UNITED PARKS & RESORTS INC. 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 endedDecember 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 theSEC . 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, includingSeaWorld ,Busch Gardens , Aquatica, Discovery Cove andSesame 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 acrossthe 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
In response to the global COVID-19 pandemic, and in compliance with government restrictions, we have temporarily closed all of our theme parks, effectiveMarch 16, 2020 . We continue to monitor guidance from federal, state and local authorities to determine when we are able to re-open our parks. Since the global COVID-19 pandemic has begun 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. Factoring in measures already taken in response to COVID-19, we estimate net cash outflows to be up to approximately$25 million per month, on average, while our parks remain closed, which reflects our current estimate of ongoing park and operating costs, average debt amortization and interest and capital expenditures. We are actively evaluating additional cost reduction and cash saving measures. 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 theSEC .
Leadership Changes
EffectiveApril 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 appointedMarc G. Swanson , our Chief Financial Officer and Treasurer, to serve as Interim Chief Executive Officer andElizabeth 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 onApril 4, 2020 , the Board appointedWalter Bogumil to serve as the Company's 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 or season passes (collectively referred to as season passes) or other multi-day or multi-park admission products. During the period the parks are temporarily closed due to the COVID-19 pandemic, which started onMarch 16, 2020 , we are not recognizing revenue from our parks.
Total revenue per capita, defined as total revenue divided by total attendance, consists of admission per capita and in-park per capita spending:
22
--------------------------------------------------------------------------------• 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. 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 theSEC .
Attendance
The level of attendance in our theme parks is 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, federal, state and local regulations related to public places, 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. We continuously monitor factors impacting our attendance, making strategic marketing and sales adjustments as necessary.
Attendance patterns on a quarterly basis have 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.
Costs and Expenses
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 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 three months endedMarch 31, 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 three months endedMarch 31, 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 included elsewhere in this Quarterly Report on Form 10-Q. We have also proactively taken measures to manage costs and expenditures in response to the COVID-19 pandemic and the related park closures. 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 theSEC . 23 --------------------------------------------------------------------------------
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 generated in the second and third quarters of the year and we typically incur a net loss in the first and fourth quarters. The percent mix of revenues by quarter is 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 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. See "Risk Factors" for further discussion of the adverse impacts of the COVID-19 pandemic on our business and financial performance.
Results of Operations
Prior to the COVID-19 impacts, we had a strong start to 2020 with record attendance and revenue through the first two months of the year. Year to date attendance for the first two months of 2020 was a record 1.9 million guests, an increase of 0.2 million guests, or 9% when compared to the first two months of 2019. Total revenue for the first two months of 2020 was also a record of approximately$120.6 million , an increase of$13.0 million , or 12%, when compared to the first two months of 2019. The COVID-19 pandemic has materially impacted our revenue and results of operations for the three months endedMarch 31, 2020 due primarily to the resulting park closures effective onMarch 16, 2020 . See "Risk Factors" for further discussion of the adverse impacts of the COVID-19 pandemic on our business. The following discussion provides an analysis of our operating results for the three months endedMarch 31, 2020 and 2019. This 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.
Comparison of the Three Months Ended
The following table presents key operating and financial information for the
three months ended
For the Three Months Ended
March 31, Variance
2020 2019 $ %
Summary Financial Data: (In thousands, except per capita data and %)
Net revenues:
Admissions $ 90,506 $ 128,913 $ (38,407 ) (29.8 %)
Food, merchandise and other 63,055 91,662 (28,607 ) (31.2 %)
Total revenues 153,561 220,575 (67,014 ) (30.4 %)
Costs and expenses:
Cost of food, merchandise and other
revenues 13,104 17,213 (4,109 ) (23.9 %)
Operating expenses (exclusive of
depreciation and amortization shown
separately below) 132,999 149,885 (16,886 ) (11.3 %)
Selling, general and administrative
expenses 26,954 42,764 (15,810 ) (37.0 %)
Severance and other separation costs 65 2,566 (2,501 ) (97.5 %)
Depreciation and amortization 38,013 39,450 (1,437 ) (3.6 %)
Total costs and expenses 211,135 251,878 (40,743 ) (16.2 %)
Operating loss (57,574 ) (31,303 ) (26,271 ) (83.9 %)
Other (income) expense, net (12 ) 27 (39 ) NM
Interest expense 19,153 20,797 (1,644 ) (7.9 %)
Loss before income taxes (76,715 ) (52,127 ) (24,588 ) (47.2 %)
Benefit from income taxes (20,196 ) (15,107 ) (5,089 ) (33.7 %)
Net Loss $ (56,519 ) $ (37,020 ) $ (19,499 ) (52.7 %)
Other data:
Attendance 2,318 3,340 (1,022 ) (30.6 %)
Total revenue per capita $ 66.25 $ 66.04 $ 0.21 0.3 %
Admission per capita $ 39.05 $ 38.60 $ 0.45 1.2 %
In-park per capita spending $ 27.20 $ 27.44 $ (0.24 ) (0.9 %)
24
-------------------------------------------------------------------------------- Admissions revenue. Admissions revenue for the three months endedMarch 31, 2020 decreased$38.4 million , or 29.8%, to$90.5 million as compared to$128.9 million for the three months endedMarch 31, 2019 . The decrease was a result of a decline in attendance partially offset by an increase in admission per capita. Total attendance for the first quarter of 2020 decreased by approximately 1.0 million guests, or 30.6%, when compared to the prior year quarter. Attendance declined primarily due to the temporary park closures resulting from the global COVID-19 pandemic, which closed all of our parks beginning onMarch 16, 2020 . The timing of the park closures fell during historically high volume spring break weeks for most of our parks, which adversely impacted the visitation mix for the quarter. Admission per capita increased by 1.2% to$39.05 for the first quarter of 2020 compared to$38.60 in the prior year quarter primarily due to pricing strategies, partially offset by the unfavorable visitation mix. Food, merchandise and other revenue. Food, merchandise and other revenue for the three months endedMarch 31, 2020 decreased$28.6 million , or 31.2%, to$63.1 million as compared to$91.7 million for the three months endedMarch 31, 2019 , primarily as a result of the decrease in attendance, as discussed above, and a decrease in in-park per capita spending. In-park per capita spending decreased by 0.9% to$27.20 in the first quarter of 2020 compared to$27.44 in the first quarter of 2019. Excluding the impact of other revenue in the prior year quarter related to certain international agreements which we previously announced were terminated in early 2019, in-park per capita spending improved by 0.9% due to pricing initiatives, partially offset by the visitation mix during the quarter. See Note 1-Description of the Business and Basis of Presentation in our notes to the unaudited condensed consolidated financial statements for further details regarding the international agreements. Costs of food, merchandise and other revenues. Costs of food, merchandise and other revenues for the three months endedMarch 31, 2020 decreased$4.1 million , or 23.9%, to$13.1 million as compared to$17.2 million for the three months endedMarch 31, 2019 , primarily due to the decrease in volume. These costs represent 20.8% and 18.8% of the related revenue earned for the three months endedMarch 31, 2020 and 2019, respectively. Excluding the impact of revenue related to international agreements in the prior year period, as discussed above, these costs were 19.1% of related revenue in the first quarter of 2019. Operating expenses. Operating expenses for the three months endedMarch 31, 2020 decreased$16.9 million , or 11.3%, to$133.0 million as compared to$149.9 million for the three months endedMarch 31, 2019 . The decrease primarily results from a reduction in labor and other direct operating costs due to the COVID-19 temporary park closures as well as the impact of cost savings initiatives. Operating expenses were also impacted by a decrease of$3.1 million in non-cash equity compensation expense related primarily to the reversal of 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 for further details. Selling, general and administrative expenses. Selling, general and administrative expenses for the three months endedMarch 31, 2020 decreased$15.8 million , or 37.0%, to$27.0 million as compared to$42.8 million for the three months endedMarch 31, 2019 . The decrease primarily relates to the following: (i) a decrease in legal costs primarily due to a previously disclosed legal settlement gain of$12.5 million related to insurance proceeds received in the first quarter of 2020; (ii) a decrease of$3.7 million 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; (iii) a decrease in marketing and media costs due to the COVID-19 temporary park closures; and (iv) 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 three months endedMarch 31, 2019 primarily relates to severance and other expenses for positions which were eliminated in 2019. Depreciation and amortization. Depreciation and amortization expense for the three months endedMarch 31, 2020 decreased$1.4 million , or 3.6%, to$38.0 million as compared to$39.5 million for the three months endedMarch 31, 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 endedMarch 31, 2020 decreased$1.6 million , or 7.9%, to$19.2 million as compared to$20.8 million for the three months endedMarch 31, 2019 . The decrease primarily relates to decreased LIBOR rates, partially offset by the impact of interest swap agreements and a higher outstanding balance on our Revolving Credit Facility during the three months endedMarch 31, 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 income taxes. Benefit from income taxes in the three months endedMarch 31, 2020 was$20.2 million compared to$15.1 million for the three months endedMarch 31, 2019 . Our consolidated effective tax rate was 26.3% for the three months endedMarch 31, 2020 compared to 29.0% for the three months endedMarch 31, 2019 . The effective tax rate decreased primarily due to a valuation allowance on state operating loss carryforwards, state income taxes and permanent items including equity-based compensation. 25 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Overview
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 ofMarch 31, 2020 , we had a working capital ratio (defined as current assets divided by current liabilities) of 0.9, due in part to a significant deferred revenue balance from revenues paid in advance for our theme park admissions products and high turnover of in-park products that results in a limited inventory balance. We typically operate with a working capital ratio less than 1 and we expect that we will continue to do so in the future. Our cash flow from operations, along with our revolving credit facilities, have allowed us to meet our liquidity needs. As previously mentioned, during the period the parks are temporarily closed due to the COVID-19 pandemic, which started onMarch 16, 2020 , we are not recognizing revenue from our parks and therefore we expect minimal cash flow from operations while the parks are closed. 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 three months endedMarch 31, 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 ofMarch 31, 2020 . In connection with Amendment No. 11 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 2021 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 for further details.
Other
As ofMarch 31, 2020 , we have five interest rate swap agreements (the "Interest Rate Swap Agreements") which effectively fix the interest rate on LIBOR-indexed interest payments associated with$1.0 billion of SEA's outstanding long-term debt. The Interest Rate Swap Agreements have a total notional amount of$1.0 billion and mature onMay 14, 2020 . See Note 6-Long-Term Debt and Note 7-Derivative Instruments and Hedging Activities to our unaudited condensed consolidated financial statements for further details. We believe that existing cash and cash equivalents, cash flow from operations, 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. 26 --------------------------------------------------------------------------------
The following table presents a summary of our cash flows provided by (used in) operating, investing, and financing activities for the periods indicated:
For the Three Months Ended March 31,
2020 2019
(In thousands)Net cash (used in) provided by operating activities $ (40,767 )
$ 37,688
Net cash used in investing activities (49,249 ) (47,887 )
Net cash provided by financing activities 242,819 28,006
Net increase in cash and cash equivalents, including restricted cash
$ 152,803 $ 17,807
Cash Flows from Operating Activities
Net cash used in operating activities was$40.8 million during the three months endedMarch 31, 2020 as compared to$37.7 million during the three months endedMarch 31, 2019 . The change in net cash 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 three months endedMarch 31, 2020 consisted of capital expenditures of$49.2 million largely related to 2020 attractions. Net cash used in investing activities during the three months endedMarch 31, 2019 consisted of$47.9 million of capital expenditures largely related to attractions that opened in 2019. The following table presents detail of our capital expenditures for the periods indicated: For the Three Months Ended March 31, 2020 2019 Capital Expenditures: (Unaudited, in thousands) Core(a) $ 44,518 $ 44,676 Expansion/ROI projects(b) 4,731 3,261 Capital expenditures, total $ 49,249 $ 47,937
(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 inMarch 2020 .
Cash Flows from Financing Activities
Net cash provided by financing activities during the three months endedMarch 31, 2020 results primarily from net draws of$262.5 million on our revolving credit facility, partially offset by share repurchases of$12.4 million and net repayments on long-term debt of$3.9 million . Net cash used in financing activities during the three months endedMarch 31, 2019 results primarily from net draws of$35.0 million on our revolving credit facility, partially offset net repayments on long-term debt of$3.9 million . See Note 6-Long-term Debt in our notes to the unaudited condensed consolidated financial statements for further details.
Our Indebtedness
The Company is a holding company and conducts its operations through its subsidiaries, which have incurred or guaranteed indebtedness as described below.
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 ofDecember 1, 2009 , as the same may be amended, restated, supplemented or modified from time to time (the "Senior Secured Credit Facilities"). OnMarch 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 . OnApril 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. See "Covenant Compliance" discussion which follows. 27 -------------------------------------------------------------------------------- As ofMarch 31, 2020 , our Senior Secured Credit Facilities consisted of$1.504 billion in Term B-5 Loans which will mature onMarch 31, 2024 , along with a$332.5 million Revolving Credit Facility, of which$312.5 million was drawn upon as ofMarch 31, 2020 . Additionally, as ofMarch 31, 2020 , SEA had approximately$19.9 million of outstanding letters of credit, leaving no remaining available amount for borrowing under the Revolving Credit Facility.
Senior Secured Notes
OnApril 21, 2020 , SEA commenced a private offering of$227.5 million aggregate principal amount of 8.750% first-priority senior secured notes due 2025 (the "Senior Notes"). We expect to use the proceeds from the issuance of the Senior Notes for working capital and other general corporate purposes and to pay fees and expenses related to the offering of the Senior Notes and Amendment No. 11 to the Amended Credit Agreement. The sale of the Senior Notes closed onApril 30, 2020 .
See Note 6-Long-Term Debt in our notes to the unaudited condensed consolidated financial statements for further details concerning our long-term debt.
Covenant Compliance
As of
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. 11, among other terms, SEA will be exempt from complying with its first lien secured leverage ratio covenant for each of the second, third and fourth quarters of 2020, after which SEA will be required to comply with such covenants starting at the first quarter of 2021. 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 2021. 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 ofSeptember 30, 2021 or the date on which the Company elects to use actual Adjusted EBITDA for purposes of calculating its financial maintenance covenant. As ofMarch 31, 2020 , the total leverage ratio as calculated under our Senior Secured Credit Facilities was 3.89 to 1.00. The Company's total leverage ratio is calculated by dividing total net debt by the last twelve months Adjusted EBITDA plus$7.2 million in estimated cost savings which have been identified based on certain specified actions the Company has taken, including restructurings and cost savings initiatives.
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. Adjusted EBITDA is not a recognized term under accounting principles generally accepted inthe 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. 28
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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
Last Twelve
For the Three Months Ended Months Ended
March 31, March 31,
2020 2019 2020
(Unaudited, in thousands)
Net (loss) income $ (56,519 ) $ (37,020 ) $ 69,977
(Benefit from) provision for income taxes (20,196 ) (15,107 ) 34,439
Interest expense 19,153 20,797 82,534
Depreciation and amortization 38,013 39,450 159,120
Equity-based compensation expense (a) (3,601 ) 3,198 4,307
Loss on impairment or disposal of assets and
certain non-cash expenses (b) 385 109 3,474
Business optimization, development and
strategic initiative costs (c) 2,035 5,108 24,796
Certain investment costs and other taxes(d) 102 50 5,108
Other adjusting items (e) (10,225 ) (169 ) 25,898
Adjusted EBITDA(f) $ (30,853 ) $ 16,416 $ 409,653
Items added back to Adjusted EBITDA, after
cost savings, as defined in the Amended
Credit Agreement:
Estimated cost savings (g) 7,200
Adjusted EBITDA, after cost savings (h) $ 416,853 (a) Reflects non-cash equity compensation expenses associated with the grants of
equity compensation. For the three and twelve months ended
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 for further details.
(b) Reflects primarily non-cash expenses related to miscellaneous fixed asset
disposals. For the twelve months ended
from service.
(c) For the three months ended
development and other strategic initiative costs primarily related to
million of third party consulting costs. For the three months ended
2019, reflects business optimization, development and other strategic
initiative costs primarily related to
employment costs associated with positions eliminated and
third party consulting costs. For the twelve months ended
reflects business optimization, development and other strategic initiative
costs primarily related to
(d) For the twelve months ended
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 for further details.
(e) Reflects the impact of expenses, net of insurance recoveries and adjustments,
incurred primarily related to certain legal matters, 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 months ended
million of insurance proceeds related to a legal settlement gain as
previously disclosed. For the twelve months ended
includes approximately
net of insurance recoveries, as previously disclosed. See Note 10-Commitments
and Contingencies in our notes to the unaudited condensed consolidated
financial statements 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.
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(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 asMarch 31, 2020 from those previously disclosed in our Annual Report on Form 10-K. Subsequent toMarch 31, 2020 , we entered into Amendment No. 11 to the Amended Credit Agreement and we issued$227.5 million in first-priority senior secured notes. See Note 6-Long-Term Debt to our unaudited condensed consolidated financial statements therein for further discussion.
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 onFebruary 27, 2020 , except as noted below.
As ofMarch 31, 2020 , we determined that due to the temporary park closures effectiveMarch 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, potential 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 ofMarch 31, 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 ofMarch 31, 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 ofMarch 31, 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 off-balance sheet arrangements as of
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--------------------------------------------------------------------------------Recently Issued Financial Accounting Standards
Refer to Note 2-Recent Accounting Pronouncements in our notes to the unaudited condensed consolidated financial statements for further details.
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