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SIX > SEC Filings for SIX > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for SIX FLAGS ENTERTAINMENT CORP

Form 10-Q for SIX FLAGS ENTERTAINMENT CORP


2-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis contains forward-looking statements relating to future events or our future financial performance, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements. Please see the discussion regarding forward-looking statements included under the caption "Cautionary Note Regarding Forward-Looking Statements" in this Quarterly Report and in "Item 1A. Risk Factors" of the 2011 Annual Report for a discussion of some of the uncertainties, risks and assumptions associated with these statements.

The following discussion and analysis presents information that we believe is relevant to an assessment and understanding of our consolidated financial position and results of operations. This information should be read in conjunction with the condensed consolidated financial statements and the notes thereto. The condensed consolidated financial statements and this discussion and analysis reflect the effects of our reclassification of the assets, liabilities and results of parks previously divested, including our Louisville and New Orleans parks, as discontinued operations.

Overview

General

We own and operate regional theme, water and zoological parks and are the largest regional theme park operator in the world. Of the 19 parks we currently own or operate, 17 are located in the United States, one is located in Mexico City, Mexico and one is located in Montreal, Canada. Our parks are located in geographically diverse markets across North America and they generally offer a broad selection of state-of-the-art and traditional thrill rides, water attractions, themed areas, concerts and shows, restaurants, game venues and retail outlets, thereby providing a complete family-oriented entertainment experience. We work continuously to improve our parks and our guests' experiences and to meet our guests' evolving needs and preferences.

Results of operations for the nine-month periods ended September 30, 2012 and 2011 are not indicative of the results expected for the full year. In particular, our park operations contribute a significant majority of their annual revenue during the period from Memorial Day to Labor Day each year while expenses are incurred year round.

Our revenue is primarily derived from the sale of tickets for entrance to our parks (approximately 54% of total revenues in the nine-month periods ended September 30, 2012 and 2011) and the sale of food and beverages, merchandise, games and attractions, parking and other services inside our parks, as well as sponsorship, licensing and other fees.

Our principal costs of operations include salaries and wages, employee benefits, advertising, third party services, repairs and maintenance, utilities and insurance. A large portion of our expenses is relatively fixed. Costs for full-time employees, repairs and maintenance, utilities, advertising and insurance do not vary significantly with attendance.

Recent Events

On December 20, 2011, we entered into a new $1,135.0 million credit agreement (the "New Credit Facility"), which replaced the Exit First Lien Facility. The New Credit Facility is comprised of a $200.0 million revolving credit loan facility (the "Revolving Loan"), a $75.0 million Tranche A Term Loan facility (the "Term Loan A") and an $860.0 million Tranche B Term Loan facility (the "Term Loan B" and together with the Term Loan A, the "Term Loans"). In certain circumstances, the Term Loan B can be increased by $300.0 million. The proceeds from the $935.0 million Term Loans were used, along with $15.0 million of existing cash, to retire the $950 million senior term loan from the prior facility. Also in connection with the New Credit Facility, the TW Loan and associated guarantee were terminated. We incurred approximately $25 million in fees and expenses in connection with the New Credit Facility and the repayment of the $950 million senior term loan, and we expect annual cash savings to be approximately $13 million. In connection with the New Credit Facility, we recorded an aggregate $46.5 million loss on debt extinguishment for the year ended December 31, 2011. See Note 6 to the condensed consolidated financial statements.

In February 2011, we initiated a stock repurchase plan (the "First Stock Repurchase Plan"), which permitted Holdings to repurchase up to $60 million shares of its common stock over a three-year period, as a sound use of our cash and a responsible way to enhance shareholder value. During the year ended December 31, 2011, Holdings repurchased an aggregate of 1,617,000 shares at a cumulative price of approximately $60.0 million under the First Stock Repurchase Plan. As of December 31, 2011, the First Stock Repurchase Plan was substantially completed. On January 3, 2012, Holdings' Board of Directors approved a new stock repurchase plan that permits Holdings to repurchase up to $250.0 million in shares of Holdings' common stock over a four-year period (the


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"Second Stock Repurchase Plan"). During the nine months ended September 30, 2012, Holdings repurchased approximately 2,077,000 shares at a cumulative price of approximately $98.4 million and at an average price per share of approximately $47 under the Second Stock Repurchase Plan.

In September 2012, dick clark productions, inc. ("DCP") was sold to a third party and we received approximately $70.0 million as a result of our approximately 39.2% interest in the venture that owned 100% of DCP. We recorded a gain of approximately $67.0 million after recovering our $2.5 million investment and a $0.5 million license that allowed us to air DCP shows at our parks.

On October 24, 2012, Holdings announced that its Board of Directors approved an increase to the quarterly cash dividend from $0.60 per share of common stock to $0.90 per share. The fourth quarter 2012 dividend of $0.90 per share of common stock will be paid on December 10, 2012 to stockholders of record on November 27, 2012.

On February 8, 2012, Holdings' Board of Directors approved an increase to the quarterly cash dividend from $0.06 per share to $0.60 per share of common stock. In connection with the February 2012 dividend increase, Holdings' Board of Directors granted dividend equivalent rights (DERs) to holders of unvested stock options. At February 8, 2012, approximately 5.0 million unvested stock options were outstanding. As stockholders are paid cash dividends, the DERs will accrue dividends which will be distributed to stock option holders upon the vesting of their stock option award. Holdings will distribute the DERs' accumulated accrued dividends in either cash or shares of common stock. In addition, Holdings' Board of Directors granted similar DERs payable in shares of common stock if and when any shares are granted under the stock-based compensation performance award program based on the EBITDA performance of the Company in 2012 - 2015. See Note 2(i) to the condensed consolidated financial statements for additional information.

Basis of Presentation

We follow the accounting prescribed by FASB ASC 852 which provides guidance for periods subsequent to a Chapter 11 filing regarding, among other things, the presentation of liabilities that are and are not subject to compromise by the Bankruptcy Court proceedings, as well as the treatment of interest expense and presentation of costs associated with the proceedings.

The implementation of the Plan and the application of fresh start accounting as discussed in Note 1 to the condensed consolidated financial statements contained in this Quarterly Report results in financial statements that are not comparable to financial statements in periods prior to emergence.

Critical Accounting Policies

In the ordinary course of business, we make a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles. The 2011 Annual Report discusses our most critical accounting policies. Since December 31, 2011, there have been no material developments with respect to any critical accounting policies discussed in the 2011 Annual Report.


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Three Months Ended September 30, 2012 vs. Three Months Ended September 30, 2011



Summary of Operations



Summary data for the three-month periods ended September 30, 2012 and 2011 were
as follows (in thousands, except per capita total revenue and percentage
changes):



                                                   Three-Month Period Ended
                                                        September 30,             Percentage
                                                    2012             2011         Change (%)
Total revenues                                  $     485,143    $     475,605             2
Operating expenses                                    132,737          130,417             2
Selling, general and administrative                    54,115           48,431            12
Costs of products sold                                 34,483           34,594             -
Depreciation and amortization                          35,312           41,832           (16 )
Loss on disposal of assets                              5,192            2,190           137
Gain on sale of investee                              (67,041 )              -           N/M
Interest expense, net                                  11,419           16,496           (31 )
Equity in loss of investee                              1,652              766           116
Restructure recovery                                        -             (202 )         N/M
Other expense, net                                        832             (340 )         345
Income from continuing operations before
reorganization items, income taxes and
discontinued operations                               276,442          201,421            37
Reorganization items, net                                 659              609             8
Income from continuing operations before
income taxes and discontinued operations              275,783          200,812            37
Income tax expense                                     11,014          (10,376 )        (206 )
Income from continuing operations before
discontinued operations                         $     264,769    $     211,188            25

Other Data:
Attendance                                             11,531           11,216             3
Total revenue per capita                        $       42.07    $       42.40            (1 )

Results of Operations

Total revenues in the third quarter of 2012 totaled $485.1 million compared to $475.6 million for the third quarter of 2011, representing a 2% increase. The increase in revenues is attributable to a 0.3 million (3%) increase in attendance partially offset by a $0.33 (1%) decrease in total revenue per capita (representing total revenues divided by total attendance). The increase in attendance was achieved despite the unfavorable weekend calendar shift, and the timing of the July 4th holiday in the current period versus the prior year period, primarily because of our strategy to increase season pass sales and the successful marketing of our new rides and attractions. On average, season pass holders spend less per visit than a single-day visitor, but generate more revenue, profit and cash flow for us over an entire season. The decrease in total revenue per capita was driven by a $0.28 (1%) decrease in per capita guest spending (which excludes sponsorship, licensing, Six Flags Great Escape Lodge and Indoor Waterpark accommodations and other fees) to $40.56 from $40.84 in the third quarter of 2011 as well as a decrease in sponsorship, licensing and other fees. Admissions revenue per capita slightly increased by $0.03 (0%) in the third quarter of 2012 compared to the prior year period, reflecting higher admissions pricing offset by a significantly higher mix of season pass attendance. The increase in attendance increased revenues in most in-park spending areas (food and beverage, parking, rentals and retail), but the high mix of season pass attendance coupled with the negative foreign exchange rate impact on in-park per capita spending related to our parks located in Mexico City and Montreal caused our non-admissions per capita guest spending to decrease $0.30 (2%) in the third quarter of 2012, compared to the third quarter of 2011.

Operating expenses for the third quarter of 2012 increased $2.3 million (2%) compared to operating expenses in the prior year period. The increase was primarily driven by increases in (i) salaries, wages and benefits ($2.7 million), (ii) operating tax expense caused by a timing shift of a refund received in the prior year period($1.1 million), and (iii) repair and maintenance expense primarily related to the painting of some of our rides ($0.7 million), partially offset by (i) the favorable settlement of potential claims at our parks (0.7 million), and (ii) the


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favorable exchange rate impact on expenses related to our parks located in Mexico City and Montreal ($0.6 million).

Selling, general and administrative expenses for the third quarter of 2012 increased $5.7 million (12%) compared to the third quarter of 2011. The increase primarily reflects increased salaries, wages and benefits ($6.5 million) primarily related to a ($6.1 million) increase in stock-based compensation and increased advertising costs ($1.0 million), partially offset by
(i) the favorable settlement of an old property claim ($1.3 million) and
(ii) decreased insurance expenses ($0.4 million).

Cost of products sold in the third quarter of 2012 decreased $0.1 million (0%) compared to the same quarter of the prior year primarily due to the favorable exchange rate impact on the costs of products sold at our park located in Mexico City.

Depreciation and amortization expense for the third quarter of 2012 decreased $6.5 million (16%) compared to the prior year quarter. The decrease in depreciation and amortization expense is attributable to property and equipment that was fully depreciated prior to the third quarter of 2012.

Loss on disposal of assets increased by $3.0 million in the third quarter of 2012 compared to the prior year quarter primarily related to the transfer of our killer whale that was located at Six Flags Discovery Kingdom to an unrelated third party.

Gain on sale of investee for the third quarter of 2012 was related to the sale of our interest in dick clark productions, inc.

Interest expense, net, decreased $5.1 million (31%) for the third quarter of 2012 compared to the prior year quarter, primarily reflecting reduced interest rates resulting from the December 2011 debt refinancing transaction.

Income tax expense was $11.0 million for the third quarter of 2012 compared to an income tax benefit of $10.4 million for the third quarter of 2011, primarily reflecting the impact of our expected utilization of net operating loss carryforwards in 2012 that will reduce the valuation allowance.

Nine Months Ended September 30, 2012 vs. Nine Months Ended September 30, 2011



Summary of Operations



Summary data for the nine-month periods ended September 30, 2012 and 2011 were
as follows (in thousands, except per capita total revenue and percentage
changes):



                                                  Nine-Month Period Ended
                                                       September 30,           Percentage
                                                    2012            2011       Change (%)
Total revenues                                  $     926,413    $  875,613              6
Operating expenses                                    339,452       328,125              3
Selling, general and administrative                   176,042       166,185              6
Costs of products sold                                 70,144        67,481              4
Depreciation and amortization                         112,722       127,361            (11 )
Loss on disposal of assets                              7,647         6,105             25
Gain on sale of investee                              (67,041 )           -            N/M
Interest expense, net                                  34,234        49,278            (31 )
Equity in loss of investee                              2,222         3,013            (26 )
Restructure (recovery) costs                              (47 )      25,146            N/M
Other (income) expense, net                               295          (193 )         (253 )
Income from continuing operations before
reorganization items, income taxes and
discontinued operations                               250,743       103,112            143
Reorganization items, net                               1,708         1,443             18
Income from continuing operations before
income taxes and discontinued operations              249,035       101,669            145
Income tax benefit                                      8,452       (14,065 )         (160 )
Income from continuing operations before
discontinued operations                         $     240,583    $  115,734            108

Other Data:
Attendance                                             22,071        20,730              6
Total revenue per capita                        $       41.97    $    42.24             (1 )


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Results of Operations

Total revenues for the nine months ended September 30, 2012 totaled $926.4 million compared to $875.6 million in the nine months ended September 30, 2011, representing a 6% increase. The increase in revenues is attributable to a 1.3 million (6%) increase in attendance, partially offset by a $0.27 (1%) decrease in total revenue per capita primarily related to significantly higher mix of season pass attendance and the negative exchange rate impact on revenue at our parks located in Mexico City and Montreal. The increase in attendance was driven by our strategy to increase season pass sales, the successful marketing of our new rides and attractions and a favorable weekend calendar shift that occurred in the current period versus the prior year period that will reverse in the fourth quarter of 2012. Per capita guest spending decreased $0.11 (0%) to $40.00 in the nine-month period ended September 30, 2012 from $40.11 in the prior year period. In the first quarter of 2012, we received business interruption insurance proceeds from a claim relating to Hurricane Irene totaling $3.0 million. Excluding the insurance proceeds benefit and the unfavorable foreign currency exchange rate impacts, total guest spending per capita increased $0.04 (0%).

Admissions revenue per capita was flat in the nine months ended September 30, 2012 compared to the prior year period, and reflects primarily a 6% increase in attendance (primarily due to season pass visitation, which lowers per capita spending but increases overall admissions revenue) which was partially offset by
(i) increased prices and reduced discounts and (ii) the ticket related portion of the Hurricane Irene insurance proceeds in the prior year period. The increase in attendance drove increased revenues from food and beverage, rentals, parking, retail and other guest services, but the increased mix of season pass attendance and the negative foreign currency exchange rate impact related to our parks in Mexico City and Montreal resulted in a $0.10 (1%) decrease in non-admissions per capita guest spending in the nine-month period ended September 30, 2012, including the non-admission portion of the insurance proceeds. The non-admissions per capita spending was negatively impacted by $0.15 of foreign currency exchange fluctuation at our parks in Mexico City and Montreal.

Operating expenses for the nine-month period ended September 30, 2012 increased $11.3 million (3%) compared to expenses in the prior year period. The increase was primarily driven by (i) increases in salaries, wages and benefits ($12.7 million), (ii) an increase in operating tax expense caused by caused by a timing shift of a refund received in the prior year period($1.2 million), and (iii) a provision of $0.9 million for probable losses associated with the settlement of potential claims at two of our parks, partially offset by the favorable exchange rate impact at our parks in Mexico City and Montreal ($2.0 million).

Selling, general and administrative expenses for the nine-month period ended September 30, 2012 increased $9.9 million (6%) compared to the prior year period. The increase reflects an increase in salaries, wages and benefits ($15.2 million) primarily related to a ($10.6 million) increase in stock-based compensation partially offset by (i) reduced insurance costs ($1.8 million),
(ii) decreased advertising expenses ($1.2 million), (iii) the favorable settlement of an old property claim ($1.3 million), and (iv) the favorable exchange rate impact at our parks in Montreal and Mexico City ($0.8 million).

Cost of products sold in the nine-month period ended September 30, 2012 increased $2.7 million (4%) compared to the prior year period primarily due to increased revenues in food and beverage and retail.

Depreciation and amortization expense for the nine-month period ended September 30, 2012 decreased $14.6 million (11%) compared to the prior year period. The decrease in depreciation and amortization expense is attributable to property and equipment that was fully depreciated prior to the nine months ended September 30, 2012.

Loss on disposal of assets increased by $1.5 million in the nine-month period ended September 30, 2012 compared to the prior year period primarily related to the loss associated with the relocation of our killer whale formerly located at Six Flags Discovery Kingdom to an unrelated third party, partially offset by a gain recognized from insurance proceeds received in the first quarter of 2012 for certain assets damaged by Hurricane Irene during the third quarter of 2011.

Gain on sale of investee for the third quarter of 2012 was related to the sale of our interest in dick clark productions, inc.

Interest expense, net, decreased $15.0 million (31%) for the nine-month period ended September 30, 2012 compared to the prior year period, primarily reflecting reduced interest rates resulting from the December 2011 debt refinancing transaction.


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Restructure costs of $25.1 million were incurred in the nine months ended September 30, 2011, while a small restructure recovery occurred during nine-month period ended September 30, 2012. During the nine months ended September 30, 2011, restructure costs incurred were attributable to a $23.7 million settlement reached with our former Executive Vice President and Chief Financial Officer in May 2011. During the nine months ended September 30, 2011, we recorded $25.3 million of restructuring charges to reflect the full settlement and related costs after consideration of amounts previously accrued.

Income tax expense was $8.5 million for the nine months ended September 30, 2012 compared to an income tax benefit of $14.1 million in the prior year period, primarily reflecting the higher pre-tax gain in 2012 versus the prior year period and the impact of our expected utilization of net operating loss carryforwards in 2012 that will reduce the valuation allowance.

Liquidity, Capital Commitments and Resources

On an annual basis, our principal sources of liquidity are cash generated from operations, funds from borrowings and existing cash on hand. Our principal uses of cash include the funding of working capital obligations, debt service, investments in parks (including capital projects), common stock dividends, payments to our partners in the Partnership Parks, and common stock repurchases.

In February 2012, Holdings' Board of Directors increased the quarterly cash dividend from $0.06 per share of common stock to $0.60 per share. During the nine-month periods ended September 30, 2012 and 2011, Holdings paid $96.7 million and $6.5 million, respectively, in cash dividends on its common stock. On October 24, 2012, Holdings announced that its Board of Directors approved an increase to the quarterly cash dividend from $0.60 per share of common stock to $0.90 per share. The fourth quarter 2012 dividend of $0.90 per share of common stock will be paid on December 10, 2012 to stockholders of record on November 27, 2012. The amount and timing of any future dividends payable on Holdings' common stock are within the sole discretion of Holdings' Board of Directors. We currently anticipate paying approximately $145 million in cash dividends on our common stock for the 2012 calendar year.

In February 2011, we initiated the First Stock Repurchase Plan, which permitted Holdings to repurchase up to $60 million shares of its common stock over a three-year period. During the year ended December 31, 2011, Holdings repurchased an aggregate of 1,617,000 shares at a cumulative price of approximately $60.0 million and the First Stock Repurchase Plan was substantially completed. On January 3, 2012, Holdings' Board of Directors approved the Second Repurchase Plan, which permits Holdings to repurchase up to $250.0 million in shares of Holdings' common stock over a four-year period. During the nine months ended September 30, 2012, Holdings repurchased approximately 2,077,000 shares at a cumulative price of approximately $98.4 million and at an average price per share of approximately $47 under the Second Stock Repurchase Plan.

We believe that, based on historical and anticipated operating results, cash flows from operations, available unrestricted cash and available amounts under the New Credit Facility will be adequate to meet our liquidity needs, including anticipated requirements for working capital, capital expenditures, common stock dividends, scheduled debt requirements, obligations under arrangements relating to the Partnership Parks and common stock repurchases.

Our current and future liquidity is greatly dependent upon our operating results, which are driven largely by overall economic conditions as well as the price and perceived quality of the entertainment experience at our parks. Our liquidity could also be adversely affected by a disruption in the availability of credit as well as unfavorable weather, contagious diseases, such as swine or avian flu, accidents or the occurrence of an event or condition at our parks, including terrorist acts or threats, negative publicity or significant local competitive events, that could significantly reduce paid attendance and, therefore, revenue at any of our parks. While we work with local police authorities on security-related precautions to prevent certain types of disturbances, we can make no assurance that these precautions will be able to prevent these types of occurrences. However, we believe that our ownership of many parks in different geographic locations reduces the effects of adverse weather or these other types of occurrences on our consolidated results. If such an adverse event were to occur, we may be unable to borrow under the Revolving Loan or be required to repay amounts outstanding under the New Credit Facility and/or may need to seek additional financing. In addition, we expect that we may be required to refinance all or a significant portion of our existing debt on or prior to maturity and potentially seek additional . . .

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