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RGC > SEC Filings for RGC > Form 10-Q on 5-Nov-2013All Recent SEC Filings

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Form 10-Q for REGAL ENTERTAINMENT GROUP


5-Nov-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 7,334 screens in 575 theatres in 42 states along with Guam, Saipan, American Samoa and the District of Columbia as of September 26, 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 September 26, 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 proper 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 three quarters ended September 26, 2013 ("Fiscal 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
          Fiscal 2013 Period totaled approximately $99.5 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 during the Fiscal 2013 Period by completing the
          acquisition of Hollywood Theaters on March 29, 2013 whereby we acquired
          a total of 43 theatres with 513 screens in exchange for an aggregate
          net cash purchase price, before post-closing adjustments, of $194.4
          million. The acquisition of Hollywood Theaters enhances our presence in
          16 states and 3 U.S. territories. See Note 3-"Acquisitions" for further
          discussion of these acquisitions. The 814 screens from Great Escape
          Theatres and Hollywood Theaters accounted for 11.8 million attendees,
          or 6.8% of the Fiscal 2013 Period total attendance, and contributed
          approximately $93.2 million, or 6.0%, of the Fiscal 2013 Period total
          admissions revenues. In addition, we opened one new theatre with 12
          screens, opened two screens at an existing theatre and closed nine
          underperforming theatres with 73 screens, ending the Fiscal 2013 Period
          with 575 theatres and 7,334 screens.



•         During the Fiscal 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. Films
          distributed by Open Road Films during the first nine months of 2013
          generated national box office revenues of approximately $115.0
          million.  Open Road Films intends to distribute approximately six to
          eight films per year. As of September 26, 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

On October 23, 2013, Regal Cinemas entered into an additional hedging relationship via a distinct interest rate swap agreement with an effective date of June 30, 2015 and a maturity term of three years from the effective date of the swap. The swap will require Regal Cinemas to pay interest at a fixed rate of 1.828% and receive interest at a variable rate. The interest rate swap is designated to hedge $200 million of variable rate debt obligations.

On October 24, 2013, the Company declared a cash dividend of $0.21 per share on each share of the Company's Class A and Class B common stock (including outstanding restricted stock), payable on December 13, 2013, to stockholders of record on December 4, 2013.


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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 2013 were estimated to have increased by approximately eight percent in comparison to the third fiscal quarter of 2012. The industry's box office results for the third quarter of 2013 were positively impacted by strong attendance from the breadth and commercial success of the overall film slate during the third quarter of 2013.

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 26, 2013 ("Q3 2013 Period"), the quarter ended September 27, 2012 ("Q3 2012 Period"), the Fiscal 2013 Period and the three quarters ended September 27, 2012 ("Fiscal 2012 Period") (dollars in millions, except average ticket prices and average concessions per patron):

                             Q3 2013 Period         Q3 2012 Period        Fiscal 2013 Period         Fiscal 2012 Period
                                        % of                   % of                      % of                       % of
                              $       Revenue        $       Revenue         $         Revenue          $         Revenue
Revenues:
Admissions                $ 548.4       67.4 %   $ 471.0       68.0 %   $  1,556.0      67.7  %   $   1,439.8       68.5 %
Concessions                 224.1       27.6       187.3       27.0          623.6      27.1            559.9       26.6
Other operating revenues     40.6        5.0        34.6        5.0          118.6       5.2            101.4        4.9
Total revenues              813.1      100.0       692.9      100.0        2,298.2     100.0          2,101.1      100.0
Operating expenses:
Film rental and
advertising costs(1)        286.6       52.3       247.6       52.6          812.4      52.2            749.7       52.1
Cost of concessions(2)       30.5       13.6        25.5       13.6           85.9      13.8             75.2       13.4
Rent expense(3)             105.7       13.0        95.9       13.8          309.9      13.5            285.3       13.6
Other operating
expenses(3)                 208.7       25.7       185.2       26.7          597.7      26.0            546.0       26.0
General and
administrative expenses
(including share-based
compensation expense of
$2.2 and $2.4 for the Q3
2013 Period and the Q3
2012 Period,
respectively, and $7.0
for the Fiscal 2013
Period and the Fiscal
2012 Period)(3)              16.9        2.1        16.1        2.3           54.5       2.4             48.7        2.3
Depreciation and
amortization(3)              50.8        6.2        45.0        6.5          149.0       6.5            137.6        6.5
Net loss on disposal and
impairment of operating
assets(3)                     4.1        0.5         3.9        0.6            4.7      (0.2 )            6.4        0.3
Total operating
expenses(3)                 703.3       86.5       619.2       89.4        2,014.1      87.6          1,848.9       88.0
Income from operations(3)   109.8       13.5        73.7       10.6          284.1      12.4            252.2       12.0
Interest expense, net(3)     35.0        4.3        32.3        4.7          106.5       4.6            102.8        4.9
Loss on extinguishment of
debt(3)                         -          -           -          -           30.7       1.3                -          -
Earnings recognized from
NCM(3)                      (10.4 )      1.3        (8.7 )      1.3          (24.6 )     1.1            (23.1 )      1.1
Gain on sale of NCM, Inc.
common stock(3)             (30.9 )      3.8           -          -          (30.9 )     1.3                -          -
Other, net(3)                (9.2 )      1.1        10.5        1.5          (23.4 )     1.0             (0.8 )        -
Provision for income
taxes(3)                     50.2        6.2        15.7        2.3           92.2       4.0             65.9        3.1
Net income attributable
to controlling
interest(3)               $  75.1        9.2     $  24.0        3.5     $    133.7       5.8      $     107.5        5.1
Attendance (in thousands)  62,392          *      53,585          *        174,318         *          161,603          *
Average ticket price(4)   $  8.79          *     $  8.79          *     $     8.93         *      $      8.91          *
Average concessions per
patron(5)                 $  3.59          *     $  3.50          *     $     3.58         *      $      3.46          *



* Not meaningful

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

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


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(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 Q3 2013 Period, total admissions revenues increased $77.4 million, or 16.4%, to $548.4 million, from $471.0 million in the Q3 2012 Period. A 16.4% increase in attendance (approximately $77.4 million of total admissions revenues), led to the increase in the Q3 2013 Period admissions revenue. The Q3 2013 Period results were bolstered by the addition of 814 Great Escape Theatres and Hollywood Theaters screens since the end of the Q3 2012 Period. The 814 screens accounted for 5.3 million attendees, or 8.5%, of the Q3 2013 Period total attendance and contributed to approximately $40.8 million, or 7.4%, of the Q3 2013 Period total admissions revenues. On a comparable screen basis (i.e., excluding the effects of the inclusion of the 814 screens from Great Escape Theatres and Hollywood Theaters), attendance for the Q3 2013 Period was approximately 57.1 million, a 6.6% increase over the Q3 2012 Period, and admissions revenues for the Q3 2013 Period was approximately $507.6 million, an increase of $36.6 million or 7.8% from the Q3 2012 Period. On a comparable screen basis, the 6.6% increase in attendance (approximately $31.1 million of admissions revenues), coupled with a 1.1% increase in average ticket prices (approximately $5.5 million of admissions revenues), led to the increase in the Q3 2013 Period admissions revenues. We believe that our attendance is primarily dependent upon the commercial appeal of content released by the motion picture studios. The increase in comparable screen attendance was primarily a result of strong attendance from the breadth and commercial success of the overall film slate during the third quarter of 2013. The comparable screen 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), partially offset by a decrease in the percentage of our admissions revenues generated by premium format films exhibited during the Q3 2013 Period.

Total admissions revenue increased $116.2 million during the Fiscal 2013 Period to $1,556.0 million, from $1,439.8 million in the Fiscal 2012 Period. A 7.9% increase in attendance (approximately $113.7 million of total admissions revenues) coupled with a 0.2% increase in average ticket prices (approximately $2.5 million of total admissions revenues) led to the increase in the Fiscal 2013 Period admissions revenues. The 814 screens from Great Escape Theatres and Hollywood Theaters accounted for 11.8 million attendees, or 6.8%, of the Fiscal 2013 Period total attendance and contributed to approximately $93.2 million, or 6.0%, of the Fiscal 2013 Period total admissions revenues. On a comparable screen basis, attendance for the Fiscal 2013 Period was approximately 162.5 million, a 0.6% increase from the Fiscal 2012 Period, and admissions revenues for the Fiscal 2013 Period was approximately $1,462.8 million, an increase of $23.0 million or 1.6% from the Fiscal 2012 Period. On a comparable screen basis, the 0.6% increase in attendance (approximately $8.6 million of admissions revenues), coupled with a 1.0% increase in average ticket prices (approximately $14.4 million of admissions revenues), led to the increase in the Fiscal 2013 Period admissions revenues. The increase in comparable screen attendance during the Fiscal 2013 Period was primarily attributable to the breadth and commercial appeal of the overall film slate during the Fiscal 2013 Period, partially offset by difficult comparisons with the strong attendance experienced in the Fiscal 2012 Period from certain premium format pictures, including The Avengers, The Dark Knight Rises and The Hunger Games. The comparable screen average ticket price increase was due to selective price increases identified during our ongoing periodic pricing reviews, partially offset by a decrease in the percentage of our admissions revenues generated by premium format films exhibited during the Fiscal 2013 Period.

Concessions

Total concessions revenues increased $36.8 million, or 19.6%, to $224.1 million during the Q3 2013 Period, from $187.3 million for the Q3 2012 Period. Average concessions revenues per patron during the Q3 2013 Period increased 2.6%, to $3.59, from $3.50 for the Q3 2012 Period. A 16.4% increase in attendance (approximately $30.7 million of total concessions revenues) coupled with a 2.6% increase in average concessions revenues per patron (approximately $6.1 million of total concessions revenues), led to the increase in the Q3 2013 Period concessions revenue. On a comparable screen basis, total concessions revenues for the Q3 2013 Period increased by approximately $17.3 million, or 9.2% from the Q3 2012 Period. On a comparable screen basis, the increase in total concessions revenues during the Q3 2013 Period was primarily attributable to the aforementioned 6.6% increase in comparable screen attendance (approximately $12.4 million of concessions revenues) and a 2.3% increase in comparable screen average concessions revenues per patron (approximately $4.9 million of concessions revenues) during the period. The increase in comparable screen average concessions revenues per patron for the Q3 2013 Period was primarily a result of an increase in popcorn and beverage sales volume and to a lesser extent, selective price increases and the continued rollout of our expanded food menu during the period.


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During the Fiscal 2013 Period, total concessions revenue increased $63.7 million, or 11.4%, to $623.6 million, from $559.9 million in the Fiscal 2012 Period. Average concessions revenues per patron during the Fiscal 2013 Period increased 3.5%, to $3.58 during the Fiscal 2013 Period, from $3.46 in the Fiscal 2012 Period. A 7.9% increase in attendance (approximately $44.2 million of total concessions revenues) coupled with a 3.5% increase in average concessions revenues per patron (approximately $19.5 million of total concessions revenues), led to the increase in the Fiscal 2013 Period concessions revenue. On a comparable screen basis, total concessions revenues for the Fiscal 2013 Period increased by approximately $20.2 million, or 3.6% from the Fiscal 2012 Period. On a comparable screen basis, the increase in total concessions revenues during the Fiscal 2013 Period was primarily attributable to a 3.2% increase in comparable screen average concessions revenues per patron (approximately $17.9 million of concessions revenues), coupled with the aforementioned 0.6% increase in comparable screen attendance (approximately $2.3 million of concessions revenues) during the period. The increase in comparable screen average concessions revenues per patron for the Fiscal 2013 Period was primarily a result of an increase in popcorn and beverage sales volume and to a lesser extent, selective price increases and the continued rollout of our expanded food menu during the period.

Other Operating Revenues

During the Q3 2013 Period, other operating revenues increased $6.0 million, or 17.3%, to $40.6 million, from $34.6 million in the Q3 2012 Period. Other operating revenues increased $17.2 million, or 17.0%, to $118.6 million during the Fiscal 2013 Period, from $101.4 million in the Fiscal 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 Q3 2013 Period was primarily driven by increases in revenues from our vendor marketing programs (approximately $2.9 million), other theatre revenues (approximately $1.7 million) and and theatre access fees (approximately $0.8 million). The increase in other operating revenues during the Fiscal 2013 Period was principally due to increases in revenues from our vendor marketing programs (approximately $8.3 million), increases in other theatre revenues (approximately $4.8 million) and theatre access fees (approximately $2.1 million).

Film Rental and Advertising Costs

Film rental and advertising costs as a percentage of admissions revenues decreased to 52.3% during the Q3 2013 Period from 52.6% in the Q3 2012 Period and for the Fiscal 2013 Period, increased slightly to 52.2% from 52.1% in the Fiscal 2012 Period. The decrease in film rental and advertising costs as a percentage of box office revenues during the Q3 2013 Period was primarily attributable to the breadth of the overall film slate during the period.

Cost of Concessions

During the Q3 2013 Period, cost of concessions increased $5.0 million, or 19.6%, to $30.5 million as compared to $25.5 million during the Q3 2012 Period. Cost of concessions increased $10.7 million, or 14.2%, to $85.9 million during the Fiscal 2013 Period, from $75.2 million in the Fiscal 2012 Period. Cost of concessions as a percentage of concessions revenues for the Q3 2013 Period and the Q3 2012 period was approximately 13.6%. For the Fiscal 2013 Period, cost of concessions as a percentage of concessions revenues was approximately 13.8% compared to 13.4% for the Fiscal 2012 Period. The increase in cost of concessions as a percentage of concessions revenues during the Fiscal 2013 Period was primarily related to slightly higher raw material and packaged good costs during the period.

Rent Expense

Rent expense increased $9.8 million, or 10.2%, to $105.7 million in the Q3 2013 Period, from $95.9 million in the Q3 2012 Period. During the Fiscal 2013 Period, rent expense totaled $309.9 million, an increase of $24.6 million, or 8.6%, from $285.3 million in the Fiscal 2012 Period. The increase in rent expense during the Q3 2013 Period and the Fiscal 2013 Period was primarily related to incremental rent associated with the leases acquired as part of the Great Escape Theatres and Hollywood Theaters acquisitions. On a comparable screen basis, rent expense increased $2.7 million, or 2.8%, during the Q3 2013 Period as compared to the Q3 2012 Period and $6.5 million, or 2.3%, during the Fiscal 2013 Period as compared to the Fiscal 2012 Period. On a comparable screen basis, the increase in rent expense in the Q3 2013 Period and the Fiscal 2013 Period was primarily attributable to higher contingent rent associated with increased admissions and concessions revenues during the Q3 2012 Period and the Fiscal 2013 Period and incremental rent associated with the opening of three new theatres with 44 screens subsequent to the end of the Q3 2012 Period, partially offset by the closure of 20 theatres with 145 screens since the end of the Q3 2012 Period.


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Other Operating Expenses

Other operating expenses increased $23.5 million, or 12.7%, to $208.7 million in the Q3 2013 Period, from $185.2 million in the Q3 2012 Period. During the Fiscal 2013 Period, other operating expenses increased $51.7 million, or 9.5%, to $597.7 million, from $546.0 million in the Fiscal 2012 Period. The increase in other operating expenses during the Q3 2013 Period and the Fiscal 2013 Period was attributable to increases in theatre level payroll expenses (approximately $8.9 million and $20.0 million for the Q3 2013 Period and the Fiscal 2013 Period, respectively) and certain non-rent occupancy costs (approximately $9.8 million and $18.9 million for the Q3 2013 Period and the Fiscal 2013 Period, respectively) associated with increased business volume and the impact of the 814 screens from Great Escape Theatres and Hollywood Theaters. On a comparable screen basis, other operating expenses increased $6.2 million, or 3.3% during the Q3 2013 Period as compared to the Q3 2012 Period and $14.3 million, or 2.6% during the Fiscal 2013 Period as compared to the Fiscal 2012 Period. On a comparable screen basis, the increase in other operating expenses during the Q3 2013 Period and the Fiscal 2013 Period was also attributable to increases in theatre level payroll expenses and certain non-rent occupancy costs associated with increased business volume during such periods.

General and Administrative Expenses

For the Q3 2013 Period, general and administrative expenses increased $0.8 . . .

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