as noted above, was dismissed with prejudice.
The Company filed a motion to dismiss the entirety of the SAC with prejudice on February 25, 2016. The United States District Court for the Southern District of California granted the Company’s motion to dismiss the entire SAC with prejudice and entered judgment for the Company on May 13, 2016. Plaintiffs filed their notice of appeal to the United States Court of Appeals for the Ninth Circuit (the “Ninth Circuit”) on June 10, 2016. The appeal has been fully briefed and is awaiting an oral argument date. The Ninth Circuit has stated that it may hear the argument in February, March, or April 2018.
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., Case No. CGC-15-545292 (the “Anderson Matter”). The putative class consists of all consumers within California who, within the past four years, purchased tickets to SeaWorld San Diego. On May 11, 2015, the plaintiffs filed a First Amended Class Action Complaint (the “First Amended Complaint”). The First Amended Complaint 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 purchasers, and omitted material facts regarding its orcas with intent to deceive and mislead the plaintiff and purported class members. The First Amended Complaint seeks actual damages, equitable relief, attorneys’ fees and costs. Based on plaintiffs’ definition of the class, the amount in controversy exceeds $5,000, but the liability exposure is speculative until the size of the class is determined (if certification is granted at all). On May 14, 2015, the Company removed the case to the United States District Court for the Northern District of California, Case No. 15: cv-2172-SC.
On May 19, 2015, the plaintiffs filed a motion to remand. On September 18, 2015, the Company filed a motion to dismiss the First Amended Complaint in its entirety. The motion was fully briefed. On September 24, 2015, the United States District Court for the Northern District of California denied plaintiffs’ motion to remand. On October 5, 2015, plaintiffs filed a motion for leave to file a motion for reconsideration of this order, and contemporaneously filed a petition for permission to appeal to the Ninth Circuit, which the Company opposed. On October 14, 2015, the United States District Court for the Northern District of California granted plaintiffs’ motion for leave. Plaintiffs’ motion for reconsideration was fully briefed. On January 12, 2016, the United States District Court for the Northern District of California granted in part and denied in part the motion for reconsideration, and refused to remand the case. On January 22, 2016, plaintiffs filed a petition for permission to appeal the January 12, 2016 order to the Ninth Circuit, which the Company opposed. On April 7, 2016, the Ninth Circuit denied both of plaintiffs’ petitions for permission to appeal and the plaintiffs filed a motion for leave to file a Second Amended Class Action Complaint (“Second Amended Complaint”), seeking to add two additional plaintiffs and make various pleading adjustments. The Company opposed the motion. On August 1, 2016, the United States District Court for the Northern District of California court issued an order granting in part the Company’s motion to dismiss and granting plaintiffs leave to file an amended complaint by August 22, 2016, which they filed.
22
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
The Second Amended Complaint likewise asserted causes of action based on the California False Advertising Law, California Unfair Competition Law and California CLRA. Essentially plaintiffs allege there were fraudulent representations made by the Company a
bout the health of its orcas that ultimately induced consumers to purchase admission tickets to SeaWorld parks and in some cases, plush toys while in the parks. The Company moved to dismiss this on various grounds.
On November 7, 2016, the United States District Court for the Northern District of California issued an order granting in part, and denying in part, the Company’s motion to dismiss. The United States District Court for the Northern District of California found that one named plaintiff failed to allege reliance on any specific statements so those claims, in their entirety, have been dismissed. In addition, the United States District Court for the Northern District of California determined that plaintiffs did not allege any misrepresentations made about the plush toy purchases, which disposes of the CLRA claims based on the toys. The United States District Court for the Northern District of California also found that certain plaintiff’s conversation with SeaWorld’s trainers was not “advertising,” and dismissed the false advertising claim and Unfair Competition Law claim premised on it.
Plaintiffs filed a Third Amended Class Action Complaint on November 22, 2016. The Company moved to dismiss portions of that pleading, but the motion to dismiss was denied. What remains at this point are plaintiff's claims under California's Unfair Competition Law, False Advertising Law and the CLRA based on the purchase of tickets; plaintiff's California Unfair Competition Law and False Advertising Law claims based on the purchase of plush toys; and plaintiff's claims under California's Unfair Competition Law based on the purchase of plush toys. The case is in the preliminary stages of discovery, with briefing on class certification currently scheduled for March through June 2018, and fact discovery currently set to close on June 22, 2018.
The Company believes that these consumer class action lawsuits are without merit and intends to defend these lawsuits 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., 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. The complaint alleges a single breach of contract claim involving the Company’s EZPay Plan which affords customers the ability to pay for annual passes through monthly installments. The plaintiff alleges the Company automatically renewed passes beyond the initial term in violation of the terms and conditions of the parties’ contract which provided in part: “Except for any passes paid in less than twelve months, THIS CONTRACT WILL RENEW AUTOMATICALLY ON A MONTH-TO-MONTH BASIS until I terminate it.” On January 21, 2015, plaintiffs amended their complaint to include claims for breach of contract, unjust enrichment and violation of federal Electronic Funds Transfer Act, 15 U.S.C. section 1693
et seq
. on behalf of three individual plaintiffs as well as on behalf of a two classes: (i) individuals in the states of Florida, Texas, Virginia and California who paid for an annual pass 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.
The Company has always considered the plaintiffs’ argument to be without merit and believes it has defenses to the action. The parties engaged in significant discovery and a motion was filed by the plaintiffs for certification of the class. In addition, plaintiffs filed a motion for summary judgment and defendant in turn filed for motion for partial summary judgment. The Company anticipated the United States District Court for the Middle District of Florida would schedule a hearing on class certification first, determine whether a class should be certified, send notice to the certified class, and then entertain the respective motions for summary judgment.
However, on March 10, 2017, the United States District Court for the Middle District of Florida issued an order granting plaintiffs’ motion for certification of the class without a hearing and included in the order findings that the contract is unambiguous and that it means that the Company could not auto-renew the contract term if the customer paid in less than 365 days.
With regard to the order granting certification, on March 24, 2017, the Company filed a Rule 23(f) petition with the United States Court of Appeals for the Eleventh Circuit seeking interlocutory review of such order. While the Rule 23(f) petition was pending, on April 17, 2017, the United States District Court for the Middle District of Florida issued another order, this time granting plaintiff’s motion for summary judgment as to liability and denying the Company’s motion for partial summary judgment. The United States District Court for the Middle District of Florida decided that the Company breached the contract by failing to terminate the contract once the passes were paid in full. No determination of damages was made nor has the court entered any final judgment.
23
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
On May 15, 2017, a three-judge panel of the United States Court of Appeals for the Eleventh Circuit denied the Company’s Rule 23(f) petitio
n on the grounds that
the
April 17, 2017 summary judgment order of the United States District Court for the Middle District of Florida constituted a “final judgment” and therefore the Company could appeal the final judgment. The United States Court of Appeals for the Eleventh Circ
uit did not address any of the arguments on the merits. The Company moved for reconsideration of the order of the United States Court of Appeals for the Eleventh Circuit and filed a notice of appeal of the “final judgment” determination that same day. Th
e Company had two related proceedings pending with the United States Court of Appeals for the Eleventh Circuit – (i) the motion for reconsideration of the denial of the Company’s Rule 23(f) petition and (ii) the appeal of the “final judgment” determination
with respect to the April 17, 2017 summary judgment order of the United States District Court for the Middle District of Florida. On August 28, 2017, the Eleventh Circuit issued an order dismissing the final appeal for lack of jurisdiction and remanded t
he case to the District Court. A trial on damages will most likely be held in May or June of 2018. The Company intends to continue to defend the lawsuit vigorously; however, there can be no assurance regarding the ultimate outcome of this lawsuit.
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) and the Securities and Exchange Commission (SEC). For example, in June 2017, the Company received a subpoena in connection with an investigation by the U.S. Department of Justice concerning disclosures and public statements made by the Company and certain executives and/or individuals on or before August 2014, including those regarding the impact of the “Blackfish” documentary, and trading in the Company’s securities. The Company also has received subpoenas from the staff of the U.S. Securities and Exchange Commission in connection with these matters. On June 16, 2017, the Company’s Board of Directors formed a Special Committee comprised of independent directors with respect to these inquiries. The Special Committee has engaged counsel to advise and assist the Committee. The Company has cooperated with these government inquiries and intends to continue to cooperate with any government requests or inquiries.
From time to time, various parties may also bring 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 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 Agreement
On May 16, 2017, SEA entered into a License Agreement (the “License Agreement”) with Sesame Workshop (“Sesame”), a New York not-for-profit corporation. The License Agreement supersedes the previous two license agreements and extends SEA’s status as Sesame’s exclusive theme park partner in the United States, Puerto Rico and the U.S. Virgin Islands (the “Territory”), and provides for the payment of certain royalty payments based on gross receipts for stand-alone theme parks (“Standalone Parks”) and license fees and merchandise royalties for Sesame themed areas within SEA theme parks (“Sesame Lands”). Sesame will retain the right to develop certain family entertainment centers subject to certain restrictions including size, number, types of attractions and geographic location. 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 within the Territory; (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, including Sesame’s annual gala event. The Company estimates the combined obligations for these commitments could be up to approximately $150,000 over the 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 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.
24
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
11. 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. Effective January 1, 2017, in accordance with its adoption of ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting,
the Company elected to recognize the impact of forfeitures as they occur (see further discussion in Note 2–Recent Accounting Pronouncements). The Company has granted stock options, time-vesting restricted share awards and performance-vesting restricted share awards. The Company used the Black-Scholes Option Pricing Model to value its stock options. The Company used the closing stock price on the date of grant to value its time-vesting restricted share awards granted in 2013 and subsequent years and its performance-vesting restricted share awards granted in 2015 and subsequent years.
Total equity compensation expense was $3,245 and $19,265 for the three and nine months ended September 30, 2017. Total equity compensation expense was $2,545 and $34,596 for the three and nine months ended September 30, 2016. Equity compensation expense for the nine months ended September 30, 2017 includes approximately $8,400 related to certain of the Company’s performance-vesting restricted shares (the “2.75x Performance Restricted shares”) for which a portion vested on May 8, 2017 with the closing of the Sale. Equity compensation expense for the nine months ended September 30, 2016 includes $27,516 related to certain of the Company’s performance-vesting restricted shares (the “2.25x Performance Restricted shares”) which became probable of vesting and vested on April 1, 2016. See
2.25x and 2.75x Performance Restricted Shares and Equity Plan Modification
section which follows 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 income (loss). Total unrecognized equity compensation expense for all equity compensation awards probable of vesting as of September 30, 2017 was approximately $33,400 which is expected to be recognized over the respective service periods.
The activity related to the Company’s time-vesting and performance-vesting share awards during the nine months ended September 30, 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
Performance-Vesting Restricted shares
|
|
|
|
Time-Vesting
Restricted shares
|
|
|
Bonus Performance
Restricted shares
|
|
|
Long-Term
Incentive
Performance
Restricted shares
|
|
|
2.75x Performance
Restricted shares
|
|
|
|
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
per Share
|
|
|
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
per Share
|
|
|
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
per Share
|
|
|
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
per Share
|
|
Outstanding at
December 31, 2016
|
|
|
1,323,025
|
|
|
$
|
17.47
|
|
|
|
451,289
|
|
|
$
|
17.88
|
|
|
|
212,369
|
|
|
$
|
18.43
|
|
|
|
1,310,726
|
|
|
$
|
8.19
|
|
Granted
|
|
|
1,185,276
|
|
|
$
|
17.25
|
|
|
|
912,986
|
|
|
$
|
18.16
|
|
|
|
791,108
|
|
|
$
|
18.57
|
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
(327,489
|
)
|
|
$
|
18.06
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(455,148
|
)
|
|
$
|
13.24
|
|
Forfeited
|
|
|
(216,588
|
)
|
|
$
|
17.88
|
|
|
|
(506,811
|
)
|
|
$
|
17.92
|
|
|
|
(110,052
|
)
|
|
$
|
18.74
|
|
|
|
(227,285
|
)
|
|
$
|
13.06
|
|
Outstanding at
September 30, 2017
|
|
|
1,964,224
|
|
|
$
|
17.19
|
|
|
|
857,464
|
|
|
$
|
18.15
|
|
|
|
893,425
|
|
|
$
|
18.51
|
|
|
|
628,293
|
|
|
$
|
3.75
|
|
The activity related to the Company’s stock option awards during the nine months ended September 30, 2017 is as follows:
|
|
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (in years)
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding at December 31, 2016
|
|
|
3,441,900
|
|
|
$
|
18.67
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(353,449
|
)
|
|
$
|
17.98
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(43,592
|
)
|
|
$
|
18.81
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(590
|
)
|
|
$
|
18.67
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
|
3,044,269
|
|
|
$
|
18.75
|
|
|
|
7.90
|
|
|
$
|
—
|
|
Exercisable at September 30, 2017
|
|
|
1,262,329
|
|
|
$
|
18.95
|
|
|
|
7.78
|
|
|
$
|
—
|
|
25
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Omnibus Incentive Plan
Prior to June 14, 2017, the Company had reserved 15,000,000 shares of common stock for issuance under the Company’s 2013 Omnibus Incentive Plan (the “2013 Omnibus Incentive Plan”). On June 14, 2017 (the “Approval Date”), the stockholders of the Company approved the 2017 Omnibus Incentive Plan (the “2017 Omnibus Incentive Plan”) and all shares that were previously available for issuance under the 2013 Omnibus Incentive Plan transferred to the 2017 Omnibus Incentive Plan and were authorized for future issuance. No new awards may be granted under the 2013 Omnibus Incentive Plan (although awards made under the 2013 Omnibus Incentive Plan prior to the Approval Date will remain outstanding in accordance with their terms) and no new or additional shares of common stock were authorized under the 2017 Omnibus Incentive Plan.
The 2017 Omnibus Incentive Plan is administered by the Compensation Committee of the Board, and provides that the Company may grant equity incentive awards to eligible employees, directors, consultants or advisors in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, and other stock-based and performance compensation awards. In the event any award expires or is canceled, forfeited, or terminated, without issuance to the participant, the unissued shares may be granted again under the 2017 Omnibus Incentive Plan. In no event will shares (i) tendered or withheld for the payment of the exercise price or withholding taxes, (ii) not issued upon the settlement of a stock appreciation right that settle (or could settle) in shares of common stock or (iii) shares purchased on the open market with cash proceeds from the exercise of options again become available for other awards under the 2017 Omnibus Incentive Plan.
As of September 30, 2017, there were 7,269,698 shares of common stock available for future issuance under the Company’s 2017 Omnibus Incentive Plan.
As part of the Company’s annual compensation-setting process and in accordance with the Company’s Equity Award Grant Policy (the “Equity Grant Policy”), on December 7, 2016 the Compensation Committee approved an annual bonus plan (the “2017 Bonus Plan”) for the fiscal year ending December 31, 2017 (“Fiscal 2017”).
Bonus Performance Restricted Shares
The 2017 Bonus Plan provides for bonus awards payable 50% in cash and 50% in performance-vesting restricted shares (the “Bonus Performance Restricted shares”) based upon the Company’s achievement of specified performance goals with respect to Fiscal 2017 Adjusted EBITDA (weighted at 50%), Total Revenue (weighted at 30%) and Adjusted EBITDA Margin (weighted at 20%). The total number of shares eligible to vest is based on the level of achievement of the targets for Fiscal 2017 which ranges from 0% (if below threshold performance), to 30% (for threshold performance), to 100% (for target performance) and up to 200% (at or above maximum performance). For actual performance between the specified threshold, target and maximum levels, the resulting weighted payment will be adjusted on a linear basis. Pursuant to the Equity Grant Policy, on March 3, 2017, the Company granted 888,235 Bonus Performance Restricted shares under its 2017 Bonus Plan which represented the total shares that could be earned under the maximum performance level of achievement. Subsequent grants were made on July 11, 2017 and on October 10, 2017 to newly hired bonus-eligible employees based on their hire date and/or to certain newly promoted employees.
The Company also had an annual bonus plan (the “2016 Bonus Plan”) for the fiscal year ended December 31, 2016 (“Fiscal 2016”), under which certain employees were eligible to receive a bonus with respect to Fiscal 2016, payable 50% in cash and 50% in Bonus Performance Restricted shares based upon the Company’s achievement of Fiscal 2016 Adjusted EBITDA. Based on the Company’s actual Fiscal 2016 Adjusted EBITDA results, no equity compensation expense was recorded in 2016 related to the 2016 Bonus Plan and all of the outstanding shares forfeited in the first quarter of 2017.
In accordance with ASC 718,
Compensation-Stock Compensation
, equity compensation expense is recorded on shares probable of vesting. Based on the Company’s progress during the nine months ended September 30, 2017 towards its performance goals for Fiscal 2017, a portion of the outstanding Bonus Performance Restricted shares were considered probable of vesting as of September 30, 2017; therefore, equity compensation expense has been recorded related to shares considered probable of vesting. If the probability of vesting related to these shares changes in a subsequent period, equity compensation expense that would have been recorded over the requisite service period had the shares been considered probable at the new percentage from inception, will be recorded as a cumulative catch-up at such subsequent date.
26
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Long-Term Incentive Awards
The 2017 Long-Term Incentive Grant is comprised of time-vesting restricted shares (the “Long-Term Incentive Time Restricted shares”) and performance-vesting restricted shares (the “Long-Term Incentive Performance Restricted shares”) (collectively, the “Long-Term Incentive Awards”). The 2017 Long-Term Incentive Grant did not include nonqualified stock options (the “Long-Term Incentive Options”). Additionally, in order to address the lack of retention value of outstanding equity awards held by certain of the Company’s executives, the Compensation Committee also approved an early grant of the time-vesting restricted shares portion of the 2018 annual equity award in the first quarter of Fiscal 2017 (the “Early 2018 Grant”). Pursuant to the Equity Grant Policy, the Long-Term Incentive Awards related to the 2017 Long-Term Incentive Grant and the time-vesting restricted shares related to the Early 2018 Grant were granted on March 3, 2017.
The Board had also approved long-term incentive plan grants (the “2016 Long-Term Incentive Grant” and the “2015 Long-Term Incentive Grant”) for Fiscal 2016 and Fiscal 2015, respectively, comprised of Long-Term Incentive Options, Long-Term Incentive Time Restricted shares and Long-Term Incentive Performance Restricted shares to certain of the Company’s management and executive officers.
Long-Term Incentive Time Restricted Shares
For certain executives, the Long-Term Incentive Time Restricted shares granted under the 2017 Long-Term Incentive Grant and the time-vesting restricted shares granted under the Early 2018 Grant vest over five years, with one-third vesting on each of the third, fourth and fifth anniversaries of the date of grant, subject to continued employment through the applicable vesting date. Equity compensation expense for these shares is recognized using the straight line method with one-third recognized over the initial three year vesting period and the remaining two-thirds recognized over the remaining vesting period.
For other employees, the Long-Term Incentive Time Restricted shares granted under the 2017 Long-Term Incentive Grant vest over three years, with all of the shares vesting on the third anniversary of the date of grant, subject to continued employment through the applicable vesting date. Equity compensation expense for these shares is recognized using the straight line method over the three year vesting period.
The Long-Term Incentive Time Restricted shares granted under the 2016 and 2015 Long-Term Incentive Grant vest ratably over four years from the date of grant (25% per year), subject to continued employment through the applicable vesting date. Equity compensation expense is recognized using the straight line method over the four year vesting period.
Long-Term Incentive Performance Restricted Shares
The Long-Term Incentive Performance Restricted shares granted under the 2017 Long-Term Incentive Plan are expected to vest following the end of the three year performance period beginning on January 1, 2017 and ending on December 31, 2019 based upon the Company’s achievement of pre-established performance goals with respect to Adjusted EBITDA (weighted at 50%), Total Revenue (weighted at 30%) and Return on Invested Capital (weighted at 20%) for the three-year performance period, as defined by the 2017 Long-Term Incentive Grant. The total number of Long-Term Incentive Performance Restricted shares eligible to vest will be based on the level of achievement of the performance goals and ranges from 0% (if below threshold performance), to 50% (for threshold performance), to 100% (for target performance), and up to 200% (for at or above maximum performance). For actual performance between the specified threshold, target and maximum levels, the resulting vesting percentage will be adjusted on a linear basis. Pursuant to the Equity Grant Policy, as of September 30, 2017, the Company had granted 587,947 Long-Term Incentive Performance Restricted shares, net of forfeitures, under its 2017 Long-Term Incentive Plan which represented the total shares that could be earned under the maximum performance level of achievement. Equity compensation expense is recognized ratably over the three year performance period, if the performance condition is probable of being achieved, beginning on the date of grant and through December 31, 2019. Based on the Company’s progress towards its respective performance goals for Fiscal 2017, none of the Long-Term Incentive Performance Restricted shares related to the Fiscal 2017 performance period are considered probable of vesting as of September 30, 2017; therefore, no equity compensation expense has been recorded related to these shares. If probability of vesting related to these shares changes in a subsequent period, all equity compensation expense related to those shares that would have been recorded over the requisite service period had the shares been considered probable at the new percentage from inception, will be recorded as a cumulative catch-up at such subsequent date.
27
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
The Long-Term Incentive Performance Restricted shares granted under the 2016 and 20
15 Long-Term Incentive Grant vest following the end of a three year performance period beginning on January 1 of the fiscal year in which the award was granted and ending on December 31 of the third fiscal year based upon the Company’s achievement of certa
in performance goals with respect to Adjusted EBITDA for each respective fiscal year performance period. The total number of shares eligible to vest is based on the level of achievement of the Adjusted EBITDA target for each fiscal year in the performance
period which ranges from 0% (if below threshold performance), to 50% (for threshold performance), to 100% (for target performance), and up to 200% (at or above maximum performance). For actual performance between the specified threshold, target, and maximu
m levels, the resulting vesting percentage is adjusted on a linear basis. Total shares earned (approximately 33% are eligible to be earned per year), based on the actual performance percentage for each performance year, will vest on the date the Company’s
Compensation Committee determines the actual performance percentage for the third fiscal year (the “Determination Date”) in the performance period if the employee has not terminated prior to the last day of such fiscal year. Additionally, all unearned shar
es will forfeit immediately as of the Determination Date.
The Adjusted EBITDA target for each fiscal year is set in the first quarter of each respective year, at which time the grant date and the grant-date fair value for accounting purposes related to that performance year is established based on the closing price of the Company’s stock on such date plus any accumulated dividends earned since the date of the initial award. Equity compensation expense is recognized ratably for each fiscal year, if the performance condition is probable of being achieved, beginning on the date of grant and through December 31 of the third fiscal year in the performance period.
As of September 30, 2017, the Company had awarded 411,547 Long-Term Incentive Performance Restricted shares, net of forfeitures, under the 2016 and 2015 Long-Term Incentive Plans which represents the total shares that could be earned under the maximum performance level of achievement for all three performance periods combined. For accounting purposes, the performance goals for the respective performance periods must be established for a grant date to be determined. As such, since the performance goal for Fiscal 2017 was established in the first quarter of 2017, for accounting purposes, 137,183 of the Long-Term Incentive Performance Restricted shares awarded under the 2016 and 2015 Long-Term Incentive Plans, net of forfeitures, have a grant date in 2017. As of September 30, 2017, 106,069 Long-Term Incentive Performance Restricted shares, net of forfeitures, which were awarded under the 2016 Long-Term Incentive Plan relate to the fiscal year ending December 31, 2018 (“Fiscal 2018”) performance period. The performance target for the Fiscal 2018 performance period has not yet been set and will be determined by the Compensation Committee during the first quarter of 2018, at which time, for accounting purposes, the grant date and respective grant-date fair value will be determined for these shares.
Based on the Company’s actual Adjusted EBITDA for Fiscal 2016 and 2015, the threshold performance level for Fiscal 2016 and the maximum performance level for Fiscal 2015 was not met; as such all of the Long-Term Incentive Performance Restricted shares related to Fiscal 2016 and a portion related to Fiscal 2015 are not considered probable of vesting as of September 30, 2017 and are expected to forfeit on their respective Determination Date.
Total unrecognized equity compensation expense related to the Fiscal 2018 performance period has not been determined as the grant date and grant-date fair value for these awards have not yet occurred for accounting purposes, as such no expense has been recorded related to this performance period.
Long-Term Incentive Options
The Long-Term Incentive Options vest ratably over four years from the date of grant (25% per year), subject to continued employment through the applicable vesting date and will expire 10 years from the date of grant or earlier if the employee’s service terminates. The options have an exercise price per share equal to the closing price of the Company’s common stock on the date of grant. Equity compensation expense is recognized using the straight line method for each tranche over the four year vesting period.
Other
2.25x and 2.75x Performance Restricted Shares and Equity Plan Modification
The Company has awarded under both its Omnibus Incentive Plan and its previous incentive plan (the “Pre-IPO Incentive Plan”) certain performance-vesting restricted shares (the “2.25x and 2.75x Performance Restricted shares”).
28
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Bas
ed on cash proceeds previously received by certain investment funds affiliated with Blackstone from the Company’s initial public offering and subsequent secondary offerings of stock, the Company’s repurchases of shares and the cumulative dividends paid by
the Company through April 1, 2016, the vesting conditions on the Company’s previously outstanding 2.25x Performance Restricted shares were satisfied with the Company’s dividend payment to such investment funds affiliated with Blackstone on April 1, 2016. A
ccordingly, during the three months ended March 31, 2016, upon declaration of the dividend, the 2.25x Performance Restricted shares were considered probable of vesting and all of the related equity compensation expense and accumulated dividends were recogn
ized in the accompanying unaudited condensed consolidated financial statements. On April 1, 2016, upon payment of the dividend to such investment funds affiliated with Blackstone, all previously outstanding 1,370,821 2.25x Performance Restricted shares ve
sted and the related accumulated dividends of $3,400 were paid.
During the first quarter of 2017, the Company modified the 2.75x Performance Restricted shares to vest 60% upon the closing of the Sale, and eight of the Company’s senior executives and the Company’s Chairman of the Board, individually agreed to forfeit the remaining 40% of their outstanding 2.75x Performance Restricted shares at such time. In addition, in accordance with his Separation and Consulting Agreement which contractually obligates the Company to apply any modifications to his outstanding 2.75x Performance Restricted shares, the Company’s former President and Chief Executive Officer’s outstanding 2.75x Performance Restricted shares were also modified to vest in 60% of his 2.75x Performance Restricted shares upon closing of the sale and forfeit the other 40% at such time. Under the terms of the Stock Purchase Agreement, if in certain circumstances the Buyer acquires a majority of the Company’s then outstanding common shares prior to the one-year anniversary of the closing of the Sale, then the Buyer is required as a condition to the closing of the acquisition that results in such majority ownership, to pay to the Seller, in respect of each share of common stock sold to the Buyer at the closing of the Sale, the excess, if any, of the highest price per share paid by the Buyer for shares of the Company’s common stock over $23.00 (the “Additional Payment”). As such, for all other plan participants, any outstanding unvested 2.75x Performance Restricted shares will continue to be eligible to vest in accordance with their terms if Seller receives an Additional Payment from the Buyer sufficient to satisfy the 2.75x cumulative return multiple in the twelve month period following the closing of the Sale.
The Sale was considered a liquidity event and was subject to customary closing conditions (including expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act). As the modification discussed above was based on a liquidity event, for accounting purposes, the 2.75x Performance Restricted shares were not considered probable of vesting until such time the Sale was consummated. In accordance with the guidance in ASC 718,
Compensation-Stock Compensation,
as the 2.75x Performance Restricted shares were not considered probable of vesting before or after the date of modification, the Company used the respective modification date fair value to record equity compensation expenses related to the modified shares when the liquidity event occurred. As a result, the Company recognized non-cash equity compensation expense related to all of the 2.75x Performance Restricted shares of approximately $8,400 upon closing of the Sale on May 8, 2017 and paid cash accumulated dividends of approximately $1,300 in the second quarter of 2017.
Other Grants
During the three months ended September 30, 2017, the Company granted 214,580 time-vesting restricted shares (the “Retention Awards”) to certain officers and employees of the Company. For the Retention Awards, 170,601 time-vesting restricted shares will vest 50% on each of the two anniversaries of the date of grant, 15,000 time-vesting restricted shares will vest 100% on the first anniversary of the date of grant, 23,979 will vest 100% on October 11, 2018 and 5,000 time-vesting restricted shares will vest 100% on March 31, 2018, subject to continued employment through the vesting date.
In accordance with the Company’s Fourth Amended and Restated Outside Director Compensation Policy, on June 14, 2017, 56,232 time-vesting restricted shares were granted to the non-employee directors of the Company’s Board of which vest 100% on the day before the next Annual Stockholders Meeting, subject to the outside directors’ continued service on the Board through such vesting date.
12. STOCKHOLDERS’ EQUITY
As of September 30, 2017, 92,550,001 shares of common stock were issued on the accompanying unaudited condensed consolidated balance sheet, which excludes 4,449,475 unvested shares of common stock held by certain participants in the Company’s equity compensation plans (see Note 11–Equity-Based Compensation) and includes 6,519,773 shares of treasury stock held by the Company.
29
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Dividends
Prior to September 19, 2016, the Board had a policy to pay, subject to legally available funds, regular quarterly dividends. The payment and timing of cash dividends was within the discretion of the Board and depended on many factors, including, but not limited to, the Company’s results of operations, financial condition, level of indebtedness, capital requirements, contractual restrictions, restrictions in its debt agreements and in any preferred stock, business prospects and other factors that the Board deemed relevant. On September 19, 2016, the Board suspended the Company’s quarterly dividend policy to allow greater flexibility to deploy capital to opportunities that offer the greatest long term returns to shareholders, such as, but not limited to, share repurchases, investments in new attractions or debt repayments.
During the nine months ended September 30, 2016, the Board declared or paid quarterly cash dividends to all common stockholders of record as follows:
Record Date
|
|
Payment Date
|
|
Cash Dividend
per Common
Share
|
|
January 15, 2016
|
|
January 22, 2016
|
|
$
|
0.21
|
|
March 14, 2016
(a)
|
|
April 1, 2016
|
|
$
|
0.21
|
|
June 20, 2016
(a)
|
|
July 1, 2016
|
|
$
|
0.21
|
|
September 29, 2016
|
|
October 7, 2016
|
|
$
|
0.10
|
|
(a)
|
As the Company had an accumulated deficit at the time these dividends were declared, these dividends were accounted for as a return of capital and recorded as a reduction to additional paid-in capital in the accompanying unaudited condensed consolidated statement of changes in stockholders’ equity.
|
As of September 30, 2017, the Company had $505 of cash dividends recorded as dividends payable in the accompanying unaudited condensed consolidated balance sheet, which relates to unvested time restricted shares and unvested performance restricted shares with a performance condition considered probable of being achieved as of September 30, 2017. These shares carry dividend rights and therefore the dividends accumulate and will be paid as the shares vest in accordance with the underlying equity compensation grants. These dividend rights will be forfeited if the shares do not vest.
During the nine months ended September 30, 2017, accumulated cash dividends of $1,535 related to previous dividend declarations were paid to certain equity plan participants upon vesting of restricted shares, including approximately $1,300 related to certain 2.75x Performance Restricted shares which vested upon closing of the Sale on May 8, 2017 (see Note 11–Equity-Based Compensation for further details). The Company expects that for tax purposes all of these dividends will be treated as a return of capital to stockholders. Distributions that qualify as a return of capital are not considered “dividends” for tax purposes only.
Share Repurchase Program
In 2014, the Board authorized the repurchase of up to $250,000 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. 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 level of the Company’s cash balances, general business and market conditions, and other factors, including legal requirements, debt covenant restrictions and alternative investment opportunities. The Company has remaining authorization for up to $190,000 for future repurchases under the Share Repurchase Program as of September 30, 2017. There were no share repurchases during the three and nine months ended September 30, 2017 and 2016.
Other
On March 24, 2017, the Company announced that an affiliate of ZHG Group entered into an agreement to acquire approximately 21% of the outstanding shares of common stock of the Company from Seller, pursuant to a Stock Purchase Agreement. On May 8, 2017, upon closing of the Sale, ZHG paid Seller $23.00 per share for the Company’s common stock acquired by ZHG in accordance with the terms of the Stock Purchase Agreement. The Company is not a party to the Stock Purchase Agreement, has no obligations thereunder and did not independently verify any arrangements between Seller and ZHG, but is a party to certain other agreements
, a Park Exclusivity and Concept Design Agreement and a Center Concept & Preliminary Design Support Agreement,
entered into in connection with the Sale
(see Note 1–Description of the Business and Basis of Presentation and Note 9–Related-Party Transactions).
30
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
13. RESTRUCTURING PROGRAMS
In October 2017, the Company executed a restructuring program in an effort to reduce costs, increase efficiencies, reduce duplication of functions and improve the Company’s operations (the “2017 Restructuring Program”). The 2017 Restructuring Program involves the elimination of approximately 350 positions by the end of the fourth quarter of 2017 across certain of the Company’s theme parks and corporate headquarters. As a result, during the three months ended September 30, 2017, the Company recorded $5,100 in pre-tax restructuring and other related costs associated primarily with estimated severance and other termination benefits related to the 2017 Restructuring Program. Severance and other termination benefits are provided under an ongoing benefit arrangement as defined by ASC 712,
Compensation-Nonretirement Postemployment Benefits,
and, accordingly, the liability was recorded in accrued salaries, wages, and benefits on the accompanying unaudited condensed consolidated balance sheet as of September 30, 2017.
In December 2016, the Company committed to and implemented a restructuring program in an effort to reduce costs, increase efficiencies, reduce duplication of functions and improve the Company’s operations (the “2016 Restructuring Program”). The 2016 Restructuring Program involved the elimination of approximately 320 positions across all of the Company’s theme parks and corporate headquarters. As a result, the Company recorded $8,904 in pre-tax restructuring and other related costs associated with the 2016 Restructuring Program during the three months ended December 31, 2016. The Company does not expect to incur any additional costs associated with the 2016 Restructuring Program as all continuing service obligations were completed as of December 31, 2016.
The 2017 and 2016 Restructuring Program activity for the nine months ended September 30, 2017 was as follows:
Severance and Other Employment Expenses
|
|
2016 Restructuring Program
|
|
|
2017 Restructuring Program
|
|
|
Total
|
|
Liability as of December 31, 2016
|
|
$
|
7,842
|
|
|
$
|
—
|
|
|
$
|
7,842
|
|
Costs incurred
|
|
|
—
|
|
|
|
5,100
|
|
|
|
5,100
|
|
Reduction in estimated expenses
|
|
|
(572
|
)
|
|
|
—
|
|
|
|
(572
|
)
|
Payments made
|
|
|
(6,941
|
)
|
|
|
—
|
|
|
|
(6,941
|
)
|
Liability as of September 30, 2017
|
|
$
|
329
|
|
|
$
|
5,100
|
|
|
$
|
5,429
|
|
The remaining liability as of September 30, 2017 under the 2016 Restructuring Program relates to restructuring and other related costs to be paid as contractually obligated by December 31, 2017 and is included in accrued salaries, wages and benefits in the accompanying unaudited condensed consolidated balance sheet.
31