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RGC > SEC Filings for RGC > Form 10-Q on 7-May-2013All Recent SEC Filings

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Form 10-Q for REGAL ENTERTAINMENT GROUP


7-May-2013

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 25, 2013 with the Commission (File No. 001-31315) for the Company's fiscal year ended December 27, 2012. 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 6,854 screens in 537 theatres in 38 states and the District of Columbia as of March 28, 2013. 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 our relationship with National CineMedia. 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 maximize 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 27, 2012 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 27, 2012 and incorporated by reference herein. As of March 28, 2013, 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 27, 2012, 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 27, 2012 and incorporated herein by reference.

Our business strategy focuses on enhancing our position in the motion picture exhibition industry by realizing selective growth opportunities through new theatre construction, managing, expanding and upgrading our existing asset base with new technologies and capitalizing on prudent industry consolidation and partnership opportunities. This strategy should enable us to continue to produce the free cash flow necessary to maintain a prudent allocation of our capital among dividend payments, debt service and repayment and investment in our theatre assets, all to provide meaningful value to our stockholders. During the quarter ended March 28, 2013 ("Q1 2013 Period"), we continued to make progress with respect to our business strategy as follows:

•         We demonstrated our commitment to providing incremental value to our
          stockholders.  Total cash dividends paid to our stockholders during the
          Q1 2013 Period totaled approximately $34.0 million.



•         In addition to the November 2012 acquisition of Great Escape Theatres
          consisting of 25 theatres and 301 screens, we continued to actively
          manage our asset base by closing three underperforming theatres with 26
          screens, ending the Q1 2013 Period with 537 theatres and 6,854 screens.
          In addition, on March 29, 2013, we completed the acquisition of
          Hollywood Theatres in which we acquired a total of 43 theatres with 513
          screens in exchange for approximately $191 million in cash,
          approximately $47 million of assumed capital lease and lease financing
          obligations, and certain working capital. The acquisition of Hollywood
          Theaters will enhance Regal's presence in 16 states and 3 U.S.
          territories. See "Recent Developments" below and Note 12-"Subsequent
          Events" for further discussion of this acquisition. We are pleased that
          our recently completed acquisitions have been fully integrated into our
          operations and are having a positive impact on our market share and
          financial results.



•         During the Q1 2013 Period, we continued to embrace innovative concepts
          that generate incremental revenue and cash flows for the Company and
          deliver a premium movie-going experience for our customers on three
          complementary fronts including (1) installation of additional IMAX®
          digital projection systems and RPXSM screens in select theatre
          locations, (2) enhancement of our various food and beverage offerings
          in certain of our theatres and (3) a continued focus on interactive
          marketing programs (such as mobile ticketing and our frequent moviegoer
          loyalty program, named the Regal Crown Club®) aimed at increasing
          attendance and enhancing the overall customer experience. The
          product-driven success of our IMAX® screens and growing portfolio of
          RPXSM screens, coupled with the continued rollout of our expanded
          concession menu and widespread availability of mobile ticketing and
          other marketing initiatives allow us to deliver a premium experience in
          a majority of our key markets.



•         Finally, we 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' first quarter of 2013 highlights include the theatrical release
          of A Haunted House and Side Effects and the DVD release of Hit and Run,
          End of Watch and Silent Hill. Films distributed by Open Road Films
          during the first four months of 2013 generated national box office
          revenues of approximately $98 million.  Open Road Films expects to
          eventually distribute approximately eight to ten films per year. As of
          March 28, 2013, 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.

Recent Developments

As described in Note 12-"Subsequent Events," on March 29, 2013, the Company completed the acquisition of Hollywood Theatres in which we acquired a total of 43 theatres with 513 screens in exchange for approximately $191 million in cash, approximately $47 million of assumed capital lease and lease financing obligations, and certain working capital. The cash portion of the purchase price includes repayment of approximately $167 million of the sellers' debt and is subject to customary post-closing adjustments. The acquisition of Hollywood Theaters will enhance Regal's presence in 16 states and 3 U.S. territories.

Also as described in Note 12-"Subsequent Events," on April 19, 2013, Regal Cinemas, Regal, REH and the other affiliates of Regal Cinemas party thereto, as guarantors, entered into the Second Amendment to the Credit Agreement, with Credit Suisse and the lenders party thereto. The Second Amendment amends the Credit Agreement by reducing the interest


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rate on the Term Facility by 0.50%. Specifically, the Second Amendment provides that, depending on the consolidated leverage ratio of Regal Cinemas and its subsidiaries, the applicable margin under the Term Facility for base rate loans will be either 1.50% or 1.75% and the applicable margin under the Term Facility for LIBOR rate loans will be either 2.50% or 2.75%. Among other things, the Second Amendment also amends the Credit Agreement (i) by deleting the interest coverage ratio test and providing that the remaining financial covenants will only be tested if the outstanding amount of the revolving loans and letters of credit (including unreimbursed drawings) under the Revolving Facility equals or exceeds 25% of the Revolving Commitment, (ii) by providing for a 1% prepayment premium applicable in the event that Regal Cinemas enters into a refinancing or amendment of the Term Facility on or prior to the first anniversary of the Second Amendment Date that, in either case, has the effect of reducing the interest rate on the Term Facility, (iii) to permit the release of Regal from its guarantee of the obligations under the Credit Agreement in the event that it does not guarantee any other debt of Regal Cinemas or its subsidiaries, and (iv) by eliminating the mortgage requirement for fee-owned real properties that are acquired by Regal Cinemas or its subsidiaries after the Second Amendment Date. Except as amended by the Second Amendment, the remaining terms of the Credit Agreement remain in full force and effect.

Finally, as described in Note 12-"Subsequent Events," during April 2013, the Company sold 0.3 million shares of RealD, Inc. common stock at prices ranging from $14.61 to $15.00 per share. We received approximately $4.3 million in net proceeds after deducting related fees and expenses payable by us.

Results of Operations

Based on our review of industry sources, North American box office revenues for the time period that corresponds to Regal's first fiscal quarter of 2013 were estimated to have decreased by approximately nine to ten percent in comparison to the first fiscal quarter of 2012. The industry's box office results for the first quarter of 2013 were negatively impacted by difficult comparisons with the strong attendance experienced in the first quarter of 2012, including the commercial success of premium format pictures such as The Hunger Games and Dr. Suess' The Lorax.

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 March 28, 2013 ("Q1 2013 Period") and the quarter ended March 29, 2012 ("Q1 2012 Period") (dollars in millions, except average ticket prices and average concessions per patron):


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                                                        Q1 2013 Period         Q1 2012 Period
                                                                   % of                   % of
                                                         $       Revenue        $       Revenue
Revenues:
Admissions                                           $ 436.6       67.9 %   $ 474.1       69.2 %
Concessions                                            171.8       26.7       180.0       26.3
Other operating revenues                                34.4        5.4        30.8        4.5
Total revenues                                         642.8      100.0       684.9      100.0
Operating expenses:
Film rental and advertising costs(1)                   215.9       49.5       236.8       49.9
Cost of concessions(2)                                  23.9       13.9        23.7       13.2
Rent expense(3)                                         99.6       15.5        94.1       13.7
Other operating expenses(3)                            183.6       28.6       176.8       25.8
General and administrative expenses (including
share-based compensation expense of $2.3 for the Q1
2013 Period and the Q1 2012 Period)(3)                  18.0        2.8        15.8        2.3
Depreciation and amortization(3)                        47.2        7.3        46.9        6.8
Net loss on disposal and impairment of operating
assets(3)                                               (2.6 )      0.4           -          -
Total operating expenses(3)                            585.6       91.1       594.1       86.7
Income from operations(3)                               57.2        8.9        90.8       13.3
Interest expense, net(3)                                34.9        5.4        36.0        5.3
Earnings recognized from NCM(3)                         (9.8 )      1.5       (13.8 )      2.0
Other, net(3)                                           (5.5 )      0.9        (2.9 )      0.4
Provision for income taxes(3)                           15.2        2.4        25.2        3.7
Net income attributable to controlling interest(3)   $  22.5        3.5     $  46.3        6.8
Attendance (in thousands)                             49,645          *      53,721          *
Average ticket price(4)                              $  8.79          *     $  8.83          *
Average concessions per patron(5)                    $  3.46          *     $  3.35          *



* 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.

Admissions

During the Q1 2013 Period, total admissions revenues decreased $37.5 million, or 7.9%, to $436.6 million, from $474.1 million in the Q1 2012 Period. A 7.6% decrease in attendance coupled with a 0.5% decrease in average ticket prices led to the decrease in the Q1 2013 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 Q1 2013 Period in comparison to that of the Q1 2012 Period was negatively impacted by difficult comparisons with the strong attendance experienced in the Q1 2012 Period, including the commercial success of premium format pictures such as The Hunger Games and Dr. Suess' The Lorax. For the Q1 2013 Period, the 0.5% average ticket price decrease was due to 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 was slightly less than the industry's results for the Q1 2013 Period as compared to the Q1 2012 Period and is primarily attributable to our November 2012 acquisition of Great Escape Theatres, which consisted of 25 theatres and 301 screens.


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Concessions

Total concessions revenues decreased $8.2 million, or 4.6%, to $171.8 million during the Q1 2013 Period, from $180.0 million for the Q1 2012 Period. Average concessions revenues per patron during the Q1 2013 Period increased 3.3%, to $3.46, from $3.35 for the Q1 2012 Period. The decrease in total concessions revenues during the Q1 2013 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 average concessions revenues per patron for the Q1 2013 Period was primarily a result of an increase in popcorn and beverage sales volume during the Q1 2013 Period, but also benefited from the continued rollout of our expanded food menu during the Q1 2013 Period.

Other Operating Revenues

During the Q1 2013 Period, other operating revenues increased $3.6 million, or 11.7%, to $34.4 million, from $30.8 million in the Q1 2012 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 Q1 2013 Period was primarily driven by increases in revenues from our vendor marketing programs and 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 49.5% during the Q1 2013 Period from 49.9% in the Q1 2012 Period. The decrease in film rental and advertising costs as a percentage of box office revenues during the Q1 2013 Period was primarily attributable to the overall decline in box office revenues and a lack of box office concentration as compared to the Q1 2012 Period.

Cost of Concessions

During the Q1 2013 Period, cost of concessions increased $0.2 million, or 0.8%, to $23.9 million as compared to $23.7 million during the Q1 2012 Period. Cost of concessions as a percentage of concessions revenues for the Q1 2013 Period was approximately 13.9%, compared to 13.2% during the Q1 2012 Period. The increase in cost of concessions as a percentage of concessions revenues during the Q1 2013 Period was primarily related to slightly higher raw material and packaged good costs and a minor shift in the mix of products sold at the concession stand.

Rent Expense

Rent expense increased $5.5 million, or 5.8%, to $99.6 million in the Q1 2013 Period, from $94.1 million in the Q1 2012 Period. The increase in rent expense during the Q1 2013 Period was primarily related to incremental rent associated with the November 2012 acquisition of Great Escape Theatres and incremental rent associated with the opening of eight new theatres with 107 screens subsequent to the end of the Q1 2012 Period, partially offset by the closure of 19 theatres with 141 screens subsequent to the end of the Q1 2012 Period.

Other Operating Expenses

Other operating expenses increased $6.8 million, or 3.8%, to $183.6 million in the Q1 2013 Period, from $176.8 million in the Q1 2012 Period. The increase in other operating expenses during the Q1 2013 Period was attributable to increases in theatre level payroll and certain non-rent occupancy costs, partially offset by decreased costs associated with lower premium format film revenues.

General and Administrative Expenses

For the Q1 2013 Period, general and administrative expenses increased $2.2 million, or 13.9%, to $18.0 million as compared to $15.8 million in the Q1 2012 Period. The increase in general and administrative expenses was primarily attributable to an increase in legal and professional fees and corporate payroll costs during the Q1 2013 Period.

Depreciation and Amortization

Depreciation and amortization expense of $47.2 million for the Q1 2013 Period was consistent with that of the Q1 2012 Period.


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Income from Operations

During the Q1 2013 Period, income from operations decreased $33.6 million, or 37.0%, to $57.2 million, from $90.8 million in the Q1 2012 Period. The decrease in income from operations during the Q1 2013 Period as compared to the Q1 2012 Period was primarily attributable to the decline in total revenues and increases in certain variable operating expense line items described above, partially offset by a $2.6 million higher net gain on disposal and impairment of operating assets.

Interest Expense, net

Net interest expense totaled $34.9 million for the Q1 2013 Period, which represents a decrease of $1.1 million, or 3.1%, from $36.0 million in the Q1 2012 Period. The decrease in net interest expense during the Q1 2013 Period was principally due to a lower effective interest rate on our Term Facility (including a change in our interest rate swap portfolio), partially offset by incremental interest associated with the Q1 2013 Period issuance of our 53/4% Senior Notes.

Earnings Recognized from NCM

Earnings recognized from NCM decreased $4.0 million to $9.8 million in the Q1 2013 Period, from $13.8 million in the Q1 2012 Period. The decrease in earnings recognized from NCM during the Q1 2013 Period as compared to the Q1 2012 Period was primarily attributable to the timing of payments received under the tax receivable agreement described more fully in Note 4 to the 2012 Audited Consolidated Financial Statements.

Income Taxes

The provision for income taxes of $15.2 million and $25.2 million for the Q1 2013 Period and the Q1 2012 Period, respectively, reflect effective tax rates of approximately 40.4% and 35.2%, respectively. The increase in the effective tax rate for the Q1 2013 Period compared to the Q1 2012 Period was primarily attributable to changes in uncertain tax positions with state taxing authorities resulting from the lapse of statutes of limitations that occurred during the Q1 2012 Period. The effective tax rates for all periods presented also reflect the impact of certain non-deductible expenses and income tax credits.

Net Income Attributable to Controlling Interest

During the Q1 2013 Period, net income attributable to controlling interest totaled $22.5 million, which represents a decrease of $23.8 million, from net income attributable to controlling interest of $46.3 million in the Q1 2012 Period. The decrease in net income attributable to controlling interest for the Q1 2013 Period was primarily attributable to a decrease in operating income as described above and lower earnings recognized from National CineMedia during the Q1 2013 Period, partially offset by lower interest expense and higher equity earnings generated by certain of our equity method investments (included in "Other, net") during the Q1 2013 Period.

Liquidity and Capital Resources

On a consolidated basis, we expect our primary uses of cash to be for operating expenses, capital expenditures, investments, acquisitions, general corporate purposes related to corporate operations, debt service and the Company's quarterly dividend payments. The principal sources of liquidity are cash generated from operations, cash on hand and borrowings under the Credit Agreement described below. Under the terms of the Credit Agreement and the 85/8% Senior Notes issued during fiscal 2009, Regal Cinemas is restricted as to how much it can advance or distribute to Regal, its indirect parent. Since Regal is a holding company with no significant assets other than the stock of its subsidiaries, this restriction could impact Regal's ability to effect future debt or dividend payments, pay corporate expenses, repurchase or retire for cash its 91/8% Senior Notes and its 53/4% Senior Notes. In addition, as described further below, the Indentures under which the 91/8% Senior Notes and 53/4% Senior Notes are issued limit the Company's (and its restricted subsidiaries') ability to, among other things, incur additional indebtedness, pay dividends on or make other distributions in respect of its capital stock, purchase or redeem capital stock, make loans or advances to its subsidiaries, or purchase, redeem or otherwise acquire or retire certain subordinated obligations.

Operating Activities

Our revenues are generated principally through admissions and concessions sales with proceeds received in cash or via credit cards at the point of sale. Our operating expenses are primarily related to film and advertising costs, rent and occupancy, and payroll. Film costs are ordinarily paid to distributors within 30 days following receipt of admissions revenues and the cost of the Company's concessions are generally paid to vendors approximately 30 to 35 days from purchase. Our current liabilities


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include items that will become due within 12 months. In addition, from time to time, we use cash from operations and borrowings to fund dividends in excess of net income attributable to controlling interest and cash flows from operating activities less cash flows from investing and other financing activities. As a result, at any given time, our balance sheet may reflect a working capital deficit.

As further described in Note 2-"Investments," the Company maintains an investment in National CineMedia, a pass-through entity for federal income tax purposes. The IRS has examined National CineMedia's 2007 and 2008 income tax returns and, as of March 28, 2013, has proposed an adjustment related to agreements entered into in conjunction with NCM Inc.'s IPO. NCM Inc., in its capacity as tax matters partner for National Cinemedia, is disputing the adjustment through the IRS' administrative appeals process. Management has . . .

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