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RGC > SEC Filings for RGC > Form 10-Q on 6-Nov-2012All Recent SEC Filings

Show all filings for REGAL ENTERTAINMENT GROUP

Form 10-Q for REGAL ENTERTAINMENT GROUP


6-Nov-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Some of the information in this Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical facts included in this Form 10-Q, including, without limitation, certain statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations", may constitute forward-looking statements. In some cases you can identify these "forward-looking statements" by words like "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of those words and other comparable words. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those indicated in these statements as a result of certain factors as more fully discussed under the heading "Risk Factors" contained in our annual report on Form 10-K filed on February 27, 2012 with the Commission (File No. 001-31315) for the Company's fiscal year ended December 29, 2011. The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included herein.

Overview and Basis of Presentation

We conduct our operations through our wholly owned subsidiaries. We operate the largest and most geographically diverse theatre circuit in the United States, consisting of 6,621 screens in 524 theatres in 37 states and the District of Columbia as of September 27, 2012. We believe the size, reach and quality of our theatre circuit provide an exceptional platform to realize economies of scale from our theatre operations. We also maintain an investment in National CineMedia, which concentrates on in-theatre advertising. The Company manages its business under one reportable segment: theatre exhibition operations.

We generate revenues primarily from admissions and concession sales. Additional revenues are generated by our vendor marketing programs, our gift card and discount ticket programs, various other activities in our theatres and theatre access fees paid by National CineMedia (net of payments for onscreen advertising time provided to our beverage concessionaire). Film rental costs depend primarily on the popularity and box office revenues of a film, and such film rental costs generally increase as the admissions revenues generated by a film increase. Because we purchase certain concession items, such as fountain drinks and popcorn, in bulk and not pre-packaged for individual servings, we are able to improve our margins by negotiating volume discounts. Other operating expenses consist primarily of theatre labor and occupancy costs.

The Company's revenues are usually seasonal, coinciding with the timing of releases of motion pictures by the major distributors. Generally, motion picture studios release the most marketable motion pictures during the summer and holiday seasons. The unexpected emergence or continuance of a "hit" film during other periods can alter the traditional pattern. The timing of movie releases can have a significant effect on the Company's results of operations, and the results of one fiscal quarter are not necessarily indicative of the results for the next or any other fiscal quarter. The seasonality of motion picture exhibition, however, has become less pronounced as motion picture studios are releasing motion pictures somewhat more evenly throughout the year. The Company does not believe that inflation has had a material impact on its financial position or results of operations.

For a summary of industry trends as well as other risks and uncertainties relevant to the Company, see "Business-Industry Overview and Trends" and "Risk Factors" contained in our annual report on Form 10-K for the fiscal year ended December 29, 2011 and incorporated herein by reference and "Results of Operations" below.

Critical Accounting Estimates

For a discussion of accounting policies that we consider critical to our business operations and the understanding of our results of operations and affect the more significant judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements, please refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Estimates" contained in our annual report on Form 10-K for the fiscal year ended December 29, 2011 and incorporated by reference herein. As of September 27, 2012, there were no significant changes in our critical accounting policies or estimation procedures.

Significant Events

For a discussion of other significant operating, financing and investing transactions which have occurred through December 29, 2011, please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations


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-Liquidity and Capital Resources" included in Part II, Item 7 of our annual report on Form 10-K for the fiscal year ended December 29, 2011 and incorporated herein by reference.

During the three quarters ended September 27, 2012 ("Fiscal 2012 Period"), we continued to make progress with respect to the following strategic initiatives:

•         We demonstrated our commitment to providing incremental value to our
          stockholders.  Total cash dividends distributed to our stockholders
          during the Fiscal 2012 Period totaled approximately $99.2 million.



•         We continued to actively manage our asset base by opening six new
          theatres with 77 screens and closing nine underperforming theatres with
          70 screens, ending the Fiscal 2012 Period with 524 theatres and 6,621
          screens.

• We continued to embrace innovative concepts to deliver a premium movie-going experience for our customers on three complementary fronts:

Our IMAX® footprint consisted of a total of 69 IMAX® screens as of September 27, 2012. We believe that expanding our IMAX® presence will continue to have a positive impact on our operating results and to that end, we have recently agreed to install an additional ten IMAX® digital projection systems, which will ultimately expand our IMAX® footprint to 87 IMAX® screens. We expect that our IMAX® footprint will consist of between 70 to 75 auditoriums by the end of 2012 and we intend to install the remaining IMAX® digital projection systems during 2013 and beyond. During the Fiscal 2012 Period, we added our proprietary large screen format known as "Regal Premium Experience" ("RPXSM") to 14 auditoriums, bringing our total to 31 RPXSM screens as of September 27, 2012. We have been encouraged by the results of RPXSM screens and expect to expand our RPXSM footprint to approximately 35 auditoriums by the end of 2012. We believe the installation of IMAX® theatre systems and the conversion of existing auditoriums to RPXSM auditoriums allow us to offer our patrons premium movies and all-digital large format experiences that generate incremental revenue and cash flows for the Company.

Second, to continually address consumer trends and customer preferences, we have expanded our menu of food and beverage products to include hot made-to-order meals, customizable coffee, healthy snacks, alcohol and other specialty products in select theatres. To that end, during the Fiscal 2012 Period, we offered expanded food items in 51 theatres and also offered beer and wine in other locations. We expect to offer expanded food items in approximately 10 to 15 additional theatres during the fourth quarter of 2012. We believe that the enhancement of our food and beverage offerings has had a positive effect on our operating results and we expect to continue to invest in such food and beverage offerings in our theatres.

Third, we continued our focus on interactive marketing programs aimed at increasing attendance and enhancing the overall customer experience. For example, during the Fiscal 2012 Period, we launched a new mobile application designed to give customers quick access to box office information via their Apple iPhone® or Android™ phone. The application provides customers the ability to find films, movie information, showtimes, special offers from Regal and purchase tickets for local theatres, thereby expediting the admissions process. Additionally, the application will help customers stay up-to-date on the latest coupons, sweepstakes, and Regal Crown Club® loyalty program promotions.

•         Finally, we continue to believe that Open Road Films has a unique
          opportunity to fill a gap in the marketplace created by the major
          studios' big-budget franchise film strategy by marketing smaller budget
          films in a cost-effective manner which we believe will drive additional
          patrons to our theatres and generate a return on our capital
          investment. Open Road Films' fiscal 2012 period highlights include the
          theatrical and DVD release of The Grey, the theatrical releases of
          Silent House, Lockout, Hit and Run and End of Watch and the DVD release
          of Killer Elite.  Open Road Films expects to distribute a total of six
          films during fiscal 2012 and eventually distribute approximately eight
          to ten films per year. As of September 27, 2012, our cumulative cash
          investment in Open Road Films totaled $20.0 million. We believe our
          investment in Open Road Films will generate incremental value for our
          stockholders.

Results of Operations

Based on our review of industry sources, North American box office revenues for the time period that corresponds to Regal's third fiscal quarter of 2012 were estimated to have decreased by approximately five percent in comparison to the third quarter of 2011. The industry's box office results for the third quarter of 2012 were negatively impacted by difficult


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comparisons generated from strong attendance experienced in the third quarter of 2011 and were likely somewhat negatively impacted by the Aurora, Colorado theatre shooting tragedy and by the 2012 Summer Olympics, but benefited from the commercial success of certain pictures released during the third quarter of 2012, most notably, The Dark Knight Rises.

The following table sets forth the percentage of total revenues represented by certain items included in our unaudited condensed consolidated statements of income for the quarter ended September 27, 2012 ("Q3 2012 Period"), the quarter ended September 29, 2011 ("Q3 2011 Period"), the Fiscal 2012 Period and the three quarters ended September 29, 2011 ("Fiscal 2011 Period") (dollars in millions, except average ticket prices and average concessions per patron):

                               Q3 2012 Period         Q3 2011 Period        Fiscal 2012 Period         Fiscal 2011 Period
                                          % of                   % of                      % of                       % of
                                $       Revenue        $       Revenue         $         Revenue          $         Revenue
Revenues:
Admissions                  $ 471.0       68.0 %   $ 514.9       69.2 %   $  1,439.8      68.5  %   $   1,428.6       69.1 %
Concessions                   187.3       27.0       197.2       26.5          559.9      26.6            548.7       26.5
Other operating revenues       34.6        5.0        31.5        4.3          101.4       4.9             90.5        4.4
Total revenues                692.9      100.0       743.6      100.0        2,101.1     100.0          2,067.8      100.0
Operating expenses:
Film rental and advertising
costs(1)                      247.6       52.6       273.5       53.1          749.7      52.1            742.8       52.0
Cost of concessions(2)         25.5       13.6        26.9       13.6           75.2      13.4             74.7       13.6
Rent expense(3)                95.9       13.8        95.5       12.8          285.3      13.6            286.0       13.8
Other operating expenses(3)   185.2       26.7       195.7       26.3          546.0      26.0            561.0       27.1
General and administrative
expenses (including
share-based compensation
expense of $2.4 and $2.2
for the Q3 2012 Period and
the Q3 2011 Period,
respectively, and $7.0 and
$6.3 for the Fiscal 2012
Period and the Fiscal 2011
Period, respectively)(3)       16.1        2.3        16.9        2.3           48.7       2.3             49.7        2.4
Depreciation and
amortization(3)                45.0        6.5        48.0        6.5          137.6       6.5            149.8        7.2
Net loss on disposal and
impairment of operating
assets(3)                       3.9        0.6         6.0        0.8            6.4       0.3             16.1        0.8
Total operating expenses(3)   619.2       89.4       662.5       89.1        1,848.9      88.0          1,880.1       90.9
Income from operations(3)      73.7       10.6        81.1       10.9          252.2      12.0            187.7        9.1
Interest expense, net(3)       32.3        4.7        37.2        5.0          102.8       4.9            113.8        5.5
Loss on extinguishment of
debt(3)                           -          -           -          -              -         -             21.9        1.1
Earnings recognized from
NCM(3)                         (8.7 )      1.3        (9.0 )      1.2          (23.1 )     1.1            (26.2 )      1.3
Other, net(3)                  10.5        1.5        13.3        1.8           (0.8 )       -             17.5        0.8
Provision for income
taxes(3)                       15.7        2.3        14.6        2.0           65.9       3.1             24.6        1.2
Net income attributable to
controlling interest(3)     $  24.0        3.5     $  25.0        3.4     $    107.5       5.1      $      36.2        1.8
Attendance (in thousands)    53,585          *      58,656          *        161,603         *          164,264          *
Average ticket price(4)     $  8.79          *     $  8.78          *     $     8.91         *      $      8.70          *
Average concessions per
patron(5)                   $  3.50          *     $  3.36          *     $     3.46         *      $      3.34          *



* Not meaningful

(1) Percentage of revenues calculated as a percentage of admissions revenues.

(2) Percentage of revenues calculated as a percentage of concessions revenues.

(3) Percentage of revenues calculated as a percentage of total revenues.

(4) Calculated as admissions revenues/attendance.

(5) Calculated as concessions revenues/attendance.


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Admissions

During the Q3 2012 Period, total admissions revenues decreased $43.9 million, or 8.5%, to $471.0 million, from $514.9 million in the Q3 2011 Period. An 8.6% decrease in attendance, partially offset by a 0.1% increase in average ticket prices, led to the decrease in the Q3 2012 Period admissions revenues. We believe that our attendance is primarily dependent upon the commercial appeal of content released by the motion picture studios. Attendance for the Q3 2012 Period in comparison to that of the Q3 2011 Period was negatively impacted by difficult comparisons generated from strong attendance experienced in the Q3 2011 Period and was likely somewhat negatively impacted by the Aurora, Colorado theatre shooting tragedy and the 2012 Summer Olympics, but benefited from the commercial success of certain films such as The Dark Knight Rises released during the Q3 2012 Period. For the Q3 2012 Period, the 0.1% average ticket price increase was due to selective price increases identified during our ongoing periodic pricing reviews (which include analysis of various factors such as general inflationary trends and local market conditions), largely offset by a decrease in the percentage of our admissions revenues generated by premium format films exhibited during the period. Based on our review of certain industry sources, the decrease in our admissions revenues on a per screen basis exceeded the industry's per screen results for the Q3 2012 Period as compared to the Q3 2011 Period.

Total admissions revenues increased $11.2 million during the Fiscal 2012 Period, or 0.8%, to $1,439.8 million, from $1,428.6 million in the Fiscal 2011 Period primarily due to a 2.4% increase in average ticket prices partially offset by a 1.6% decrease in attendance. The primary driver of the increase in our Fiscal 2012 Period average ticket price was selective price increases identified during our ongoing periodic pricing reviews. The Fiscal 2012 Period decrease in attendance was primarily attributable to the commercial appeal of the overall Fiscal 2011 Period film slate, partially offset by strong attendance from certain premium format pictures during the Fiscal 2012 Period, including The Avengers, The Dark Knight Rises and The Hunger Games.

Concessions

Total concessions revenues decreased $9.9 million, or 5.0%, to $187.3 million during the Q3 2012 Period, from $197.2 million for the Q3 2011 Period. During the Fiscal 2012 Period, total concessions revenues increased $11.2 million, or 2.0%, to $559.9 million, from $548.7 million in the Fiscal 2011 Period. Average concessions revenues per patron during the Q3 2012 Period increased 4.2%, to $3.50, from $3.36 for the Q3 2011 Period and increased 3.6%, to $3.46 during the Fiscal 2012 Period, from $3.34 in the Fiscal 2011 Period. The decrease in total concessions revenues during the Q3 2012 Period was attributable to the aforementioned decline in attendance during the period, partially offset by an increase in average concessions revenues per patron. The increase in total concessions revenues during the Fiscal 2012 Period was attributable to the increase in average concessions revenues per patron during the period, partially offset by a decline in attendance. The increase in average concessions revenues per patron for the Q3 2012 Period and the Fiscal 2012 Period was primarily a result of an increase in popcorn and beverage sales volume during the Q3 2012 Period and the Fiscal 2012 Period and to a lesser extent, the positive impact of an expanded variety of food items offered in certain of our theatres.

Other Operating Revenues

During the Q3 2012 Period, other operating revenues increased $3.1 million, or 9.8%, to $34.6 million, from $31.5 million in the Q3 2011 Period. Other operating revenues increased $10.9 million, or 12.0%, to $101.4 million during the Fiscal 2012 Period, from $90.5 million for the Fiscal 2011 Period. Included in other operating revenues are the theatre access fees paid by National CineMedia (net of payments for onscreen advertising time provided to our beverage concessionaire), revenues from our vendor marketing programs and other theatre revenues, including revenue related to our gift card and discount ticket programs. The increase in other operating revenues during the Q3 2012 Period was primarily driven by increases in revenues from our vendor marketing programs, increases in other theatre revenues and increases in revenue related to our gift card and discount ticket programs. The increase in other operating revenues during the Fiscal 2012 Period was primarily attributable to increases in revenues from our vendor marketing programs, increases in other theatre revenues and increases in theatre access fees, partially offset by a decline in revenue related to our gift card and discount ticket programs.

Film Rental and Advertising Costs

Film rental and advertising costs as a percentage of admissions revenues decreased to 52.6% during the Q3 2012 Period from 53.1% in the Q3 2011 Period and for the Fiscal 2012 Period, increased to 52.1% from 52.0% in the Fiscal 2011 Period. The decrease in film rental and advertising costs as a percentage of box office revenues during the Q3 2012 Period was primarily attributable to higher film costs associated with the commercial success of films exhibited during the Q3 2011 Period.


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The increase in film rental and advertising costs as a percentage of box office revenues during the Fiscal 2012 Period was primarily attributable to higher film costs associated with the success of the top tier films exhibited during the Fiscal 2012 Period.

Cost of Concessions

During the Q3 2012 Period, cost of concessions decreased $1.4 million, or 5.2%, to $25.5 million as compared to $26.9 million during the Q3 2011 Period. Cost of concessions increased $0.5 million, or 0.7%, to $75.2 million during the Fiscal 2012 Period, from $74.7 million in the Fiscal 2011 Period. Cost of concessions as a percentage of concessions revenues for the Q3 2012 Period and the Q3 2011 Period was approximately 13.6%. For the Fiscal 2012 Period, cost of concessions as a percentage of concession revenues was approximately 13.4% compared to 13.6% for the Fiscal 2011 Period. The decrease in cost of concessions as a percentage of concessions revenues during the Fiscal 2012 Period was primarily related to an increase in the amount of vendor marketing revenue recorded as a reduction of cost of concessions during the period, partially offset by slightly higher raw material costs for certain items.

Rent Expense

Rent expense increased $0.4 million, or 0.4%, to $95.9 million in the Q3 2012 Period, from $95.5 million in the Q3 2011 Period. During the Fiscal 2012 Period, rent expense totaled $285.3 million, a decrease of $0.7 million, or 0.2% from the Fiscal 2011 Period. The increase in rent expense during the Q3 2012 Period was primarily related to incremental rent associated with the opening of eight new theatres with 108 screens subsequent to the end of the Q3 2011 Period, partially offset by the closure of 12 theatres representing 92 screens subsequent to the end of the Q3 2011 Period. The decrease in rent expense during the Fiscal 2012 Period was primarily attributable to the closure of 12 theatres representing 92 screens subsequent to the end of the Q3 2011 Period, partially offset by incremental rent associated with the opening of eight new theatres with 108 screens subsequent to the end of the Q3 2011 Period and slightly higher contingent rent associated with increased admissions and concessions revenues during the Fiscal 2012 Period.

Other Operating Expenses

Other operating expenses decreased $10.5 million, or 5.4%, to $185.2 million in the Q3 2012 Period, from $195.7 million in the Q3 2011 Period. During the Fiscal 2012 Period, other operating expenses decreased $15.0 million, or 2.7%, to $546.0 million, from $561.0 million in the Fiscal 2011 Period. The decrease in other operating expenses during the Q3 2012 Period and the Fiscal 2012 Period was attributable to reductions in theatre level payroll and certain non-rent occupancy costs and decreased costs associated with lower 3D film revenues, partially offset by an increase in costs associated with higher IMAX® film revenues.

General and Administrative Expenses

For the Q3 2012 Period, general and administrative expenses decreased $0.8 million, or 4.7%, to $16.1 million as compared to $16.9 million in the Q3 2011 Period. General and administrative expenses decreased $1.0 million, or 2.0%, to $48.7 million during the Fiscal 2012 Period, from $49.7 million in the Fiscal 2011 Period. The decrease in general and administrative expenses during the Q3 2012 Period and the Fiscal 2012 Period was primarily attributable to decreases in corporate payroll costs and other corporate expenses, partially offset by increases in share-based compensation expense and legal and professional fees during such periods.

Depreciation and Amortization

Depreciation and amortization expense decreased $3.0 million, or 6.3%, to $45.0 million for the Q3 2012 Period, from $48.0 million in the Q3 2011 Period. During the Fiscal 2012 Period, depreciation and amortization expense decreased $12.2 million, or 8.1%, to $137.6 million, from $149.8 million in the Fiscal 2011 Period. The decrease in depreciation and amortization expense during the Q3 2012 Period and the Fiscal 2012 Period as compared to the Q3 2011 Period and the Fiscal 2011 Period was primarily due to a reduction in depreciation related to the replacement of owned 35mm film projectors with leased digital projection systems and slightly lower depreciation associated with the reduction in our average screen count subsequent to the end of the Q3 2011 Period.

Income from Operations

During the Q3 2012 Period, income from operations decreased $7.4 million, or 9.1%, to $73.7 million, from $81.1 million in the Q3 2011 Period. Income from operations increased $64.5 million, or 34.4%, to $252.2 million during the Fiscal


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2012 Period, from $187.7 million in the Fiscal 2011 Period. The decrease in income from operations during the Q3 2012 Period as compared to the Q3 2011 Period was primarily attributable to the decline in total revenues, partially offset by reductions in certain variable operating expense line items described above, and a $2.1 million lower net loss on disposal and impairment of operating assets. The increase in income from operations during the Fiscal 2012 Period as compared to the Fiscal 2011 Period was primarily attributable to the increase in total revenues, reductions in certain Fiscal 2012 Period variable operating expense line items described above, and a $9.7 million lower net loss on disposal and impairment of operating assets.

Interest Expense, net

Net interest expense totaled $32.3 million for the Q3 2012 Period, which represents a decrease of $4.9 million, or 13.2%, from the Q3 2011 Period. During the Fiscal 2012 Period, net interest expense decreased $11.0 million, or 9.7%, to $102.8 million, from $113.8 million in the Fiscal 2011 Period. The decrease in net interest expense during the Q3 2012 Period and the Fiscal 2012 Period was principally due to a lower effective interest rate on our Term Facility (including a change in our interest rate swap portfolio).

Earnings Recognized from NCM

Earnings recognized from NCM decreased $0.3 million to $8.7 million in the Q3 2012 Period, from $9.0 million in the Q3 2011 Period. Earnings recognized from NCM decreased $3.1 million, or 11.8%, to $23.1 million in the Fiscal 2012 Period, from $26.2 million in the Fiscal 2011 Period. The Company received $7.9 million and $8.5 million, respectively, in cash distributions from National CineMedia during the Q3 2012 Period and Q3 2011 Period. Approximately $1.6 million and $1.7 million, respectively, of these cash distributions received during the Q3 2012 Period and the Q3 2011 Period were recognized as a reduction in our investment in National CineMedia. The Company received $25.6 million and $27.4 million, respectively, in cash distributions from National CineMedia (including payments received of $8.5 million and $6.8 million, respectively, under the tax receivable agreement described more fully in Note 4 to the 2011 Audited Consolidated Financial Statements) during the Fiscal 2012 Period and Fiscal 2011 Period. Approximately $5.1 million and $5.0 million, respectively, . . .

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