seas-10q_20160930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to            

Commission File Number: 001-35883

 

SeaWorld Entertainment, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

27-1220297

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

9205 South Park Center Loop, Suite 400

Orlando, Florida 32819

(Address of principal executive offices) (Zip Code)

(407) 226-5011

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The registrant had outstanding 88,971,588 shares of Common Stock, par value $0.01 per share as of November 4, 2016.

 

 

 

 


SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

 

 

 

Page No.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

1

 

 

 

 

 

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Unaudited Condensed Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Balance Sheets

 

3

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)

 

4

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity

 

5

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows

 

6

 

 

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

7

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

26

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

40

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

41

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

42

 

 

 

 

 

Item 1A.

 

Risk Factors

 

42

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

42

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

42

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

42

 

 

 

 

 

Item 5.

 

Other Information

 

42

 

 

 

 

 

Item 6.

 

Exhibits

 

43

 

 

 

 


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-Q may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. All statements, other than statements of historical facts, including statements concerning our plans, objectives, goals, beliefs, business strategies, future events, business conditions, our results of operations, financial position and our business outlook, business trends and other information, may be forward-looking statements. Words such as “might,” “will,” “may,” “should,” “estimates,” “expects,” “continues,” “contemplates,” “anticipates,” “projects,” “plans,” “potential,” “predicts,” “intends,” “believes,” “forecasts,” “future,” “targeted” and variations of such words or similar expressions are intended to identify forward-looking statements. The forward-looking statements are not historical facts, and are based upon our current expectations, beliefs, estimates and projections, and various assumptions, many of which, by their nature, are inherently uncertain and beyond our control. Our expectations, beliefs, estimates and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs, estimates and projections will result or be achieved and actual results may vary materially from what is expressed in or indicated by the forward-looking statements.

There are a number of risks, uncertainties and other important factors, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. Such risks, uncertainties and other important factors that could cause actual results to differ include, among others, the risks, uncertainties and factors set forth under “Item 1A.  Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (the “Annual Report on Form 10-K”), filed with the Securities and Exchange Commission (the “SEC”), as such risk factors may be updated from time to time in our periodic filings with the SEC, including this report, and are accessible on the SEC’s website at www.sec.gov, including the following:

 

complex federal and state regulations governing the treatment of animals, which can change, and claims and lawsuits by activist groups;

 

various factors beyond our control adversely affecting attendance and guest spending at our theme parks, including the potential spread of contagious diseases, such as the Zika virus;

 

incidents or adverse publicity concerning our theme parks;

 

a decline in discretionary consumer spending or consumer confidence;

 

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

 

seasonal fluctuations;

 

inability to compete effectively in the highly competitive theme park industry;

 

interactions between animals and our employees and our guests at attractions at our theme parks;

 

animal exposure to infectious disease;

 

high fixed cost structure of theme park operations;

 

changing consumer tastes and preferences;

 

cyber security risks and failure to maintain the integrity of internal or guest data;

 

increased labor costs and employee health and welfare benefits;

 

inability to grow our business or fund theme park capital expenditures;

 

adverse litigation judgments or settlements;

 

inability to protect our intellectual property or the infringement on intellectual property rights of others;

 

the loss of licenses and permits required to exhibit animals or the violation of laws and regulations;

 

loss of key personnel;

 

unionization activities or labor disputes;

 

inability to meet workforce needs;

 

inability to maintain certain commercial licenses;

1


 

restrictions in our debt agreements limiting flexibility in operating our business;

 

our substantial leverage;

 

inability to realize the benefits of acquisitions or other strategic initiatives;

 

inadequate insurance coverage;

 

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

 

environmental regulations, expenditures and liabilities;

 

suspension or termination of any of our business licenses;

 

the ability of affiliates of The Blackstone Group L.P. to significantly influence our decisions;

 

changes or declines in our stock prices, as well as the risk that securities analysts could downgrade our stock or our sector; and

 

risks associated with our capital allocation plans and share repurchases, including the risk that our share repurchase program could increase volatility and fail to enhance stockholder value.

We caution you that the risks, uncertainties and other factors referenced above may not contain all of the risks, uncertainties and other factors that are important to you or to our business. In addition, we cannot assure you that we will realize the results, benefits or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. There can be no assurance that (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors’ likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct or (iv) our strategy, which is based in part on this analysis, will be successful. All forward-looking statements in this Quarterly Report on Form 10-Q apply only as of the date of this Quarterly Report on Form 10-Q or as of the date they were made or as otherwise specified herein and, except as required by applicable law, we undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.

All references to “we,” “us,” “our,” “Company” or “SeaWorld” in this Quarterly Report on Form 10-Q mean SeaWorld Entertainment, Inc., its subsidiaries and affiliates. 

Website and Social Media Disclosure

We use our websites (www.seaworldentertainment.com and www.seaworldinvestors.com) and our corporate Twitter account (@SeaWorld) as channels of distribution of Company information.  The information we post through these channels may be deemed material.  Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts.  In addition, you may automatically receive e-mail alerts and other information about SeaWorld when you enroll your e-mail address by visiting the “E-mail Alerts” section of our website at www.seaworldinvestors.com. The contents of our website and social media channels are not, however, a part of this Quarterly Report on Form 10-Q.

Trademarks, Service Marks and Tradenames

We own or have rights to use a number of registered and common law trademarks, service marks and trade names in connection with our business in the United States and in certain foreign jurisdictions, including SeaWorld Entertainment, SeaWorld Parks & Entertainment, SeaWorld®, Shamu®, Busch Gardens®, Aquatica®, Discovery Cove®, Sea Rescue® and other names and marks that identify our theme parks, characters, rides, attractions and other businesses. In addition, we have certain rights to use Sesame Street® marks, characters and related indicia through certain license agreements with Sesame Workshop (f/k/a Children’s Television Workshop).

Solely for convenience, the trademarks, service marks, and trade names referred to hereafter in this Quarterly Report on Form 10-Q are without the ® and ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks, and trade names. This Quarterly Report on Form 10-Q may contain additional trademarks, service marks and trade names of others, which are the property of their respective owners. All trademarks, service marks and trade names appearing in this Quarterly Report on Form 10-Q are, to our knowledge, the property of their respective owners.

 

 

2


PART I — FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

55,807

 

 

$

18,971

 

Accounts receivable, net

 

 

49,380

 

 

 

39,538

 

Inventories

 

 

33,415

 

 

 

31,213

 

Prepaid expenses and other current assets

 

 

11,898

 

 

 

16,360

 

Total current assets

 

 

150,500

 

 

 

106,082

 

Property and equipment, at cost

 

 

2,803,477

 

 

 

2,748,161

 

Accumulated depreciation

 

 

(1,126,207

)

 

 

(1,029,165

)

Property and equipment, net

 

 

1,677,270

 

 

 

1,718,996

 

Goodwill

 

 

335,610

 

 

 

335,610

 

Trade names/trademarks, net

 

 

161,629

 

 

 

162,726

 

Other intangible assets, net

 

 

18,838

 

 

 

21,327

 

Deferred tax assets, net

 

 

15,283

 

 

 

23,994

 

Other assets

 

 

20,686

 

 

 

19,927

 

Total assets

 

$

2,379,816

 

 

$

2,388,662

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

73,110

 

 

$

93,743

 

Current maturities on long-term debt

 

 

16,850

 

 

 

31,850

 

Accrued salaries, wages and benefits

 

 

16,917

 

 

 

12,330

 

Deferred revenue

 

 

98,124

 

 

 

79,818

 

Dividends payable

 

 

9,467

 

 

 

430

 

Other accrued expenses

 

 

20,481

 

 

 

11,143

 

Total current liabilities

 

 

234,949

 

 

 

229,314

 

Long-term debt, net of debt issuance costs of $10,607 and $13,333 as of

   September 30, 2016 and December 31, 2015, respectively

 

 

1,540,255

 

 

 

1,548,893

 

Deferred tax liabilities, net

 

 

73,250

 

 

 

65,689

 

Other liabilities

 

 

72,819

 

 

 

40,646

 

Total liabilities

 

 

1,921,273

 

 

 

1,884,542

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

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

   or outstanding at September 30, 2016 and December 31, 2015

 

 

 

 

 

 

Common stock, $0.01 par value—authorized, 1,000,000,000 shares; 91,849,408 and 90,320,374 shares issued at September 30, 2016 and December 31, 2015, respectively

 

 

919

 

 

 

903

 

Additional paid-in capital

 

 

618,449

 

 

 

624,765

 

Accumulated other comprehensive loss

 

 

(25,369

)

 

 

(13,137

)

Retained earnings

 

 

19,415

 

 

 

46,460

 

Treasury stock, at cost (6,519,773 shares at September 30, 2016 and December 31,

   2015)

 

 

(154,871

)

 

 

(154,871

)

Total stockholders’ equity

 

 

458,543

 

 

 

504,120

 

Total liabilities and stockholders’ equity

 

$

2,379,816

 

 

$

2,388,662

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

3


SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share amounts)

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Admissions

 

$

294,605

 

 

$

304,626

 

 

$

655,510

 

 

$

679,917

 

Food, merchandise and other

 

 

190,713

 

 

 

192,313

 

 

 

421,185

 

 

 

423,230

 

Total revenues

 

 

485,318

 

 

 

496,939

 

 

 

1,076,695

 

 

 

1,103,147

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of food, merchandise and other revenues

 

 

35,854

 

 

 

36,959

 

 

 

81,768

 

 

 

83,974

 

Operating expenses (exclusive of depreciation and amortization shown separately below and includes equity compensation of $505 and $267 for the three months ended September 30, 2016 and 2015, respectively, and $10,371 and $595 for the nine months ended September 30, 2016 and 2015, respectively)

 

 

198,754

 

 

 

196,931

 

 

 

570,480

 

 

 

541,944

 

Selling, general and administrative (includes equity compensation of $2,040 and $1,282 for the three months ended September 30, 2016 and 2015, respectively and $24,225 and $4,205 for the nine months ended September 30, 2016 and 2015, respectively)

 

 

57,148

 

 

 

47,684

 

 

 

196,534

 

 

 

172,082

 

Restructuring and other related costs

 

 

 

 

 

 

 

 

112

 

 

 

267

 

Depreciation and amortization

 

 

40,921

 

 

 

44,505

 

 

 

156,677

 

 

 

138,469

 

Total costs and expenses

 

 

332,677

 

 

 

326,079

 

 

 

1,005,571

 

 

 

936,736

 

Operating income

 

 

152,641

 

 

 

170,860

 

 

 

71,124

 

 

 

166,411

 

Other expense, net

 

 

72

 

 

 

41

 

 

 

48

 

 

 

511

 

Interest expense

 

 

15,137

 

 

 

15,019

 

 

 

44,297

 

 

 

50,929

 

Loss on early extinguishment of debt and write-off of discounts and debt issuance costs

 

 

 

 

 

 

 

 

 

 

 

20,348

 

      Income before income taxes

 

 

137,432

 

 

 

155,800

 

 

 

26,779

 

 

 

94,623

 

Provision for income taxes

 

 

71,777

 

 

 

57,850

 

 

 

27,405

 

 

 

34,462

 

Net income (loss)

 

$

65,655

 

 

$

97,950

 

 

$

(626

)

 

$

60,161

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on derivatives, net of tax

 

 

1,489

 

 

 

(10,740

)

 

 

(12,232

)

 

 

(15,360

)

Comprehensive income (loss)

 

$

67,144

 

 

$

87,210

 

 

$

(12,858

)

 

$

44,801

 

  Income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share, basic

 

$

0.77

 

 

$

1.14

 

 

$

(0.01

)

 

$

0.70

 

Net income (loss) per share, diluted

 

$

0.77

 

 

$

1.14

 

 

$

(0.01

)

 

$

0.70

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

85,290

 

 

 

86,006

 

 

 

84,787

 

 

 

86,096

 

Diluted

 

 

85,447

 

 

 

86,100

 

 

 

84,787

 

 

 

86,207

 

Cash dividends declared per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per share

 

$

0.10

 

 

$

0.21

 

 

$

0.73

 

 

$

0.84

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

4


SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016

(In thousands, except per share and share amounts)

 

 

 

Shares of

Common

Stock

Issued

 

 

Common

Stock

 

 

Additional

Paid-In

Capital

 

 

Retained Earnings

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Treasury

Stock,

at Cost

 

 

Total

Stockholders'

Equity

 

Balance at December 31, 2015

 

 

90,320,374

 

 

$

903

 

 

$

624,765

 

 

$

46,460

 

 

$

(13,137

)

 

$

(154,871

)

 

$

504,120

 

Equity-based compensation

 

 

 

 

 

 

 

 

34,596

 

 

 

 

 

 

 

 

 

 

 

 

34,596

 

Unrealized loss on derivatives, net of tax

   benefit of $10,497

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,232

)

 

 

 

 

 

(12,232

)

Vesting of restricted shares

 

 

1,612,063

 

 

 

16

 

 

 

(16

)

 

 

 

 

 

 

 

 

 

 

 

 

Shares withheld for tax withholdings

 

 

(87,360

)

 

 

 

 

 

(1,604

)

 

 

 

 

 

 

 

 

 

 

 

(1,604

)

Exercise of stock options

 

 

4,331

 

 

 

 

 

 

82

 

 

 

 

 

 

 

 

 

 

 

 

82

 

Accumulated cash dividends related to performance shares which vested during the period

 

 

 

 

 

 

 

 

(3,400

)

 

 

 

 

 

 

 

 

 

 

 

(3,400

)

Cash dividends declared to stockholders ($0.73 per share), net of forfeitures

 

 

 

 

 

 

 

 

(35,974

)

 

 

(26,419

)

 

 

 

 

 

 

 

 

(62,393

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(626

)

 

 

 

 

 

 

 

 

(626

)

Balance at September 30, 2016

 

 

91,849,408

 

 

$

919

 

 

$

618,449

 

 

$

19,415

 

 

$

(25,369

)

 

$

(154,871

)

 

$

458,543

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

5


SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

For the Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(626

)

 

$

60,161

 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

156,677

 

 

 

138,469

 

Amortization of debt issuance costs and discounts

 

 

3,999

 

 

 

5,170

 

Loss on early extinguishment of debt and write-off of discounts and debt issuance costs

 

 

 

 

 

20,348

 

Loss on sale or disposal of assets

 

 

6,823

 

 

 

4,334

 

Loss on derivatives

 

 

1

 

 

 

288

 

Deferred income tax provision

 

 

27,405

 

 

 

34,462

 

Equity-based compensation

 

 

34,596

 

 

 

4,800

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(14,447

)

 

 

(15,097

)

Inventories

 

 

(2,218

)

 

 

556

 

Prepaid expenses and other current assets

 

 

5,086

 

 

 

3,195

 

Accounts payable

 

 

(2,762

)

 

 

(1,771

)

Accrued salaries, wages and benefits

 

 

4,587

 

 

 

(3,468

)

Deferred revenue

 

 

21,736

 

 

 

22,608

 

Other accrued expenses

 

 

7,771

 

 

 

6,510

 

Other assets and liabilities

 

 

10,243

 

 

 

(645

)

Net cash provided by operating activities

 

 

258,871

 

 

 

279,920

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(135,496

)

 

 

(117,129

)

Change in restricted cash

 

 

(624

)

 

 

(379

)

Net cash used in investing activities

 

 

(136,120

)

 

 

(117,508

)

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from the issuance of debt

 

 

 

 

 

280,000

 

Repayment of long-term debt

 

 

(12,637

)

 

 

(271,938

)

Proceeds from draw on revolving credit facility

 

 

85,000

 

 

 

45,000

 

Repayment of revolving credit facility

 

 

(100,000

)

 

 

(45,000

)

Dividends paid to stockholders

 

 

(56,756

)

 

 

(54,370

)

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

 

 

(1,604

)

 

 

(838

)

Exercise of stock options

 

 

82

 

 

 

 

Debt issuance costs

 

 

 

 

 

(4,571

)

Redemption premium payment

 

 

 

 

 

(14,300

)

Purchase of treasury stock

 

 

 

 

 

(20,650

)

Net cash used in financing activities

 

 

(85,915

)

 

 

(86,667

)

Change in Cash and Cash Equivalents

 

 

36,836

 

 

 

75,745

 

Cash and Cash Equivalents—Beginning of period

 

 

18,971

 

 

 

43,906

 

Cash and Cash Equivalents—End of period

 

$

55,807

 

 

$

119,651

 

Supplemental Disclosures of Noncash Investing and Financing Activities

 

 

 

 

 

 

 

 

Capital expenditures in accounts payable

 

$

10,872

 

 

$

18,404

 

Dividends declared, but unpaid

 

$

9,467

 

 

$

18,396

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

6


SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

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 “selling stockholders”), ultimately owned by affiliates of The Blackstone Group L.P. (“Blackstone”) and certain co-investors.  

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). In March 2016, Aquatica San Antonio was converted into a stand-alone, separate admission park that guests can access through an independent gate without the need to purchase admission to SeaWorld San Antonio.

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, 2015 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, 2015 has been 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, 2016 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.

Reclassifications

Certain prior year amounts have been reclassified to conform to the 2016 presentation, in particular, $2,975 previously included in deferred tax assets, net, in the accompanying unaudited condensed consolidated balance sheet as of December 31, 2015 was reclassified to noncurrent deferred tax assets, net, and noncurrent deferred tax liabilities, net, in the amounts of $503 and $2,472, respectively. The reclassification is as a result of the adoption of a new Accounting Standards Update (“ASU”). See Note 2–Recently Issued Accounting Pronouncements for further details.

7


SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

 

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.

Property and Equipment—Net

Property and equipment are recorded at cost.  The cost of ordinary or routine maintenance, repairs, spare parts and minor renewals is expensed as incurred. Development costs associated with new attractions and products are generally capitalized after necessary feasibility studies have been completed and final concept or contracts have been approved. The cost of assets is depreciated using the straight-line method based on the following estimated lives:

Land improvements

 

10-40 years

 

Buildings

 

5-40 years

 

Rides, attractions and equipment

 

3-20 years

 

Animals

 

1-50 years

 

Material costs to purchase animals are capitalized and amortized over their estimated lives (1-50 years).  Construction in process assets consist primarily of new rides, attractions and infrastructure improvements that have not yet been placed in service. These assets are stated at cost and are not depreciated. Once construction of an asset is completed and placed into service, the asset is reclassified to the appropriate asset class based on its nature and depreciated in accordance with its useful life above.

During the first quarter of 2016, the Company removed 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 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.

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.  

During the third quarter of 2016, which is one of the Company’s largest quarters, due to year to date financial performance through September 30, 2016, driven primarily by a decline in international attendance along with competitive pressures and an overall softness in the Orlando market, the Company determined a triggering event occurred that required an interim goodwill impairment test for its SeaWorld Orlando reporting unit, which had goodwill recorded of approximately $269,000.  The first step in its interim goodwill impairment test is a comparison of the fair value of the reporting unit, determined using the income and market approach, to its carrying value. If the carrying value exceeds the fair value, the second step quantifies any impairment write-down by comparing the current implied value of goodwill to the recorded goodwill balance.

8


SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

 

The results of step one of the interim goodwill impairment test as of September 30, 2016 indicated that the fair value for the reporting unit exceeded its carrying value and as a result, step two of the goodwill impairment test was not required.  Given the current macroeconomic environment and the uncertainties regarding the related impact on the reporting unit’s financial performance, there can be no assurance that the estimates and assumptions made for purposes of the goodwill impairment testing will prove to be accurate predictions of the future. If the Company’s assumptions, including its projections of future cash flows and financial performance, as well as the economic outlook for the reporting unit are not achieved, the Company may be required to record goodwill impairment charges in future periods, whether in connection with the Company’s next annual impairment testing in the fourth quarter of 2016, or on an interim basis, if any such change constitutes a triggering event outside of the quarter when the Company regularly performs its annual goodwill impairment test. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material.

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, 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 fully offset internal expenses.  Approximately $1,120 of costs incurred related to the Middle East Project are recorded in other assets on the accompanying unaudited condensed consolidated balance sheet as of September 30, 2016.  On November 3, 2016, the definitive documents related to the Middle East Project were finalized and executed by the parties.  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.

The Company has 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.

2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

The Company reviews new accounting pronouncements as they are issued or proposed by the Financial Accounting Standards Board (“FASB”).

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This 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 is currently assessing the potential impact of the adoption of this ASU on its 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 condensed consolidated statements of cash flows.

9


SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

 

On March 30, 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. The ASU will be effective for annual periods beginning after December 15, 2016, and interim periods therein, with early adoption permitted.  The Company is currently evaluating the impact of this ASU on its condensed consolidated financial statements.  

On February 25, 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.  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 is currently evaluating the impact of this ASU on its condensed consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes.  This ASU simplifies the accounting for deferred taxes by requiring an entity to classify all deferred taxes as noncurrent assets or noncurrent liabilities. No other changes were made to the current guidance on deferred taxes. The ASU is effective for annual periods beginning after December 15, 2016 with early adoption permitted and may be applied as a change in accounting principle either retrospectively or prospectively. The Company elected to early adopt this ASU retrospectively as of March 31, 2016.  As a result of adopting this ASU, the Company reclassified $2,975 of current deferred tax assets, net, in the accompanying unaudited condensed consolidated balance sheet as of December 31, 2015, to noncurrent deferred tax assets, net, and noncurrent deferred tax liabilities, net, in the amounts of $503 and $2,472, respectively. The adoption of this ASU did not impact the Company’s condensed consolidated results of operations, stockholders’ equity or cash flows.

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 ASU 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 requires 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 fulfill 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 retrospective application methods with earlier adoption permitted for annual periods beginning after December 15, 2016. During 2016, the FASB issued three 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 and ASU 2016-12, Narrow-Scope Improvements and Practical Expedients. The Company has not yet selected a transition method and is evaluating the accounting and disclosure requirements on its condensed consolidated financial statements but does not currently anticipate a material impact upon adoption; however, the Company is in the process of evaluating the effect this ASU will have on the classification of revenue and related disclosures.

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,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

Net

Income

 

 

Shares

 

 

Per

Share

Amount

 

 

Net

Income

 

 

Shares

 

 

Per

Share

Amount

 

 

Net

Loss

 

 

Shares

 

 

Per

Share

Amount

 

 

Net

Income

 

 

Shares

 

 

Per

Share

Amount

 

Basic earnings (loss) per share

 

$

65,655

 

 

 

85,290

 

 

$

0.77

 

 

$

97,950

 

 

 

86,006

 

 

$

1.14

 

 

$

(626

)

 

 

84,787

 

 

$

(0.01

)

 

$

60,161

 

 

 

86,096

 

 

$

0.70

 

Effect of dilutive incentive-based awards

 

 

 

 

 

 

157

 

 

 

 

 

 

 

 

 

 

 

94

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

111

 

 

 

 

 

Diluted earnings (loss) per share

 

$

65,655

 

 

 

85,447

 

 

$

0.77

 

 

$

97,950

 

 

 

86,100

 

 

$

1.14

 

 

$

(626

)

 

 

84,787

 

 

$

(0.01

)

 

$

60,161

 

 

 

86,207

 

 

$

0.70

 

 

10


SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

 

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 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.  There were approximately 4,374,000 and 2,463,000 anti-dilutive shares of common stock excluded from the computation of diluted earnings per share during the three months ended September 30, 2016 and 2015, respectively. During the nine months ended September 30, 2016, there were approximately 4,811,000 potentially dilutive shares excluded from the computation of diluted loss per share as their effect would have been anti-dilutive due to the Company’s net loss during the period. During the nine months ended September 30, 2015, there were approximately 1,599,000 anti-dilutive shares of common stock excluded from the computation of diluted earnings per share.

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, 2016 was 52.2% and 102.3%, respectively, and differs from the statutory federal income tax rate primarily due to permanent items, the majority of which relates to nondeductible 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 at Note 11Equity-Based Compensation), and state income taxes.  The Company’s consolidated effective tax rate for the three and nine months ended September 30, 2015 was 37.1% and 36.4%, respectively, and differs from the statutory federal income tax rate primarily due to state income taxes and permanent items.

The Company has determined that there are no positions currently taken that would rise to a level requiring an amount to be recorded or disclosed as an unrecognized tax benefit. If such positions do arise, it is the Company’s intent that any interest or penalty amount related to such positions will be recorded as a component of the income tax provision (benefit) in the applicable period.

5. OTHER ACCRUED EXPENSES

Other accrued expenses at September 30, 2016 and December 31, 2015, consisted of the following:

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Accrued property taxes

 

$

11,253

 

 

$

2,250

 

Accrued interest

 

 

493

 

 

 

441

 

Self-insurance reserve

 

 

7,280

 

 

 

6,973

 

Other

 

 

1,455

 

 

 

1,479

 

Total other accrued expenses

 

$

20,481

 

 

$

11,143

 

 

11


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, 2016 and December 31, 2015 consisted of the following:

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Term B-2 Loans (effective interest rate of 3.26% at

September 30, 2016 and December 31, 2015)

 

$

1,327,850

 

 

$

1,338,387

 

Term B-3 Loans (effective interest rate of 4.33% at

  September 30, 2016 and December 31, 2015)

 

 

245,800

 

 

 

247,900

 

Revolving Credit Facility

 

 

 

 

 

15,000

 

Total long-term debt

 

 

1,573,650

 

 

 

1,601,287

 

Less discounts

 

 

(5,938

)

 

 

(7,211

)

Less debt issuance costs

 

 

(10,607

)

 

 

(13,333

)

Less current maturities

 

 

(16,850

)

 

 

(31,850

)

Total long-term debt, net

 

$

1,540,255

 

 

$

1,548,893

 

SEA is the borrower under the senior secured credit facilities, as amended pursuant to a credit agreement dated as of December 1, 2009 (the “Senior Secured Credit Facilities”).  Also on December 1, 2009, SEA issued $400,000 aggregate principal amount of unsecured senior notes due December 1, 2016 (the “Senior Notes”).   On March 30, 2015, SEA entered into an incremental term loan amendment, Amendment No. 7 (the “Incremental Amendment”), to its existing Senior Secured Credit Facilities.  On April 7, 2015, SEA borrowed $280,000 of additional term loans (the “Term B-3 Loans”) pursuant to the Incremental Amendment. The proceeds, along with cash on hand, were used to redeem all of the $260,000 outstanding principal of the Senior Notes at a redemption price of 105.5% plus accrued and unpaid interest and pay fees, costs and other expenses in connection with the Term B-3 Loans.

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.  Unamortized debt issuance costs and discounts for the Term B-2 Loans, Term B-3 Loans and senior secured revolving credit facility (the “Revolving Credit Facility”) were $12,117, $2,839 and $1,589, respectively, at September 30, 2016.  Unamortized debt issuance costs and discounts for the Term B-2 Loans, Term B-3 Loans and Revolving Credit Facility were $14,713, $3,448 and $2,383, respectively, at December 31, 2015.

Senior Secured Credit Facilities

As of September 30, 2016, the Senior Secured Credit Facilities consisted of $1,327,850 in Term B-2 Loans and $245,800 in Term B-3 Loans, which will mature on May 14, 2020, along with a $192,500 Revolving Credit Facility, which was not drawn upon as of September 30, 2016.  The Revolving Credit Facility will mature on the earlier of (a) April 24, 2018 and (b) the 91st day prior to the maturity date of any indebtedness incurred to refinance any of the term loans. 

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. The Term B-3 Loans amortize in equal quarterly installments in an aggregate annual amount equal to 1.0% of the original principal amount of the Term B-3 Loans on April 7, 2015, with the balance due on the final maturity date of May 14, 2020. SEA may voluntarily repay amounts outstanding under the Senior Secured Credit Facilities at any time without premium or penalty, other than customary “breakage” costs with respect to LIBOR loans.

SEA is required to prepay the outstanding Term B-2 and Term B-3 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 total 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.

12


SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

 

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.  There were no mandatory prepayments during 2016 or 2015 since none of the events indicated above occurred.

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 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-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 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 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.  At September 30, 2016, SEA selected the LIBOR rate (interest rate of 3.00% at September 30, 2016).

Term B-3 Loans

Borrowings of Term B-3 Loans bear interest at a fluctuating rate per annum equal to, at SEA’s option, (a) a base rate equal to the higher of (1) the federal funds rate plus 1/2 of 1% and (2) 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” or (b) a LIBOR rate determined by reference to 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-3 Loans is 2.25%, in the case of base rate loans, and 3.25%, in the case of LIBOR rate loans, subject to a base rate floor of 1.75% and a LIBOR floor of 0.75%. At September 30, 2016, SEA selected the LIBOR rate (interest rate of 4.00% at September 30, 2016).

Revolving Credit Facility

Borrowings of loans under the Revolving Credit Facility bear interest at a fluctuating rate per annum equal to, at SEA’s option, (a) a base rate equal to the higher of (1) the federal funds rate plus 1/2 of 1%, and (2) 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” or (b) a LIBOR rate determined by reference to 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 borrowings under the 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 (under either a base rate or LIBOR rate) is subject to one 25 basis point step-down upon achievement by SEA of certain corporate credit ratings.  At September 30, 2016, SEA selected the LIBOR rate and achieved the corporate credit ratings for an applicable LIBOR margin of 2.50%.

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 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.

13


SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

 

As of September 30, 2016, SEA had approximately $17,200 of outstanding letters of credit leaving approximately $175,300 available for borrowing.

Restrictive Covenants

The Senior Secured Credit Facilities contain a number of customary negative covenants. Such covenants, among other things, restrict, subject to certain exceptions, the ability of SEA and its restricted subsidiaries to incur additional indebtedness; make guarantees; create liens on assets; enter into sale and leaseback transactions; engage in mergers or consolidations; sell assets; make fundamental changes; pay dividends and distributions or repurchase SEA’s capital stock; make investments, loans and advances, including acquisitions; engage in certain transactions with affiliates; make changes in the nature of the business; and make prepayments of junior debt. 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 Senior Secured Credit Facilities permit restricted payments in an aggregate amount per annum not to exceed the greater of (1) 6% of initial public offering net proceeds received by SEA or (2) (a) $90,000, so long as, on a Pro Forma Basis (as defined in the Senior Secured Credit Facilities) after giving effect to the payment of any such restricted payment, the Total Leverage Ratio, (as defined in the Senior Secured Credit Facilities), is no greater than 5.00 to 1.00 and greater than 4.50 to 1.00, (b) $120,000, so long as, on a Pro Forma Basis after giving effect to the payment of any such restricted payment, the Total Leverage Ratio is no greater than 4.50 to 1.00 and greater than 4.00 to 1.00, (c) the greater of (A) $120,000 and (B) 7.5% of Market Capitalization (as defined in the Senior Secured Credit Facilities), so long as, on a Pro Forma Basis after giving effect to the payment of any such restricted payment, the Total Leverage Ratio is no greater than 4.00 to 1.00 and greater than 3.50 to 1.00 and (d) an unlimited amount, so long as, on a Pro Forma Basis after giving effect to the payment of any such restricted payment, the Total Leverage Ratio is no greater than 3.50 to 1.00.

As of September 30, 2016, the Total Leverage Ratio as calculated under the Senior Secured Credit Facilities was 4.73 to 1.00, which results in the Company having a $90,000 capacity for restricted payments in 2016. During the nine months ended September 30, 2016, the Company used approximately $66,000 of its available restricted payments capacity leaving an aggregate amount of approximately $24,000 for the remainder of calendar year 2016 to repurchase shares or make certain other restricted payments under the Senior Secured Credit Facilities, provided that the Total Leverage Ratio does not exceed 5.00 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, 2016, SEA was in compliance with all covenants contained in the documents governing the Senior Secured Credit Facilities.

Interest Rate Swap Agreements

On September 30, 2016, SEA’s four traditional interest rate swap agreements (collectively, the “Interest Rate Swap Agreements”) matured in accordance with their terms.  Three of the interest rate swap agreements had a combined notional amount of $1,000,000; required the Company to pay a fixed rate of interest between 1.049% and 1.051% per annum; paid swap counterparties a variable rate of interest based upon the greater of 0.75% or the three month BBA LIBOR; and had interest settlement dates occurring on the last day of March, June, September and December through maturity. The fourth traditional interest rate swap was executed in April 2015 to effectively fix the interest rate on $250,000 of the Term B-3 Loans and had a notional amount of $250,000; required the Company to pay a fixed rate of interest of 0.901% per annum; paid swap counterparties a variable rate of interest based upon the greater of 0.75% or the three month BBA LIBOR; and had interest settlement dates occurring on the last day of September, December, March and June through maturity.

In June 2015, the Company entered into five forward interest rate swap agreements (“the Forward Swaps”) to 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 Forward Swaps 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; pay swap counterparties 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 and the Forward Swaps 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 $42,521 in the nine months ended September 30, 2016. Cash paid for interest relating to the Senior Secured Credit Facilities, Interest Rate Swap Agreements and the then-existing Senior Notes was $49,681 in the nine months ended September 30, 2015.

14


SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

 

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, 2016 and December 31, 2015, 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, 2016 and 2015, 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 Forward Swaps with a combined notional value of $1,000,000 became effective.  The Interest Rate Swap Agreements and the Forward Swaps were designated as cash flow hedges of interest rate risk.  The effective portion of changes in the fair value of derivatives 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 change in fair value of the derivatives is recognized directly in earnings. During the three and nine months ended September 30, 2016 and during the three months ended September 30, 2015, an immaterial loss related to the ineffective portion was recognized in other expense, net, on the accompanying unaudited condensed consolidated statements of comprehensive income (loss).  During the nine months ended September 30, 2015, a loss of $288 related to the ineffective portion was recognized in other expense, net, on the accompanying unaudited condensed consolidated statements of comprehensive income (loss).  Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next 12 months, the Company estimates that an additional $15,112 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, 2016 and December 31, 2015:

 

 

 

Liability Derivatives

 

 

Liability Derivatives

 

 

 

As of September 30, 2016

 

 

As of December 31, 2015

 

 

 

Balance Sheet

Location

 

Fair Value

 

 

Balance Sheet

Location

 

Fair Value

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

Other liabilities

 

$

 

 

Other liabilities

 

$

1,673

 

Forward interest rate swaps

 

Other liabilities

 

 

42,267

 

 

Other liabilities

 

 

17,927

 

Total derivatives designated as hedging instruments

 

 

 

$

42,267

 

 

 

 

$

19,600

 

 

The unrealized gain (loss) on derivatives is recorded net of a tax benefit of $10,497 for the nine months ended September 30, 2016, and is included in the unaudited condensed consolidated statement of changes in stockholders’ equity and the unaudited condensed consolidated statements of comprehensive income (loss).  The unrealized gain (loss) on derivatives is recorded net of a tax expense of $1,003 and net of a tax benefit of $5,907 for the three months ended September 30, 2016 and 2015, respectively, and net of a tax benefit of $8,799 for the nine months ended September 30, 2015, and is included in the unaudited condensed consolidated statements of comprehensive income (loss).

 

15


SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

 

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, 2016 and 2015:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Derivatives in Cash Flow Hedging Relationships:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) related to effective portion of derivatives recognized in accumulated other comprehensive loss

 

$

1,612

 

 

$

(17,490

)

 

$

(25,276

)

 

$

(26,471

)

Gain related to effective portion of derivatives reclassified from accumulated other comprehensive loss to interest expense

 

$

880

 

 

$

843

 

 

$

2,546

 

 

$

2,312

 

Loss related to ineffective portion of derivatives recognized in other expense, net

 

$

 

 

$

(1

)

 

$

(1

)

 

$

(288

)

 

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, 2016, 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 $44,824. As of September 30, 2016, the Company has posted no collateral related to these agreements. If the Company had breached any of these provisions at September 30, 2016, it could have been required to settle its obligations under the agreements at their termination value of $44,824.

Changes in Accumulated Other Comprehensive Loss

The following table reflects the changes in accumulated other comprehensive loss for the nine months ended September 30, 2016, net of tax:

 

Accumulated other comprehensive loss: