Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion contains management’s discussion and analysis of our financial condition and results of operations and should be read together with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion should also be read in conjunction with our consolidated financial statements and related notes thereto, and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended December 31, 2019. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs and involve numerous risks and uncertainties, including, but not limited to, those described in the “Risk Factors” section of our Annual Report on Form 10-K, and under “Part II, Item 1A., Risk Factors” in this Quarterly Report on Form 10-Q, as such risk factors may be updated from time to time in our periodic filings with the SEC. Actual results may differ materially from those contained in any forward-looking statements. You should carefully read “Special Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q.
Business Overview
We are a leading theme park and entertainment company providing experiences that matter and inspiring guests to protect animals and the wild wonders of our world. We own or license a portfolio of recognized brands, including SeaWorld, Busch Gardens, Aquatica, Discovery Cove and Sesame Place. Over our more than 60-year history, we have developed a diversified portfolio of 12 differentiated theme parks that are grouped in key markets across the United States. Many of our theme parks showcase our one-of-a-kind zoological collection and feature a diverse array of both thrill and family-friendly rides, educational presentations, shows and/or other attractions with broad demographic appeal which deliver memorable experiences and a strong value proposition for our guests.
Recent Developments
Impact of Global COVID-19 Pandemic
Since the global COVID-19 pandemic began we have taken proactive measures for the safety of our guests, employees and animals, to appropriately manage costs and expenditures, and to provide liquidity in response to COVID-19. See further discussion concerning the proactive measures we have taken in Note 1–Description of the Business and Basis of Presentation to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
In response to the global COVID-19 pandemic, and in compliance with government restrictions, we temporarily closed all of our theme parks, effective March 16, 2020. Beginning in June 2020, we began the phased reopening of some of our parks with capacity limitations, reduced hours of operation and/or reduced operating days. In particular, on June 6, our Aquatica park in Texas reopened; on June 11, all five of our Florida parks reopened; on June 19, our SeaWorld park in Texas reopened; on July 24, our Sesame Place park in Pennsylvania reopened; and on August 6, our Busch Gardens park in Virginia reopened. We continue to monitor guidance from, and engage with, federal, state and local authorities to determine when we can reopen in California. We do not currently plan to open our Aquatica water park in San Diego or our Water Country USA water park in Williamsburg this year.
We have implemented enhanced health and safety protocols for our open parks including capacity limitations, increased cleaning and sanitizing, physical distancing practices, face covering requirements and temperature screening of both guests and employees. Additionally, we have introduced an online reservation system to help manage capacity and we are managing the number of operating days by park to optimize cash flow. We also continue our focus on cost reduction initiatives and have identified and executed on additional cost efficiencies during the closure period which we are implementing as the parks reopen including optimizing labor through more efficient staffing .
Attendance since the parks reopened has been impacted by capacity limitations, fewer operating days per week versus the prior year, limited marketing spend and a limited events line-up. Despite the limitations, total attendance at reopened parks that have been opened for at least 30 days has increased 15% on a same park basis from the week ended June 28 (the first full week these parks were open) to the week ended August 2, 2020. We believe attendance trends compared to the prior year will strengthen as we begin to re-introduce special events, interactive experiences and other in-park offerings which were temporarily suspended. Additionally, we have significantly curtailed marketing spend during the initial reopening phase and we expect a measured ramp-up in marketing spend will also support further attendance growth.
For other factors concerning the global COVID-19 pandemic, see the “ Risk Factors ” section of our Annual Report on Form 10-K, and under “ Part II, Item 1A., Risk Factors ” in this Quarterly Report on Form 10-Q, as such risk factors may be updated from time to time in our periodic filings with the SEC.
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Leadership Changes
Effective April 4, 2020, Sergio D. Rivera resigned from his position of Chief Executive Officer and as a member of our Board. As a result, the Board appointed Marc G. Swanson, our Chief Financial Officer and Treasurer, to serve as Interim Chief Executive Officer and Elizabeth C. Gulacsy, our Chief Accounting Officer, to serve as Interim Chief Financial Officer and Treasurer in addition to her role of Chief Accounting Officer. Also on April 4, 2020, the Board appointed Walter Bogumil to serve as Chief Operating Officer. Mr. Rivera was not entitled to any severance benefits in connection with his departure and forfeited his outstanding equity awards.
Principal Factors and Trends Affecting Our Results of Operations
Revenues
Our revenues are driven primarily by attendance in our theme parks and the level of per capita spending for admission and per capita spending for culinary, merchandise and other in-park products. We define attendance as the number of guest visits. Attendance drives admissions revenue as well as total in-park spending. Admissions revenue primarily consists of single-day tickets, annual passes (which generally expire after a 12 month term), season passes (including our fun card products and, collectively with annual passes, referred to as “passes” or “season passes”) or other multi-day or multi-park admission products. Revenue from these admissions products are generally recognized based on attendance. Certain pass products are purchased through monthly installment arrangements which allow guests to pay over the product’s initial commitment period. Once the initial commitment period is reached, these products transition to a month to month basis providing these guests access to specific parks on a monthly basis with related revenue recognized monthly when the parks are open. During the period each park was temporarily closed due to the COVID-19 pandemic, which started on March 16, 2020, we did not recognize revenue from the closed park's admission products.
Total revenue per capita, defined as total revenue divided by total attendance, consists of admission per capita and in-park per capita spending:
•
Admission Per Capita. We calculate admission per capita as total admissions revenue divided by total attendance. Admission per capita is primarily driven by ticket pricing, the admissions product mix and the park attendance mix, among other factors. The admissions product mix, also referred to as the visitation mix, is defined as the mix of attendance by ticket category such as single day, multi-day, annual passes or complimentary tickets and can be impacted by the mix of guests as domestic and international guests generally purchase higher admission per capita ticket products than our local guests. The park attendance mix is defined as the mix of theme parks visited and can impact admission per capita based on the theme park’s respective pricing which, on average, is lower for our water parks compared to our other theme parks.
•
In-Park Per Capita Spending. We calculate in-park per capita spending as total food, merchandise and other revenue divided by total attendance. Food, merchandise and other revenue primarily consists of culinary, merchandise, parking and other in-park products and also includes other miscellaneous revenue not necessarily generated in our parks, which is not significant in the periods presented, including revenue related to our international agreements. In-park per capita spending is primarily driven by pricing changes, new product offerings, the mix of guests (such as local, domestic or international guests), penetration levels (percentage of guests purchasing) and the mix of in-park spending, among other factors.
See further discussion in the “ Results of Operations ” section which follows or Note 1–Description of the Business and Basis of Presentation to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. For other factors affecting our revenues, see the “ Risk Factors ” section of our Annual Report on Form 10-K and under “ Part II, Item 1A., Risk Factors ” in this Quarterly Report on Form 10-Q, as such risk factors may be updated from time to time in our periodic filings with the SEC.
Attendance
The level of attendance in our theme parks is generally a function of many factors, including affordability, the opening of new attractions and shows, competitive offerings, weather, marketing and sales efforts, awareness and type of ticket and park offerings, travel patterns of both our domestic and international guests, fluctuations in foreign exchange rates and global and regional economic conditions, consumer confidence, the external perceptions of our brands and reputation, industry best practices and perceptions as to safety. The external perceptions of our brands and reputation have at times impacted relationships with some of our business partners, including certain ticket resellers that have terminated relationships with us and other zoological-themed attractions . As a result of the COVID-19 pandemic, we believe the level of attendance in our theme parks could also be impacted by public concerns over the COVID-19 pandemic, the number of reported local cases of COVID-19, travel restrictions, federal, state and local regulations related to public places, limits on social gatherings and overall public safety sentiment. We continuously monitor factors impacting our attendance, making strategic marketing and sales adjustments as necessary.
Attendance patterns on a quarterly basis have historically had significant seasonality, driven by the timing of holidays, school vacations, calendar shifts in the number of weekend days in a quarter and weather conditions; in addition, seven of our theme parks are seasonal and only open for part of the year.
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Costs and Expenses
Historically, the principal costs of our operations are employee wages and benefits, advertising, maintenance, animal care, utilities and insurance. Factors that affect our costs and expenses include fixed operating costs, competitive wage pressures including minimum wage legislation, commodity prices, costs for construction, repairs and maintenance, other inflationary pressures and attendance levels, among other factors.
During the six months ended June 30, 2020, in connection with a previously disclosed legal settlement, we recorded a gain of $12.5 million which is included as a reduction to selling, general and administrative expenses in the accompanying consolidated statements of comprehensive loss included elsewhere in this Quarterly Report on Form 10-Q. See Note 10–Commitments and Contingencies to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details.
We remain committed to continuous improvement and regularly evaluate operations to evaluate that we are properly organized for performance and efficiency. As part of these ongoing efforts, during the six months ended June 30, 2019, we recorded approximately $2.6 million in pre-tax charges primarily consisting of severance and other termination benefits related to positions eliminated in 2019, which is included in severance and other separation costs in the accompanying unaudited condensed consolidated statements of comprehensive (loss) income included elsewhere in this Quarterly Report on Form 10-Q.
As a result of the park closures related to the COVID-19 pandemic, costs and expenses for the three and six months ended June 30, 2020, are not necessarily indicative of costs and expenses for the year ending December 31, 2020 or any future period. See the “Impact of Global COVID-19 Pandemic” section for further details. For other factors affecting our costs and expenses, see the “ Risk Factors ” section of our Annual Report on Form 10-K, and under “ Part II, Item 1A., Risk Factors ” in this Quarterly Report on Form 10-Q, as such risk factors may be updated from time to time in our periodic filings with the SEC.
Seasonality
The theme park industry is seasonal in nature. Historically, we generate the highest revenues in the second and third quarters of each year, in part because seven of our theme parks are only open for a portion of the year. Approximately two-thirds of our attendance and revenues are typically generated in the second and third quarters of the year and we generally incur a net loss in the first and fourth quarters. The percent mix of revenues by quarter has been relatively constant each year, but revenues can shift between the first and second quarters due to the timing of Easter and spring break holidays and between the first and fourth quarters due to the timing of holiday breaks around Christmas and New Year. Even for our five theme parks which have historically been open year-round, attendance patterns have significant seasonality, driven by holidays, school vacations and weather conditions. Changes in school calendars that impact traditional summer vacation months could also impact attendance patterns. The COVID-19 pandemic has impacted the seasonality of our business for the first half of 2020 and it is difficult to estimate how the COVID-19 pandemic will impact seasonality for the rest of the year. See “ Risk Factors ” for further discussion of the adverse impacts of the COVID-19 pandemic on our business and financial performance.
Results of Operations
The following discussion provides an analysis of our operating results for the three months ended June 30, 2020 and 2019. The COVID-19 pandemic has materially impacted our revenue and results of operations for the three and six months ended June 30, 2020. See “Attendance” and “ Risk Factors ” for further discussion of the adverse impacts of the COVID-19 pandemic on our business. The following data should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q.
26
Comparison of the Three Months Ended June 30, 2020 and 2019
The following table presents key operating and financial information for the three months ended June 30, 2020 and 2019:
For the Three Months Ended
June 30,
Variance
2020
2019
$
%
Summary Financial Data:
(In thousands, except per capita data)
Net revenues:
Admissions
$
9,775
$
227,828
$
(218,053
)
(95.7
%)
Food, merchandise and other
8,251
178,164
(169,913
)
(95.4
%)
Total revenues
18,026
405,992
(387,966
)
(95.6
%)
Costs and expenses:
Cost of food, merchandise and other revenues
1,153
32,006
(30,853
)
(96.4
%)
Operating expenses (exclusive of depreciation and amortization shown separately below)
59,049
170,398
(111,349
)
(65.3
%)
Selling, general and administrative expenses
21,104
67,205
(46,101
)
(68.6
%)
Severance and other separation costs
9
66
(57
)
(86.4
%)
Depreciation and amortization
37,941
40,053
(2,112
)
(5.3
%)
Total costs and expenses
119,256
309,728
(190,472
)
(61.5
%)
Operating (loss) income
(101,230
)
96,264
(197,494
)
NM
Other income, net
(1
)
(79
)
78
98.7
%
Interest expense
21,908
21,803
105
0.5
%
(Loss) income before income taxes
(123,137
)
74,540
(197,677
)
NM
Provision for income taxes
7,892
21,889
(13,997
)
(63.9
%)
Net (loss) income
$
(131,029
)
$
52,651
$
(183,680
)
NM
Other data:
Attendance
272
6,463
(6,191
)
(95.8
%)
Total revenue per capita
$
66.27
$
62.82
$
3.45
5.5
%
Admission per capita
$
35.94
$
35.25
$
0.69
2.0
%
In-park per capita spending
$
30.33
$
27.57
$
2.76
10.0
%
Admissions revenue . Admissions revenue for the three months ended June 30, 2020 decreased $218.1 million, or 95.7%, to $9.8 million as compared to $227.8 million for the three months ended June 30, 2019. The decline in admissions revenue was primarily a result of a decrease in attendance of approximately 6.2 million guests, or 95.8%, slightly offset by an increase in admission per capita. Attendance declined largely due to fact that all of our parks were closed for the vast majority of the quarter. Admission per capita increased by 2.0% to $35.94 for the three months ended June 30, 2020 compared to $35.25 in the comparable prior year quarter. Admission per capita increased primarily due to the realization of higher prices across admission products, partially offset by the net impact of attendance mix related to higher pass attendance when compared to the prior year period.
Food, merchandise and other revenue. Food, merchandise and other revenue for the three months ended June 30, 2020 decreased $169.9 million, or 95.4%, to $8.3 million as compared to $178.2 million for the three months ended June 30, 2019. The decrease results primarily from the decline in attendance discussed above, slightly offset by an increase in in-park per capita spending. In-park per capita spending increased by 10.0% to $30.33 in the second quarter of 2020 compared to $27.57 in the second quarter of 2019. In-park per capita spending improved primarily due to increased sales of certain in-park products and higher realized prices and fees, partially offset by reduced in-park offerings during the quarter.
Costs of food, merchandise and other revenues. Costs of food, merchandise and other revenues for the three months ended June 30, 2020 decreased by $30.9 million, or 96.4%, to $1.2 million as compared to $32.0 million for the three months ended June 30, 2019. These costs represent 14.0% and 18.0% of the related revenue earned for the three months ended June 30, 2020 and 2019, respectively, and were impacted by the decline in attendance and related park closures.
Operating expenses. Operating expenses for the three months ended June 30, 2020 decreased by $111.3 million, or 65.3%, to $59.0 million as compared to $170.4 million for the three months ended June 30, 2019. The decrease largely results from a reduction in labor-related costs due primarily to furloughs resulting from the COVID-19 temporary park closures. Operating expenses also declined due to a reduction in nonessential operating costs which were deferred or eliminated due to the park closures as well as other cost savings initiatives.
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Selling, general and administrative expenses . Selling, general and administrative expenses for the three months ended June 30, 2020 decreased $46.1 million, or 68.6% , to $21.1 million as compared to $67.2 million for the three months ended June 30, 2019 . The decrease primarily relates to the following: (i) a reduction in marketing and media related costs due to the COVID-19 temporary park closures; (ii) a decline in third-party consulting costs; (iii) a decrease in legal costs and (iv) the impact of cost savings initiatives.
Depreciation and amortization. Depreciation and amortization expense for the three months ended June 30, 2020 declined by $2.1 million, or 5.3%, to $37.9 million as compared to $40.1 million for the three months ended June 30, 2019. The decrease relates to the impact of asset retirements and fully depreciated assets, partially offset by new asset additions.
Interest expense. Interest expense for the three months ended June 30, 2020 increased $0.1 million, or 0.5%, to $21.9 million as compared to $21.8 million for the three months ended June 30, 2019. The increase primarily relates to additional interest related to the Senior Secured Notes issued in April 2020, a higher outstanding balance on our Revolving Credit Facility during the three months ended June 30, 2020 and the impact of interest rate swap agreements, which expired in May 2020, partially offset by the impact of decreased LIBOR rates. See Note 6–Long-Term Debt in our notes to the unaudited condensed consolidated financial statements and the “ Our Indebtedness ” section which follows for further details on our long-term debt.
Provision for income taxes. The provision for income taxes in the three months ended June 30, 2020 was $7.9 million compared to $21.9 million for the three months ended June 30, 2019. Our consolidated effective tax rate was -6.4% for the three months ended June 30, 2020 compared to 29.4% for the three months ended June 30, 2019. The effective tax rate decreased primarily due to a non-cash valuation allowance adjustment on federal and state net operating loss carryforwards, a valuation allowance adjustment on federal tax credits and charitable contributions, changes in state tax rates, and other permanent items including equity-based compensation.
Comparison of the Six Months Ended June 30, 2020 and 2019
The following table presents key operating and financial information for the six months ended June 30, 2020 and 2019:
For the Six Months Ended
June 30,
Variance
2020
2019
$
%
Summary Financial Data:
(In thousands, except per capita data)
Net revenues:
Admissions
$
100,281
$
356,741
$
(256,460
)
(71.9
%)
Food, merchandise and other
71,306
269,826
(198,520
)
(73.6
%)
Total revenues
171,587
626,567
(454,980
)
(72.6
%)
Costs and expenses:
Cost of food, merchandise and other revenues
14,257
49,219
(34,962
)
(71.0
%)
Operating expenses (exclusive of depreciation and amortization shown separately below)
192,048
320,283
(128,235
)
(40.0
%)
Selling, general and administrative expenses
48,058
109,969
(61,911
)
(56.3
%)
Severance and other separation costs
74
2,632
(2,558
)
(97.2
%)
Depreciation and amortization
75,954
79,503
(3,549
)
(4.5
%)
Total costs and expenses
330,391
561,606
(231,215
)
(41.2
%)
Operating income
(158,804
)
64,961
(223,765
)
NM
Other income, net
(13
)
(52
)
39
75.0
%
Interest expense
41,061
42,600
(1,539
)
(3.6
%)
(Loss) income before income taxes
(199,852
)
22,413
(222,265
)
NM
(Benefit from) provision for income taxes
(12,304
)
6,782
(19,086
)
NM
Net (loss) income
$
(187,548
)
$
15,631
$
(203,179
)
NM
Other data:
Attendance
2,591
9,802
(7,211
)
(73.6
%)
Total revenue per capita
$
66.22
$
63.92
$
2.30
3.6
%
Admission per capita
$
38.70
$
36.39
$
2.31
6.3
%
In-park per capita spending
$
27.52
$
27.53
$
(0.01
)
(0.0
%)
NM-Not Meaningful.
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Admissions revenue . Admissions revenue for the six months ended June 30, 2020 decreased $256.5 million, or 71.9% , to $100.3 million as compared to $356.7 million for the six months ended June 30, 2019 . The decline in admissions revenue was primarily a result of a decrease in attendance of approximately 7.2 million guests, or 73.6% , partially offset by an increase in admission per capita. Attendance declined due to the temporary park closures , beginning on March 16, 2020, resulting from the global COVID-19 pandemic . Admission per capita increased by 6.3% to $38.70 for the six months ended June 30, 2020 compared to $36.39 for the six months ended June 30, 2019 . Admission per capita increased primarily due to the realization of higher prices in admission products , partially offset by the net impact of attendance mix related to higher pass attendance when compared to the prior year period .
Food, merchandise and other revenue. Food, merchandise and other revenue for the six months ended June 30, 2020 decreased $198.5 million, or 73.6%, to $71.3 million as compared to $269.8 million for the six months ended June 30, 2019. The decrease largely results from the decline in attendance discussed above. In-park per capita spending was relatively flat at $27.52 for the six months ended June 30, 2020 compared to $27.53 for the six months ended June 30, 2019.
Costs of food, merchandise and other revenues. Costs of food, merchandise and other revenues for the six months ended June 30, 2020 decreased $35.0 million, or 71.0%, to $14.3 million as compared to $49.2 million for the six months ended June 30, 2019. These costs represent 20.0% and 18.2% of the related revenue earned for the six months ended June 30, 2020 and 2019, respectively, and were impacted by the decline in attendance and related park closures.
Operating expenses. Operating expenses for the six months ended June 30, 2020 decreased by $128.2 million, or 40.0%, to $192.0 million as compared to $320.3 million for the six months ended June 30, 2019. The decrease largely results from the following: (i) a reduction in labor-related costs due primarily to the COVID-19 temporary park closures; (ii) a reduction in other nonessential operating costs which were deferred or eliminated due to the park closures; (iii) a decrease in non-cash equity compensation expense related primarily to the reversal of certain performance vesting restricted units which were no longer considered probable of vesting; and (iv) the impact of other cost savings initiatives. See Note 11–Equity-Based Compensation in our notes to the unaudited condensed consolidated financial statements for further details.
Selling, general and administrative expenses . Selling, general and administrative expenses for the six months ended June 30, 2020 decreased $61.9 million, or 56.3%, to $48.1 million as compared to $110.0 million for the six months ended June 30, 2019. The decrease primarily relates to the following: (i) a reduction in marketing and media related costs due to the COVID-19 temporary park closures; (ii) a decrease in legal costs due to a previously disclosed legal settlement gain of $12.5 million related to insurance proceeds received in the first quarter of 2020; (iii) a decline in third-party consulting costs (iv) a decrease in non-cash equity compensation expense, primarily related to the reversal of equity compensation, as mentioned above, and also includes the reversal of equity compensation expense related to outstanding unvested equity awards previously held by the Company’s former chief executive officer; and (v) the impact of cost savings initiatives. See Note 10–Commitments and Contingencies and Note 11–Equity-Based Compensation in our notes to the unaudited condensed consolidated financial statements for further details.
Severance and other separation costs. Severance and other separation costs for the six months ended June 30, 2019 primarily relates to severance and other expenses for positions which were eliminated in 2019.
Depreciation and amortization. Depreciation and amortization expense for the six months ended June 30, 2020 decreased $3.5 million, or 4.5%, to $76.0 million as compared to $79.5 million for the six months ended June 30, 2019. The decrease relates to the impact of asset retirements and fully depreciated assets, partially offset by new asset additions.
Interest expense. Interest expense for the six months ended June 30, 2020 decreased $1.5 million, or 3.6%, to $41.1 million as compared to $42.6 million for the six months ended June 30, 2019. The decrease primarily relates to decreased LIBOR rates, partially offset by a higher outstanding balance on our Revolving Credit Facility during the six months ended June 30, 2020, the impact of interest rate swap agreements, which expired in May 2020 and additional interest related to the Senior Secured Notes issued in April 2020. See Note 6–Long-Term Debt in our notes to the unaudited condensed consolidated financial statements and the “ Our Indebtedness ” section which follows for further details.
(Benefit from) provision for income taxes. The benefit from income taxes for the six months ended June 30, 2020 was $12.3 million compared to a provision for income taxes of $6.8 million for the six months ended June 30, 2019. Our consolidated effective tax rate was 6.2% for the six months ended June 30, 2020 compared to 30.3% for the six months ended June 30, 2019. The effective tax rate decreased primarily due to a non-cash valuation allowance adjustment on federal and state net operating loss carryforwards, a valuation allowance adjustment on federal tax credits and charitable contributions, changes in state tax rates, and other permanent items including equity-based compensation. See Note 4–Income Taxes in our notes to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details.
29
Liquidity and Capital Resources
Overview
On August 5, 2020, we closed on a private offering of $500.0 million aggregate principal amount of 9.500% second-priority senior secured notes due 2025 (the “Second-Priority Senior Notes”). We intend to use the proceeds from the issuance of the Second-Priority Senior Notes to repay outstanding borrowings under our Revolving Credit Facility and for working capital and other general corporate purposes.
Generally, our principal sources of liquidity are cash generated from operations, funds from borrowings and existing cash on hand. Our principal uses of cash include the funding of working capital obligations, debt service, investments in theme parks (including capital projects), and share repurchases, when permitted. As of June 30, 2020, we had a working capital ratio (defined as current assets divided by current liabilities) of 1.3, due in part to our outstanding cash balance at June 30, 2020. Historically, we typically operate with a working capital ratio less than 1 due to significant deferred revenue balance from revenues paid in advance for our theme park admissions products and high turnover of in-park products that result in limited inventory balances. Our cash flow from operations, along with our revolving credit facilities, have historically allowed us to meet our liquidity needs.
Due to the adverse impact of the COVID-19 temporary park closures, which started on March 16, 2020, and the limited reopening with reduced operating days and capacity of our Florida and Texas parks in June, we generated negative cash flows from operating activities for the six months ended June 30, 2020. See the “ Impact of Global COVID-19 Pandemic ” section and the “ Our Indebtedness ” section for further details concerning the proactive measures we have taken to address liquidity in response to the COVID-19 pandemic. For other factors concerning the global COVID-19 pandemic, see the “ Risk Factors ” section in this Quarterly Report on Form 10-Q.
As market conditions warrant and subject to our contractual restrictions and liquidity position, we, our affiliates and/or our stockholders, may from time to time purchase our outstanding equity and/or debt securities, including our outstanding bank loans in privately negotiated or open market transactions, by tender offer or otherwise. Any such purchases may be funded by incurring new debt, including additional borrowings under the Senior Secured Credit Facilities. Any new debt may also be secured debt. We may also use available cash on our balance sheet. The amounts involved in any such transactions, individually or in the aggregate, may be material. Further, since some of our debt may trade at a discount to the face amount among current or future syndicate members, any such purchases may result in our acquiring and retiring a substantial amount of any particular series, with the attendant reduction in the trading liquidity of any such series. Depending on conditions in the credit and capital markets and other factors, we will, from time to time, consider other financing transactions, the proceeds of which could be used to refinance our indebtedness or for other purposes.
Share Repurchases
Our Board had previously authorized a share repurchase program of up to $250.0 million of our common stock (the “Share Repurchase Program”). Under the Share Repurchase Program, we are authorized to repurchase shares through open market purchases, privately-negotiated transactions or otherwise in accordance with applicable federal securities laws, including through Rule 10b5-1 trading plans and under Rule 10b-18 of the Exchange Act. The Share Repurchase Program has no time limit and may be suspended or discontinued completely at any time.
During the six months ended June 30, 2020, prior to the COVID-19 temporary park closures, we completed a share repurchase of 469,785 shares for an aggregate total of approximately $12.4 million, leaving approximately $237.6 million available under the Share Repurchase Program as of June 30, 2020. In connection with Amendment No. 12 to the Amended Credit Agreement, we are restricted from paying any dividends or making other restricted payments, including share repurchases, through the third quarter of 2022 unless certain conditions are met. The number of shares to be purchased and the timing of purchases will be based on our trading windows and available liquidity, general business and market conditions and other factors, including legal requirements and alternative opportunities. See Note 6–Long-Term Debt and Note 12–Stockholders’ Equity in our notes to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details.
Other
We believe that existing cash and cash equivalents and available borrowings under our revolving credit facility will be adequate to meet the capital expenditures and working capital requirements of our operations for at least the next 12 months.
30
The following table presents a summary of our cash flows (used in) provided by operating, investing, and financing activities for the periods indicated:
For the Six Months Ended June 30,
2020
2019
(Unaudited, in thousands)
Net cash (used in) provided by operating activities
$
(68,326
)
$
167,386
Net cash used in investing activities
(53,699
)
(112,790
)
Net cash provided by (used in) financing activities
458,273
(44,784
)
Net increase in cash and cash equivalents, including restricted cash
$
336,248
$
9,812
Cash Flows from Operating Activities
Net cash used in operating activities was $68.3 million during the six months ended June 30, 2020 as compared to net cash provided by operating activities of $167.4 million during the six months ended June 30, 2019. Net cash (used in) provided by operating activities was primarily impacted by the decline in revenue due to the temporary park closures.
Cash Flows from Investing Activities
Investing activities consist principally of capital investments we make in our theme parks for future attractions and infrastructure. Net cash used in investing activities during the six months ended June 30, 2020 consisted primarily of capital expenditures of $53.7 million largely related to future attractions. Net cash used in investing activities during the six months ended June 30, 2019 consisted primarily of $112.7 million of capital expenditures largely related future attractions.
The following table presents detail of our capital expenditures for the periods indicated:
For the Six Months Ended June 30,
2020
2019
Capital Expenditures:
(Unaudited, in thousands)
Core (a)
$
45,840
$
100,271
Expansion/ROI projects (b)
7,859
12,467
Capital expenditures, total
$
53,699
$
112,738
(a)
Reflects capital expenditures for park rides, attractions and maintenance activities.
(b)
Reflects capital expenditures for park expansion, new properties, and revenue and/or expense return on investment (“ROI”) projects.
The amount of our capital expenditures may be affected by general economic and financial conditions, among other things, including restrictions imposed by our borrowing arrangements. We generally expect to fund our capital expenditures through our operating cash flow. See the “ Impact of Global COVID-19 Pandemic ” section for further details regarding proactive measures we have taken starting in March 2020 relating to our capital expenditures including delaying the opening of certain new rides to 2021.
Cash Flows from Financing Activities
Net cash provided by financing activities during the six months ended June 30, 2020 results primarily from net draws on our revolving credit facility of $261.0 million and net proceeds from our Senior Notes offering of $222.3 million, partially offset by $12.4 million used to repurchase shares and repayments of $7.8 million on our long-term debt. Net cash used in financing activities during the six months ended June 30, 2019 results primarily from $150.0 million used to repurchase shares and repayments of $7.8 million on our long-term debt, partially offset by a net draw on our revolving credit facility of $115.0 million which was primarily used for the share repurchase. See Note 6–Long-term Debt in our notes to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details.
Our Indebtedness
We are a holding company and conduct our operations through our subsidiaries, which have incurred or guaranteed indebtedness as described below. As of June 30, 2020, our indebtedness consisted of senior secured credit facilities and senior secured notes (“Senior Notes”).
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Senior Secured Credit Facilities
SeaWorld Parks & Entertainment, Inc. (“SEA”) is the borrower under the senior secured credit facilities, as amended pursuant to a credit agreement (the “Amended Credit Agreement”) dated as of December 1, 2009, as the same may be amended, restated, supplemented or modified from time to time (the “Senior Secured Credit Facilities”). On March 10, 2020, SEA entered into an amendment, Amendment No. 10 (the “Amendment No. 10”) to its Amended Credit Agreement. Pursuant to Amendment No. 10, SEA increased the revolving credit commitments available under the Amended Credit Agreement from $210.0 million to an aggregate of $332.5 million. On April 19, 2020, SEA entered into another amendment, Amendment No. 11, (the “Amendment No. 11”) to the credit agreement governing the Senior Secured Credit Facilities to amend certain covenant provisions therein. On July 29, 2020, SEA entered into another amendment, Amendment No. 12, (the “Amendment No. 12”) to its Amended Credit Agreement to further amend certain provisions therein. See “Covenant Compliance” discussion which follows.
As of June 30, 2020, our Senior Secured Credit Facilities consisted of $1.5 billion in Term B-5 Loans which will mature on March 31, 2024, along with a $332.5 million Revolving Credit Facility, of which $311.0 million was drawn upon as of June 30, 2020. Additionally, as of June 30, 2020, SEA had approximately $21.2 million of outstanding letters of credit, leaving no remaining amount available for borrowing under the Revolving Credit Facility.
Senior Secured Notes
On April 30, 2020, SEA closed on a private offering of $227.5 million aggregate principal amount of 8.750% first-priority senior secured notes due 2025 (the “Senior Notes”). Net of expenses related to the offering of the Senior Notes and Amendment No. 11 to the Amended Credit Agreement, we expect to use the proceeds from the issuance of the Senior Notes for working capital and other general corporate purposes.
See Note 6–Long-Term Debt in our notes to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details concerning our long-term debt.
Second-Priority Senior Secured Notes
On August 5, 2020, SEA closed on a private offering of $500.0 million aggregate principal amount of 9.500% second-priority senior secured notes due 2025 (the “Second-Priority Senior Notes”). Net of expenses related to the offering of the Second-Priority Senior Notes and Amendment No. 12 to the Credit Agreement, we intend to use the proceeds from the issuance of the Second-Priority Senior Notes to repay outstanding borrowings under the Revolving Credit Facility and for working capital and other general corporate purposes.
See Note 6–Long-Term Debt in our notes to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details concerning our long-term debt.
Covenant Compliance
As of June 30, 2020, we were in compliance with all covenants in the credit agreement governing the Senior Secured Credit Facilities.
The Revolving Credit Facility requires that the Company comply with a springing maximum first lien secured leverage ratio of 6.25x to be tested as of the last day of any fiscal quarter, solely to the extent that on such date the aggregate amount of funded loans and letters of credit (excluding undrawn letters of credit in an amount not to exceed $30.0 million and cash collateralized letters of credit) under the Revolving Credit Facility exceeds an amount equal to 35% of the then outstanding commitments under the Revolving Credit Facility. Pursuant to Amendment No. 12, among other terms, SEA will be exempt from complying with its first lien secured leverage ratio covenant through the end of 2021, after which SEA will be required to comply with such covenants starting at the first quarter of 2022. For purposes of calculating compliance with such covenant, unless a Triggering Event occurs (as defined in Amendment No. 12), beginning with the first quarter of 2022, to the extent trailing Adjusted EBITDA (as defined in Amendment No. 12) for the second, third or fourth quarters of 2021 would have otherwise been included in the calculation of such covenant, in lieu of using actual Adjusted EBITDA for such periods, Adjusted EBITDA for such applicable periods will be deemed to be Adjusted EBITDA (as defined in Amendment No. 12) for the corresponding quarter of 2019.
See Note 6–Long-Term Debt to the unaudited condensed consolidated financial statements for further details relating to the calculation beginning in the first quarter of 2022. In addition, SEA will be required to comply with a quarterly minimum liquidity test (defined as unrestricted cash and cash equivalents and available commitments under the Revolving Credit Facility) of not less than $75.0 million until the earlier of September 30, 2022 or the date on which the Company elects to use actual Adjusted EBITDA for purposes of calculating its financial maintenance covenant.
See Note 6–Long-Term Debt to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details.
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Adjusted EBITDA
Under the credit agreement governing the Senior Secured Credit Facilities, our ability to engage in activities such as incurring additional indebtedness, making investments, refinancing certain indebtedness, paying dividends and entering into certain merger transactions is governed, in part, by our ability to satisfy tests based on “Adjusted EBITDA”. The Senior Secured Credit Facilities defines “Adjusted EBITDA” as net income before interest expense, income tax expense, depreciation and amortization, as further adjusted to exclude certain unusual, non-cash, and other items permitted in calculating covenant compliance under the Senior Secured Credit Facilities, subject to certain limitations. Adjusted EBITDA as defined in the Senior Secured Credit Facilities is consistent with our reported Adjusted EBITDA. We believe that the presentation of Adjusted EBITDA is appropriate as it eliminates the effect of certain non-cash and other items not necessarily indicative of a company’s underlying operating performance. We use Adjusted EBITDA in connection with certain components of our executive compensation program. In addition, investors, lenders, financial analysts and rating agencies have historically used EBITDA related measures in our industry, along with other measures, to estimate the value of a company, to make informed investment decisions and to evaluate companies in the industry. In addition, the presentation of Adjusted EBITDA for the last twelve months provides additional information to investors about the calculation of, and compliance with, certain financial covenants in the Senior Secured Credit Facilities. Adjusted EBITDA is a material component of these covenants. See the “ Our Indebtedness-Covenant Compliance” section for further details.
Adjusted EBITDA is not a recognized term under accounting principles generally accepted in the United States of America (“GAAP”), should not be considered in isolation or as a substitute for a measure of our financial performance prepared in accordance with GAAP and is not indicative of income from operations as determined under GAAP. Adjusted EBITDA and other non-GAAP financial measures have limitations which should be considered before using these measures to evaluate our financial performance. Adjusted EBITDA, as presented by us, may not be comparable to similarly titled measures of other companies due to varying methods of calculation.
The following table reconciles Adjusted EBITDA, as defined in the Amended Credit Agreement, to net (loss) income for the periods indicated:
SEAWORLD ENTERTAINMENT, INC. AND SUBSIDIARIES
UNAUDITED RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
For the Three Months Ended June 30,
For the Six Months Ended June 30,
Last Twelve Months Ended
June 30,
2020
2019
2020
2019
2020
(Unaudited, in thousands)
Net (loss) income
$
(131,029
)
$
52,651
$
(187,548
)
$
15,631
$
(113,703
)
Provision for (benefit from) income taxes
7,892
21,889
(12,304
)
6,782
20,442
Interest expense
21,908
21,803
41,061
42,600
82,639
Depreciation and amortization
37,941
40,053
75,954
79,503
157,008
Equity-based compensation expense (a)
3,320
4,084
(281
)
7,282
3,543
Loss on impairment or disposal of assets and certain non-cash expenses (b)
1,035
683
1,420
792
3,826
Business optimization, development and strategic initiative costs (c)
264
3,884
2,299
8,992
21,176
Certain investment costs and other taxes (d)
560
4,412
662
4,462
1,256
Other adjusting items (e)
4,271
215
(5,954
)
46
29,954
Adjusted EBITDA (f)
$
(53,838
)
$
149,674
$
(84,691
)
$
166,090
$
206,141
Items added back to Adjusted EBITDA, after cost savings, as defined in the Amended Credit Agreement:
Estimated cost savings (g)
4,500
Adjusted EBITDA, after cost savings (h)
$
210,641
( a )
Reflects non-cash equity compensation expenses associated with the grants of equity compensation. For the six and twelve months ended June 30, 2020, includes a reversal of equity compensation for certain performance vesting restricted units which are no longer considered probable of vesting. See Note 11–Equity-Based Compensation in our notes to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details.
( b )
Reflects primarily non-cash expenses related to miscellaneous fixed asset disposals. For the twelve months ended June 30, 2020, primarily reflects asset write-offs related to certain rides and equipment which were removed from service.
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( c )
For the six months ended June 30, 2020, reflects business optimization, development and other strategic initiative costs primarily related to $1.9 million of third party consulting costs. For the three and six months ended June 30, 2019, reflects business optimization, development and other strategic initiative costs primarily related to: (i) $3.6 million and $5.9 million, respectively, of third party consulting costs and (ii) $0.1 million and $2.6 million, respectively, of severance and other employment costs associated with positions eliminated. For the twelve months ended June 30, 2020, reflects business optimization, development and other strategic initiative costs primarily related to $18.0 million of third party consulting costs and $1.6 million of severance and other employment costs.
( d )
For the three and six months ended June 30, 2019, $4.3 million relates to expenses associated with the previously disclosed transfer of shares and HP agreements. See Note 9-Related Party Transactions in our notes to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details.
( e )
Reflects the impact of certain expenses, net of insurance recoveries and adjustments, which we are permitted to exclude under the credit agreement governing our Senior Secured Credit Facilities due to the unusual nature of the items. For the three, six and twelve months ended June 30, 2020, includes approximately $3.9 million in incremental nonrecurring costs directly associated with the COVID-19 global pandemic, primarily due to incremental labor-related costs to prepare the parks for reopening with enhanced safety measures, incremental third-party consulting costs related to our COVID-19 response and safety communication strategies and initial purchases of personal protective equipment. For the six and twelve months ended June 30, 2020, includes $12.5 million of insurance proceeds related to a legal settlement gain as previously disclosed . For the twelve months ended June 30, 2020, also includes approximately $32.1 million related to a legal settlement charge, net of insurance recoveries, as previously disclosed. See Note 10-Commitments and Contingencies in our notes to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details.
( f )
Adjusted EBITDA is defined as net (loss) income before income tax expense, interest expense, depreciation and amortization, as further adjusted to exclude certain non-cash, and other items permitted in calculating covenant compliance under the credit agreement governing the Company’s Senior Secured Credit Facilities.
( g )
The Senior Secured Credit Facilities permits the Company’s calculation of certain covenants to be based on Adjusted EBITDA, as defined above, for the last twelve month period further adjusted for net annualized estimated savings the Company expects to realize over the following 18 month period related to certain specified actions, including restructurings and cost savings initiatives. These estimated savings are calculated net of the amount of actual benefits realized during such period. These estimated savings are a non-GAAP Adjusted EBITDA add-back item only as defined in the Amended Credit Agreement and does not impact the Company’s reported GAAP net (loss) income. The Amended Credit Agreement limits the amount of such estimated savings which may be reflected to 25% of Adjusted EBITDA, calculated for the last twelve months before the impact of these estimated cost savings.
( h )
The Senior Secured Credit Facilities permits the Company’s calculation of certain covenants to be based on Adjusted EBITDA, as defined above, for the last twelve month period further adjusted for net annualized estimated savings as described in footnote (g) above.
Contractual Obligations
There have been no material changes to our contractual obligations from those previously disclosed in our Annual Report on Form 10-K other than long-term debt and interest obligations pursuant to our Senior Notes offering which closed on April 30, 2020 and Amendment No. 10 to our Amended Credit Agreement. As a result, our total long-term debt obligations as of June 30, 2020, not including any possible prepayments, are as follows for the remainder of 2020, 2021-2022, 2023-2024 and 2025, respectively (in thousands): $7,753; $31,010; $1,772,368; and $227,500. Our estimated future interest payments based on interest rates in effect at June 30, 2020 are as follows for the remainder of 2020, 2021-2022, 2023-2024 and 2025, respectively (in thousands): $44,687; $177,170; $120,796; and $9,844. Interest obligations also include letter of credit and commitment fees for the used and unused portions of our Revolving Credit Facility assuming payoff at maturity and excluding any possible principal prepayments.
Subsequent to June 30, 2020, we entered into Amendment No. 12 to the Amended Credit Agreement and we issued $500.0 million in second-priority senior secured notes. See Note 6-Long-Term Debt to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details.
See the “ Impact of Global COVID-19 Pandemic ” section for further details regarding proactive measures we have taken starting in March 2020 relating to our capital expenditures including delaying the opening of certain new rides to 2021.
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Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities, revenues and expenses, and disclosure of contingencies during the reporting period. Significant estimates and assumptions include the valuation and useful lives of long-lived tangible and intangible assets, the valuation of goodwill and other indefinite-lived intangible assets, the accounting for income taxes, the accounting for self-insurance and revenue recognition. Actual results could differ from those estimates. The critical accounting estimates associated with these policies are described in our Annual Report on Form 10-K under “ Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These critical accounting policies include impairment of long-lived assets, goodwill and other indefinite-lived intangible assets, accounting for income taxes, self-insurance reserves, and revenue recognition. There have been no material changes to our significant accounting policies as compared to the significant accounting policies described in our Annual Report on Form 10-K, filed on February 27, 2020, except as noted below .
Goodwill, Other Indefinite-Lived Intangible Assets and Other Long-Lived Assets
As of June 30, 2020, we determined that due to the temporary park closures effective March 16, 2020 resulting from the global COVID-19 pandemic, a triggering event had occurred that required an interim impairment assessment for goodwill and other indefinite-lived intangible assets. We performed a qualitative impairment analysis which included certain judgements and assumptions related to the impact of the park closures, reopening time frames and expected attendance levels upon reopening and determined that, based on the significant excess fair values over carrying values that previously existed, there was no impairment as of June 30, 2020 related to these assets. Additionally, using similar assumptions, we evaluated certain other long-lived assets, including our right of use assets for impairment as of June 30, 2020. We compared the estimated undiscounted net cash flows of our long-lived and right of use assets to their respective carrying values. Based on the results of the analysis and our intent and ability to retain value and use for a period of time sufficient to allow for any anticipated recovery in market conditions, we concluded that the estimated undiscounted net cash flows for these assets exceeded its carrying value and therefore, no impairment of other long-lived assets had occurred as of June 30, 2020.
Given the current macroeconomic environment related to the global COVID-19 pandemic and the uncertainties regarding the related impact on financial performance, there can be no assurance that the estimates and assumptions made for purposes of the interim impairment assessments will prove to be accurate predictions of the future. If our assumptions, as well as the economic outlook are not achieved, we may be required to record impairment charges in future periods, whether in connection with the our next annual impairment testing, or on an interim basis, if any such change constitutes a triggering event outside of the quarter when we regularly performs our annual 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.
Off-Balance Sheet Arrangements
We had no material off-balance sheet arrangements as of June 30, 2020.
Recently Issued Financial Accounting Standards
Refer to Note 2–Recent Accounting Pronouncements in our notes to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details.