TRK Speedway Motorsports Inc

1. DESCRIPTION OF BUSINESS

Basis of Presentation – The consolidated financial statements include the accounts of Speedway Motorsports, Inc. and all of its wholly-owned and operating subsidiaries: Atlanta Motor Speedway LLC (AMS), Bristol Motor Speedway LLC (BMS), Charlotte Motor Speedway LLC (CMS), Kentucky Raceway LLC d/b/a Kentucky Speedway (KyS), Nevada Speedway LLC d/b/a Las Vegas Motor Speedway (LVMS), New Hampshire Motor Speedway, Inc. (NHMS), North Wilkesboro Speedway, Inc. (NWS), Speedway Sonoma LLC (Sonoma Raceway or SR), Texas Motor Speedway, Inc. (TMS), SMISC Holdings LLC d/b/a SMI Properties (SMI Properties or SMIP), US Legend Cars International, Inc. (Legend Cars), Oil-Chem Research Corporation (Oil-Chem), SMI Trackside LLC (SMI Trackside), Speedway Funding LLC, Speedway Properties Company LLC a/k/a Performance Racing Network (PRN), Speedway Media LLC a/k/a Racing Country USA (RCU), and TSI Management Company LLC d/b/a The Source International LLC (TSI) (collectively, the Company, SMI, we, our or us). Hereafter, references to “the Company’s” or “eight” speedways exclude NWS, which presently has no significant operations and assets consist primarily of real estate which has no significant fair value. See Notes 1 and 2 to the Consolidated Financial Statements in our 2017 Annual Report on Form 10-K (2017 Annual Report) for further description of our business operations, properties and scheduled events.

Racing Events – In 2018, we are holding 24 major annual racing events sanctioned by the National Association for Stock Car Auto Racing, Inc. (NASCAR), including 13 Monster Energy Cup and 11 Xfinity Series racing events. We also are holding eight NASCAR Camping World Truck Series, five NASCAR K&N Pro Series, three NASCAR Whelen Modified Tour, two IndyCar Series, six major National Hot Rod Association (NHRA), one Automobile Racing Club of America (ARCA) and three World of Outlaws (WOO) racing events. In 2017, we held 24 major annual racing events sanctioned by NASCAR, including 13 Monster Energy Cup and 11 Xfinity Series racing events. We also held eight NASCAR Camping World Truck Series, three NASCAR K&N Pro Series, four NASCAR Whelen Modified Tour, two IndyCar Series, six major NHRA, one ARCA and three WOO racing events.

2018 Monster Energy NASCAR Cup, Xfinity and Camping World Truck Series Race Date Realignments to Las Vegas Motor Speedway  – We realigned one annual Monster Energy Cup Series and one annual Camping World Truck Series racing event from NHMS, and an annual Xfinity Series racing event from KyS, to LVMS beginning in September 2018. We considered many factors, including the popularity, demand, alternative uses and revenues, and potential net increase in long-term future profitability from conducting additional annual NASCAR racing events in the LVMS market. 

2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER DISCLOSURES

These unaudited consolidated financial statements should be read in conjunction with our consolidated financial statements included in our 2017 Annual Report. In management's opinion, these unaudited consolidated financial statements contain all adjustments necessary for their fair statement at interim periods in accordance with accounting principles generally accepted in the United States. All such adjustments are of a normal recurring nature unless otherwise noted. The results of operations for interim periods are not necessarily indicative of operating results that may be expected for the entire year due to the seasonal nature of the Company's motorsports business. See Note 2 to the Consolidated Financial Statements in our 2017 Annual Report for further discussion of significant accounting policies.

NASCAR Broadcasting Revenues and NASCAR Event Management (formerly purse and sanction) Fees – Under event management agreements, NASCAR typically retains 10% of gross broadcasting revenues as a component of their event management fees. We recognize 90% of gross broadcasting revenues as revenue, and 25% of gross revenues for purses awarded to race participants for each race. The remainder represents additional annually negotiated event management fees paid to NASCAR by the Company for each race. We historically presented the 10% portion of broadcast rights fees retained by NASCAR as both broadcasting revenues and related event management fees. We have determined that such amounts should be presented net, and have revised the presentation of our previously issued financial statements. We concluded the effect on our previously reported interim financial statements was not material. In addition, management believes the revised presentation provides consistency with that used by other companies that promote NASCAR racing events. We revised NASCAR broadcasting revenue and NASCAR event management fees by $6,885,000 and $20,008,000 in the three and nine months ended September 30, 2017 (comparable amounts were $8,709,000 and $22,361,000 for the three and nine months ended September 30, 2018). The revision had no impact on our net income or loss, earnings or loss per share, balance sheet or cash flows.

Quarterly Reporting – We recognize revenues and operating expenses for all events in the calendar quarter in which conducted. Changes in race schedules at our speedways from time to time, including speedway acquisitions, can lessen the comparability of operating results between quarterly financial statements of successive years and increase or decrease the seasonal nature of our motorsports business. The more significant races affected by poor weather and other racing schedule changes for the three and nine months ended September 30, 2018 as compared to 2017 include:

Consolidated Statements of Cash Flows – Under Accounting Standards Update No. 2016-15 adopted as of January 1, 2018 (see “Recently Issued Accounting Standards” below), we now include restricted cash balances in Cash and Cash Equivalents on our Consolidated Statements of Cash Flows for all periods presented. Restricted cash balances are insignificant and included in Other Assets on our Consolidated Balance Sheets.

Income Taxes – We provide for income taxes at the end of each interim period based on management’s best estimate of the annual estimated effective income tax rate. Cumulative adjustments to our annual estimated effective income tax rate are recorded in the interim period in which a change in the annual estimated effective income tax rate is determined. Cash paid for income taxes excludes any previous overpayments the Company may have elected to apply to income tax liabilities. The Company has no undistributed foreign earnings or cash or cash equivalents held outside of the US. See Notes 2 and 8 to the Consolidated Financial Statements in our 2017 Annual Report for additional information on our accounting for income taxes.

Our effective income tax rate for the three months ended September 30, 2018 and 2017 was 25.2% and 37.1%, and for the nine months ended September 30, 2018 and 2017 was 23.2% and 35.0%, respectively. The 2018 tax rates reflect the lower US corporate federal tax rate under the Tax Cuts and Jobs Act further described below, and a second quarter 2018 non-recurring tax benefit of $1,110,000 resulting from certain state income tax law changes. Our tax rates for the nine months ended September 30, 2017 reflect reduced net deferred income tax liabilities of $1,791,000 for anticipated lower state income tax rates associated with race date realignments, and other lower effective state income tax rates. The tax rate for the nine months ended September 30, 2017 was partially offset by reduced deferred tax assets associated with certain state net operating loss carryforwards of $515,000. We paid cash of $11,625,000 and $12,855,000 for income taxes in the nine months ended September 30, 2018 and 2017.

Accounting for Uncertainty in Income Taxes – Income tax liabilities for unrecognized tax benefits approximate $11,711,000 at both September 30, 2018 and December 31, 2017, all of which relates to our previously discontinued operation. Of those amounts, $11,534,000 is included in noncurrent other liabilities, all of which would favorably impact our effective tax rate if recognized, and $177,000 is included in deferred tax liabilities at both September 30, 2018 and December 31, 2017. As of September 30, 2018 and December 31, 2017, management believes $823,000 of unrecognized tax benefits will be recognized within the next twelve months. Interest and penalties associated with unrecognized tax benefits were insignificant for the three and nine months ended September 30, 2018 and 2017. As of September 30, 2018 and December 31, 2017, we had $660,000 and $241,000 accrued for the payment of interest and penalties on uncertain tax positions, which is included in other noncurrent liabilities. The tax years that remain open to examination include 2015 through 2017 by the Internal Revenue Service, and 2013 through 2017 by other state taxing jurisdictions to which we are subject. 

December 2017 Tax Cuts and Jobs Act Enactment – On December 22, 2017, the Tax Cuts and Jobs Act (the Tax Act) was enacted and substantially amended the Internal Revenue Code. Effective January 1, 2018, the Act reduces US corporate federal tax rates from 35% to 21%, provides for 100% expensing of certain qualified capital investments through 2022, repeals the corporate Alternative Minimum Tax, eliminates loss carrybacks, limits using future losses, and further limits the deductibility of certain executive compensation, among other provisions. Current accounting guidance provides for a provisional one-year measurement period for entities to finalize their accounting for certain income tax effects of the Tax Act.

As of December 31, 2017, we recognized provisional tax expense related to non-deductible executive compensation as we anticipated that performance-based compensation would no longer be tax deductible. During the three and nine months ended September 30, 2018, we recognized $56,000 of tax benefit related to changes made to the provisional amounts, primarily related to the revaluation of deferred tax assets and liabilities. We expect to continue to refine the calculations as additional analysis is completed and as the Internal Revenue Service issues additional guidance. We plan to finalize the accounting for those provisional amounts in the fourth quarter 2018 upon filing our corporate income tax returns. Final amounts may differ from provisional amounts after further analysis, changes in interpretation and assumptions, or additional regulatory guidance that may be issued, among other things.

Income Tax Benefits – Applicable accounting guidance may require establishing valuation allowances for certain deferred tax assets or income tax liabilities for unrecognized tax benefits, notwithstanding management believes associated tax filing positions are sustainable and are or will be reflected in its tax filings. At September 30, 2018 and December 31, 2017, liabilities for unrecognized tax benefits totaled $11.7 million. Should those tax positions not be fully sustained if examined, an acceleration of material income taxes payable could occur. Where no net income tax benefit had been previously reflected because of providing a valuation allowance on related deferred tax assets, our future results of operations might not be significantly impacted. However, resulting cash required for payments of income taxes could be material in the period in which such determination is made.

Advertising Expenses – Event specific advertising costs are expensed when an associated event is held and included principally in direct expense of events. Non-event related advertising costs are expensed as incurred and included principally in other direct operating expense. Advertising expense amounted to $4,449,000 and $3,831,000 for the three months ended September 30, 2018 and 2017, and $10,879,000 and $10,854,000 for the nine months ended September 30, 2018 and 2017. There were no deferred direct-response advertising costs at September 30, 2018 or December 31, 2017.

TMS Mineral Rights Lease Receipts – We recognized royalty revenue of $334,000 and $508,000 in the three months ended September 30, 2018 and 2017, and $1,077,000 and $1,486,000 in the nine months ended September 30, 2018 and 2017 under a natural gas mineral rights lease agreement and a joint exploration agreement entitling TMS to stipulated stand-alone and shared royalties. Such revenues can vary due to associated volatility in natural gas price levels and common diminishing well production, as well as other factors outside of TMS’s control. At this time, while extraction activities continue, no new wells are being explored, and management is unable to determine ongoing volumes of production if any or for how long (including common diminishing well production over time), or if natural gas price levels will further decline, remain steady or adequate. The agreements stipulate that TMS distribute 25% of production royalty revenues to the lessee, and obligate TMS to spend amounts equal to royalties received on TMS facility and road infrastructure improvements beginning in 2017, up to specified cumulative amounts. At this time, management believes 2018 revenues will not differ significantly from 2017, and that our infrastructure spending will continue to exceed anticipated future royalties similar to 2017. As of September 30, 2018 and December 31, 2017, there was no deferred income associated with these agreements.

Fair Value of Financial Instruments – We follow applicable authoritative guidance which requires that financial and non-financial assets and liabilities measured and reported on a fair value basis be classified, disclosed and categorized as further described below. Fair value estimates are based on relevant market information and single broker quoted market prices where available at a specific point in time, and changes in assumptions or market conditions could significantly affect estimates. The carrying values of cash and cash equivalents, accounts receivable, certain other assets and accounts payable approximate fair value because of the short maturity of these financial instruments. Cash surrender values are carried at fair value based on binding broker quoted market prices. Notes receivable and bank revolving credit facility and term loan borrowings are variable interest rate financial instruments and, therefore, carrying values approximate fair value. The fixed rate senior notes payable are publicly traded and estimated fair values are based on single broker quoted market prices. Other long-term debt bears interest approximating market rates; therefore, carrying values approximate market value. There have been no changes or transfers between category levels or classes.

The following table presents estimated fair values and categorization levels of our financial instruments as of September 30, 2018 and December 31, 2017 (in thousands):

Property and Equipment – From time to time, we renovate various seating, suite and other areas at our speedways for modernizing our facilities, alternative marketing or development purposes such as offering unique fan zones, expanded premium hospitality and RV camping areas, or wider seating and improved sight lines. When management decides on renovation and removal, accelerated depreciation is recorded prospectively over shortened estimated remaining useful lives of the assets, and accounted for as a change in estimate, beginning when management contracts and begins removal. In the first quarter 2017, we contracted and began removing certain seating at CMS, KyS and NHMS. As such, we recorded pre-tax charges for accelerated depreciation and costs of removal (included in other expense, net) aggregating $4,597,000, before income tax benefits of $1,700,000, in the first quarter 2017. These charges are included in our "motorsports event related" reporting segment (see Note 10).

Recently Issued Accounting Standards – The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-15 “Statement of Cash Flows (Topic 23) - Classification of Certain Cash Receipts and Cash Payments” which provides specific guidance on eight cash flow classification issues. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, and was applied using a retrospective transition method to each period presented. Our adoption of this new guidance as of January 1, 2018 had an immaterial impact on our financial statements.

The FASB issued ASU No. 2016-02 “Leases (Subtopic 842)” which replaces all current US GAAP guidance on this topic, and requires lessees to recognize assets and liabilities arising from leases as well as extensive quantitative and qualitative disclosures. The FASB issued ASU No. 2018-10 “Codification Improvements to Topic 842, Leases” which clarifies certain transitional and application guidance. Lessees will need to recognize on their balance sheets right-of-use assets and lease liabilities for the majority of their leases (other than leases meeting the definition of a short-term lease). Right-of-use assets will be measured at lease liability amounts, adjusted for lease prepayments, lease incentives received and lessee’s initial direct costs. Lease liabilities will equal the present value of lease payments. Assets will be based on the liability, subject to adjustment, such as for initial direct costs. Operating leases may typically result in straight-line expense, while finance leases similar to front-loaded expense pattern. Classification will be based on criteria largely similar to those applied in current lease accounting. The FASB also issued ASU No. 2018-11 “Leases (Topic 842), Targeted Improvements” which provides entities with an optional cumulative-effect adjustment transition method for adopting the new leases standard, and a practical expedient related to accounting for separate leasing and non-leasing components of a contract. Entities also have the option of applying the guidance using the modified retrospective approach for all leases existing as of the effective date, which requires application at the beginning of the earliest comparative period presented. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the adoption alternatives and potential impact that adoption may have on our financial statements, including ongoing analysis of transactional data, underlying contracts and associated accounting policies, and continue to gather information for required presentation and disclosures. Also, we are implementing processes, internal controls and technology solutions to help enable timely and accurate reporting.

The FASB issued ASU No. 2018–01 "Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842" which provides an optional transition practical expedient to not evaluate existing or expired land easements that were not previously accounted for as leases under current lease guidance. Entities that elect this practical expedient should evaluate new or modified land easements at the date of adoption, which should be applied consistently to all existing or expired land easements not previously accounted for as leases. Entities that do not elect this practical expedient should evaluate all existing or expired land easements to assess whether they meet the definition of a lease. This Update affects entities with land easements that existed or expired before adoption, provided the entity does not account for those land easements as leases under current guidance. Once adopted, this Update should be applied prospectively to all new or modified land easements to determine whether any arrangements should be accounted for as a lease. Entities should continue to apply its current accounting policy for accounting for land easements that existed before adoption of this Update. This guidance is effective beginning in the same periods as Update No. 2016-02 described above. We are currently evaluating the potential impact that adoption may have on our financial statements.

Revenue from Contracts with Customers – As of January 1, 2018, we adopted Accounting Standards Update No. 2014-09 "Revenue from Contracts with Customers (Topic 606)” and associated amendments, using the modified retrospective method of adoption (ASC 606). We applied, and are continuing to apply, the five-step model provided in this new standard. The guidance includes the core principle that entities recognize revenue to depict transfers of promised goods or services to customers in amounts that reflect the consideration entities expect to be entitled in exchange for those goods or services, and expands required financial statement disclosures regarding revenue recognition. Adoption did not result in an initial cumulative adjustment that impacted our retained earnings. There was no impact on the measurement or recognition of revenue of prior periods, and management believes adoption will not materially impact our future timing or classification of revenue recognition. Management believes no unusual or significant estimation was necessary to apply the new revenue guidance to existing customer contracts. Our main types of revenue contracts and performance obligations are further described below. Our evaluation under ASC 606 determined that certain accounts receivable should be classified as contract assets, and corresponding deferred revenues should be classified as contract liabilities. These future contracted revenues, as further described below, include various event related marketing agreements, and event tickets purchased under extended payment terms that have not yet been paid in full, and related performance obligations have not been satisfied. Under ASC 606, contract assets and contract liabilities in a contract are reportable on a net basis.

Disaggregated Revenues – Based on economic factors, including their nature, timing and certainty as further described below, we have disaggregated the composition of our revenues in the following table. The table includes our admissions, NASCAR broadcasting, and sponsorships and other event related revenues that are reported in our Motorsports Event Related segment, and souvenir and other merchandise and other revenues that are reported in that segment and our All Other segment (see Note 10). This disaggregation corresponds with our segment reporting except as described below. Management believes there are no unusual or significant uncertainties or conditions regarding our revenues or cash flows, except should uncontrollable circumstances such as poor weather, adverse incidents or geopolitical events involving large gatherings of people prevent a major NASCAR race from being held during the racing season. All such races have been held within their scheduled calendar year over the years.

The following describes the composition of our disaggregated revenues and associated performance obligations:

Admissions – We sell tickets to individuals, corporate customers and other groups, including contracted admissions and other access, to our motorsport and non-motorsports events.

NASCAR Broadcasting – NASCAR contracts directly with certain television networks on broadcasting rights for all NASCAR-sanctioned racing events. We receive television broadcasting revenues under contractual sanction agreements for each such race. SMI has separate five-year Event Management Agreements (formerly purse and sanction) with NASCAR under which our speedways will conduct such racing events through 2020.

Sponsorships and Other Event Related – Sponsorships generally consist of event and official sponsorship agreements. These various marketing agreements can be event, speedway or period specific, or pertain to multiple events, speedways or years. Marketing agreements that are not event specific typically contain stated fiscal year periods. We receive payments based on contracted terms. Our marketing agreements sometimes include multiple specified elements such as sponsorships, tickets, hospitality, suites or on-site advertising in varying combinations for one or more events or contract periods, although there is typically a predominant element. Contracted revenues are allocated between admissions and event related revenue financial statement categories based on relative fair or stand-alone selling price of the respective multiple elements as such events or activities are conducted each year in accordance with underlying agreement terms.

We derive other event related revenue from various marketing agreements for on-site advertising, hospitality and other promotion related activities. We derive revenue based commissioned payments from a long-term contracted third party for food and beverage sales during motorsports and non-motorsports events, speedway catered “hospitality” receptions and private parties. We also derive revenue from luxury suite rentals, parking and other event and speedway related activities. Our speedways and related facilities are frequently leased to others for use in driving schools, testing, research and development of race cars and racing products, concerts, settings for commercials and motion pictures, and other outdoor events. We derive event related revenue from the sale of commercial time and other radio broadcast programming on PRN, and from ancillary broadcasting rights other than NASCAR broadcasting revenue.

Souvenir and Other Merchandise – We derive event related revenue from sales of owned motorsports related souvenir merchandise and commissioned souvenir merchandise sales during racing and non-racing events and in our speedway gift shops throughout the year. Souvenir merchandise is sold in concession areas to individual, group, corporate and other customers. Fees and sales based commissions are paid to us by third-party vendors to allow on-site selling of merchandise and promotional items during our events and activities. We also derive other operating revenue from our Legend Cars and from Oil-Chem operations, and sales of souvenir merchandising, including screen-printing, embroidery, services and products to third parties that typically are not event specific.

Other – We derive other operating revenue from dining and entertainment facilities at The Speedway Clubs at CMS and TMS. We also derive other operating revenue from leasing of SR’s industrial park to individuals, corporate and other customers, including race teams and driving schools, from leasing of office towers located at several of our speedways, TMS natural gas mineral rights, and from sanctioning US Legend Cars circuit races.

Accounting Recognition for Event Related Revenues and Associated Net Deferred Event Income – We recognize admissions, NASCAR broadcasting and event related revenues when an event is held. Deferred race event income, and associated direct event expenses, pertain to scheduled events to be held in upcoming periods, are recognized when an event is held, and are reflected net as current liabilities in deferred race event and other income. We recognize contracted sponsorship and other marketing arrangement fee revenues, and associated expenses, as events or activities are conducted each year in accordance with the respective agreement terms. Event souvenir merchandise sales and commission based net revenues from food and beverage sales are recognized at time of sale. Advance revenues and associated direct expenses pertaining to specific events are deferred until the event is held. Deferred expenses often include NASCAR Event Management Fees, race purses and sanction fees for other racing events, sales commissions, event specific advertising, signage and other marketing costs, sales and admission taxes, and credit card processing fees on advance revenues associated with our upcoming events.

If circumstances prevent a race from being held during the racing season: (i) generally advance revenue is refundable, (ii) all deferred direct event expenses would be immediately recognized except for race event management fees which would be refundable from NASCAR or other sanctioning bodies, and (iii) sales and admission taxes would be refundable from taxing authorities. Management believes this accounting policy results in appropriate matching of revenues and expenses associated with our racing events and helps ensure comparability and consistency between our financial statements. Advance revenues, and associated direct expenses, if any, for track rentals, driving schools and similar activities are deferred and recognized when the activities take place.

Accounting Recognition for Non-Event Souvenir Merchandise and Other Revenues – We recognize revenue (including associated shipping and handling which is insignificant) when products are shipped, title transfers to customers, right of return or cancellation provisions expire, sales prices are final and collection is probable. Product sold on consignment with right of return or cancellation provisions has not been significant.

Accounting Recognition for Noncurrent Net Deferred Income – We recognize revenue associated with Preferred Seat License (PSL) agreements whereby licensees are entitled to purchase annual season ticket packages for sanctioned racing events under specified terms and conditions. Among other items, licensees are required to purchase all season ticket packages as offered each year. License agreements automatically terminate without refund should licensees not purchase any offered ticket and are transferable once each year subject to certain terms and conditions. Licensees are not entitled to refunds for postponement or cancellation of events due to weather or certain other conditions. Net PSL fees are deferred when received and amortized into income over the estimated useful life of those facilities or recognized upon license agreement termination.

Performance Obligations – A performance obligation is defined as a contracted promise to transfer a distinct good or service to the customer. Our performance obligations and associated accounting recognition are described above. Significantly, we are obligated to conduct events in the manner stipulated under terms and conditions of our sanctioning agreements. We typically require payment of event specific related contracts before associated events are held. Management believes we recognize revenues, and associated costs, when or as distinct and multiple performance obligations are satisfied. For non-event merchandise sales, we transfer control and recognize revenue when products are shipped and customers have accepted and obtained control of the goods. At that time, our obligations under customer contract terms have been satisfied and transfer of control of associated goods and services has occurred. Our contracts typically do not contain financing components, or variable consideration except for net commission based revenues for food and beverage sales described above. Our contracts are typically not modified, and returns, refunds and warranty costs for goods or services are not significant. Management believes there are no partially satisfied obligations based on the nature of our operations and contract terms.

We have contracted future revenues representing unsatisfied performance obligations, and the estimated revenue expected to be recognized in the future related to these performance obligations. These contracts contain initial terms typically ranging from one to five years, with some for ten-year periods, excluding renewal options. We have elected to use the following practical expedients under ASC 606 for disclosures related to unsatisfied performance obligations: (i) associated future costs to obtain or fulfill unrecorded performance obligations were not estimated, (ii) unsatisfied performance obligations expected to be satisfied within the next twelve months were excluded, and (iii) time bands, reflecting management’s best estimate of when we will transfer control to customers, are based on calendar years to comport with our seasonal business. We also excluded unsatisfied performance obligations for future NASCAR broadcasting revenue terms through 2024. We anticipate recognizing unsatisfied performance obligations for the calendar year ending 2019 and beyond of approximately $150,150,000 at September 30, 2018. 

Contract Balances – Our contract assets are comprised of accounts receivable and deferred event expenses (described above), and our contract liabilities are comprised of deferred event income and noncurrent deferred income (both described above). Costs to obtain and fulfill contracts (performance obligations) are comprised principally of such deferred event expenses. Significantly, such costs include NASCAR Event Management Fees which must be incurred enabling us to hold associated racing events and receive NASCAR broadcasting revenues. Our policy for expense recognition of contract assets associated with deferred event expenses is further described above. 

Changes in contract assets and liabilities during the nine months ended September 30, 2018 result principally from recognition upon holding associated motorsport and non-motorsports events during the period. At September 30, 2018 and December 31, 2017, contract assets aggregated $5,686,000 and $7,511,000, and contract liabilities aggregated $32,415,000 and $51,344,000. For the nine months ended September 30, 2018, we recognized revenue associated with contract liabilities amounting to $42,413,000. Our contract liabilities consist of current and noncurrent deferred revenue of $29,914,000 and $2,501,000 at September 30, 2018, and we anticipate recognizing current amounts in the upcoming twelve-month period and noncurrent amounts thereafter.

Taxes Collected from Customers – We have elected to report sales, admission and other taxes collected from customers based on our applicable jurisdiction tax reporting requirements. As such, taxes are reported on both a gross and net basis in our operations, and those reported on a gross basis amounted to $1,579,000 and $1,386,000 in the three months ended September 30, 2018 and 2017, and $3,967,000 and $4,115,000 in the nine months ended September 30, 2018 and 2017.

4. GOODWILL AND OTHER INTANGIBLE ASSETS

Annual Impairment Assessment – We evaluate goodwill and other intangible assets for possible impairment annually in the second quarter, or when events or circumstances indicate possible impairment may have occurred. Other intangible assets are comprised of nonamortizable race event sanctioning and renewal agreements. See Notes 2 and 5 to the Consolidated Financial Statements in our 2017 Annual Report for additional information on our goodwill and other intangible assets, and the methods, assumptions and business factors used in our annual impairment assessment.

Management's latest annual assessment in the second quarter 2018 was based predominately on management's best estimate of future discounted operating cash flows and profitability attributable to such assets for all individual reporting units. The impairment evaluation considered NASCAR’s approved realignment of one annual Monster Energy Cup Series and one annual Camping World Truck Series racing event from NHMS, and an annual Xfinity Series racing event from KyS, to LVMS beginning in September 2018, and anticipated associated net increases in future long-term cash flows and operating profits. Management also considered that the estimated market value for comparable NASCAR race event sanction and renewal agreements (we had agreements with NASCAR to annually conduct thirteen Monster Energy Cup, eleven Xfinity and eight Camping World Truck Series races as of the evaluation date), combined with the estimated fair value for all other Company net assets, substantially exceeds its current market capitalization. Among other factors, the latest assessment assumes projected cash flow and profitability using minimal or modest annual growth rates for projected revenue streams and operating costs (other than NASCAR broadcasting revenues and event management fees), and strategic amounts of planned capital expenditures. The assessment also reflects anticipated lower cash federal income taxes under the Tax Cuts and Jobs Act. Management projected annual increases in contracted NASCAR broadcasting rights revenues, and associated NASCAR event management fees, based on historical and anticipated rates which are supported by recently negotiated multi-year contracts. NASCAR event management fees for years after 2020 have not been negotiated, and future annual fees could differ substantially from those assumed in management’s impairment assessment. Management also considered control premiums and other market information related to our common stock from historical and forward-looking perspectives. Management believes the methods used to determine fair value and evaluate impairment were appropriate, relevant, and represent methods customarily available and used for such purposes and are the best available estimate of fair value.

Management's assessment found the estimated fair value of each reporting unit and each indefinite-lived race date intangible asset substantially exceeded its associated carrying value except for three race date agreements. We recorded sizable impairment charges in 2015 and earlier years to reduce the carrying values for two of those race date agreements to estimated fair values. As such, their adjusted carrying values approximated estimated fair values as of evaluation dates, and which are reflected in our current evaluation. As of September 30, 2018 and December 31, 2017, the aggregate carrying value for those non-amortizable race date event sanctioning and renewal agreements was approximately $298.4 million. The estimated excess of fair value of these identified intangible assets is relatively nominal at this time, heightening sensitivity to management’s assumptions used in estimating future discounted cash flows and profitability and associated risk of failing impairment testing. The evaluation reflects, similar to challenges faced by many major sports, reduced visibility on profit recovery due to factors such as changing demographics, evolving entertainment choices for fans, appealing “at-home viewing” experiences and retirement of popular long-standing “megastars”. We have lowered our expectations for forecasted growth rates for certain revenues and profit recovery. However, those expectations and forecasts are based on many factors out of our control, and could be found unachievable. Such ultimate outcome could adversely impact our estimates of fair values, particularly for those three race date intangible assets.

There have been no triggering events that indicate possible impairment, and management believes our operational and cash flow forecasts support our conclusions that no unrecognized impairment exists as of September 30, 2018. Our future profitability or success associated with any current or future NASCAR race realignments could significantly differ from management expectations and estimates, and are subject to numerous factors, conditions and assumptions, many of which are beyond our control. Different economic or industry conditions or assumptions, and changes in projected cash flows or profitability, if significantly negative or unfavorable, could have a material adverse effect on the impairment evaluation and our future financial condition or results of operations. The evaluations are subjective and based on conditions, trends and assumptions existing at the time of evaluation.

2017 Impairment of Goodwill – Our 2017 annual assessment indicated that the carrying value of goodwill associated with SMIP, which conducts event and non-event souvenir merchandising, exceeded its estimated fair value because of potentially unfavorable merchandising business model developments. As such, a non-cash impairment charge of $1,117,000, before income tax benefits of $419,000, was reflected in the second quarter 2017 to reduce associated goodwill to $0. The 2017 impairment charge pertains to our “motorsports event related” reporting segment (see Note 10).

Other Information – There were no changes in the gross carrying value of other intangible assets or goodwill during the nine months ended September 30, 2018. Those carrying amounts include accumulated impairments of $100.0 million for other intangible assets and $149.7 million for goodwill at both September 30, 2018 and December 31, 2017. There is no accumulated amortization for either asset class.

5. LONG-TERM DEBT

Bank Credit Facility – Our Credit Facility, among other things: (i) provides for a five-year $100,000,000 senior secured revolving credit facility, with separate sub-limits of $50,000,000 for standby letters of credit and $10,000,000 for swing line loans; (ii) provides for a five-year $150,000,000 senior secured term loan (which was fully drawn) and a five-year delayed draw term loan of up to $50,000,000 (which was fully drawn and repaid in 2015) (the Term Loan); (iii) matures in December 2019; (iv) contains an accordion feature allowing the Company to increase revolving commitments or establish a term loan up to an aggregate additional $100,000,000 or $200,000,000, respectively (or a combined aggregate additional amount of up to $250,000,000) with certain lender commitment conditions; (v) allows for annual aggregate payments of dividends and repurchases of SMI securities of up to $50,000,000, increasing up to $75,000,000 subject to maintaining certain financial covenants; and (vi) limits annual capital expenditures to $75,000,000 and provides for motor speedway acquisitions and related businesses. Term Loans require equal minimum quarterly principal payments of at least 5% of initial amounts drawn on an annualized basis.

Interest is based, at the Company’s option, upon the Eurodollar Rate plus 1.25% to 2.00% or a base rate defined as the higher of Bank of America’s prime rate, the Federal Funds Rate plus 0.5% or the Eurodollar Rate plus 1%, plus 0.25% to 1.00%. The Credit Facility also contains a commitment fee ranging from 0.25% to 0.40% of unused amounts available for borrowing. The interest rate margins on borrowings and the commitment fee are adjustable periodically based upon certain consolidated total leverage ratios. The Credit Facility contains a number of affirmative and negative financial covenants, including requirements that we maintain certain consolidated total leverage ratios and consolidated interest coverage ratios.

We repaid Term Loan borrowings of $4,000,000 and $27,000,000 during the three and nine months ended September 30, 2018, and $5,000,000 and $31,000,000 during the three and nine months ended September 30, 2017, and there were no new borrowings under the Credit Facility. At September 30, 2018 and December 31, 2017, outstanding borrowings under the Credit Facility were $3,000,000 and $30,000,000 (all Term Loan borrowings), and outstanding letters of credit amounted to $662,000 and $698,000. As of September 30, 2018, we had availability for borrowing up to an additional $99,338,000, including up to an additional $49,338,000 in letters of credit, under the revolving Credit Facility, and $50,000,000 under the delayed draw term loan provision.

2023 Senior Notes – We completed a private placement of 5.125% Senior Notes due 2023 in aggregate principal amount of $200.0 million in January 2015 (the 2023 Senior Notes), and an exchange offer for substantially identical 2023 Senior Notes registered under the Securities Act in the second quarter 2015. The 2023 Senior Notes were issued at par, and net proceeds were used to redeem a portion of our former 2019 Senior Notes as further described in Note 6 to the Consolidated Financial Statements in our 2017 Annual Report. The 2023 Senior Notes mature in February 2023 and interest payments are due semi-annually on February 1 and August 1.

Other Notes Payable – At September 30, 2018 and December 31, 2017, long-term debt includes a 3% interest bearing debt obligation of $887,000 and $1,049,000 associated with the purchase of real property at BMS, payable in eight annual installments of $194,000 beginning January 2016.

Deferred Financing Costs – Deferred financing costs associated with our revolving Credit Facility are reported in other noncurrent assets, and those associated with our 2023 Senior Notes and bank Term Loan are reflected as a reduction of long-term debt. As of September 30, 2018 and December 31, 2017, long-term debt reflects deferred financing costs, net of accumulated amortization, of $3,023,000 and $3,935,000.  

Other General Terms and Conditions – The Credit Facility and 2023 Senior Notes contain specific requirements and restrictive financial covenants and limits or prohibits various financial and transactional activities, and also contain cross-default and change of control provisions. We were in compliance with all applicable covenants under these debt agreements as of September 30, 2018. See Note 6 to the Consolidated Financial Statements included in our 2017 Annual Report for additional information on these debt agreements, including dividend, redemption, and right of payment provisions, pledged security and financial and restrictive covenants.

Subsidiary Guarantees – Amounts outstanding under our Credit Facility and 2023 Senior Notes are guaranteed by all of SMI’s material operative subsidiaries except for Oil-Chem and its subsidiaries (which are presently minor). These guarantees are full and unconditional, and joint and several with the 2023 Senior Notes on a senior unsecured basis. The parent company has no significant independent assets or operations. There are no restrictions on our subsidiaries’ ability to pay dividends or advance funds to the parent company.

Interest Expense, Net – Interest expense, interest income and capitalized interest costs are summarized as follows (in thousands):

Stock Repurchase Program – Our Board of Directors has approved a stock repurchase program authorizing SMI to repurchase up to an aggregate of 6,000,000 shares (increased from 5,000,000 shares with Board of Director approval on February 12, 2018) of our outstanding common stock from time to time, depending on market conditions, share price, applicable limitations under our debt agreements, and other factors the Board of Directors or its designees, in their sole discretion, may consider relevant. The purchases can be in the open market or private transactions. The stock repurchase program is presently funded using available cash and cash equivalents and may be suspended or discontinued at any time.

During the three and nine months ended September 30, 2018, we repurchased 63,000 and 185,000 shares of common stock for $1,114,000 and $3,371,000. As of September 30, 2018, we could repurchase up to an additional 1,006,000 shares under the current authorization. During the nine months ended September 30, 2018, we repurchased approximately 28,000 shares of common stock for $540,000 from management employees to settle income taxes on 62,000 restricted shares that vested during the period. As of and through September 30, 2018, treasury stock includes 356,000 shares of common stock delivered to the Company for such purposes.

Declaration of Cash Dividends – To date in 2018, our Board of Directors has approved the following quarterly cash dividends on common stock, which are being paid using available cash and cash equivalents on hand (in thousands except per share amounts):

7. RELATED PARTY TRANSACTIONS

The Company and Sonic Financial Corporation (Sonic Financial), a Company affiliate through common ownership by our Executive Chairman and our Chief Executive Officer, and by a member of our Board of Directors, share various expenses in the ordinary course of business under a shared services agreement. The Company incurred expenses of $301,000 and $280,000 in the three months ended September 30, 2018 and 2017, and $1,036,000 and $686,000 in the nine months ended September 30, 2018 and 2017 under the shared services agreement. No amounts were due from or payable to Sonic Financial at September 30, 2018 and December 31, 2017.

The Company and certain SMI subsidiaries lease office and warehouse facilities from companies affiliated through common ownership by our Executive Chairman and Chief Executive Officer, and by a member of our Board of Directors, under annually renewable lease agreements. Rent expense amounted to $182,000 in both the three months ended September 30, 2018 and 2017, and $544,000 in both the nine months ended September 30, 2018 and 2017. Amounts owed to these affiliated companies at September 30, 2018 or December 31, 2017 were not significant.

Various SMI subsidiaries purchased new and used vehicles for operations and employee use from certain subsidiary dealerships of Sonic Automotive, Inc. (SAI), an entity in which our Executive Chairman is a controlling stockholder, for an aggregate of $8,000 and $28,000 in the three months ended September 30, 2018 and 2017, and $189,000 and $172,000 in the nine months ended September 30, 2018 and 2017. There were no vehicles sold to SAI in the three or nine months ended September 30, 2018 and 2017. Also, SMI sold through certain speedways and its SMIP merchandising subsidiary various event related inventory and merchandise to SAI totaling $210,000 and $203,000 in the three months ended September 30, 2018 and 2017, and $662,000 and $679,000 in the nine months ended September 30, 2018 and 2017. At September 30, 2018 and December 31, 2017, approximately $159,000 and $70,000 was due from SAI and is reflected in current assets.

Oil-Chem sold zMAX micro-lubricant ^® product to certain SAI dealerships for resale to service customers of the dealerships in the ordinary course of business. Total purchases from Oil-Chem by SAI dealerships were $432,000 and $449,000 in the three months ended September 30, 2018 and 2017, and $1,262,000 and $1,507,000 in the nine months ended September 30, 2018 and 2017. At September 30, 2018 and December 31, 2017, approximately $191,000 and $148,000 was due from SAI and is reflected in current assets.

The foregoing related party balances as of September 30, 2018 and December 31, 2017, and transactions for the three and nine months ended September 30, 2018 and 2017, are summarized below (in thousands):

8. LEGAL PROCEEDINGS AND CONTINGENCIES

From time to time, we are party to routine litigation incidental to our business. We believe that the resolution of any or all of such litigation will not have a material effect on our financial condition, results of operations or cash flows.

9. STOCK COMPENSATION PLANS    

See Note 11 to the Consolidated Financial Statements in our 2017 Annual Report for additional information and terms of the Company’s stock compensation plans.

2013 Stock Incentive Plan, Amended and Restated as of April 19, 2017 – The Compensation Committee of the Company’s Board of Directors approved grants of 35,000 restricted stock units to the Company’s Chief Executive Officer and President and 35,000 shares of restricted stock to the Company’s Vice Chairman and Chief Financial Officer in each of the nine months ended September 30, 2018 and 2017. These grants are to be settled in shares of common stock, vest in equal installments over three years and are subject to reaching certain defined full year earnings targets established at the beginning of each year by the Compensation Committee. Forfeitures in any given year result from differences between the Company’s actual results for the previous year as compared to the defined full year earnings target.

The following is a summary of restricted stock and restricted stock units granted, vested and forfeited under the 2013 Stock Incentive Plan for the indicated periods (shares in thousands):

During the nine months ended September 30, 2018 and 2017, the Company repurchased 28,000 and 31,000 shares of common stock for $540,000 and $597,000 from executive management employees to settle income taxes on 62,000 and 64,000 shares that vested in each respective period.

2008 Formula Restricted Stock Plan, Amended and Restated as of April 17, 2012 – The 2008 Formula Restricted Stock Plan (the 2008 Formula Plan) expired by its terms in February 2018 (see the 2018 Formula Restricted Stock Plan below). The 2008 Formula Plan constituted a “formula plan” within the meaning of SEC Rule 16b-3 of the Exchange Act and was administered by the Board of Directors, excluding non-employee directors. An aggregate of 15,572 shares granted under this plan in April 2017 vested in April 2018, and 15,976 shares granted in April 2016 vested in April 2017. No further shares can be granted under this plan.

2018 Formula Restricted Stock Plan – In March 2018, our Board of Directors adopted the 2018 Formula Restricted Stock Plan (the 2018 Formula Plan) which was approved by our stockholders at the 2018 Annual Meeting. The 2018 Formula Plan is intended to promote the interests of the Company and its stockholders by providing non-employee directors with Company ownership interests to more closely align their interests with our stockholders and enhance our ability to attract and retain highly qualified non-employee directors. The 2018 Formula Plan constitutes a “formula plan” within the meaning of SEC Rule 16b-3 of the Exchange Act. Approval of the 2018 Formula Plan, and expiration of the 2008 Formula Plan, did not adversely affect the rights of any outstanding awards previously granted under the 2008 Formula Plan. The 2018 Formula Plan is administered by the Board of Directors, excluding non-employee directors, who can amend, suspend or terminate the plan in whole or in part, provided that no such amendment, suspension or termination adversely affects previously granted awards without the consent of the award recipient. Any such amendment, suspension or termination may be subject to stockholder approval.

Under the 2018 Formula Plan, 250,000 shares of SMI’s common stock are reserved for issuance and awards will be in the form of restricted stock. On the first business day following each annual meeting, each standing non-employee director will receive a grant of restricted stock consisting of the number of shares equaling $75,000 divided by the average closing sale price for the twenty days immediately preceding the grant date. These grants of restricted stock fully vest on the earlier of (i) the first grant date anniversary or (ii) the day before our next annual meeting following the grant date. Non-employees appointed as a member of the Board of Directors after the annual meeting will receive a restricted stock grant effective as of the date of appointment. The number of shares granted are calculated in the same manner as previously described and fully vest on the first anniversary of the grant date. Vesting is subject to continued service as a director through scheduled vesting dates. These terms and conditions are similar to those of the expired 2008 Formula Plan. The Company awarded 4,226 shares of restricted stock to each of the Company’s four non-employee directors in April 2018, and 4,459 shares of restricted stock to a non-employee director appointed to the Board of Directors in October 2018, under this plan.

Share-Based Payments – There were no significant changes in the characteristics of restricted stock or restricted stock units granted in 2018 or 2017 as compared to prior grants and no modifications of the terms of any share-based payment arrangements. There were no significant changes in estimates, assumptions or valuation methods used to estimate the fair value of share-based payment awards. No stock options were granted under any of the Company’s stock compensation plans during the nine months ended September 30, 2018 or 2017. No stock options were exercised in the nine months ended September 30, 2018. A total of 30,500 stock options previously granted under the 2004 Plan were exercised in the nine months ended September 30, 2017 at an exercise price of $15.83.

Share-based compensation cost for the three months ended September 30, 2018 and 2017 totaled $881,000 and $868,000, before income taxes of $222,000 and $322,000, and for the nine months ended September 30, 2018 and 2017 totaled $2,593,000 and $2,533,000, before income taxes of $602,000 and $887,000, respectively, and is included in general and administrative expense. There were no capitalized share-based compensation costs at September 30, 2018 or December 31, 2017. As of September 30, 2018, there was approximately $2,920,000 of total unrecognized compensation cost related to non-vested restricted stock and restricted stock units granted under the Company's stock compensation plans that is expected to be recognized over a weighted average period of 0.8 year. As of September 30, 2018, all stock options were vested and there was no unrecognized compensation cost related to stock options granted under any of the Company’s stock compensation plans.

10. SEGMENT DISCLOSURES

Our operations are predominately comprised of promoting, marketing and sponsoring motorsports racing events, merchandising and other related activities conducted at our various major speedway facilities located in the United States. Our business activities, including those of our subsidiaries, are further described in Note 1 to this Quarterly Report on Form 10-Q and in Notes 1 and 2 to the Consolidated Financial Statements in our 2017 Annual Report. All Company assets are located in the United States, and our speedway names denote their respective geographical areas. Our “motorsports event related” segment consists of revenues and expenses associated with all admissions, event related, NASCAR broadcasting and event motorsports merchandising activities. The segment includes motorsports related events and operations for all Company speedways, NASCAR broadcasting and ancillary media rights, PRN and RCU motorsports radio programming, and SMI Properties and SMI Trackside motorsports merchandising at Company and non-Company speedways. These operating segments have been aggregated into the motorsports related reportable segment as each share similar types and classes of customers, similar methods for providing or distributing motorsports related services, souvenirs and other merchandise, and other similar economic characteristics. Our “all other” operations consist of SMIP subsidiary non-event motorsports and non-motorsports merchandising, Legend Cars non-event merchandising and sanctioning body activities, Oil-Chem micro-lubricant activities, TMS natural gas mineral rights lease and related revenues, and office rentals at certain Company speedways.

Segment information as presented below comports with information our chief operating decision maker and management use and focus on when assessing segment performance and allocating resources. Segment operating income or loss excludes interest, income taxes, other income or expense and specified non-recurring items, if any, and corporate general and administrative and depreciation costs are allocated to operating segments based on their respective revenues relative to consolidated revenues. The following tables present our segment information (in thousands):

The following table reconciles segment operating income above to consolidated income before income taxes for the periods indicated (in thousands):