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 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. 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.
We are a leading theme park and entertainment company delivering personal, interactive and educational experiences that blend imagination with nature and enable our customers to celebrate, connect with and care for the natural world we share. We own or license a portfolio of globally recognized brands, including
Key Business Metrics Evaluated by Management
We define attendance as the number of guest visits to our theme parks. Increased attendance drives increased admissions revenue to our theme parks as well as total in-park spending. The level of attendance at our theme parks is a function of many factors, including the opening of new attractions and shows, weather, global and regional economic conditions, competitive offerings and overall consumer confidence in the economy.
Total Revenue Per Capita
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 for any period as total admissions revenue divided by total attendance. Theme park admissions accounted for approximately 65% of our total revenue for the three months ended
March 31, 2014. For the first quarter of 2014, we reported $45.12in admission per capita, representing an increase of 3.6% from the first quarter of 2013. Admission per capita is driven by ticket pricing, the mix of tickets purchased (such as single day, multi-day and annual pass) and the mix of attendance by theme parks visited. • In-Park Per Capita Spending. We calculate in-park per capita spending for any period as total food, merchandise and other revenue divided by total attendance. For the three months ended March 31, 2014, food, merchandise and other revenue accounted for approximately 35% of our total revenue. For the first quarter of 2014, we reported $24.60of in-park per capita spending, relatively flat from the first quarter of 2013. In-park per capita spending is driven by pricing changes, penetration levels (percentage of guests purchasing), new product offerings, the mix of guests and the mix of in-park spending. 20
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Trends Affecting Our Results of Operations
Our success depends to a significant extent on discretionary consumer spending, which is heavily influenced by general economic conditions and the availability of discretionary income. The recent severe economic downturn, coupled with high volatility and uncertainty as to the future global economic landscape, has had and continues to have an adverse effect on consumers' discretionary income and consumer confidence. Difficult economic conditions and recessionary periods may adversely impact attendance figures, the frequency with which guests choose to visit our theme parks and guest spending patterns at our theme parks. Historically, our revenue and attendance growth have been highly correlated with domestic economic growth, as reflected in the gross domestic product ("GDP") and the overall level of growth in domestic consumer spending. For example, in 2009 and 2010, we experienced a decline in attendance as a result of the global economic crisis, which, in turn, adversely affected our revenue and profitability. We expect that forecasted moderate improvements in GDP and growth in domestic consumer spending will have a positive impact on our future performance. Both attendance and total revenue per capita at our theme parks are key drivers of our revenue and profitability, and reductions in either can materially adversely affect our business, financial condition, results of operations and cash flows.
The theme park industry is seasonal in nature. Based upon historical results, we generate the highest revenues in the second and third quarters of each year, in part because six 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 mix of revenues by quarter is relatively constant, but revenues can shift between the first and second quarters due to the timing of Easter or between the first and fourth quarters due to the timing of Christmas and
Principal Factors Affecting Our Results of Operations
Our revenues are driven primarily by attendance in our theme parks and the level of per capita spending for admission to the theme parks and per capita spending inside the theme parks for culinary, merchandise and other in-park experiences. The level of attendance in our theme parks is a function of many factors, including the opening of new attractions and shows, weather, global and regional economic conditions, competitive offerings and consumer confidence. Admission per capita is driven by ticket pricing, the mix of ticket type purchased (such as single day, multi-day, and annual pass) and the mix of attendance by theme parks visited. In-park per capita spending is driven by pricing changes, penetration levels (percentage of guests purchasing), new product offerings, the mix of guests and the mix of in-park spending. For other factors affecting our revenues, see the "Risk Factors" section of our Annual Report on Form 10-K.
In addition to the theme parks, we are also involved in entertainment, media, and consumer product businesses that leverage our intellectual property. While these businesses currently do not represent a material percentage of our revenue, they are important strategic drivers in terms of consumer awareness and brand building. We aim to expand these businesses into a greater source of revenue in the future.
Costs and Expenses
The principal costs of our operations are employee salaries, employee benefits, advertising, maintenance, animal care, utilities and insurance. Factors that affect our costs and expenses include commodity prices, costs for construction, repairs and maintenance, other inflationary pressures and attendance levels. A large portion of our expenses is relatively fixed because the costs for full-time employees, maintenance, animal care, utilities, advertising and insurance do not vary significantly with attendance. For factors affecting our costs and expenses, see the "Risk Factors" section of our Annual Report on Form 10-K.
We barter theme park admission products for advertising and various other products and services. The fair value of the admission products is recognized into revenue or contra-expense and related expenses at the time of the exchange and approximates the fair value of the goods or services received.
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Results of Operations
The following discussion provides an analysis of our operating results for the three months ended
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, 2014 2013 (Unaudited, amounts in thousands, except per Statement of comprehensive loss data: capita data) Net revenues: Admissions
$ 137,386 $ 152,426Food, merchandise and other 74,904 86,184 Total revenues 212,290 238,610 Costs and expenses: Cost of food, merchandise and other revenues 16,760 19,828 Operating expenses (exclusive of depreciation and amortization shown separately below) 167,912 173,260 Selling, general and administrative 45,076 39,987 Secondary offering costs 674 - Depreciation and amortization 41,276 41,408 Total costs and expenses 271,698 274,483 Operating loss (59,408 ) (35,873 ) Other loss (income), net 17 (73 ) Interest expense 20,046 28,606 Loss before income taxes (79,471 ) (64,406 ) Benefit from income taxes (30,040 ) (24,046 ) Net loss $ (49,431 ) $ (40,360 )Other data: Attendance 3,045 3,499 Total revenue per capita $ 69.72 $ 68.19
Admissions revenue. Admissions revenue for the three months ended
Food, merchandise and other revenue. Food, merchandise and other revenue for the three months ended
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Costs of food, merchandise and other revenues. Costs of food, merchandise and other revenues for the three months ended
Operating expenses. Operating expenses for the three months ended
Selling, general and administrative. Selling, general and administrative expenses for the three months ended
Secondary Offering Costs. Secondary offering costs for the three months ended
Depreciation and amortization. Depreciation and amortization expense for the three months ended
Interest expense. Interest expense for the three months ended
Benefit from income taxes. The benefit from income taxes for the three months ended
Liquidity and Capital Resources
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 common stock dividends. As of
As market conditions warrant and subject to our contractual restrictions and liquidity position, we, our affiliates and/or our major stockholders, including Blackstone and its affiliates, may from time to time repurchase our outstanding equity and/or debt securities, including the Senior Notes and/or our outstanding bank loans in privately negotiated or open market transactions, by tender offer or
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otherwise. Any such repurchases 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.
Concurrently with the closing of the secondary offering on
Concurrently with the closing of the secondary offering on
We believe that existing cash and cash equivalents, cash flow from operations, and available borrowings under the Senior Secured Credit Facilities will be adequate to meet the capital expenditures, dividends and working capital requirements of our operations for at least the next 12 months.
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, 2014 2013 (Unaudited, amounts in thousands) Net cash provided by operating activities
$ 13,011 $ 24,174Net cash used in investing activities (47,331 ) (32,786 ) Net cash (used in) provided by financing activities (21,281 ) 22,304
Net (decrease) increase in cash and cash equivalents
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Cash Flows from Operating Activities
Net cash provided by operating activities was
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 ended
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 2014 capital expenditures through our operating cash flow.
Cash Flows from Financing Activities
Net cash used in financing activities during the three months ended
Net cash provided by financing activities during the three months ended
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
Borrowings under our Senior Secured Credit Facilities bear interest, at SEA's option, at a rate equal to a margin over either (a) a base rate determined by reference to the higher of (1) Bank of America's prime lending rate and (2) the federal funds effective rate plus 1/2 of 1% or (b) a
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The applicable margin for borrowings under the Revolving Credit Facility is 1.75%, in the case of base rate loans and 2.75% , in the case of
In addition to paying interest on outstanding principal under our Senior Secured Credit Facilities, SEA is required to pay a commitment fee to the lenders under the Revolving Credit Facility in respect of the unutilized commitments thereunder at a rate of 0.50% per annum. SEA is also required to pay customary letter of credit fees.
SEA is required to prepay outstanding term loans, subject to certain exceptions, with (i) 50% of SEA's annual "excess cash flow" (with step-downs to 25% and 0%, as applicable, based upon achievement by SEA of a certain total net leverage ratio), subject to certain exceptions; (ii) 100% of the net cash proceeds of certain non-ordinary course asset sales or other dispositions subject to reinvestment rights and certain exceptions; and (iii) 100% of the net cash proceeds of any incurrence of debt by SEA or any of its restricted subsidiaries, other than debt permitted to be incurred or issued under our Senior Secured Credit Facilities.
Term B-2 Loans amortize in equal quarterly installments in an aggregate annual amount equal to 1.0% per annum of the original principal amount of the Term B-2 Loans, with the balance due on the final maturity date. SEA may voluntarily repay amounts outstanding under our Senior Secured Credit Facilities at any time without premium or penalty, other than customary "breakage" costs with respect to
The obligations under our Senior Secured Credit Facilities are fully, unconditionally and irrevocably guaranteed by each of the Company, any subsidiary of the Company that directly or indirectly owns 100% of the issued and outstanding equity interests of SEA, and, subject to certain exceptions, each of SEA's existing and future material domestic wholly-owned subsidiaries (collectively, the "Guarantors"). Our Senior Secured Credit Facilities are collateralized by first priority or equivalent security interests in (i) all the capital stock of, or other equity interests in, substantially all SEA's direct or indirect material domestic subsidiaries (subject to certain exceptions and qualifications) and 65% of the capital stock of, or other equity interests in, any of SEA's first tier foreign subsidiaries and (ii) certain tangible and intangible assets of SEA and those of the Guarantors (subject to certain exceptions and qualifications).
Our Senior Secured Credit Facilities contain a number of customary negative covenants. Such covenants, among other things, restrict, subject to certain exceptions, the ability of SEA and its restricted subsidiaries to incur additional indebtedness; make guarantees; create liens on assets; enter into sale and leaseback transactions; engage in mergers or consolidations; sell assets; make fundamental changes; pay dividends and distributions or repurchase SEA's capital stock; make investments, loans and advances, including acquisitions; engage in certain transactions with affiliates; make changes in nature of the business; and make prepayments of junior debt.
Our Senior Secured Credit Facilities also contain covenants requiring SEA to maintain specified maximum annual capital expenditures, a maximum total net leverage ratio and a minimum interest coverage ratio. In addition, our Senior Secured Credit Facilities contain certain customary representations and warranties, affirmative covenants and events of default.
The Senior Notes
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The Senior Notes are senior unsecured obligations and:
• rank senior in right of payment to all existing and future debt and other obligations that are, by their terms, expressly subordinated in right of payment to the Senior Notes; • rank equally in right of payment to all existing and future senior debt and other obligations that are not, by their terms, expressly subordinated in right of payment to the Senior Notes; and • are effectively subordinated in right of payment to all existing and future secured debt (including obligations under our Senior Secured Credit Facilities), to the extent of the value of the assets securing such debt, and are structurally subordinated to all obligations of each of our subsidiaries that is not a guarantor of the Senior Notes.
We may redeem some or all of the Senior Notes at any time prior to
We used a portion of the net proceeds received by us in our initial public offering to redeem
The indenture governing the Senior Notes contains a number of covenants that, among other things, restrict SEA's ability and the ability of its restricted subsidiaries to, among other things, dispose of certain assets; incur additional indebtedness; pay dividends; prepay subordinated indebtedness; incur liens; make capital expenditures; make investments or acquisitions; engage in mergers or consolidations; and engage in certain types of transactions with affiliates. These covenants are subject to a number of important limitations and exceptions.
See Note 6-Long-Term Debt to our unaudited condensed consolidated financial statements therein for further discussion regarding our Senior Secured Credit Facilities and Senior Notes.
The indenture governing the Senior Notes and the credit agreement governing the Senior Secured Credit Facilities provide for certain events of default which, if any of them were to occur, would permit or require the principal of and accrued interest, if any, on the Senior Notes or the loans under the Senior Secured Credit Facilities, respectively, to become or be declared due and payable (subject, in some cases, to specified grace periods).
Under the indenture governing the Senior Notes and 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 covenant Adjusted EBITDA.
The Senior Notes and the Senior Secured Credit Facilities generally define "Adjusted EBITDA" as net income (loss) before interest expense, income tax expense (benefit), depreciation and amortization, as further adjusted to exclude certain unusual, non-cash, and other items permitted in calculating covenant compliance under the indenture governing the Senior Notes and the Senior Secured Credit Facilities.
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We believe that the presentation of Adjusted EBITDA is appropriate to provide additional information to investors about the calculation of, and compliance with, certain financial covenants in the indenture governing the Senior Notes and in the Senior Secured Credit Facilities. Adjusted EBITDA is a material component of these covenants. In addition, investors, lenders, financial analysts and rating agencies have historically used EBITDA related measures in our industry, along with other measures, to evaluate a company's ability to meet its debt service requirements, to estimate the value of a company and to make informed investment decisions. We also use Adjusted EBITDA in connection with certain components of our executive compensation program. Adjusted EBITDA eliminates the effect of certain non-cash depreciation of tangible assets and amortization of intangible assets, along with the effects of interest rates and changes in capitalization which management believes may not necessarily be indicative of a company's underlying operating performance.
Adjusted EBITDA is not a recognized term under accounting principles generally accepted in
The following table reconciles Adjusted EBITDA to net loss for the periods indicated: For the Three Months Ended March 31, 2014 2013 (Unaudited, amounts in thousands) Net loss
$ (49,431 ) $ (40,360 )Benefit from income taxes (30,040 ) (24,046 ) Interest expense 20,046 28,606 Depreciation and amortization 41,276 41,408 Secondary offering costs (a) 674 - Advisory fees (b) - 925 Equity-based compensation expense (c) 762 320 Other adjusting items (d) - 111 Other non-cash expenses (e) 908 4,147 Adjusted EBITDA $ (15,805 ) $ 11,111
(a) Reflects fees and expenses incurred prior to
with the secondary offering of our common stock in
April 2014. The selling stockholders received all of the net proceeds from the offering and we paid all expenses related to the offering, other than underwriting discounts and commissions. No shares were sold by us in the secondary offering.
(b) Reflects historical fees paid to an affiliate of Blackstone under the 2009
Advisory Agreement. The 2009 Advisory Agreement was terminated on
2013 in connection with the Company's initial public offering.
(c) Reflects non-cash compensation expense associated with the grants of equity
(d) Reflects costs related to our acquisition of the Knott's Soak City Chula
Vista water park and pre-opening costs related to Aquatica San Diego.
(e) Reflects non-cash expenses related to miscellaneous asset write-offs which
were expensed. 28
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There have been no material changes to our contractual obligations from those previously disclosed in our Annual Report on Form 10-K.
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, revenue recognition and equity-based compensation. 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 property and equipment, 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.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of
Recently Issued Financial Accounting Standards
The Company reviews new accounting pronouncements as they are issued or proposed by the