See accompanying notes to unaudited condensed consolidated financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
Description of the Business
SeaWorld Entertainment, Inc., through its wholly-owned subsidiary, SeaWorld Parks & Entertainment, Inc. (“SEA”) (collectively, the “Company”), owns and operates twelve theme parks within the United States. The Company operates SeaWorld theme parks in Orlando, Florida; San Antonio, Texas; and San Diego, California; and Busch Gardens theme parks in Tampa, Florida; and Williamsburg, Virginia. The Company operates water park attractions in Orlando, Florida (Aquatica); San Antonio, Texas (Aquatica); Tampa, Florida (Adventure Island); and Williamsburg, Virginia (Water Country USA). The Company also operates a reservations-only theme park in Orlando, Florida (Discovery Cove) and Sesame Place theme parks in Langhorne, Pennsylvania and San Diego, California.
Impact of Global COVID-19 Pandemic
The Company’s results of operations for the three and nine months ended September 30, 2022 continued to be impacted by the global COVID-19 pandemic due in part to a decline in both international and group-related attendance from historical levels. Additionally, results of operations for the nine months ended September 30, 2021 were also impacted by the following factors: (i) capacity limitations, modified/limited operations and/or temporary park closures through the first half of 2021; (ii) decreased demand due to public concerns associated with the pandemic; and (iii) severe restrictions on international travel, some of which were in effect through the fourth quarter of 2021. In particular, the Company’s SeaWorld park in California was closed at the beginning of 2021 due to State of California guidance. The Company was able to reopen this park on February 6, 2021 on a limited basis, following California guidance for reopening zoos. Subsequently, on April 12, 2021, in accordance with California guidance, this park resumed operations as a theme park with restricted capacity and on June 15, 2021, capacity restrictions for this park were removed. Separately, during the first quarter of 2021, the Company’s Busch Gardens park in Virginia was also significantly impacted by state restrictions. At the beginning of 2021, the State of Virginia had a state mandated capacity restriction of approximately 4,000 guests at a time for this park. On February 1, 2021, in consultation with the State of Virginia, the Company further increased capacity to approximately 6,000 guests. The Company was able to further increase capacity for this park on April 1, 2021 to approximately 13,000 guests. On May 28, 2021, theme park capacity restrictions in the State of Virginia were removed. By the end of the second quarter of 2021, all of the Company’s 12 parks were open and operating without COVID-19 related capacity limitations.
The Company continuously monitors guidance from federal, state and local authorities and engages with governmental authorities as well as medical/scientific consultants, when necessary. The Company may adjust its plans accordingly as laws change and new information and guidance becomes available. The COVID-19 pandemic has had, and may continue to have, a material impact on the Company’s financial results.
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, 2021 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, 2021 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K.
In the opinion of management, such unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations for the year ending December 31, 2022 or any future period due in part 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 were historically only open for a portion of the year. However, starting in 2021, the Company added additional operating days for three of these parks. In particular, the Company began year-round operations at its SeaWorld park in Texas and began to operate on select days on a year round basis at its Busch Gardens park in Virginia and its Sesame Place park in Pennsylvania. Additionally, on March 26, 2022, the Company opened its Sesame Place San Diego park which, on an annual basis, is expected to be open more operating days, weather permitting, than the Aquatica San Diego park it replaced.
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.
9
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates and assumptions include, but are not limited to, the accounting for self-insurance, deferred tax assets and liabilities, deferred revenue, equity compensation, the valuation of goodwill and other indefinite-lived intangible assets and reviews for potential impairment of long-lived assets. Estimates are based on various factors including current and historical trends, as well as other pertinent company and industry data. The Company regularly evaluates this information to determine if it is necessary to update the basis for its estimates and to adjust for known changes. Actual results could differ from those estimates. Based on the uncertainty relating to the COVID-19 pandemic, the emergence of new variants, and the current operating environment, including but not limited to the impact or timing of government restrictions, any future capacity limitations due to social distancing guidelines, public sentiment on social gatherings, travel and attendance patterns, possible travel restrictions, effectiveness and adoption of vaccines, boosters and/or medications, supply chain disruptions, inflationary pressures, foreign exchange rates, and/or additional actions which could be taken by government authorities to manage the pandemic or other macroeconomic issues, the Company is not certain of the ultimate impact these factors could have on its estimates, business or results of operations.
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”), as a basis for allocating resources and assessing performance. Each theme park has been identified as an operating segment and meets the criteria for aggregation due to similar economic characteristics. In addition, all the Company’s theme parks provide similar products and services and share similar processes for delivering services. The theme parks have a high degree of similarity in the workforces and target similar consumer groups. Accordingly, based on these economic and operational similarities and the way the CODM monitors and makes decisions affecting the operations, the Company has concluded that its operating segments may be aggregated and that it has one reportable segment.
Restricted Cash
Restricted cash is recorded in prepaid expenses and other current assets in the accompanying unaudited condensed consolidated balance sheets. Restricted cash as of September 30, 2022 and December 31, 2021 consists primarily of advanced funds for which costs have yet to be incurred related to the Company’s international services agreements, as discussed in the “International Agreements” section which follows.
|
|
September 30, |
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
|
(In thousands) |
|
Cash and cash equivalents |
|
$ |
109,572 |
|
|
$ |
443,707 |
|
Restricted cash, included in prepaid expenses and other current assets |
|
|
5,920 |
|
|
|
779 |
|
Total cash, cash equivalents and restricted cash |
|
$ |
115,492 |
|
|
$ |
444,486 |
|
Share Repurchase Programs and Treasury Stock
From time to time, the Company’s Board of Directors (the “Board”) may authorize share repurchases of common stock. Shares repurchased under Board authorizations are currently held in treasury for general corporate purposes. The Company accounts for treasury stock on the trade date under the cost method. Treasury stock at September 30, 2022 and December 31, 2021 is reflected within stockholders’ deficit. See further discussion of the Company’s share repurchase programs in Note 10–Stockholders’ Deficit.
10
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition
Admissions revenue primarily consists of single-day tickets, annual or season passes or other multi-day or multi-park admission products. For single-day tickets, the Company recognizes revenue at a point in time, upon admission to the park. Annual passes, season passes, or other multi-day or multi-park passes allow guests access to specific parks over a specified time period. For these pass and multi-use products, revenue is deferred and recognized over the terms of the admission product based on estimated redemption rates for similar products and is adjusted periodically. The Company estimates redemption rates using historical and forecasted attendance trends by park for similar products. Attendance trends factor in seasonality and are adjusted based on actual trends periodically. These estimated redemption rates impact the timing of when revenue is recognized on these products. Actual results could materially differ from these estimates based on actual attendance patterns. Revenue is recognized on a pro-rata basis based on the estimated allocated selling price of the admission product. For pass products purchased on an installment plan that have met their initial commitment period and have transitioned to a month-to-month basis, monthly charges are recognized as revenue as payments are received each month. For multi-day admission products, revenue is allocated based on the number of visits included in the pass and recognized ratably based on each admission into the theme park.
Food, merchandise and other revenue primarily consists of food and beverage, merchandise, parking and other in-park products and also includes other miscellaneous revenue which is not significant in the periods presented. The Company recognizes revenue for food and beverage, merchandise and other in-park products when the related products or services are received by the guests.
Deferred revenue primarily includes revenue associated with pass products, admission or in-park products or services with a future intended use date and contract liability balances related to licensing and international agreements collected in advance of the Company satisfying its performance obligations and is expected to be recognized in future periods. At September 30, 2022 and December 31, 2021, the long-term portion of deferred revenue included in other liabilities in the accompanying unaudited condensed consolidated balance sheets primarily relates to the Company’s international agreements, as discussed in the following section.
The following table reflects the Company’s deferred revenue balance as of September 30, 2022 and December 31, 2021:
|
|
September 30, |
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
|
(In thousands) |
|
Deferred revenue, including long-term portion |
|
$ |
198,114 |
|
|
$ |
169,333 |
|
Less: Deferred revenue, long-term portion, included in other liabilities |
|
|
15,847 |
|
|
|
14,540 |
|
Deferred revenue, short-term portion |
|
$ |
182,267 |
|
|
$ |
154,793 |
|
The Company estimates approximately $149.0 million of the deferred revenue, short term portion, balance outstanding as of December 31, 2021 was recognized as revenue during the nine months ended September 30, 2022. For certain admission products, the Company estimated timing of redemption using average historical redemption rates.
International Agreements
The Company has previously received $10.0 million in deferred revenue which is recorded in other liabilities related to a nonrefundable payment received from a partner in connection with a project in the Middle East to provide certain services pertaining to the planning and design of SeaWorld Abu Dhabi, a marine life theme park on Yas Island (the “Middle East Project”), with funding received expected to offset internal expenses. The Middle East Project is on track with the park expected to open in 2023. The Company also receives additional funds from its partner related to agreed-upon services and reimbursements of costs incurred by the Company on behalf of the Middle East Project (the “Middle East Services Agreements”).
Revenue and expenses associated with the Middle East Project will begin to be recognized when substantially all the services have been performed which is anticipated to occur in 2023, when SeaWorld Abu Dhabi is expected to open. Revenue and expenses associated with the Middle East Services Agreements will be recognized upon completion of the respective performance obligations.
As a result of the Middle East Project, approximately $11.0 million and $8.4 million of other related costs incurred are recorded in other assets in the accompanying unaudited condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021, respectively. Separately, approximately $14.2 million and $12.5 million of long-term deferred revenue is recorded in other liabilities in the accompanying unaudited condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021, respectively related to the Middle East Project, which both periods include the $10.0 million nonrefundable payment previously discussed.
11
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As a result of the Middle East Services Agreements, approximately $1.8 million of costs incurred by the Company are recorded in prepaid expenses and other current assets as of September 30, 2022 and approximately $1.2 million of costs are recorded in other assets as of December 31, 2021 in the accompanying unaudited condensed consolidated balance sheets. Separately, deferred revenue of approximately $7.7 million is recorded in deferred revenue as of September 30, 2022 and approximately $2.0 million is recorded in other liabilities as of December 31, 2021 in the accompanying unaudited condensed consolidated balance sheets.
2. RECENT ACCOUNTING PRONOUNCEMENTS
The Company reviews new accounting pronouncements as they are issued or proposed by the Financial Accounting Standards Board (“FASB”). There are no recent accounting pronouncements or recently implemented accounting standards that are expected to have a material impact on the Company’s unaudited condensed consolidated financial statements or disclosures.
3. EARNINGS PER SHARE
Earnings per share is computed as follows:
|
|
For the Three Months Ended September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
|
Net
Income |
|
|
Shares |
|
|
Per
Share
Amount |
|
|
Net
Income |
|
|
Shares |
|
|
Per
Share
Amount |
|
|
|
(In thousands, except per share amounts) |
|
Basic earnings per share |
|
$ |
134,557 |
|
|
|
67,176 |
|
|
$ |
2.00 |
|
|
$ |
102,097 |
|
|
|
78,962 |
|
|
$ |
1.29 |
|
Effect of dilutive incentive-based awards |
|
|
|
|
|
|
393 |
|
|
|
|
|
|
|
|
|
|
|
988 |
|
|
|
|
|
Diluted earnings per share |
|
$ |
134,557 |
|
|
|
67,569 |
|
|
$ |
1.99 |
|
|
$ |
102,097 |
|
|
|
79,950 |
|
|
$ |
1.28 |
|
|
|
For the Nine Months Ended September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
|
Net
Income |
|
|
Shares |
|
|
Per
Share
Amount |
|
|
Net
Income |
|
|
Shares |
|
|
Per
Share
Amount |
|
|
|
(In thousands, except per share amounts) |
|
Basic earnings per share |
|
$ |
242,180 |
|
|
|
71,450 |
|
|
$ |
3.39 |
|
|
$ |
184,975 |
|
|
|
78,804 |
|
|
$ |
2.35 |
|
Effect of dilutive incentive-based awards |
|
|
|
|
|
|
680 |
|
|
|
|
|
|
|
|
|
|
|
1,261 |
|
|
|
|
|
Diluted earnings per share |
|
$ |
242,180 |
|
|
|
72,130 |
|
|
$ |
3.36 |
|
|
$ |
184,975 |
|
|
|
80,065 |
|
|
$ |
2.31 |
|
In accordance with the Earnings Per Share Topic of the Accounting Standards Codification (“ASC”), basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period (excluding treasury stock and unvested restricted stock awards). Unvested restricted stock awards are eligible to receive dividends, if any; however, dividend rights will be forfeited if the award does not vest. Accordingly, only vested shares of formerly restricted stock are included in the calculation of basic earnings per share. The weighted average number of repurchased shares during the period, if any, which are held as treasury stock, are excluded from shares of common stock outstanding.
Diluted earnings 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. During the three and nine months ended September 30, 2022, there were approximately 328,000 and 246,000 anti-dilutive shares excluded from the computation of diluted earnings per share, respectively. During the three and nine months ended September 30, 2021, there were approximately 178,000 and 143,000 anti-dilutive shares excluded from the computation of diluted earnings per share, respectively. The Company’s outstanding performance-vesting restricted awards of approximately 1,015,000 and 1,100,000 as of September 30, 2022 and 2021, respectively, are considered contingently issuable shares and are excluded from the calculation of diluted earnings per share until the performance measure criteria is met as of the end of the reporting period.
12
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. INCOME TAXES
Income tax expense or benefit and the Company’s effective tax rate are based upon the tax rate expected for the full calendar year applied to the year-to-date pretax income or loss of the interim period, plus the tax effect of any year-to-date discrete tax items. The Company’s consolidated effective tax rate for the three months ended September 30, 2022 was 28.1% and differs from the effective statutory federal income tax rate of 21.0% primarily due to state income taxes including the effect of state tax rate changes enacted during the period. The Company’s consolidated effective tax rate for the nine months ended September 30, 2022 was 25.0% and differs from the effective statutory federal income tax rate of 21.0% primarily due to state income taxes, including the effect of state tax rate changes enacted during the period, and other compensation related items, partially offset by tax benefits related to equity-based compensation which vested during the period. The Company’s consolidated effective tax rate for the three and nine months ended September 30, 2021 was 8.0% and 6.2%, respectively, and differs from the effective statutory federal income tax rate of 21.0% primarily due to valuation allowance adjustments on federal and state carryforwards, state income taxes, and deductible equity-based compensation.
Due to the uncertainty of realizing the benefit from deferred tax assets, tax positions are reviewed at least quarterly by assessing future expected taxable income from all sources. Realization of deferred tax assets, primarily arising from net operating loss carryforwards and charitable contribution carryforwards, is dependent upon generating sufficient taxable income prior to expiration of the carryforwards. Based on its analysis, the Company believes that some of its deferred tax assets may not be realized. As of September 30, 2022 and December 31, 2021, the Company’s valuation allowance consisted of approximately $4.6 million and $4.8 million, respectively, net of federal tax benefit, on the deferred tax assets related to state net operating loss carryforwards.
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.
The computation of the estimated annual effective tax rate at each interim period requires certain estimates and assumptions including, but not limited to, the forecasted pre-tax income or loss for the year, projections of the proportion of income and/or loss earned and taxed in respective jurisdictions, permanent and temporary differences, and the likelihood of the realizability of deferred tax assets generated in the current year. The volatile global economic conditions resulting in part from the COVID-19 pandemic, the impacts of which are difficult to predict, may cause fluctuations in the Company’s forecasted pre-tax income or loss for the year, which could create volatility in its estimated annual effective tax rate. The estimates used to compute the provision or benefit for income taxes may change as new events occur, additional information is obtained or as the Company’s tax environment changes. To the extent that the estimated annual effective tax rate changes, the effect of the change on prior interim periods is included in the income tax provision in the period in which the change in estimate occurs. The Company’s valuation allowances, in part, also rely on estimates and assumptions related to future financial performance. Given the macroeconomic environment, related in part to the COVID-19 pandemic and the uncertainties regarding the related impact on financial performance, the Company’s valuation allowances may need to be further adjusted in the future.
The Inflation Reduction Act (“IRA”) of 2022 was signed into law on August 16, 2022. This legislation includes a 15% corporate alternative minimum tax and a 1% excise tax on stock repurchases among its key tax provisions effective for years beginning after December 31, 2022. The Company is continuing to evaluate the existing guidance but does not anticipate a material impact for either of these provisions. The Company will continue to evaluate the impact of the IRA as additional information becomes available.
5. OTHER ACCRUED LIABILITIES
Other accrued liabilities at September 30, 2022 and December 31, 2021, consisted of the following:
|
|
September 30, |
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
|
(In thousands) |
|
Accrued interest |
|
$ |
13,656 |
|
|
$ |
17,372 |
|
Accrued taxes |
|
|
12,997 |
|
|
|
784 |
|
Self-insurance reserve |
|
|
8,470 |
|
|
|
8,210 |
|
Other |
|
|
22,603 |
|
|
|
19,445 |
|
Total other accrued liabilities |
|
$ |
57,726 |
|
|
$ |
45,811 |
|
As of September 30, 2022 and December 31, 2021, other accrued liabilities above includes approximately $10.9 million related to certain contractual liabilities arising from the temporary COVID-19 park closures. As of September 30, 2022, other accrued liabilities above also includes approximately $5.3 million related to share repurchases not yet settled. See further discussion of the Company’s share repurchase program in Note 10–Stockholders’ Deficit.
13
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. LONG-TERM DEBT
Long-term debt, net, as of September 30, 2022 and December 31, 2021 consisted of the following:
|
|
September 30, |
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
|
(In thousands) |
|
Term B Loans (effective interest rate of 6.13% and 3.50% at September 30, 2022 and December 31, 2021, respectively) |
|
$ |
1,188,000 |
|
|
$ |
1,197,000 |
|
Senior Notes due 2029 (interest rate of 5.25%) |
|
|
725,000 |
|
|
|
725,000 |
|
First-Priority Senior Secured Notes due 2025 (interest rate of 8.75%) |
|
|
227,500 |
|
|
|
227,500 |
|
Total long-term debt |
|
|
2,140,500 |
|
|
|
2,149,500 |
|
Less: unamortized discounts and debt issuance costs |
|
|
(27,990 |
) |
|
|
(32,665 |
) |
Less: current maturities |
|
|
(12,000 |
) |
|
|
(12,000 |
) |
Total long-term debt, net |
|
$ |
2,100,510 |
|
|
$ |
2,104,835 |
|
Refinancing Transactions
On August 25, 2021 (the “Closing Date”), SEA entered into a Restatement Agreement (the “Restatement Agreement”) pursuant to which SEA amended and restated its then existing senior secured credit agreement dated as of December 1, 2009 (as amended, restated, supplemented or otherwise modified from time to time, and the senior secured credit facilities thereunder (the “Existing Secured Credit Facilities”), and, as amended and restated by the Restatement Agreement (the “Amended and Restated Credit Agreement”)).
The Amended and Restated Credit Agreement provides for senior secured financing of up to $1,585.0 million, consisting of:
|
(i) |
a first lien term loan facility (the “Term Loan Facility” and the loans thereunder, the “Term B Loans”), in an aggregate principal amount of $1,200.0 million which was fully drawn on the Closing Date. The Term Loan Facility will mature on August 25, 2028; and |
|
(ii) |
a first lien revolving credit facility (the “Revolving Credit Facility” (and the loans thereunder, the “Revolving Loans”) and, together with the Term Loan Facility, the “Senior Secured Credit Facilities”), in an aggregate committed principal amount of $385.0 million, including both a letter of credit sub-facility and a swingline loan sub-facility. The Revolving Credit Facility will mature on August 25, 2026. On June 9, 2022, SEA entered into an incremental amendment to the Amended and Restated Credit Agreement to increase the revolving facility commitments under the Revolving Credit Facility by $5.0 million bringing the aggregate committed principal amount to $390.0 million as of such date. |
Also on the Closing Date, SEA completed a private offering of $725.0 million aggregate principal amount of 5.250% unsecured senior notes due 2029 (the “Senior Notes”). See Senior Notes section for more details.
The Company used proceeds of the Term B Loans drawn on the Closing Date, together with the proceeds from the offering of the Senior Notes and cash on hand, to fully redeem the remaining $400.0 million of SEA’s then outstanding 9.500% second-priority senior secured notes due 2025 (the “Second-Priority Senior Secured Notes”) (the “Full Redemption”), to refinance the SEA’s Existing Secured Credit Facilities, and to pay related expenses of the offering and refinancing (collectively, the “Refinancing Transactions”). As a result of the Refinancing Transactions, on the Closing Date, SEA terminated its Existing Secured Credit Facilities and associated Term B-5 Loans and repaid all of its related outstanding obligations in respect of principal, interest and fees.
Prior to the Refinancing Transactions, on July 14, 2021, SEA completed a redemption of $50.0 million of its then outstanding Second-Priority Senior Secured Notes and separately on August 25, 2021, SEA completed another redemption of $50.0 million of its then outstanding Second-Priority Senior Secured Notes (collectively, the “Partial Redemptions”). Pursuant to the Partial Redemptions, the aggregate principal amount of the Second-Priority Senior Secured Notes were redeemed at a price equal to 103.000% of the respective principal amounts thereof, plus accrued and unpaid interest thereon to, but excluding, the respective redemption dates. In connection with the Refinancing Transactions, SEA also redeemed the remaining $400.0 million of its Second-Priority Senior Secured Notes (the “Full Redemption”). Pursuant to the Full Redemption, all of the aggregate principal amount of the Second-Priority Senior Secured Notes were redeemed at a price equal to the sum of (a) 100.000% of the outstanding principal amount of the Second-Priority Senior Secured Notes redeemed pursuant to the Full Redemption plus (b) approximately $34.3 million related to the Applicable Premium (as defined in the respective indenture), which is included in loss on early extinguishment of debt and write-off of discounts and debt issuance costs in the accompanying condensed consolidated statement of operations for the three and nine months ended September 30, 2021, plus (c) accrued and unpaid interest thereon to, but excluding, the redemption date.
14
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In connection with the Refinancing Transactions, SEA recorded a discount of $12.0 million and debt issuance costs of $12.5 million during the three and nine months ended September 30, 2021. Additionally, SEA wrote-off debt issuance costs and discounts of $21.5 million which is included in loss on early extinguishment of debt and write-off of discounts and debt issuance costs in the accompanying condensed consolidated statement of operations for the three and nine months ended September 30, 2021.
Senior Secured Credit Facilities
Borrowings under the Term B Loans bear interest at a fluctuating rate per annum equal to, at the Company’s option, (i) a base rate equal to the higher of (a) the federal funds rate plus 1/2 of 1%, (b) the rate of interest quoted in the print edition of the Wall Street Journal, Money Rates Section, as the prime rate as in effect from time to time and (c) one-month Adjusted LIBOR plus 1% per annum (provided that in no event shall such ABR rate with respect to the Term B Loans be less than 1.50% per annum) (“ABR”), in each case, plus an applicable margin of 2.00% or (ii) a LIBOR rate for the applicable interest period (provided that in no event shall such LIBOR rate with respect to the Term B Loans be less than 0.50% per annum) (“LIBOR”) plus an applicable margin of 3.00%.
Borrowings under the Revolving Loans bear interest at a fluctuating rate per annum equal to, at the Company’s option, (i) ABR (provided that in no event shall such ABR rate with respect to the Revolving Loans be less than 1.00% per annum) plus an applicable margin equal to 1.75% or (ii) LIBOR (provided that in no event shall such LIBOR rate with respect to the Revolving Loans be less than 0.00%) plus an applicable margin of 2.75%. The applicable margin for borrowings of Revolving Loans are subject to one 25 basis point step-down upon achievement by the Company of certain corporate credit ratings.
In addition to paying interest on the outstanding principal under the Senior Secured Credit Facilities, the Company is required to pay a commitment fee equal to 0.50% per annum to the lenders under the Revolving Credit Facility in respect of the unutilized commitments thereunder. The Company will also be required to pay customary agency fees as well as letter of credit participation fees computed at a rate per annum equal to the applicable margin for LIBOR rate borrowings on the dollar equivalent of the daily stated amount of outstanding letters of credit, plus such letter of credit issuer’s customary documentary and processing fees and charges and a fronting fee computed at a rate equal to 0.125% per annum on the daily stated amount of each letter of credit.
The Senior Secured Credit Facilities require scheduled amortization payments on the term loans in quarterly amounts equal to 0.25% of the original principal amount of the Term B Loans, payable quarterly, with the balance to be paid at maturity.
In addition, the Senior Secured Credit Facilities require the Company to prepay outstanding term loan borrowings, subject to certain exceptions, with:
|
- |
beginning with the fiscal year ending on December 31, 2022, 50% (which percentage will be reduced to 25% and 0% if the Company satisfies certain net first lien senior secured leverage ratios) of annual excess cash flow, as defined under the Senior Secured Credit Facilities; |
|
- |
100% of the net cash proceeds of all non-ordinary course asset sales or other non-ordinary course dispositions of property, in each case subject to certain exceptions and reinvestment rights; |
|
- |
100% of the net cash proceeds of any issuance or incurrence of debt, other than proceeds from debt permitted under the Senior Secured Credit Facilities. |
The Company may voluntarily repay outstanding loans under the Senior Secured Credit Facilities at any time, without prepayment premium or penalty, except in connection with a repricing event in respect of the term loans as described below, subject to customary “breakage” costs with respect to LIBOR rate loans.
All borrowings under the Revolving Credit Facility are subject to the satisfaction of customary conditions, including the absence of a default or event of default and the accuracy of representations and warranties in all material respects.
All obligations under the Senior Secured Credit Facilities are unconditionally guaranteed by the Company on a limited-recourse basis and each of SEA’s existing and future direct and indirect wholly owned material domestic subsidiaries, subject to certain exceptions. The obligations are secured by a pledge of SEA’s capital stock directly held by the Company and substantially all of SEA’s assets and those of each guarantor (other than the Company), including a pledge of the capital stock of all entities directly held by SEA or the guarantors, in each case subject to exceptions. Such security interests consist of a first-priority lien with respect to the collateral.
As of September 30, 2022, SEA had approximately $19.7 million of outstanding letters of credit, leaving approximately $370.3 million available under the Revolving Credit Facility, which was not drawn upon as of September 30, 2022.
15
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Senior Notes
The Senior Notes will mature on August 15, 2029. Interest on the Senior Notes will accrue at 5.250% per annum and will be paid semi-annually, in arrears on February 15 and August 15 of each year.
On or after August 15, 2024, SEA may redeem the Senior Notes, in whole at any time or in part from time to time, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, if redeemed during the 12-month period commencing on August 15 of the years as follows: (i) in 2024 at 102.625%; (ii) in 2025 at 101.313%; and (iii) in 2026 and thereafter at 100%. In addition, prior to August 15, 2024, SEA may redeem the Senior Notes at its option, in whole at any time or in part from time to time, at a redemption price equal to 100% of the principal amount of the Senior Notes redeemed, plus the “Applicable Premium” and accrued and unpaid interest, if any, to, but excluding, the redemption date. Notwithstanding the foregoing, subject to the provisions set forth in the Indenture, at any time and from time to time on or prior to August 15, 2024, SEA may redeem in the aggregate up to 40% of the original aggregate principal amount of the Senior Notes (calculated after giving effect to any issuance of additional Senior Notes) in an aggregate amount equal to the net cash proceeds of one or more equity offerings at a redemption price equal to 105.250%, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. Additionally, upon the occurrence of specified change of control events, each holder will have the right to require SEA to repurchase all or any part of such holder’s notes at a purchase price in cash equal to 101%.
SEA’s obligations under the Senior Notes and related indenture are guaranteed, jointly and severally, on a senior secured basis, by the Guarantors, as defined, in accordance with the provisions of the indenture.
First-Priority Senior Secured Notes
The 8.750% first-priority senior secured notes (the “First-Priority Senior Secured Notes”) mature on May 1, 2025 and have interest payment dates of May 1 and November 1.
SEA may redeem the First-Priority Senior Secured Notes at its option, in whole at any time or in part from time to time, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, if redeemed during the 12-month period commencing on May 1 of the years as follows: (i) in 2022 at 104.375%; (ii) in 2023 at 102.188%; and (iii) in 2024 and thereafter at 100%. SEA may also redeem in the aggregate (at a redemption price expressed as a percentage of principal amount thereof): (i) 100% of the First-Priority Senior Secured Notes after certain events constituting a change of control at a redemption price of 101%, plus accrued and unpaid interest, if any, to, but excluding, the redemption date and (ii) up to 40% of the original aggregate principal amount of the First-Priority Senior Secured Notes with amounts equal to the net cash proceeds of certain equity offerings at a redemption price of 108.750%, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.
The First-Priority Senior Secured Notes are fully and unconditionally 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 subsidiaries that guarantees SEA’s existing senior secured credit facilities.
Second-Priority Senior Secured Notes
The Second-Priority Senior Secured Notes were scheduled to mature on August 1, 2025 and had interest payment dates of February 1 and August 1. See additional discussion in the preceding Refinancing Transactions section regarding the full redemption of the Second-Priority Senior Secured Notes in August 2021.
Restrictive Covenants
The Amended and Restated Credit Agreement governing the Senior Secured Credit Facilities and the indentures governing the Senior Notes and First-Priority Senior Secured Notes (collectively, the “Debt Agreements”), contain covenants that limit the ability of the Company, SEA and its restricted subsidiaries to, among other things: (i) incur additional indebtedness or issue certain preferred shares; (ii) make dividend payments on or make other distributions in respect of their capital stock or make other restricted payments; (iii) make certain investments; (iv) sell certain assets; (v) create or permit to exist dividend and/or payment restrictions affecting their restricted subsidiaries; (vi) create liens on assets; (vii) consolidate, merge, sell or otherwise dispose of all or substantially all of their assets; and (viii) enter into certain transactions with their affiliates. These covenants are subject to a number of important limitations and exceptions and are based, in part on the Company’s ability to satisfy certain tests and engage in certain transactions based on Covenant Adjusted EBITDA, as defined in the related Debt Agreements. Covenant Adjusted EBITDA includes certain adjustments permitted under the relevant agreements, including but not limited to estimated cost savings, recruiting and retention costs, public company compliance costs, litigation and arbitration costs and other costs and adjustments as permitted under the Debt Agreements.
16
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Debt Agreements contain certain customary events of default, including relating to a change of control. If an event of default occurs, the lenders under the Debt Agreements will be entitled to take various actions, including the acceleration of amounts due under the Debt Agreements and all actions permitted to be taken by a secured creditor in respect of the collateral securing the Debt Agreements.
The Revolving Credit Facility requires that the Company, commencing as of the last day of the first full fiscal quarter after the Closing Date and subject to a testing threshold, comply on a quarterly basis with a maximum net first lien senior secured leverage ratio of 6.25 to 1.00. The testing threshold will be satisfied (and therefore the covenant must be complied with at the end of such quarter) if the aggregate amount of funded loans and issued letters of credit (excluding up to $30.0 million of undrawn letters of credit under the Revolving Credit Facility and letters of credit that are cash collateralized) under the Revolving Credit Facility on such date exceeds an amount equal to 35% of the then-outstanding commitments under the Revolving Credit Facility.
The Debt Agreements permit an unlimited capacity for restricted payments if the net total leverage ratio on a pro forma basis does not exceed 4.25 to 1.00 after giving effect to the payment of any such restricted payment. As of September 30, 2022, the net total leverage ratio as calculated under the Debt Agreements was 2.71 to 1.00.
As of September 30, 2022, SEA was in compliance with all covenants contained in the documents governing the Debt Agreements.
Long-term debt at September 30, 2022 is repayable as follows and does not include the impact of any future voluntary prepayments.
Years Ending December 31: |
|
(In thousands) |
|
Remainder of 2022 |
|
$ |
3,000 |
|
2023 |
|
|
12,000 |
|
2024 |
|
|
12,000 |
|
2025 |
|
|
239,500 |
|
2026 |
|
|
12,000 |
|
Thereafter |
|
|
1,862,000 |
|
Total |
|
$ |
2,140,500 |
|
Cash paid for interest relating to the Senior Secured Credit Facilities, the Senior Notes, and the First-Priority Senior Secured Notes, net of amounts capitalized, as applicable, was $82.4 million in the nine months ended September 30, 2022. Cash paid for interest relating to the Second-Priority Senior Secured Notes, the Senior Secured Credit Facilities, and the First-Priority Senior Secured Notes, net of amounts capitalized, as applicable, was $95.8 million in the nine months ended September 30, 2021.
7. FAIR VALUE MEASUREMENTS
Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement is required to be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, fair value accounting standards establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity. The standard describes three levels of inputs that may be used to measure fair value:
Level 1 – Quoted prices for identical instruments in active markets.
Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
Of the Company’s long-term obligations as of September 30, 2022 and December 31, 2021, the Term B Loans are classified in Level 2 of the fair value hierarchy and the First-Priority Senior Secured Notes and the Senior Notes are classified in Level 1 of the fair value hierarchy. The fair value of the Term B Loans approximates their carrying value, excluding unamortized debt issuance costs and discounts, due to the variable nature of the underlying interest rates and the frequent intervals at which such interest rates are reset. The fair value of the First-Priority Senior Secured Notes and Senior Notes was determined using quoted prices in active markets for identical instruments. See Note 6–Long-Term Debt for further details.
17
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company did not have any assets measured on a recurring basis at fair value as of September 30, 2022 and December 31, 2021. The Company maintains its long-term liabilities at carrying value, net of unamortized debt issuance costs and discounts, in the unaudited condensed consolidated balance sheet.
The following table presents the Company’s estimated fair value measurements and related classifications for liabilities measured on a recurring basis as of September 30, 2022:
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
for Identical |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
Assets and |
|
|
Observable |
|
|
Unobservable |
|
|
Balance at |
|
|
Liabilities |
|
|
Inputs |
|
|
Inputs |
|
|
September 30, |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
2022 |
|
|
(In thousands) |
|
Long-term obligations (a) |
$ |
833,125 |
|
|
$ |
1,188,000 |
|
|
$ |
— |
|
|
$ |
2,021,125 |
|
(a) |
Reflected at carrying value, net of unamortized debt issuance costs and discounts, in the unaudited condensed consolidated balance sheet as current maturities of long-term debt of $12.0 million and long-term debt, net of $2.101 billion as of September 30, 2022. |
The following table presents the Company’s estimated fair value measurements and related classifications for liabilities measured on a recurring basis as of December 31, 2021:
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
for Identical |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
Assets and |
|
|
Observable |
|
|
Unobservable |
|
|
Balance at |
|
|
Liabilities |
|
|
Inputs |
|
|
Inputs |
|
|
December 31, |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
2021 |
|
|
(In thousands) |
|
Long-term obligations (a) |
$ |
977,594 |
|
|
$ |
1,197,000 |
|
|
$ |
— |
|
|
$ |
2,174,594 |
|
(a) |
Reflected at carrying value, net of unamortized debt issuance costs and discounts, in the unaudited condensed consolidated balance sheet as current maturities of long-term debt of $12.0 million and long-term debt, net of $2.105 billion as of December 31, 2021. |
8. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
Securities Class Action Lawsuit
On June 14, 2018, a lawsuit captioned Highfields Capital I LP et al v. SeaWorld Entertainment, Inc. et al, was filed in the United States District Court in the Southern District of California against the Company and certain of the Company’s former and present executive officers. The plaintiffs allege, among other things, that the defendants made false and misleading statements in violation of the federal securities laws and Florida common law, regarding the impact of the film Blackfish on SeaWorld’s business. The complaint further alleges that such statements were made to induce plaintiffs to purchase common stock of the Company at artificially-inflated prices and that plaintiffs suffered investment losses as a result. In May 2022, the parties reached a resolution of the matter, and the case has now been dismissed with prejudice. The full settlement amount is not considered material and was paid in the second quarter of 2022.
Sesame Workshop Arbitration
On February 4, 2022, Sesame Workshop delivered notice asserting that the Company failed to pay an additional royalty payment for 2021 under its licensing agreement with the Company (the “Licensing Agreement”). The Company had previously recorded the additional amount claimed but disputes the application and calculation of the additional payment. The amount accrued is the Company’s best estimate and, at this time, the Company does not anticipate any exposure to loss in excess of amounts accrued to be material. On June 27, 2022, Sesame Workshop initiated arbitration pursuant to the License Agreement. The Company intends to vigorously defend its position.
18
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Other Lawsuits
In October 2018, the Company received a demand letter from attorneys representing certain former employees who claim that the terms of their respective separation agreements entitle them to certain favorable modifications made to certain performance vesting restricted shares (the “Tranche 3 Shares”) issued under the Company’s 2013 Omnibus Incentive Plan (the “Plan”).
In November 2020, the Company filed in the Court of Chancery of the State of Delaware an action for declaratory judgment seeking a determination that the threatened claims of the former employees are time-barred and without merit. In response, the defendant former employees filed a motion to dismiss or in the alternative to stay and compel arbitration. The parties agreed to arbitrate whether the former employees’ claims are subject to arbitration. On October 21, 2021, the arbitrator determined that disputes related to the former employees’ claims for the vesting of the Tranche 3 Shares are governed by the forum selection clauses of the equity award amendments rather than the Company’s dispute resolution process and notice of the arbitrator’s decision was filed with the Court of Chancery. On August 10, 2022, the defendant former employees filed answers, affirmative defenses and counterclaims. On October 10, 2022, the Company filed motions for judgment on the pleadings and to dismiss the counterclaims. In terms of potential exposure, the value of the total shares at issue for these certain former employees depends largely upon the Company’s current share price, which fluctuates daily. Approximately 300,000 shares are at issue. The Company believes that the former employees’ claims are without merit and intends to defend vigorously its positions. While there can be no assurance regarding the ultimate outcome of this matter, the Company believes that any potential loss would not be material.
On July 27, 2022, a purported class action was filed in the United States District Court for the Eastern District of Pennsylvania against the Company captioned Quinton Burns individually and Next Friend of K.B., a minor v. SeaWorld Parks & Entertainment, Inc. and SeaWorld Parks & Entertainment LLC, Civil Case No. 2:22-cv-09941 (the “Quinton Matter”). The Complaint states the putative class consists of Quinton Burns and K.B. Burns and similarly situated Black people. The Complaint alleges the Company engaged in disparate treatment of Class members based on their race and in so doing violated the Civil Rights Act of 1866 and Pennsylvania common law. The Complaint seeks compensatory and punitive damages and attorneys’ fees and costs as well declarative and injunctive relief. The Quinton matter is in the preliminary stages of litigation. The Company has been served with the Complaint, and the parties are engaged in initial discovery. The Company believes that the lawsuit is without merit and intends to defend the lawsuit vigorously. While there can be no assurance regarding the ultimate outcome of the litigation, the Company believes a potential loss, if any, would not be material.
Other Matters
The Company is a party to various other claims and legal proceedings arising in the normal course of business. In addition, from time to time the Company is subject to audits, inspections and investigations by, or receives requests for information from, various federal and state regulatory agencies, including, but not limited to, the U.S. Department of Agriculture’s Animal and Plant Health Inspection Service (“APHIS”), the U.S. Department of Labor’s Occupational Safety and Health Administration (“OSHA”), the California Occupational Safety and Health Administration (“Cal-OSHA”), the Florida Fish & Wildlife Commission (“FWC”), the Equal Employment Opportunity Commission (“EEOC”), the Internal Revenue Service (“IRS”) the U.S. Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”).
Other than those matters discussed above, from time to time, various parties also bring other lawsuits against the Company. Matters where an unfavorable outcome to the Company is probable and which can be reasonably estimated are accrued. Such accruals, which are not material for any period presented, are based on information known about the matters, the Company’s estimate of the outcomes of such matters, and the Company’s experience in contesting, litigating and settling similar matters. Matters that are considered reasonably possible to result in a material loss are not accrued for, but an estimate of the possible loss or range of loss is disclosed, if such amount or range can be determined. At this time, management does not expect any such known claims, legal proceedings or regulatory matters to have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
19
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
License Commitments
Pursuant to the License Agreement with Sesame Workshop, the Company pays a specified annual license fee and a specified royalty based on revenues earned in connection with sales of licensed products, all food and beverage items utilizing the licensed elements and any events utilizing such elements if a separate fee is paid for such event. The Company’s principal commitments pursuant to the License Agreement include, among other items, the opening of a second standalone park (“Standalone Park”) (the Company opened the Standalone Park in San Diego on March 26, 2022) and minimum annual capital and marketing thresholds. After the opening of the second Standalone Park (counting the existing Sesame Place Standalone Park in Langhorne, Pennsylvania), SEA has the option to build additional Standalone Parks in the Sesame Territory within agreed upon timelines. The License Agreement has an initial term through December 31, 2031, with an automatic additional 15-year extension plus a five-year option added to the term of the License Agreement from December 31st of the year of each new Standalone Park opening. As of September 30, 2022, the Company estimates the combined remaining liabilities and obligations for the License Agreement commitments could be up to approximately $25.0 million over the remaining term of the agreement. See further discussion concerning royalty payments for the year 2021 in the Sesame Workshop Arbitration section.
Anheuser-Busch, Incorporated (“ABI”) has granted the Company a perpetual, exclusive, worldwide, royalty-free license to use the Busch Gardens trademark and certain related domain names in connection with the operation, marketing, promotion and advertising of certain of the Company’s theme parks, as well as in connection with the production, use, distribution and sale of merchandise sold in connection with such theme parks. Under the license, the Company is required to indemnify ABI against losses related to the use of the marks.
9. EQUITY-BASED COMPENSATION
In accordance with ASC 718, Compensation-Stock Compensation, the Company measures the cost of employee services rendered in exchange for share-based compensation based upon the grant date fair market value. The cost is recognized over the requisite service period, which is generally the vesting period unless service or performance conditions require otherwise. The Company recognizes the impact of forfeitures as they occur.
Equity compensation expense is included in operating expenses and in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations as follows:
|
|
For the Three Months Ended September 30, |
|
|
For the Nine Months Ended September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
(In thousands) |
|
Equity compensation expense included in operating expenses |
|
$ |
961 |
|
|
$ |
3,297 |
|
|
$ |
3,615 |
|
|
$ |
5,799 |
|
Equity compensation expense included in selling, general and administrative expenses |
|
|
3,483 |
|
|
|
9,752 |
|
|
|
10,360 |
|
|
|
17,357 |
|
Total equity compensation expense |
|
$ |
4,444 |
|
|
$ |
13,049 |
|
|
$ |
13,975 |
|
|
$ |
23,156 |
|
During the three and nine months ended September 30, 2021, cumulative equity compensation expense was recorded related to certain performance vesting restricted awards which were previously not considered likely of vesting.
Omnibus Incentive Plan
The Company has reserved 15.0 million shares of common stock for issuance under its Omnibus Incentive Plan (the “Omnibus Incentive Plan”), of which approximately 7.3 million shares are available for future issuance as of September 30, 2022.
Bonus Performance Restricted Units
During the nine months ended September 30, 2022, the Company granted approximately 115,000 performance-vesting restricted units (the “Bonus Performance Restricted Units”) in accordance with its annual bonus plan for 2022 (the “2022 Bonus Plan”). The 2022 Bonus Plan provides for bonus awards payable 50% in cash and 50% in performance-vesting restricted units (the “Bonus Performance Restricted Units”) and is based upon the Company’s achievement of specified performance goals, including the achievement of certain cost targets, as defined by the 2022 Bonus Plan, with respect to the year ended December 31, 2022 (“Fiscal 2022”). The total number of units eligible to vest into shares of stock is based on the level of achievement of the targets for Fiscal 2022 which ranges from 0% (if below threshold performance), to 100% (if at target performance) with opportunities to earn above 100% when achievement is above the target performance for certain metrics.
20
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company also had an annual bonus plan for the fiscal year ended December 31, 2021 (“Fiscal 2021”), under which certain employees were eligible to vest in Bonus Performance Restricted Units based upon the Company’s achievement of certain performance goals with respect to Fiscal 2021. Based on the Company’s actual Fiscal 2021 results, a portion of these Bonus Performance Restricted Units vested and were converted into approximately 120,000 shares in the nine months ended September 30, 2022 and the remaining unvested units forfeited in accordance with their terms.
Long-term Incentive Performance Restricted Awards
During the nine months ended September 30, 2022, the Company granted long-term incentive plan awards for 2022 (the “2022 Long-Term Incentive Grant”) which were comprised of approximately 50,000 nonqualified stock options (the “Long-Term Incentive Options”) and approximately 160,000 performance-vesting restricted units (the “Long-Term Incentive Performance Restricted Units”) (collectively, the “Long-Term Incentive Awards”).
Long-Term Incentive Options
The Long-Term Incentive Options vest over three years, with one-third vesting on each anniversary of the date of grant, subject to continued service through the applicable vesting date. Equity compensation expense for these options is recognized for each tranche over the vesting period using the straight-line method. Upon stock option exercises, authorized but unissued shares are issued by the Company.
Long-Term Incentive Performance Restricted Units
The Long-Term Incentive Performance Restricted Units are eligible to vest during the three-year performance period beginning on January 1, 2022 and ending on December 31, 2024 (or, extended through December 31, 2025, as applicable) (the “Performance Period”) based upon the Company’s achievement of specified performance goals during the Performance Period. The total number of Long-Term Incentive Performance Restricted Units eligible to vest will be based on the level of achievement of the performance goals and ranges from 0% (if below threshold performance) up to 150% (for maximum performance). Upon achievement of at least the threshold performance goals, 50% of the award for a given level of performance will vest, with the remaining 50% subject to a one-year performance test period. Performance for the test period must meet or exceed the prior year’s performance before up to the remaining 50% of the units can be earned.
Other
During the nine months ended September 30, 2022, a portion of the previously granted long-term incentive performance restricted units under the 2019 Long-Term Incentive Plan vested based on the Company’s actual Fiscal 2021 results. The remainder of the 2019 Long-Term Incentive Plan awards are eligible to vest in 2023 and/or 2024.
The Company recognizes equity compensation expense for its performance-vesting restricted awards ratably over the related performance period if the performance condition is probable of being achieved. If the probability of vesting changes for performance-vesting restricted awards in a subsequent period, all equity compensation expense related to those awards, that would have been recorded, if any, over the requisite service period had the new percentage been applied from inception, will be recorded as a cumulative catch-up or reduction at such subsequent date.
10. STOCKHOLDERS’ DEFICIT
As of September 30, 2022, 96,255,843 shares of common stock were issued in the accompanying unaudited condensed consolidated balance sheet, which includes 30,993,771 shares of treasury stock held by the Company and excludes 1,514,970 unvested restricted stock awards or deferred stock units held by certain participants in the Company’s equity compensation plans or members of the Company’s Board (see Note 9–Equity-Based Compensation).
Share Repurchase Programs
The Board had previously authorized a share repurchase program of up to $250.0 million of the Company’s common stock (the “Former Share Repurchase Program”). In March 2022, the Board approved a replenishment to the Former Share Repurchase Program of $228.2 million, bringing the total amount authorized back up to $250.0 million at that time. Under the Former Share Repurchase Program, during the nine months ended September 30, 2022, the Company repurchased 3,563,086 shares for an aggregate total of approximately $250.0 million, leaving no amount remaining under the Former Share Repurchase Program.
In May 2022, the Board approved a $250.0 million share repurchase program (the “May Share Repurchase Program”). Under the May Share Repurchase Program, during the nine months ended September 30, 2022, the Company repurchased 5,085,752 shares for an aggregate total of approximately $250.0 million, leaving no amount remaining under the May Share Repurchase Program.
21
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In August 2022, the Board approved a new $250.0 million share repurchase program (the “Share Repurchase Program”). Under the Share Repurchase Program, during the nine months ended September 30, 2022, the Company repurchased 2,391,891 shares for an aggregate total of approximately $123.1 million, leaving approximately $126.9 million available under the Share Repurchase Program as of September 30, 2022. Subsequent to September 30, 2022, the Company repurchased an additional 1,214,882 shares for an aggregate total of approximately $60.8 million, leaving approximately $66.1 million remaining under the Share Repurchase Program as of October 31, 2022.
Collectively, as a result of the repurchase programs disclosed above, the Company has repurchased a combined total of 3,163,547 shares for an aggregate combined total of approximately $158.5 million during the three months ended September 30, 2022 and a combined total of 11,040,729 shares for an aggregate combined total of approximately $623.1 million during the nine months ended September 30, 2022.
Under the Share Repurchase Program, the Company is authorized to repurchase shares through open market purchases, privately-negotiated transactions or otherwise in accordance with applicable federal securities laws, including through Rule 10b5-1 trading plans and under Rule 10b-18 of the Exchange Act. The Share Repurchase Program has no time limits and could be suspended or discontinued completely at any time. The number of shares to be purchased and the timing of purchases will be based on the Company’s trading windows and available liquidity, general business and market conditions, and other factors, including legal requirements, share ownership thresholds, debt covenant restrictions, future tax implications and alternative investment opportunities.
22