The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2016, 2015 and 2014
1.
|
BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
|
Basis of Presentation
– The consolidated financial statements include the accounts of Speedway Motorsports, Inc. and all of its wholly-owned and operating subsidiaries: Atlanta Motor Speedway LLC (AMS), Bristol Motor Speedway LLC (BMS), Charlotte Motor Speedway LLC (CMS), Kentucky Raceway LLC d/b/a Kentucky Speedway (KyS), Nevada Speedway LLC d/b/a Las Vegas Motor Speedway (LVMS), New Hampshire Motor Speedway, Inc. (NHMS), North Wilkesboro Speedway, Inc. (NWS), Speedway Sonoma LLC (Sonoma Raceway or SR), Texas Motor Speedway, Inc. (TMS), SMISC Holdings, Inc. d/b/a SMI Properties (SMI Properties), US Legend Cars International, Inc. (Legend Cars), Oil-Chem Research Corporation (Oil-Chem), SMI Trackside LLC (SMI Trackside), Speedway Funding LLC, Speedway Properties Company LLC a/k/a Performance Racing Network (PRN), Speedway Media LLC a/k/a Racing Country USA (RCU), and TSI Management Company LLC d/b/a The Source International LLC (TSI) (collectively, the Company, SMI, we, our or us). Hereafter, references to “the Company’s” or “eight” speedways exclude NWS, which presently has no significant operations and assets consist primarily of real estate which has no significant fair value.
Description of Business
– We are a promoter, marketer and sponsor of motorsports activities in the United States. We principally own and operate the following motorsports facilities: Atlanta Motor Speedway, Bristol Motor Speedway, Charlotte Motor Speedway, Kentucky Speedway, Las Vegas Motor Speedway, New Hampshire Motor Speedway, Sonoma Raceway, and Texas Motor Speedway. We also provide event and non-event souvenir merchandising and distribution services, and food, beverage and hospitality catering services under an outside management contract through our SMI Properties subsidiaries; provide radio programming, production and distribution through PRN and RCU; manufacture and distribute smaller-scale, modified racing cars and parts through Legend Cars, and sell an environmentally-friendly micro-lubricant
®
through Oil-Chem.
In early 2017, the NASCAR Sprint Cu
p Series became the Monster Energy NASCAR Cup Series
and that naming convention is used throughout this document.
Discontinued Oil and Gas Activities
– In 2008, we discontinued our oil and gas operations primarily because of ongoing challenges and business risks in conducting these activities in foreign countries. We have no remaining involvement or ownership interest, and there are no assets, liabilities, revenues or expenses (other than as described below), associated with the discontinued operation for any period presented herein. All note disclosures pertain to continuing operations unless otherwise indicated. We incurred insignificant legal fees and other costs in 2014 and 2015 associated with efforts to recover previously reserved receivables. In 2014, we recovered approximately $6.0 million of previously reserved receivables through favorable settlements. There were no associated income tax benefits reflected in discontinued operations for any period presented (see Note 8).
Racing Events
– As further described in Note 2, we derive a substantial portion of our total revenues from admissions, event related and NASCAR broadcasting revenue. In 2016
, we held 24 major annual racing events sanctioned by NASCAR, including 13 Monster Energy Cup and 11
Xfinity Series racing events. We also held eight NASCAR Camping World Truck Series, three NASCAR K&N Pro Series, four NASCAR Whelen Modified Tour, two IndyCar Series, six major National Hot Rod Association, one Automobile Racing Club of America and three
World of Outlaws racing events.
In 2015, we held 24 major annual racing events sanctioned by NASCAR, including 13 Monster Energy Cup and 11 Xfinity Series racing events. We also held eight NASCAR Camping World Truck Series, three NASCAR K&N Pro Series, four NASCAR Whelen Modified Tour, two IndyCar Series, six major NHRA, one ARCA and three WOO events. In 2014, we held 24 major annual racing events sanctioned by NASCAR, including 13 Monster Energy Cup and 11 Xfinity Series racing events. We also held seven NASCAR Camping World Truck Series, three NASCAR K&N Pro Series, four NASCAR Whelen Modified Tour, two IndyCar Series, six major NHRA, one ARCA and three WOO racing events.
The Battle at Bristol
–
In 2016, BMS hosted two collegiate football games, one of which (the “Battle at Bristol”, including a large preceding concert) was substantially larger than the other due to team standings and public interest. Under the same accounting policy for our racing events described below, we previously deferred advance revenues and direct expenses pertaining to these events in current “deferred race event and other income, net”, all of which were recognized when held in 2016. These events had a material positive effect on our 2016 operating results, and associated revenues and direct expenses have been reflected in “other operating revenue” and “other direct operating expense” in our Consolidated Statements of Operations, and in our “all other” reporting segment (see Note 13). Management believes reporting these results separate from our core business of motorsports operations is appropriate as we do not have additional football games scheduled at this time (nor have any been held before), and these results are not indicative of future results that can be expected or forecast.
The more significant racing schedule changes during the last three years include:
•
|
Our
2016 race season experienced an unusually high number of event weekends with significant poor weather. For example, 8 events held during our 13 NASCAR Cup weekends were negatively impacted by poor weather.
|
•
|
In 2016, poor weather resulted in: (i) postponing and res
cheduling one Monster Energy NASCAR Cup race held at BMS, (ii) starting and completing the NASCAR All-Star race and next day rescheduling of one NASCAR Camping World Truck Series race held at CMS, (iii) delaying the start of the Monster Energy NASCAR Cup race held at LVMS, and (iv) delays in starting or completing or shortening two Monster Energy NASCAR Cup races held at TMS
|
•
|
In 2016,
Hurricane Matthew
resulted in postponing and rescheduling one Monster Energy NASCAR Cup and one Xfinity Series race held at CMS
|
•
|
In 2016, poor weather resulted in cancellation of a portion of one major NHRA weekend racing event held at CMS, and
delays in starting and completing one IndyCar race held at TMS, which was rescheduled from the second quarter 2016 to the third quarter 2016 (see
Note 2)
|
•
|
TMS held one Red Bull Air Race in 2015 and 2014 that was not held in 2016
|
•
|
In 2015, poor weather resulted in delays in starting and completing one Monster Energy NASCAR Cup race at AMS and BMS, and postponing and
rescheduling one Monster Energy NASCAR Cup race held at CMS
|
•
|
In 2014, poor weather resulted in delays in starting and completing one Monster Energy NASCAR Cup race held at BMS and postponing and rescheduling one Monster Energy NASCAR Cup race held at
TMS
|
•
|
AMS held one NASCAR Camping World Truck Series race in 2016 and 2015 that was not held in 2014
|
2018 Monster Energy NASCAR Cup, Xfinity and Camping World Truck Series Race Date Realignments to Las Vegas Motor Speedway –
We recently obtained approval from NASCAR to realign one
annual Monster Energy Cup Series and one annual Camping World Truck Series racing event from NHMS, and an annual Xfinity Series racing event from KyS, to LVMS beginning in 2018.
We considered many factors, including the popularity, demand, alternative uses and revenues, and potential net increase in long-term future profitability from conducting additional annual NASCAR racing events in the LVMS market.
2.
|
SIGNIFICANT ACCOUNTING POLICIES
|
Principles of Consolidation
– All significant intercompany accounts and transactions have been eliminated in consolidation.
Revenue and Expense Classification
– We classify our revenues as admissions, event related revenue, NASCAR broadcasting revenue, and other operating revenue. “Admissions” includes ticket sales for all Company events. “Event related revenue” includes amounts received from sponsorships, luxury suite rentals, souvenir sales, commissions from food and beverage sales, advertising and other promotional revenues, hospitality revenues, track rentals, driving school revenues, camping and other non-admission access revenues, broadcasting rights other than NASCAR broadcasting revenue, and other event and speedway related revenues. “NASCAR broadcasting revenue” includes rights fees obtained for domestic television broadcasts of NASCAR-sanctioned events held at our speedways. “Other operating revenue” includes non-event merchandising revenues and Legend Cars and parts sales, The Speedway Club at CMS and The Speedway Club at TMS (together the “Speedway Clubs”) revenues, Oil-Chem revenues, TMS oil and gas mineral rights lease and related revenues, industrial park and office tower rentals, and for 2016 also includes revenues associated with the “Battle at Bristol” as further described in Note 1.
We classify our expenses to include direct expense of events, NASCAR event management (formerly purse and sanction) fees, and other direct operating expense, among other categories. “
Direct expense of events” principally includes cost of souvenir sales, non-NASCAR race purses and sanctioning fees, property and event insurance, compensation of certain employees, advertising, sales and admission taxes, outside event support services, cost of driving school revenues, and event settlement payments to non-NASCAR sanctioning bodies. “NASCAR event management fees” includes payments to, and portions of broadcasting revenues retained by, NASCAR for associated events held at the Company’s speedways. “Other direct operating expense” includes the cost of certain SMI Properties and subsidiaries, Legend Cars, Speedway Clubs, Oil-Chem, industrial park and office tower rental revenues, and for 2016 also includes expenses associated with the “Battle at Bristol” as further described in Note 1.
Event
Revenues and Deferred Event Income, Net
– We recognize admissions, NASCAR broadcasting and event related revenues when an event is held. Event souvenir merchandise sales and commissions from food and beverage sales are recognized at time of sale. Advance revenues and certain related direct expenses pertaining to specific events are deferred until the event is held. Deferred expenses can include race purses and sanction fees remitted to or retained by NASCAR or other sanctioning bodies and sales and admission taxes and credit card processing fees on advance revenues. Deferred race event income relates to scheduled events to be held in upcoming periods. If circumstances prevent a race from being held during the racing season: (i) generally advance revenue is refundable and (ii) all deferred direct event expenses would be immediately recognized except for race event management fees which would be refundable from NASCAR or other sanctioning bodies, and for sales and admission taxes which would be refundable from taxing authorities. Management believes this accounting policy results in appropriate matching of revenues and expenses associated with our racing events and helps ensure comparability and consistency between our financial statements. Advance revenues, and certain related direct expenses, if any, for track rentals, driving schools and similar activities are deferred and recognized when the activities take place. Management believes its revenue recognition policies follow applicable authoritative guidance. Sales of gift cards or gift certificates for tickets, merchandise or other redemption use have not been significant.
An IndyCar race scheduled at TMS in the second quarter 2016 was postponed due to poor weather, rescheduled for the next day and started and stopped due to poor weather, and rescheduled again and held in the third quarter 2016.
The Company has offered to honor unused tickets through exchange for race tickets to TMS’s upcoming Monster Energy NASCAR Cup race in April 2017 or IndyCar race in June 2017. The exchange offer expires in June 2017, and cash refunds were not offered. We are presently unable to determine the ultimate number of tickets or which race events or future reporting periods that may be affected by ticket exchanges or redemption. As of December 31, 2016, we have deferred race event income of $524,000 for unredeemed tickets associated with TMS’s 2016 IndyCar race. Management believes the matter will not materially affect our future financial condition, results of operations or cash flows.
NASCAR Broadcasting Revenues and NASCAR Event Management (formerly Purse and San
ction) Fees
– NASCAR contracts directly with certain television networks on broadcasting rights for all NASCAR-sanctioned Monster Energy Cup, Xfinity and Camping World Truck Series racing events. We receive television broadcasting revenues under contractual sanction agreements for each NASCAR-sanctioned race. The Company periodically negotiates its sanction fees for individual races with NASCAR. In 2015, SMI entered into separate five-year Event Management Agreements with NASCAR, under which our speedways will conduct Monster Energy NASCAR Cup, Xfinity and Camping World Truck Series and the All-Star Race events beginning in 2016 and through 2020. These agreements are substantially similar in form, substance and relative allocation of broadcast rights revenue to previous sanction agreements between SMI and NASCAR, except agreement duration increased from one to five years and annual increases in broadcast rights revenue and event management fees of three to four percent annually over the new five-year agreement term were established. Under the sanction agreements, NASCAR typically retains 10% of gross broadcasting revenues as a component of their sanction fees. NASCAR also retains 25% of gross broadcasting revenues for purses awarded to race participants for each race. The remainder represents additional annually negotiated event management fees paid to NASCAR by the Company for each race. These amounts retained by and paid to NASCAR are reflected in NASCAR event management fee expense.
Marketing Agreem
ents
– We have various marketing agreements for sponsorships, on-site advertising, hospitality and other promotional activities. Sponsorships generally consist of event and official sponsorship agreements. These various marketing agreements can be event, speedway or period specific, or pertain to multiple events, speedways or years. Marketing agreements that are not event specific typically contain stated fiscal year periods. We receive payments based on contracted terms. Marketing customers and agreement terms change from time to time. We recognize contracted fee revenues, and associated expenses, as events or activities are conducted each year in accordance with the respective agreement terms. Our marketing agreements sometimes include multiple specified elements such as sponsorships, tickets, hospitality, suites or on-site advertising in varying combinations for one or more events or contract periods, although there is typically a predominant element. Contracted revenues are allocated between admissions and event related revenue financial statement categories based on the relative fair or retail value of the respective multiple elements as such events or activities are conducted each year in accordance with the respective agreement terms.
Certain marketin
g agreements contain elements of purchased property and equipment exchanged for multi-year marketing and other promotional activities at one or more of our facilities. The associated assets and deferred revenue are initially recorded based on their estimated fair or retail values, with assets then depreciated over estimated useful lives and deferred revenue recognized into income on a straight-line basis as events are conducted each year in accordance with the respective agreement terms. Deferred revenues recognizable in each upcoming fiscal year are reflected as current liabilities in deferred race event and other income.
Long-Term Food and Beverage Management Contract
– Levy Premium Foodservice Limited Partnership, wholly-owned by Compass Group USA, Inc., has exclusive rights to provide on-site food, beverage and hospitality catering services for essentially all Company speedway events and operations under a long-term food and beverage management contract through 2021. The long-term agreement provides for, among other items, specified annual fixed and periodic gross revenue based commission payments to the Company over the contract period. Our commission-based net revenues associated with activities provided by Levy are reported in event related revenue and at times, to a lesser extent, other operating revenue depending on the venue.
Non-Event Souvenir Merchandise and Other Revenues
– We recognize revenue when products are shipped, title transfers to customers, right of return or cancellation provisions expire, sales prices are final and collection is probable. We use these same methods and timing of revenue recognition for products sold through e-commerce or our websites, which has not been significant. For products sold on consignment through various promotional activities, revenues are recognized upon product shipment by promoters to customers, or purchase by reseller customers, and expiration of any right of return or cancellation provisions. Product sold on consignment with right of return or cancellation provisions has not been significant.
Revenue Composition
– Our revenues are comprised of the following (in thousands):
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Admissions
|
|
$
|
90,639
|
|
|
$
|
100,694
|
|
|
$
|
100,798
|
|
NASCAR broadcasting
|
|
|
224,227
|
|
|
|
217,469
|
|
|
|
207,369
|
|
Sponsorships
and other event related
|
|
|
126,046
|
|
|
|
132,928
|
|
|
|
133,071
|
|
Souvenir and other merchandise
|
|
|
27,742
|
|
|
|
31,781
|
|
|
|
31,058
|
|
Other
(Note 1)
|
|
|
43,502
|
|
|
|
13,591
|
|
|
|
12,013
|
|
Total revenue
|
|
$
|
512,156
|
|
|
$
|
496,463
|
|
|
$
|
484,309
|
|
Revenues described as “
other event related” consist principally of commissions from food, beverage and souvenir sales, luxury suite rentals, advertising and other promotional revenues, hospitality revenues, track rentals, driving school revenues, camping and other non-admission access revenues, broadcasting rights other than NASCAR broadcasting revenue, and other event and speedway related revenues. “Souvenir and other merchandise revenue” consists of SMI Properties and SMI Trackside sales of owned souvenir merchandise during racing and non-racing events and in speedway gift shops (motorsports event related merchandise), certain SMI Properties sales of racing and other sports related souvenir merchandise and Legend Cars operations (non-event motorsports related merchandise), and Oil-Chem product sales (non-motorsports related merchandise). “Other revenue” consists principally of revenues from the Speedway Clubs, industrial park and office tower rentals, Legend Cars as the sanctioning body for Legend Cars circuit races, and TMS oil and gas mineral rights lease and related revenues, and for 2016 also includes all revenues associated with the “Battle at Bristol”.
Use of Estimates
– The preparation of financial statements in conformity with generally accepted accounting principles requires extensive use of management estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at financial statement dates, and reported amounts of revenues and expenses. Actual future results could differ from those estimates. Such significant estimates include (i) recoverability of property and equipment, goodwill and other intangible assets, (ii) depreciable lives for property and equipment and amortization periods for intangible assets, (iii) accounting for income taxes, (iv) realization of receivables and inventories, (v) accruals for certain business taxes, uninsured business risks, litigation, and other contingencies, and (vi) deferred compensation obligations and disclosures of stock-based compensation.
Consolidated Statements of Cash Flows
–
We classify as cash equivalents all highly liquid investments with original maturities of three months or less. Cash equivalents principally consist of variable rate, overnight sweep accounts of commercial paper, repurchase agreements, municipal bond and United States Treasury securities.
Before December 31, 2016,
cash we collected and temporarily held on behalf of our third-party food and beverage concessionaire, and not remitted until after period end, was presented separately from cash flows from operating activities on the Consolidated Statements of Cash Flows. At December 31, 2016, such amounts are now included in c
ash flows from operating activities on the Consolidated Statements of Cash Flows. The change decreased cash flow from operations, and the change in accounts payable, $141,000 for 2015 and $612,000 for 2014, which management believes is not significant. There was no impact on the Consolidated Balance Sheets or Statements of Operations.
Accounts Receivable
are reported net of allowance for doubtful accounts summarized as follows (in thousands):
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Balance, beginning of year
|
|
$
|
1,287
|
|
|
$
|
1,271
|
|
|
$
|
1,273
|
|
Bad debt expense
|
|
|
126
|
|
|
|
605
|
|
|
|
261
|
|
Actual write-offs, net of specific accounts recovered
|
|
|
(235
|
)
|
|
|
(589
|
)
|
|
|
(263
|
)
|
Balance, end of year
|
|
$
|
1,178
|
|
|
$
|
1,287
|
|
|
$
|
1,271
|
|
Deferred Financing Costs
are amortized into interest expense over the associated debt terms or remaining terms for loan amendment costs. Deferred financing costs reflected in other noncurrent assets below are associated with our revolving Credit Facility, and are reported net of accumulated amortization of $3,167,000 and $2,806,000 at December 31, 2016 and 2015. Deferred financing costs associated with our 2023 Senior Notes and bank Term Loan are reflected as a reduction of long-term debt, and are reported net of accumulated amortization of $7,275,000 and $6,062,000 at December 31, 2016 and 2015. See "Recently Issued Accounting Standards" for related guidance adopted in 2016, and Note 6 for information on 2015 charges associated with previously deferred financing costs.
Other Noncurrent Assets
as of December 31, 2016 and 2015 consist of (in thousands):
|
|
2016
|
|
|
2015
|
|
Deferred financing costs, net (Note 6)
|
|
$
|
1,084
|
|
|
$
|
1,445
|
|
Land held for development
|
|
|
12,265
|
|
|
|
12,265
|
|
Other
|
|
|
9,793
|
|
|
|
9,548
|
|
Total
|
|
$
|
23,142
|
|
|
$
|
23,258
|
|
Noncurrent assets are generally reported at cost except for cash surrender values of life insurance policies which are reported at fair value (see Note 12). Management
evaluates these assets for recovery when events or circumstances indicate possible impairment may have occurred. As of December 31, 2016, there have been no events or circumstances which might indicate possible recoverability concerns or impairment.
Original
Debt Issuance Discount or Premium
is amortized into interest expense over the associated debt terms using the effective interest method.
Land Held For Development
represents property adjacent to a regional outlet mall in the Charlotte metropolitan area which management plans to develop and market or possibly sell in suitable market conditions.
Property and Equipment (Note 4)
are recorded at cost less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements pertain primarily to industrial park, office and warehouse facilities, and are amortized using the straight-line method over the lesser of associated lease terms or estimated useful lives. Constructed assets, including construction in progress, include all direct costs and capitalized interest until placed into service. Expenditures for repairs and maintenance are charged to expense when incurred, unless useful asset lives are extended or assets improved.
When events or circumstances indicate possible impairment may have occu
rred, the Company evaluates long-lived assets, including tangible assets and intangible assets subject to amortization, for possible impairment based on expected future undiscounted operating cash flows attributable to such assets using applicable authoritative guidance. Assets are grouped at the lowest level for which identifiable cash flows are largely independent of other assets and liabilities when assessing impairment. When management decides to repurpose and remove grandstand seating and suites as part of managing facility capacity or other speedway facility assets, depreciation is accelerated and recorded prospectively over shortened estimated remaining useful lives of the assets, and accounted for as a change in estimate, beginning when management contracts and begins removal. Gains or losses on property and equipment disposals are recognized when disposed. Recording accelerated depreciation, gain or loss on disposal or impairment losses related to property and equipment is based on assessment of the associated facts and circumstances. Also, assets are classified as held for sale when management determines that sale is probable within one year.
In connection with the development and completed construction of TMS in 1997, the Company entered into arra
ngements with the Fort Worth Sports Authority (FWSA), a non-profit corporate instrumentality of the City of Fort Worth, Texas, whereby the Company conveyed the speedway facility, excluding its on-site condominiums and office and entertainment complex, to the FWSA. The Company, which has the right to reacquire the facility, operates the speedway facility under a 30-year arrangement with the FWSA. Because of the Company’s responsibilities, including associated risks, rewards and obligations, under these arrangements, the speedway facility and related liabilities are included in the accompanying consolidated balance sheets.
Other Intangible Assets
and
Goodwill (Note 5)
represent the excess of business acquisition costs over the fair value of net assets acquired, and are all associated with our motorsports related activities and reporting units. Intangible assets consist predominately of goodwill and nonamortizable intangible assets for race event sanctioning and renewal agreements and, to a lesser extent, goodwill associated with event related motorsports merchandising. Acquired intangible assets are valued using the direct value method. Our race event sanctioning and renewal agreements for each NASCAR-sanctioned racing event are awarded annually. We have evaluated each of our intangible assets for these agreements and determined that each will extend into the foreseeable future. We have never been unable to renew these race date agreements for any subsequent year and no such agreement has ever been cancelled. Based on these and other factors, such race date agreements are expected to be awarded to the Company in perpetuity. As such, these nonamortizable intangible assets for race event sanctioning and renewal agreements are considered to have indefinite useful lives because their renewal and cash flow generation are expected to continue indefinitely. No direct costs for agreement renewal or extension have been incurred or capitalized. However, we are obligated to conduct events in the manner stipulated under the terms and conditions of the annual sanctioning agreements. We follow applicable authoritative guidance on accounting for goodwill and other intangible assets which specifies, among other things, nonamortization of goodwill and requires testing of intangible assets with indefinite useful lives for possible impairment at least annually.
Impairment Assessment Methodology.
We evaluate goodwill and other intangible assets for possible impairment annually in the second quarter, or when events or circumstances indicate possible impairment may have occurred. Management considers each speedway and motorsports and non-motorsports merchandising subsidiary a separate reporting unit principally because that is the lowest level for which discrete financial information is available to our managers and chief operating decision maker. No reporting units are aggregated, and no intangible assets are allocated or transferred between reporting units, for purposes of evaluating intangible assets for possible impairment. We evaluate intangible assets for possible impairment based predominately on management’s best estimate of future discounted operating cash flows and profitability attributable to such assets (using the fair value assessment provisions of applicable authoritative guidance). The inputs for measuring fair value are considered "Level 3" or unobservable inputs that are not corroborated by market data under applicable fair value authoritative guidance, as quoted market prices are not available. Our annual impairment assessment did not consider the possibility that management may realign one or more other Monster Energy NASCAR Cup Series racing events among its speedway facilities, which could result in net higher or improved future projected cash flows.
Such information was also compared to available market information for certain motorsports industry peers. Management also considered recent market trading ranges of price to earnings and sales multiples, cash flow and other traditional valuation methods, control premiums, and other market information related to our common stock from historical and forward-looking perspectives. No weighting of evaluation results was believed necessary. Despite ongoing domestic and global economic and market challenges, management believes there has been no fundamental change in our core motorsports business. Impairment charges and associated operations are included in our "motorsports event related" reportable segment (see Note 13).
2016 Annual Impairment Assessment
. Management's latest annual assessment in the second quarter 2016 was based predominately on management's best estimate of future discounted operating cash flows and profitability attributable to such assets for all individual reporting units. Management also considered that the estimated market value for comparable NASCAR race event sanction and renewal agreements (we had agreements with NASCAR to annually conduct thirteen Monster Energy Cup, eleven Xfinity and eight Camping World Truck Series races as of the evaluation date), combined with the estimated fair value for all other Company net assets, substantially exceeds its current market capitalization. Management believes the methods used to determine fair value and evaluate impairment were appropriate, relevant, and represent methods customarily available and used for such purposes and are the best available estimate of fair value. Among other factors, the latest assessment assumes projected cash flow and profitability recovery, using modest annual inflationary growth rates for projected revenue streams and operating costs (other than NASCAR broadcasting revenues and event management fees),
and strategic amounts of planned capital expenditures. Management projected annual increases in contracted NASCAR broadcasting rights revenues, and associated NASCAR event management fees, based on historical and anticipated rates which are supported by recently negotiated multi-year contracts. NASCAR event management fees for years after 2020 have not been negotiated, and future annual fees could differ substantially from those assumed in management’s impairment assessment.
Our
2016 annual assessment found the estimated fair value of each reporting unit and each indefinite-lived race-date intangible asset substantially exceeded its associated carrying value except for NHMS and TMS race date agreements. As of December 31, 2016, the carrying values of non-amortizable race date event sanctioning and renewal agreements associated with NHMS and TMS were approximately $199.6 million and $98.8 million. The estimated excess of fair value of identified intangible assets associated with NHMS and TMS, while more than nominal at this time, have heightened sensitivity to management’s assumptions used in estimating future discounted cash flows and profitability and associated risk of failing impairment testing. Management’s assumptions considered the following factors and conditions, the majority of which also contributed to our 2015 impairment charge described below. NHMS was acquired in 2008, largely before the severe economic recession, which has resulted in long-term operating challenges for many major sports. The 2016 (and 2015) evaluation reflects continuing lowered estimated future cash flows because the economic recovery has been slower and weaker than previous forecasts, and ongoing lower than anticipated revenues for various major racing events. The evaluation also reflects, similar to challenges faced by many major sports, reduced visibility on profit recovery due to factors such as changing demographics, evolving entertainment choices for fans, appealing “at-home viewing” experiences and retirement of popular long-standing “megastars”. We have lowered our expectations for forecasted growth rates for certain revenues and profit recovery. However, those expectations and forecasts are based on many factors out of our control, and could be found unachievable. Such ultimate outcome could adversely impact our estimates of fair values, particularly for NHMS and TMS race date intangible assets.
There have since been no other events or circumstances that indicate possible impairment, and management believes our operational and cash flow forecasts support our conclusions that no unrecognized impairment exists as of December 31, 2016.
Different economic or industry conditions or assumptions, and changes in projected cash flows or profitability, if significantly negative or unfavorable, could have a material adverse effect on the impairment evaluation and our future financial condition or results of operations. The evaluations are subjective and based on conditions, trends and assumptions existing at the time of evaluation.
2015 Impairment of Other Intangible Assets
and Goodwill.
In 2015, we recorded sizable non-cash impairment charges to reduce the carrying value of non-amortizable race date event sanctioning and renewal agreements associated with NHMS, and goodwill associated with certain event souvenir merchandising activities. These charges resulted from our 2015 annual impairment assessment which found the carrying values for these sanctioning and renewal agreements associated with NHMS exceeded their estimated fair value. The various factors considered in this assessment (described above and not repeated here) resulted in lowering our expectations for forecasted growth rates for certain revenues and profit recovery. As such, a non-cash impairment charge of $96,530,000, before income tax benefits of $34,569,000, was reflected in 2015 to reduce the race date intangible assets to estimated fair value. Our 2015 annual assessment also indicated that goodwill associated with SMI Trackside, which conducts event souvenir merchandising at our and other third-party speedways, was impaired because of potentially unfavorable developments associated with NASCAR’s announced industry changes to the trackside merchandising business model. As such, a non-cash impairment charge of $2,338,000, before income tax benefits of $885,000, was reflected in 2015 to reduce associated goodwill to an estimated fair value of $0.
Deferred Income, Net
(noncurrent) as of December 31, 2016 and 2015 consists of (in thousands):
|
|
2016
|
|
|
2015
|
|
Preferred seat license fees, net
|
|
$
|
2,512
|
|
|
$
|
2,871
|
|
Multi-year marketing and other arrangements, and deferred membership income
|
|
|
1,230
|
|
|
|
1,710
|
|
Total
|
|
$
|
3,742
|
|
|
$
|
4,581
|
|
Preferred Seat License Fees, Net.
KyS and TMS offer Preferred Seat License (PSL) agreements whereby licensees are entitled to purchase annual season-ticket packages for sanctioned racing events under specified terms and conditions. Among other items, licensees are required to purchase all season ticket packages when and as offered each year. License agreements automatically terminate without refund should licensees not purchase any offered ticket and are transferable once each year subject to certain terms and conditions. Also, licensees are not entitled to refunds for postponement or cancellation of events due to weather or certain other conditions. Net PSL fees are deferred when received and amortized into income over the estimated useful life of those facilities or recognized upon license agreement termination.
Deferred Speedway Club Membership Income.
The CMS and TMS Speedway Clubs sell memberships that entitle members to certain dining, other club and racing event seating privileges, and require upfront fees and monthly assessments. Net membership revenues are deferred when billed and amortized into income over an estimated average membership term of ten years.
Advertising Expenses
– Event specific advertising costs are expensed when an associated event is held and included principally in direct expense of events. Non-event related advertising costs are expensed as incurred and included principally in other direct operating expense. Advertising expense amounted to $17,321,000 in 2016, $16,660,000 in 2015 and $16,833,000 in 2014. There were no deferred direct-response advertising costs at December 31, 2016 or 2015.
Operating Leases
– We have various operating leases principally for office and warehouse space and for equipment used in conducting racing events and other operations. These operating leases typically have initial terms of less than one year or are cancelable with minimal notice, although certain operating equipment leases include multi-year terms. Rent expense for operating leases amounted to $8,730,000 in 2016, $6,233,000 in 2015 and $6,023,000 in 2014. Various office and warehouse facilities leased from an affiliate (see Note 9) are cancelable with minimal notice; however, such lease arrangements will likely be renewed annually through specific contract periods. We lease various office, warehouse and industrial park space under operating leases to various entities largely involved in motorsports. These operating leases typically have initial terms of one year or more and are noncancelable. Lease revenue for operating leases, excluding the TMS oil and gas mineral rights lease receipts discussed above, amounted to $5,625,000 in 2016, $5,343,000 in 2015 and $4,927,000 in 2014.
Future annual minimum lease payments (where initial terms are one year or more and assuming
renewal through contracted periods), and contracted future annual minimum lease revenues, under operating leases at December 31, 2016 are as follows (in thousands):
|
|
Lease
Payments
|
|
|
Lease
Revenues
|
|
2017
|
|
$
|
1,231
|
|
|
$
|
4,983
|
|
2018
|
|
|
722
|
|
|
|
3,848
|
|
2019
|
|
|
304
|
|
|
|
2,560
|
|
2020
|
|
|
200
|
|
|
|
1,078
|
|
2021
|
|
|
154
|
|
|
|
410
|
|
Thereafter
|
|
|
505
|
|
|
|
221
|
|
Total
|
|
$
|
3,116
|
|
|
$
|
13,100
|
|
Other
(Income)
Expense, Net
consists of (in thousands):
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Removal
costs for retired assets, and net gain associated with insurance recovery and involuntary conversion of property (2014) (Note 4)
|
|
$
|
44
|
|
|
$
|
552
|
|
|
$
|
(2,235
|
)
|
Net (gain) loss on disposals of property and equipment and other assets
|
|
|
(1,397
|
)
|
|
|
101
|
|
|
|
30
|
|
Other
|
|
|
356
|
|
|
|
209
|
|
|
|
(100
|
)
|
Total
|
|
$
|
(997
|
)
|
|
$
|
862
|
|
|
$
|
(2,305
|
)
|
Income Taxes (Note 8)
– We recognize deferred tax assets and liabilities for the future income tax effect of temporary differences between financial and income tax bases of assets and liabilities. Income taxes are provided using the liability method whereby estimated deferred income taxes, and significant items giving rise to deferred tax assets and liabilities, reflect management’s assessment of future taxes likely to be paid, including timing, probability of realization and other relevant factors. Our accounting for income taxes reflects management’s assessment of future tax liabilities based on assumptions and estimates for timing, likelihood of realization, and tax laws existing at the time of evaluation. We assess the need for valuation allowances for deferred tax assets based on the sufficiency of estimated future taxable income and other relevant factors. We report interest expense and penalties related to income tax liabilities, when applicable, in income tax expense. Cash Paid for Income Taxes excludes any previous overpayments the Company may have elected to apply to income tax liabilities. The Company has no undistributed foreign earnings or cash or cash equivalents held outside of the US.
We follow applicable authoritative guidance on accounting for uncertainty in income taxes which, among other things, prescribes a recognition threshold and measurement attribute for financial statement recognition and
measurement of tax positions taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, and disclosures. Evaluation of a tax position includes determining whether it is more likely than not a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position meets the more-likely-than-not recognition threshold, it is presumed the position will be examined by appropriate taxing authorities having full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to be recognized in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.
TMS Mineral Rights Lease Receipts
–
TMS, in conjunction with the Fort Worth Sports Authority, has a natural gas mineral rights lease agreement and a joint exploration agreement which, among other things, provides the lessee various defined property access and right-of-ways, exclusive exploration and extraction rights, and non-interference by TMS as extraction infrastructure construction and operations commence. TMS is required to coordinate directly with the lessee on roadway and pipeline logistics to prevent interference of TMS or lessee activities, and monitor regulatory and other contract compliance. The long-term lease remains enforceable as long as drilling or extraction related activities continue or certain prices levels are met. Under the lease agreement, TMS received and recognized royalty payments of $2,139,000 in 2016, $4,265,000 in 2015 and $3,208,000 in 2014.
An initial lease agreement was extended and natural gas extraction commenced in 2014, entitling TMS to stipulated stand-alone and shared royalties
. The lessee expanded production capacity in 2014, including an increased number of extraction wells. Such revenues have declined from associated market declines and volatility in natural gas price levels. At this time, while extraction activities continue, no new wells are being explored, and management is unable to determine ongoing volumes of production if any or for how long (including common diminishing well production over time), or if natural gas price levels will further decline, remain steady, or adequate. The agreements stipulate the sharing of production revenues, and obligate TMS to spend amounts equal to royalties received on TMS facility and road infrastructure improvements beginning in 2017, up to specified cumulative amounts. There are no stipulated annual or specific period spending requirements, and TMS will continue to receive royalties, and is not obligated to return or refund such royalties, should infrastructure spending not exceed amounts received. TMS infrastructure spending has historically exceeded royalties received each year and on a cumulative basis, which management believes will continue throughout the remaining terms of the agreements. Any future production revenues or royalties are subject to production levels and market prices that can deteriorate or fluctuate significantly and rapidly, as well as other factors outside of TMS’s control. As such, management is unable to determine the amounts, if any, or timing of possible future royalty payments to TMS or obligated spending on infrastructure by TMS.
However, at this time, management believes 2017 revenues will not differ significantly from 2016, and that our infrastructure spending will continue to exceed anticipated future royalties.
As of December 31, 2016 and 2015, there were no receivables (not since collected) or deferred income associated with the expired or extended agreements.
Taxes Collected from Customers
– We report sales, admission and other taxes collected from customers on both a gross and net basis in operations. Such taxes reported on a gross basis amounted to $7,642,000 in 2016, $6,024,000 in 2015 and $5,340,000 in 2014.
Fair Value of Financial In
struments
– We follow applicable authoritative guidance which requires that financial and non-financial assets and liabilities measured and reported on a fair value basis be classified, disclosed and categorized as further described below. Fair value estimates are based on relevant market information and single broker quoted market prices where available at a specific point in time, and changes in assumptions or market conditions could significantly affect estimates. The carrying values of cash and cash equivalents, accounts receivable, certain other assets and accounts payable approximate fair value because of the short maturity of these financial instruments. Cash surrender values are carried at fair value based on binding broker quoted market prices. Notes receivable and bank revolving credit facility and term loan borrowings are variable interest rate financial instruments and, therefore, carrying values approximate fair value. The fixed rate senior notes payable are publicly traded and estimated fair values are based on single broker quoted market prices. Other long-term debt bears interest approximating market rates or where non-interest bearing is discounted based on estimated current cost of borrowings; therefore, carrying values approximate market value. There have been no changes or transfers between category levels or classes. The following table presents estimated fair values and categorization levels of our financial instruments as of December 31, 2016 and 2015 (in thousands):
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Level
|
|
Class
|
|
Carrying
Value
|
|
|
Fair Value
|
|
|
Carrying
Value
|
|
|
Fair Value
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
1
|
|
R
|
|
$
|
79,342
|
|
|
$
|
79,342
|
|
|
$
|
82,010
|
|
|
$
|
82,010
|
|
Notes receivable
|
|
|
2
|
|
NR
|
|
|
1,143
|
|
|
|
1,143
|
|
|
|
1,303
|
|
|
|
1,303
|
|
Cash surrender values
|
|
|
2
|
|
NR
|
|
|
8,919
|
|
|
|
8,919
|
|
|
|
8,551
|
|
|
|
8,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
(principal)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate revolving Credit Facility, including Term Loan
|
|
|
2
|
|
NR
|
|
|
66,000
|
|
|
|
66,000
|
|
|
|
120,000
|
|
|
|
120,000
|
|
5.125% Senior Notes Payable due 2023
|
|
|
2
|
|
NR
|
|
|
200,000
|
|
|
|
202,500
|
|
|
|
200,000
|
|
|
|
199,000
|
|
Other long-term debt
|
|
|
2
|
|
NR
|
|
|
1,206
|
|
|
|
1,206
|
|
|
|
1,383
|
|
|
|
1,383
|
|
Level
1:
|
Quoted market prices in active markets for identical assets or liabilities.
|
Level 2:
|
Observable market-based inputs or unobservable inputs that are corroborated by market data.
|
Level 3:
|
Unobservable inputs that are not
corroborated by market data.
|
Class
R:
|
Measured at fair value on recurring basis, subsequent to initial recognition.
|
Class
NR:
|
Measured at fair value on nonrecurring basis, subsequent to initial recognition.
|
Concentrations of Credit Risk
– Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, accounts and notes receivable, and cash surrender values. Concentration of credit risk with respect to cash and cash equivalents and cash surrender values is limited through placement with major high-credit qualified financial institutions and insurance carriers, respectively. However, amounts placed often significantly exceed available insured limits. Concentrations of credit risk with respect to accounts receivable are limited due to the large numbers and wide variety of customers and customer industries and their broad geographical dispersion. Also, a significant portion of our accounts receivable typically pertain to advance revenues for specific events which are deferred until the event is held. As such, exposure to credit risk on such receivables that could adversely affect operating results is limited until recognition of the associated deferred race event income. We generally require sufficient collateral equal to or exceeding note amounts, or accept notes from high-credit quality entities or high net-worth individuals, limiting our exposure to credit risk. Amounts due from affiliates typically can be offset to the extent of amounts payable to affiliates, limiting our exposure to credit risk.
Loss and Other Contingencies and Financial Guarantees
– We accrue a liability for contingencies if the likelihood of an adverse outcome is probable and the amount is estimable. Legal and other costs associated with loss contingencies are expensed as incurred. We account for financial guarantees using applicable authoritative guidance which requires, among other things, that guarantors recognize a liability for the fair value of obligations undertaken by issuing a guarantee.
CMS
’s property includes areas used as solid waste landfills for many years. Landfilling of general categories of municipal solid waste on the CMS property ceased in 1992, but CMS currently allows certain property to be used for land clearing and inert debris landfilling. Landfilling for construction and demolition debris has ceased on the CMS property. Management believes the Company’s operations, including the landfills on its property, comply with all applicable federal, state and local environmental laws and regulations. Management is not aware of any situation related to landfill operations which would have a material adverse effect on our financial position, future results of operations or cash flows.
Recently Issued Accounting Standards
– The Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 "Revenue from Contracts with Customers (Topic 606): Section A - Summary and Amendments That Create Revenue from Contracts with Customers and Other Assets and Deferred Costs - Contracts with Customers (Subtopic 340-40)" which enhances comparability and clarifies principles of revenue recognition arising from contracts with customers that supersedes most current revenue recognition guidance. The guidance includes the core principle that entities recognize revenue to depict transfers of promised goods or services to customers in amounts that reflect the consideration entities expect to be entitled in exchange for those goods or services, and expands required financial statement disclosures regarding revenue recognition. The FASB has recently issued several amendments to the new standard, including Update No. 2016-08 "Revenue from Contracts with Customers (Topic 606) - Principal versus Agent Considerations" clarifying implementation guidance for those considerations in Update No. 2014-09, and Update No. 2016-10 "Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing" amending the guidance in Update No. 2014-09 related to those items. The FASB issued Update No. 2015-14 approving deferral of Update No. 2014-09 for one year, with such guidance now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The guidance may be applied retrospectively to each prior period presented or retrospectively with cumulative effects recognized as of the date of adoption. The Company plans to adopt this new guidance in the first quarter 2018. The Company has begun preliminary evaluation of the potential impact that adoption may have on its financial statements, as well as expected method of adoption, including associated accounting policies, processes, and system requirements to enable timely and accurate reporting.
The FASB issued Accounting Standards Update No. 2015-03 "Interest
– Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” which requires that debt issuance costs related to debt liabilities be presented in the balance sheet as a direct deduction from the associated carrying amount, similar to debt discounts. In August 2015, the FASB issued Update No. 2015-15 “Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements” which provides guidance on presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements, and indicating the SEC staff would not object to entities deferring and presenting debt issuance costs as an asset and subsequently amortizing deferred debt issuance costs ratably over line-of-credit arrangement terms even if there are no outstanding borrowings.
The Company adopted this guidance as a change in accounting principle as stipulated, chose to continue amortizing deferred debt issuance costs ratably over line-of-credit arrangement terms, and has applied the guidance retrospectively to its financial statements and note disclosures for all p
eriods presented (see Note 6). Deferred financing costs associated with the Company's revolving Credit Facility are reported in other noncurrent assets, and those associated with the 2023 Senior Notes and bank Term Loan are reflected as a reduction of long-term debt. Retroactive application resulted in reclassifying deferred financing costs of $6,364,000, net of accumulated amortization of $6,062,000, from other non-current assets to a reduction in long-term debt as of December 31, 2015. Adoption had no impact on the Company's operating results or cash flows.
The FASB issued Accounting Standards Update No. 2015-11 "Inventory (Topic 330): Simplifying the Measurement of Inventory” which requires measuring inventory at the lower of cost and net realizable value based on estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation (changed from the previous guidance of lower of cost or market). This update also clarified various other inventory measurement and disclosure requirements. The update does not apply to inventory measured using the LIFO or retail inventory methods. The guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and should be applied prospectively. Early application is permitted. The Company believes adoption will have no significant impact on its financial statements.
The FASB issued Accounting Standards Update No. 2016-02 “Leases (Subtopic 842)” which replaces all current US GAAP guidance on this topic, and requires lessees to recognize assets and liabilities arising from leases as well as extensive quantitative and qualitative disclosures. Lessees will need to recognize on their balance sheets right-of-use assets and lease liabilities for the majority of their leases (other than leases meeting the definition of a short-term lease). Right-of-use assets will be measured at lease liability amounts, adjusted for lease prepayments, lease incentives received and lessee
’s initial direct costs. Lease liabilities will equal the present value of lease payments. Assets will be based on the liability, subject to adjustment, such as for initial direct costs. Operating leases may typically result in straight-line expense, while finance leases similar to front-loaded expense pattern. Classification will be based on criteria largely similar to those applied in current lease accounting. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The guidance is required to be applied using the modified retrospective approach for all leases existing as of the effective date, requires application at the beginning of the earliest comparative period presented, and provides for certain practical expedients. The Company is currently evaluating the potential impact that adoption may have on its financial statements.
The FASB issued Accounting Standards Update No. 2016-09 “
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” which changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as the classification of related matters in the statement of cash flows. Under previous guidance, excess tax benefits and deficiencies from stock-based compensation arrangements were reflected in equity when awards vested or were settled. The new guidance requires prospective recognition of excess tax benefits and deficiencies in income tax expense, among other things. Also i
n recording share-based compensation cost, the guidance allows entities to elect whether they will include an estimate of awards expected to be forfeited or account for forfeitures as they occur. The Company elected to include an estimate of forfeitures in computing its share-based compensation cost, which is consistent with its treatment under previous guidance.
The new guidance is effective for years beginning after December 15, 2016, with early adoption permitted. The Company elected to adopt this new guidance early as of January 1, 2016, and applied it prospectively to its financial statements and note disclosures (see Note 11). Adoption had an insignificant impact on the Company's financial statements.
The FASB issued Accounting Standards Update No. 2016-15 “Statement of Cash Flows (Topic 23) - Classification of Certain Cash Receipts and Cash Payments
” which provides specific guidance on eight cash flow classification issues. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, and should be applied using a retrospective transition method to each period presented. Early adoption is permitted, and any amendments must be adopted in the same period. At this time, the Company believes adoption will have no significant impact on its financial statements, and plans to apply this guidance to future classifications when applicable.
The FASB issued Accounting Standards Update No. 2017-04 “Intangibles
– Goodwill and Other (Topic 350): Simplifying the Test of Goodwill Impairment” which simplifies
how an entity is required to test goodwill for impairment by eliminating Step 2 (measuring goodwill impairment loss by comparing implied fair value of a reporting unit’s goodwill to the carrying amount of that goodwill) from the impairment test. Under this update, entities should perform goodwill impairment testing by comparing the fair value of a reporting unit with its carrying amount, and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The same impairment assessment applies to all reporting units, and entities still have the option to perform qualitative assessment for a reporting unit to determine if quantitative impairment testing is necessary. This update modifies the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. Entities will no longer determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. The Company is to adopt this guidance for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the potential impact that adoption may have on its impairment testing and financial statements.
Inventory costs consist of: (i)
souvenirs and apparel, 5/8-scale and similar small-scale finished race cars and parts and accessories determined on a first-in, first-out basis; and (ii) micro-lubricant
®
product costs determined on an average current cost basis. No general and administrative costs are included in inventory costs. Cost of sales are charged using the same inventory cost bases. Inventories as of December 31, 2016 and 2015 consist of (in thousands):
|
|
2016
|
|
|
2015
|
|
Finished race cars, parts and accessories
|
|
$
|
5,263
|
|
|
$
|
5,542
|
|
Souvenirs and apparel
|
|
|
2,131
|
|
|
|
2,550
|
|
Micro-lubricant
®
and other
|
|
|
818
|
|
|
|
619
|
|
Total
|
|
$
|
8,212
|
|
|
$
|
8,711
|
|
All inventories are stated at the lower of cost or market value with provisions for differences between cost and estimated market value based on assumptions about current and future demand, market conditions and trends that might adversely impact realizat
ion. Inventories are reflected net of lower of cost or market value provisions summarized as follows (in thousands):
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Balance, beginning of year
|
|
$
|
2,756
|
|
|
$
|
4,407
|
|
|
$
|
4,083
|
|
Current year provision
|
|
|
1,024
|
|
|
|
310
|
|
|
|
711
|
|
Current year sales and write-offs
|
|
|
(704
|
)
|
|
|
(1,961
|
)
|
|
|
(387
|
)
|
Balance, end of year
|
|
$
|
3,076
|
|
|
$
|
2,756
|
|
|
$
|
4,407
|
|
4. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 2016 and 2015 is summarized as follows
(dollars in thousands):
|
|
Estimated
Useful Lives
|
|
|
2016
|
|
|
2015
|
|
Land and land improvements
|
|
5
|
-
|
25
|
|
|
$
|
465,19
4
|
|
|
$
|
464,057
|
|
Racetracks and grandstands
|
|
5
|
-
|
45
|
|
|
|
738,302
|
|
|
|
722,939
|
|
Buildings and luxury suites
|
|
5
|
-
|
40
|
|
|
|
468,627
|
|
|
|
454,762
|
|
Machinery and equipment
|
|
3
|
-
|
20
|
|
|
|
46,285
|
|
|
|
45,192
|
|
Furniture and fixtures
|
|
5
|
-
|
20
|
|
|
|
46,973
|
|
|
|
38,025
|
|
Autos and trucks
|
|
3
|
-
|
10
|
|
|
|
13,292
|
|
|
|
13,073
|
|
Construction in progress
|
|
|
|
|
|
|
|
1,465
|
|
|
|
8,456
|
|
Total
|
|
|
|
|
|
|
|
1,780,138
|
|
|
|
1,746,504
|
|
Less accumulated depreciation
|
|
|
|
|
|
|
|
(779,908
|
)
|
|
|
(726,854
|
)
|
Net
|
|
|
|
|
|
|
$
|
1,000,230
|
|
|
$
|
1,019,650
|
|
Other Information
– From time to time, we may remove or reduce certain low demand seating areas or suites for managing facility capacity, offering wider seating and improved sight lines or other marketing or alternative development purposes such as premium hospitality, RV camping and advertising areas. In 2015, we recorded non-cash, pre-tax charges for accelerated depreciation aggregating $9,111,000 associated with removal of certain low demand seating at CMS and LVMS, retired leaderboard assets at certain speedways, and a decline in estimated fair value of certain real property. In 2014, we recorded non-cash, pre-tax charges for accelerated depreciation aggregating $25,118,000 associated with removal of certain low demand seating and suites at AMS, CMS and NHMS, and certain damaged speedway assets. In 2016, we recorded pre-tax accelerated depreciation of $313,000 associated with removal of certain TMS assets.
Costs of removal are included in Other Expense, Net (see Note 2).These charges are included in our "motorsports event related" reporting segment (see Note 13).
Depreciation expense amounted to $
54,344,000 in 2016, $61,933,000 in 2015 and $78,375,000 in 2014. As of December 31, 2016, we had no significant contractual obligations for capital expenditures. In 2014, we reflected a gain from involuntary conversion of certain TMS property, increasing property and equipment and other income, net by approximately $985,000.
5. OTHER INTANGIBLE ASSETS AND GOODWILL
The composition and accounting for intangible assets ar
e further described in Note 2. As of December 31, 2016 and 2015, gross carrying values and accumulated amortization by class of intangible asset are as follows (dollars in thousands):
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
Gross
Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Gross
Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Estimated
Amortization
Period
(Years)
|
|
Nonamortizable race event sanctioning and renewal agreements
|
|
$
|
298,383
|
|
|
|
–
|
|
|
$
|
298,383
|
|
|
$
|
298,383
|
|
|
|
–
|
|
|
$
|
298,383
|
|
|
|
–
|
|
Amortizable race event sanctioning and renewal agreements
|
|
|
100
|
|
|
$
|
(100
|
)
|
|
|
–
|
|
|
|
100
|
|
|
$
|
(89
|
)
|
|
|
11
|
|
|
|
5
|
|
Total
|
|
$
|
298,483
|
|
|
$
|
(100
|
)
|
|
$
|
298,383
|
|
|
$
|
298,483
|
|
|
$
|
(89
|
)
|
|
$
|
298,394
|
|
|
|
|
|
Changes in the gross carrying value of other intangible assets and goodwill are as follows (in thousands):
|
|
Other Intangible Assets
|
|
|
Goodwill
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Balance, beginning of year
|
|
$
|
298,483
|
|
|
$
|
395,013
|
|
|
$
|
47,342
|
|
|
$
|
49,680
|
|
Increase from acquisitions
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Decrease from impairment charges (Note 2)
|
|
|
–
|
|
|
|
(96,530
|
)
|
|
|
–
|
|
|
|
(2,338
|
)
|
Balance, end of year
|
|
$
|
298,483
|
|
|
$
|
298,483
|
|
|
$
|
47,342
|
|
|
$
|
47,342
|
|
The 2015 decreases reflect impairment charges to reduce other intangible assets associated with NHMS, and goodwill associated with certain event souvenir merchandising, to estimated fair value. The
carrying amounts for goodwill and other intangible assets include accumulated impairments of $148.6 million and $99.9 million at December 31, 2016 and 2015. Amortization expense on other intangible assets amounted to $11,000 in 2016, $17,000 in 2015 and $14,000 in 2014. Estimated annual amortization expense for each of the next five years is not significant.
Long-term debt at December 31, 2016 and 2015 consists of (in thousands):
|
|
2016
|
|
|
2015
|
|
Credit Facility, all Term Loan
|
|
$
|
66,000
|
|
|
$
|
120,000
|
|
2023 Senior Notes
|
|
|
200,000
|
|
|
|
200,000
|
|
Other notes payable
|
|
|
1,206
|
|
|
|
1,383
|
|
Total
|
|
|
267,206
|
|
|
|
321,383
|
|
Less current maturities
|
|
|
(7,657
|
)
|
|
|
(7,677
|
)
|
Less deferred financing costs, net of accumulated amortization (Note 2)
|
|
|
(5,151
|
)
|
|
|
(6,364
|
)
|
Long-term debt, excluding current maturities
|
|
$
|
254,398
|
|
|
$
|
307,342
|
|
Annual principal maturities of long-term debt at December 31, 2016 are as follows (in thousands):
2017
|
|
$
|
7,657
|
|
2018
|
|
|
7,662
|
|
2019
|
|
|
51,167
|
|
2020
|
|
|
172
|
|
2021
|
|
|
177
|
|
Thereafter
|
|
|
200,371
|
|
Total
|
|
$
|
267,206
|
|
Bank Credit Facility
– Our Credit Facility, as amended in December 2014, among other things: (i) provides for a five-year $100,000,000 senior secured revolving credit facility, with separate sub-limits of $50,000,000 for standby letters of credit and $10,000,000 for swing line loans; (ii) provides for a five-year $150,000,000 senior secured term loan (which was fully drawn in December 2014) and a five-year delayed draw term loan of up to $50,000,000 (which was fully drawn in March 2015 and repaid in the second quarter 2015) (the Term Loan or Term Loans); (iii) matures in December 2019; (iv) contains an accordion feature allowing the Company to increase revolving commitments or establish a term loan up to an aggregate additional $100,000,000 or $200,000,000, respectively (or a combined aggregate additional amount of up to $250,000,000) with certain lender commitment conditions; (v) allows for annual aggregate payments of dividends and repurchases of SMI securities of up to $50,000,000, increasing up to $75,000,000 subject to maintaining certain financial covenants; and (vi) limits annual capital expenditures to $75,000,000 and provides for motor speedway acquisitions and related businesses. Term Loans require equal minimum quarterly principal payments of at least 5% of initial amounts drawn on an annualized basis ($7,500,000 for fiscal 2017).
Interest is based, at the Company
’s option, upon the Eurodollar Rate plus 1.25% to 2.00% or a base rate defined as the higher of Bank of America’s prime rate, the Federal Funds Rate plus 0.5% or the Eurodollar Rate plus 1%, plus 0.25% to 1.00%. The Credit Facility also contains a commitment fee ranging from 0.25% to 0.40% of unused amounts available for borrowing. The interest rate margins on borrowings and the commitment fee are adjustable periodically based upon certain consolidated total leverage ratios. The Credit Facility contains a number of affirmative and negative financial covenants, including requirements that we maintain certain consolidated total leverage ratios and consolidated interest coverage ratios.
In 2016, we repaid Term Loan borrowings of $54,000,000.
In 2015, we borrowed $50,000,000 under the Term Loan (for partial funding of the 2019 Senior Notes redemption as further described below), and repaid Term Loan borrowings of $80,000,000. In 2014, we repaid $210,000,000 and borrowed $150,000,000 under the Term Loan (including $150,000,000 repayment and borrowing in amending the Credit Facility), for a net repayment of $60,000,000. At December 31, 2016 and 2015, outstanding borrowings under the Credit Facility were $66,000,000 and $120,000,000 (all Term Loan borrowings), and outstanding letters of credit amounted to $605,000 and $845,000. As of December 31, 2016, we had availability for borrowing up to an additional $99,395,000, including up to an additional $49,395,000 in letters of credit, under the revolving Credit Facility, and $50,000,000 under the delayed draw term loan provision.
2023 Senior Notes
– We completed a private placement of new 5.125% Senior Notes due 2023 in aggregate principal amount of $200,000,000 in January 2015 (the 2023 Senior Notes). The 2023 Senior Notes were issued at par, and net proceeds after commissions and fees of approximately $196,816,000 were used to fund a portion of the March 2015 redemption of 2019 Senior Notes as described below. We completed an exchange offer for substantially identical 2023 Senior Notes registered under the Securities Act in the second quarter 2015. The 2023 Senior Notes mature in February 2023 and interest payments are due semi-annually on February 1 and August 1.
These 2023 Senior Notes contain various specified redemption and change of control provisions. The 2023 Senior Notes rank equally in right of payment with all other Company existing and future unsubordinated debt, are senior in right of payment to any future subordinated debt and are effectively subordinated to all existing and future secured debt, including the Credit Facility. The Indenture governing the 2023 Senior Notes permits dividend payments each year of up to approximately $0.80 per share of common stock, increasable subject to meeting certain financial covenants. The 2023 Senior Notes contain specific requirements and restrictive financial covenants and limitations, redemption and change of control provisions and premiums, guarantees and cross-default provisions.
2015 Early Redemption of 2019 Senior Notes
– We redeemed all outstanding 6.75% Senior Notes due in 2019 in aggregate principal of $250,000,000 (the 2019 Senior Notes) at 103.375% of par plus accrued interest in March 2015. The 2019 Senior Notes were scheduled to mature in February 2019. We used net proceeds of the 2023 Senior Notes, $50,000,000 of delayed draw Term Loan borrowings under the Credit Facility and cash on hand to fund the redemption, including redemption premium and transaction costs. We recognized a 2015 charge to earnings of $8,372,000, before income taxes of $3,106,000, for associated redemption premium, unamortized net deferred loan costs and transaction costs of $3,134,000, net of issuance premium of $3,200,000.
Other Notes Payable
– At December 31, 2016 and 2015, long-term debt includes a 3% interest bearing debt obligation of $1,206,000 and $1,383,000 associated with the purchase of real property at BMS, payable in eight annual installments of $194,000 beginning January 2016.
O
ther General Terms and Conditions
– The Credit Facility and 2023 Senior Notes contain specific requirements and restrictive financial covenants and limitations on capital expenditures, speedway or other acquisitions, dividends, repurchase or issuance of SMI securities, restricted payments, equity and debt security repurchases, limitations or prohibitions on incurring other indebtedness, liens or pledging assets to third parties, consolidation, mergers, transactions with affiliates, guarantees, asset sales, specific types of investments, distributions, redemptions and disposition of property, and entering into new lines of business. The Credit Facility and 2023 Senior Notes Indenture also contain cross-default provisions. We were in compliance with all applicable financial covenants under these debt agreements as of December 31, 2016.
Subsidiary Guarantees
–
Amounts outstanding under the Credit Facility and 2023 Senior Notes are guaranteed by all of SMI’s material operative subsidiaries except for Oil-Chem and its subsidiaries (which are presently minor). These guarantees are full and unconditional and joint and several, with the 2023 Senior Notes on a senior unsecured basis. The parent company has no independent assets or operations. There are no restrictions on the subsidiaries’ ability to pay dividends or advance funds to the parent company.
Interest Expen
se, Net
– Interest expense, interest income and capitalized interest costs are summarized as follows (in thousands):
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Gross interest costs
|
|
$
|
13,818
|
|
|
$
|
17,469
|
|
|
$
|
22,092
|
|
Less capitalized interest costs
|
|
|
(476
|
)
|
|
|
(251
|
)
|
|
|
(321
|
)
|
Interest expense
|
|
|
13,342
|
|
|
|
17,218
|
|
|
|
21,771
|
|
Interest income
|
|
|
(194
|
)
|
|
|
(407
|
)
|
|
|
(534
|
)
|
Interest expense, net
|
|
$
|
13,148
|
|
|
$
|
16,811
|
|
|
$
|
21,237
|
|
Weighted average interest rate on Credit Facility borrowings
|
|
|
1.9
|
%
|
|
|
1.9
|
%
|
|
|
2.1
|
%
|
During the first quarter 2015, we incurred net interest expense of $1,688,000 on the former 2019 Senior Notes between January 27, 2015 (issuance date of the new 2023 Senior Notes) and March 13, 2015 (redemption date of the 2019 Senior Notes). The new notes were issued before redemption of the former notes because of a favorable interest rate environment and required notice of redemption to 2019 Senior Note holders by the Company.
7.
|
CAPITAL STRUCTURE, PER SHARE DATA AND OTHER EQUITY INFORMATION
|
Preferred Stock
– At December 31, 2016, SMI has authorized 3,000,000 shares of preferred stock with a par value of $.10 per share. Shares of preferred stock may be issued in one or more series with rights and restrictions as may be determined by our Board of Directors. No preferred shares were issued or outstanding at December 31, 2016 or 2015.
Per Share Data
– The following schedule reconciles basic and diluted earnings or loss per share from continuing operations (where computations are anti-dilutive, reported basic and diluted per share amounts are the same) (in thousands except per share amounts):
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Income (loss) from continuing operations applicable to common stockholders and assumed conversions
|
|
$
|
39,545
|
|
|
$
|
(34,350
|
)
|
|
$
|
25,437
|
|
Weighted average common shares outstanding
|
|
|
41,152
|
|
|
|
41,284
|
|
|
|
41,377
|
|
Dilution effect of assumed conversions, common stock equivalents
– stock awards
|
|
|
15
|
|
|
|
28
|
|
|
|
23
|
|
Weighted average common shares outstanding and assumed
conversions
|
|
|
41,167
|
|
|
|
41,312
|
|
|
|
41,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.96
|
|
|
$
|
(0.83
|
)
|
|
$
|
0.61
|
|
Diluted earnings (loss) per share
|
|
$
|
0.96
|
|
|
$
|
(0.83
|
)
|
|
$
|
0.61
|
|
Anti-dilutive common stock equivalents
excluded in computing diluted earnings (loss) per share
|
|
|
120
|
|
|
|
174
|
|
|
|
531
|
|
Declaration of Cash Dividends
– Our Board of Directors approved aggregate dividends on common stock as follows (in thousands except per share amounts):
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Cash dividends paid
|
|
$
|
24,759
|
|
|
$
|
24,807
|
|
|
$
|
24,860
|
|
Dividends per common share
|
|
$
|
0.60
|
|
|
$
|
0.60
|
|
|
$
|
0.60
|
|
Quarterly dividends were declared in each period and all declaration, record and payment dates were in the same
fiscal periods. See Note 6 for annual limitations on dividend payments under our debt agreements. On February 15, 2017, our Board of Directors declared a quarterly cash dividend of $0.15 per share of common stock aggregating approximately $6.2 million payable on March 17, 2017 to shareholders of record as of March 1, 2017. These quarterly cash dividends are being paid using available cash and cash equivalents on hand.
Stock Repurchase Program
– Our Board of Directors has approved a stock repurchase program authorizing SMI to repurchase up to an aggregate of 5,000,000 shares of our outstanding common stock from time to time, depending on market conditions, share price, applicable limitations under our debt agreements (see Note 6), and other factors the Board of Directors or its designees, in their sole discretion, may consider relevant. The purchases can be in the open market or private transactions. The stock repurchase program is presently funded using available cash and cash equivalents and may be suspended or discontinued at any time.
We repurchased 252,000, 252,000 and 172,000 shares of common stock for $4,667,000 in 2016, $5,375,000 in 2015 and $3,236,000 in 2014, respectively. As of December 31, 2016, we could repurchase up to an additional 442,000 s
hares under the current authorization. In 2016 and 2015, we repurchased approximately 58,000 and 53,000 shares of common stock for $1,169,000 and $1,122,000 from management employees to settle income taxes on 136,000 and 125,000 restricted shares that vested during the period, respectively. As of and through December 31, 2016 and 2015, treasury stock includes 272,000 and 215,000 shares of common stock delivered to the Company for such purposes.
Components of the provision (benefit)
for income taxes are as follows (in thousands):
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
12,630
|
|
|
$
|
11,710
|
|
|
$
|
226
|
|
State
|
|
|
262
|
|
|
|
606
|
|
|
|
(102
|
)
|
|
|
|
12,892
|
|
|
|
12,316
|
|
|
|
124
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
8,604
|
|
|
|
(26,440
|
)
|
|
|
13,357
|
|
State
|
|
|
155
|
|
|
|
2,245
|
|
|
|
2,308
|
|
|
|
|
8,759
|
|
|
|
(24,195
|
)
|
|
|
15,665
|
|
Total
|
|
$
|
21,651
|
|
|
$
|
(11,879
|
)
|
|
$
|
15,789
|
|
The reconciliation of statutory federal and effective
income tax rates is as follows:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Statutory federal tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State and local income taxes, net of federal income tax effect
|
|
|
1.8
|
|
|
|
3.4
|
|
|
|
4.4
|
|
Change in valuation allowances
|
|
|
0.6
|
|
|
|
22.6
|
|
|
|
(4.9
|
)
|
Change in uncertain tax positions, including income tax liabilities for settlements with taxing authorities
|
|
|
(0.2
|
)
|
|
|
(24.4
|
)
|
|
|
(1.2
|
)
|
Change in state tax rates
|
|
|
(0.9
|
)
|
|
|
(7.6
|
)
|
|
|
4.5
|
|
Other, net
|
|
|
(0.9
|
)
|
|
|
(3.3
|
)
|
|
|
0.5
|
|
Total
|
|
|
35.4
|
%
|
|
|
25.7
|
%
|
|
|
38.3
|
%
|
Tax effects of temporary differences resulting in deferred income taxes are as
follows (in thousands):
|
|
2016
|
|
|
2015
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
$
|
232,565
|
|
|
$
|
233,855
|
|
Goodwill and other intangible assets
|
|
|
107,927
|
|
|
|
107,653
|
|
Expenses deducted for tax purposes and other
|
|
|
2,866
|
|
|
|
3,661
|
|
Subtotal
|
|
|
343,358
|
|
|
|
345,169
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Income previously recognized for tax purposes
|
|
|
(4,658
|
)
|
|
|
(418
|
)
|
Stock option and other deferred compensation expense
|
|
|
(3,581
|
)
|
|
|
(3,770
|
)
|
PSL and
other deferred income recognized for tax purposes
|
|
|
(1,072
|
)
|
|
|
(1,272
|
)
|
State and federal net operating loss carryforwards
|
|
|
(6,397
|
)
|
|
|
(20,085
|
)
|
Subtotal
|
|
|
(15,708
|
)
|
|
|
(25,545
|
)
|
Less: valuation allowance
|
|
|
1,748
|
|
|
|
1,422
|
|
Net deferred tax assets
|
|
|
(13,960
|
)
|
|
|
(24,123
|
)
|
Total net deferred tax liabilities
|
|
$
|
329,398
|
|
|
$
|
321,046
|
|
Effective Tax Rate Comparison for 2014
through 2016
– The Company’s effective income tax rate for 2016 was 35.4%, for 2015 was 25.7% and for 2014 was 38.3%. Our 2016 effective tax rate reflects non-recurring tax benefits of $546,000 resulting from certain state income tax law changes. Our 2015 tax rate reflects reductions of valuation allowances on deferred tax assets associated with our discontinued operation. This reduction was largely offset by an increase in tax reserves for deferred tax assets, resulting in a net tax impact of $1.3 million associated with the discontinued operation (see Note 1). Our 2015 tax rate also reflects lower effective state income tax rates, adjustments associated with the 2015 intangible asset and goodwill impairment charges and certain deferred tax assets, and a non-recurring tax benefit of $610,000 resulting from certain state income tax law changes enacted in 2015. Our 2014 provision for income taxes reflects elimination of previously recorded income tax expense of $2.3 million associated with the $6.0 million favorable settlement for our discontinued operation. Such income tax was previously reflected in continuing operations under applicable authoritative guidance. Our 2014 tax rate also reflects the positive impact of net decreases in uncertain tax position liabilities of prior years and lower effective state income tax rates.
At December 31, 2016, the Company has approximately $217,827,000 of state net operating loss carryforwards expiring in 2017 through 2036.
At December 31, 2016 and 2015, valuation allowances of $1,748,000 and $1,422,000 have been provided against deferred tax assets because management has determined that ultimate realization is not more likely than not for certain deferred tax assets and state net operating loss carryforwards. The valuation allowances for deferred tax assets increased by $326,000 in 2016, decreased by $10,771,000 in 2015, and decreased by $2,000,000 in 2014.
Income Tax Benefit From Equity Interest Abandonment
– On January 31, 2014, the Company abandoned its interest and rights in Motorsports Authentics (former 50% owned, non-controlling interest, merchandising equity investment joint venture) (MA) to focus management resources in areas that may be profitable and more productive. The Company’s carrying value of the investment was reduced to $0 through sizable impairment charges prior to 2010 and MA’s historical operating results. The Company recognized no concurrent tax benefits as valuation allowances were provided against associated deferred tax assets. As a result of abandonment, the Company recognized a material income tax benefit of $48.1 million at December 31, 2013 for the reversal of previously recorded valuation allowances under applicable accounting guidance, and recognized tax losses reported on its 2014 income tax returns. Management believes there is or will be sufficient taxable income in carryback or carryforward periods under tax law for full utilization of these tax losses.
The Company has reduced income taxes payable by amounts approximating that tax benefit
through December 31, 2016 by utilization of deferred income tax assets, including net operating losses, related to abandonment.
The Company believes it is more likely than not that its filing position would be sustained based on its technical merits upon examination with taxing authorities that have full knowledge of all relevant information. The Company reached this conclusion based on the use of outside legal counsel and other tax consultants and the potential to utilize tax losses.
Under applicable accounting guidance, tax positions are measured at the largest amount of benefit that is greater than 50 percent likely (or more likely than not) of being ultimately realized. As such, the full tax benefit was recognized because the Company believes that partial sustaining of its tax position by taxing authorities would be an unlikely outcome given the nature of the position. The Company believes it will fully utilize the associated tax losses. Should the Company’s tax position not be fully sustained upon examination,
reestablishment of material income tax liabilities
and acceleration of cash income taxes payable could occur. Any differences between the final tax outcome and amounts recorded would affect the Company’s income tax provision in the period in which such determination was made.
Other Income Tax Benefits
– As reflected above, applicable accounting guidance may require establishing valuation allowances for certain deferred tax assets or income tax liabilities for unrecognized tax benefits, notwithstanding management believes associated tax filing positions are sustainable and are or will be reflected in its tax filings. Should those tax positions not be fully sustained if examined, an acceleration of material income taxes payable could occur. Because no net income tax benefit had been previously reflected because of providing a valuation allowance on related deferred tax assets, our future results of operations might not be significantly impacted. However, resulting cash required for payments of income taxes could be material in the period in which such determination is made.
Accounting for Uncertainty in Income Taxes
– Income tax liabilities for
unrecognized tax benefits approximate $12,006,000 and $12,280,000 at December 31, 2016 and 2015, $11,746,000 of which relates to the Company’s discontinued operation. Of those amounts, $11,794,000 and $499,000 is included in noncurrent other liabilities, all of which would favorably impact the Company’s effective tax rate if recognized
,
and $212,000 and $11,781,000 is included in deferred tax liabilities, at December 31, 2016 and 2015, respectively. The reclassification of amounts from deferred tax liabilities at December 31, 2015 to noncurrent other liabilities at December 31, 2016 is due to current period utilization of net operating loss carryforwards that were previously available to offset any unfavorable adjustments related to the Company’s discontinued operation.
As of December 31, 2016 and 2015, management believes $260,000 and $239,000 of unrecognized tax benefits will be recognized within the next twelve months. Interest and penalties associated with uncertain tax positions amounted to $61,000 in 2016, $15,000 in 2015 and $8,000 in 2014, and derecognized amounts were $90,000 in 2016, $174,000 in 2015 and $524,000 in 2014. As of December 31, 2016 and 2015, the Company had $140,000 and $169,000 accrued for the payment of interest and penalties on uncertain tax positions, which is included in other noncurrent liabilities. The tax years that remain open to examination include 2006 through 2008, and 2012 through 2016, by the California Franchise Tax Board, 2013 through 2016 by the Internal Revenue Service, and 2013 through 2016 by most, and 2012 through 2016 by other, state taxing jurisdictions to which the Company is subject. The Company’s 2014 federal income tax return is under examination by the Internal Revenue Service, which began in July 2016.
A reconciliation of the change in the total unrecognized tax benefits and other information for the three years ended December 31, 2016 is as follows (in thousands):
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Beginning of period
|
|
$
|
12,280
|
|
|
$
|
885
|
|
|
$
|
1,004
|
|
Increases (decreases) for tax positions of current year
|
|
|
–
|
|
|
|
11,781
|
|
|
|
–
|
|
Increases for tax positions of prior years
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Decreases for tax positions of prior years
|
|
|
(274
|
)
|
|
|
(386
|
)
|
|
|
(119
|
)
|
Reductions for lapse of applicable statute of limitations
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Increases (decreases) for settlements with taxing authorities
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
End of period
|
|
$
|
12,006
|
|
|
$
|
12,280
|
|
|
$
|
885
|
|
9.
|
RELATED PARTY
TRANSACTIONS
|
The Company and Sonic Financial Corporation (Sonic Financial), a Company affiliate through common ownership by our Executive Chairman and our Chief Executive Officer, share various expenses in the ordinary course of business under a shared
services agreement. We incurred expenses under the shared services agreement of $930,000 in 2016 and $452,000 in 2015. No amounts were due from or payable to Sonic Financial at December 31, 2016 and 2015. Before July 30, 2002, we made loans to, and paid certain expenses on behalf of, Sonic Financial for various corporate purposes. In December 2014, we used $2,594,000 owed to Sonic Financial (for acquisition and other expenses paid on behalf of AMS by Sonic Financial prior to 1996) to settle and repay amounts due from Sonic Financial. Excluding the 2014 repayment and settlement, amounts due were reduced by shared expenses, net of accrued interest, of $700,000 in 2014.
The Company and certain SMI subsidiaries lease office and warehouse facilities from compani
es affiliated through common ownership by our Executive Chairman and Chief Executive Officer, under annually renewable lease agreements.
Rent expense amounted to $721,000 in 2016, $698,000 in 2015 and $661,000 in 2014. Amounts owed to these affiliated companies at December 31, 2016 and 2015 were not significant.
Various SMI subsidiaries purchased new and used vehicles for operations and
employee use from certain subsidiary dealerships of Sonic Automotive, Inc. (SAI), an entity in which our Executive Chairman is a controlling stockholder, for an aggregate of approximately $162,000 in 2016, $120,000 in 2015 and $268,000 in 2014. Vehicles sold to SAI in 2016, 2015 or 2014 were not significant. Also, SMI sold through certain speedways and its SMIP merchandising subsidiary various event related inventory and merchandise to SAI totaling approximately $937,000 in 2016, $913,000 in 2015 and $908,000 in 2014. At December 31, 2016 and 2015, $84,000 and $85,000 was due from SAI and is reflected in current assets.
Oil-Chem sold zMAX micro-lubricant
®
product to certain SAI dealerships for resale to service customers of the dealerships in the ordinary course of business. Total purchases from Oil-Chem by SAI dealerships approximated $2,054,000 in 2016, $2,131,000 in 2015 and $2,086,000 in 2014. At December 31, 2016 and 2015, $194,000 and $158,000 was due from SAI and is reflected in current assets.
SMI
Properties and, to a lesser extent, other SMI subsidiaries purchased and sold motorsports merchandise, and received commissions from MA for merchandise sold during our events. As further described in Note 8, the Company abandoned its interest in MA on January 31, 2014, after which MA is no longer a related party. For the one month ended January 31, 2014, merchandise purchases approximated $234,000 and merchandise sales and event related commissions approximated $60,000.
The foregoing related party balanc
es as of December 31, 2016 and 2015, and transactions for the three years ended December 31, 2016 are summarized below (in thousands):
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Accounts receivable
|
|
$
|
278
|
|
|
$
|
243
|
|
|
|
201
6
|
|
|
201
5
|
|
|
201
4
|
|
Merchandise and vehicle purchases
|
|
$
|
162
|
|
|
$
|
120
|
|
|
$
|
502
|
|
Shared services expense, net of accrued interest
|
|
|
930
|
|
|
|
452
|
|
|
|
700
|
|
Merchandise and vehicle sales and event related commissions
|
|
|
2,991
|
|
|
|
3,044
|
|
|
|
3,054
|
|
Rent expense
|
|
|
721
|
|
|
|
698
|
|
|
|
661
|
|
10.
|
LEGAL PROCEEDINGS AND CONTINGENCIES
|
From time to time, we are party to routine litigation incidental to our business.
We believe that the resolution of any or all of such litigation will not have a material effect on our financial condition, results of operations or cash flows.