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FUN > SEC Filings for FUN > Form 10-K on 26-Feb-2014All Recent SEC Filings

Show all filings for CEDAR FAIR L P

Form 10-K for CEDAR FAIR L P


26-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Business Overview

We generate our revenues primarily from sales of (1) admission to our parks, (2) food, merchandise and games inside our parks, and (3) hotel rooms, food and other attractions outside our parks. Our principal costs and expenses, which include salaries and wages, advertising, maintenance, operating supplies, utilities and insurance, are relatively fixed and do not vary significantly with attendance.

Each of our properties is run by a park general manager and operates autonomously. Management reviews operating results, evaluates performance and makes operating decisions, including the allocation of resources, on a property-by-property basis.

Discrete financial information and operating results are prepared at the individual park level for use by the CEO, who is the Chief Operating Decision Maker (CODM), as well as by the Chief Financial Officer, the Chief Operating Officer, the Executive Vice President of Operations, and the park general managers.


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The following table presents certain financial data expressed as a percent of total net revenues and selective statistical information for the periods indicated.

For the years ended
December 31,                                       2013                                 2012                             2011
                                               ( amounts in millions, except attendance, per capita spending and percentages)
Net revenues:
Admissions                           $      647.0            57.0  %      $      612.1            57.3  %      $      596.0      57.9  %
Food, merchandise and
games                                       356.1            31.4  %             342.2            32.0  %             349.5      34.0  %
Accommodations and
other                                       131.5            11.6  %             114.1            10.7  %              83.0       8.1  %
Net revenues                              1,134.6           100.0  %           1,068.4           100.0  %           1,028.5     100.0  %
Operating costs and
expenses                                    716.5            63.2  %             684.7            64.1  %             663.3      64.5  %
Depreciation and
amortization                                122.5            10.8  %             126.3            11.8  %             125.8      12.2  %
Loss on impairment / retirement of
fixed assets                                  2.5             0.2  %              30.3             2.8  %              11.4       1.1  %
Gain on sale of other
assets                                       (8.7 )          (0.8 )%              (6.6 )          (0.6 )%                 -         -  %
Operating income                            301.8            26.6  %             233.7            21.9  %             228.0      22.2  %
Interest and other
expense, net                                102.9             9.0  %             110.6            10.3  %             158.0      15.4  %
Net effect of swaps                           6.9             0.6  %              (1.5 )          (0.1 )%             (13.1 )    (1.3 )%
Loss on early debt
extinguishment                               34.6             3.0  %                 -               -  %                 -         -  %
Unrealized / realized foreign
currency (gain) loss                         28.9             2.5  %              (9.0 )          (0.8 )%               9.9       1.0  %
Provision for taxes                          20.3             1.8  %              31.7             3.0  %               7.9       0.8  %
Net income                           $      108.2             9.5  %      $      101.9             9.5  %      $       65.3       6.3  %
Other data:
Combined attendance (in thousands)         23,519                               23,300                               23,386
Combined in-park guest per capita
spending                             $      44.15                         $      41.95                         $      40.03

Critical Accounting Policies

Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which were prepared in accordance with accounting principles generally accepted in the United States of America. These principles require us to make judgments, estimates and assumptions during the normal course of business that affect the amounts reported in the Consolidated Financial Statements and related notes. The following discussion addresses our critical accounting policies, which are those that are most important to the portrayal of our financial condition and operating results or involve a higher degree of judgment and complexity (see Note 2 to our Consolidated Financial Statements for a complete discussion of our significant accounting policies). Application of the critical accounting policies described below involves the exercise of judgment and the use of assumptions as to future uncertainties, and, as a result, actual results could differ from these estimates and assumptions.

Impairment of Long-Lived Assets

The carrying values of long-lived assets, including property and equipment, are reviewed whenever events or changes in circumstances indicate that the carrying values of the assets may not be recoverable. An impairment loss may be recognized when estimated undiscounted future cash flows expected to result from the use of the assets, including disposition, are less than the carrying value of the assets. The measurement of the impairment loss to be recognized is based on the difference between the fair value and the carrying amounts of the assets. Fair value is generally determined based on a discounted cash flow analysis. In order to determine if an asset has been impaired, assets are grouped and tested at the lowest level for which identifiable, independent cash flows are available.

The determination of both undiscounted and discounted cash flows requires management to make significant estimates and consider an anticipated course of action as of the balance sheet date. Subsequent changes in estimated undiscounted and discounted cash flows arising from changes in anticipated actions could impact the determination of whether impairment exists, the amount of the impairment charge recorded and whether the effects could materially impact the consolidated financial statements.

There was no impairment of any long-lived assets in 2013. At the end of the third quarter of 2012, we concluded based on 2012 operating results through the third quarter and updated forecasts, that a review of the carrying value of operating long-lived assets at Wildwater Kingdom was warranted. After performing our review, we determined that a portion of the park's fixed assets were impaired. Also, at the end of the third quarter of 2012, we concluded that market conditions had changed on the adjacent non-operating land of Wildwater Kingdom. After performing a review of the updated market value of the land, we determined the land was impaired. Accordingly, we recognized a total of $25.0 million of


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fixed-asset impairment for operating and non-operating assets during the third quarter of 2012. There was no impairment of long-lived assets in 2011.

Goodwill and Other Intangible Assets

Goodwill and other indefinite-lived intangible assets, including trade-names, are reviewed for impairment annually, or more frequently if indicators of impairment exist. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in expected future cash flows; a sustained, significant decline in equity price and market capitalization; a significant adverse change in legal factors or in the business climate; unanticipated competition; the testing for recoverability of a significant asset group within a reporting unit; and slower growth rates. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on our consolidated financial statements.

An impairment loss may be recognized if the carrying value of the reporting unit is higher than its fair value, which is estimated using both an income (discounted cash flow) and market approach. The amount of impairment is determined by comparing the implied fair value of reporting unit goodwill to the carrying value of the goodwill in the same manner as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill is less than the recorded goodwill, an impairment charge is recorded for the difference. Goodwill and trade-names have been assigned at the reporting unit, or park level, for purposes of impairment testing.

We completed the review of goodwill and other indefinite-lived intangibles as of December 31, 2013, December 31, 2012 and December 31, 2011, respectively, and determined the goodwill was not impaired at these balance sheet dates.

It is possible that our assumptions about future performance, as well as the economic outlook and related conclusions regarding the valuation of our reporting units (parks), could change adversely, which may result in additional impairment that would have a material effect on our financial position and results of operations in future periods. At December 31, 2013, all reporting units with goodwill had fair values in excess of their carrying values by greater than 10%.

Self-Insurance Reserves

Reserves are recorded for the estimated amounts of guest and employee claims and expenses incurred each period that are not covered by insurance. Reserves are established for both identified claims and incurred but not reported (IBNR) claims. Such amounts are accrued for when claim amounts become probable and estimable. Reserves for identified claims are based upon our own historical claims experience and third-party estimates of settlement costs. Reserves for IBNR claims, which are not material to our consolidated financial statements, are based upon our own claims data history. All reserves are periodically reviewed for changes in facts and circumstances and adjustments are made as necessary.

Derivative Financial Instruments

Derivative financial instruments are used within our overall risk management program to manage certain interest rate and foreign currency risks. By utilizing a derivative instrument to hedge our exposure to LIBOR rate changes, we are exposed to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. To mitigate this risk, hedging instruments are placed with a counterparty that we believe poses minimal credit risk.

We do not use derivative financial instruments for trading purposes.

Derivative financial instruments used in hedging transactions are assessed both at inception and quarterly thereafter to ensure they are effective in offsetting changes in the cash flows of the related underlying exposures. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the change in fair value of the derivative instrument is reported as a component of "Other comprehensive income (loss)" and reclassified into earnings in the period during which the hedged transaction affects earnings. Changes in fair value of derivative instruments that do not qualify as effective hedging activities are reported as "Net effect of swaps" in the consolidated statement of operations. Additionally, the "Accumulated other comprehensive income (loss)" related to interest rate swaps that become ineffective is amortized over the remaining life of the interest rate swap, and reported as a component of "Net effect of swaps" in the consolidated statements of operations.

Revenue Recognition

Revenues on multi-day admission tickets are recognized over the estimated number of visits expected for each type of ticket, and are adjusted periodically during the season. All other revenues are recognized on a daily basis based on actual guest spending at our facilities, or over the park operating season in the case of certain marina revenues and certain sponsorship revenues. Revenues on admission tickets for the next operating season, including season passes, are deferred in the year received and recognized as revenue in the following operating season.

Admission revenues include amounts paid to gain admission into our parks, including parking fees. Revenues related to extra-charge attractions, including our premium benefit offerings, are included in Accommodations and other revenue.


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Income Taxes

Our legal structure includes both partnerships and corporate subsidiaries. As a publicly traded partnership, we are subject to an entity-level tax (the "PTP tax"). Accordingly, the partnership itself is not subject to corporate income taxes; rather, the partnership's tax attributes (except those of the corporate subsidiaries) are included in the tax returns of our partners. Our corporate subsidiaries are subject to entity-level income taxes. Our "Provision for taxes" includes both the PTP tax and the income taxes from the corporate subsidiaries.

Our corporate subsidiaries account for income taxes under the asset and liability method. Accordingly, deferred tax assets and liabilities are recognized for the future book and tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are determined using enacted tax rate expected to apply in the year in which those temporary differences are expected to be recovered or settled.

We record a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion, or all, of a deferred tax asset will not be realized. Through December 31, 2012, we had recorded an $11.3 million valuation allowance related to a $31.2 million deferred tax asset for foreign tax credit carryforwards. The need for this allowance was based on several factors including the ten-year carryforward period allowed for excess foreign tax credits, experience to date of foreign tax credit limitations, and management's long term estimates of domestic and foreign source income.

During 2013, we continued to utilize the foreign tax credits and updated our long term estimates of domestic and foreign source income. Based on these updated estimates, we believe no additional adjustments to the valuation allowance was warranted. As of December 31, 2013, we had $24.3 million of deferred tax assets associated with the foreign tax credit carryforwards and a $6.8 million related valuation allowance.

There is inherent uncertainty in the estimates used to project the amount of foreign tax credit carryforwards that are more likely than not to be realized. It is possible that our future income projections, as well as the economic outlook and related conclusions regarding the valuation allowance could change, which may result in additional valuation allowance being recorded or may result in additional valuation allowance reductions, which may have a material negative or positive effect on our reported financial position and results of operations in future periods.

Results of Operations

2013 vs. 2012

The following table presents key operating and financial information for the years ended December 31, 2013 and 2012 (amounts in thousands, except per capita spending and percentages):

                                                                                                   Increase (Decrease)
                                                    12/31/13              12/31/12                   $                  %

Net revenues                                    $   1,134,572         $   1,068,454         $       66,118             6.2  %
Operating costs and expenses                          716,528               684,762                 31,766             4.6  %
Depreciation and amortization                         122,487               126,306                 (3,819 )          (3.0 )%
Loss on impairment/retirement of fixed
assets                                                  2,539                30,336                (27,797 )           N/M
Gain on sale of other assets                           (8,743 )              (6,625 )               (2,118 )           N/M
Operating income                                $     301,761         $     233,675         $       68,086            29.1  %
Other Data:
Adjusted EBITDA (1)                             $     425,430         $     390,954         $       34,476             8.8  %
Adjusted EBITDA margin                                   37.5 %                36.6 %                    -             0.9  %
Attendance                                             23,519                23,300                    219             0.9  %
Per capita spending                             $       44.15         $       41.95         $         2.20             5.2  %
Out-of-park revenues                            $     124,164         $     116,767         $        7,397             6.3  %
N/M - Not meaningful


(1) for additional information regarding Adjusted EBITDA, including how we define and use Adjusted EBITDA, as well as a reconciliation from net income, see Item 6, "Selected Financial Data," on pages 14-15.

Consolidated net revenues totaled $1,134.6 million in 2013, increasing $66.1 million, from $1,068.5 million in 2012. The 6% increase in revenues reflects a 5%, or $2.20, increase in average in-park guest per capita spending compared with a year ago, a 6%, or $7.4 million, increase in out-of-park revenues, and a 1%, or 0.2 million-visit, increase in attendance. In-park guest per capita spending represents the amount spent per attendee to gain admission to a park, plus all amounts spent while inside the park gates. The increase in per capita spending was primarily due to increases in admissions pricing, strong returns from investments in our food and beverage programs, and results of premium benefit offerings.


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Out-of-park revenues include the sale of hotel rooms, food, merchandise, and other complementary activities located outside of the park gates, as well as transaction fees from on-line product sales. The increase in out-of-park revenues was primarily driven by the strong performance of our resort properties, which drove higher average daily room rates and occupancy rates.

The 1% increase in attendance for 2013 compared to 2012 was due largely to the continued success of our season pass programs, which grew in terms of both number of passes sold and number of total visits. Excluding the sale of two of our water parks over the past two years, attendance would have increased 2%, or approximately 0.5 million visits.

The increase in revenues for the fiscal year also reflects the negative impact of currency exchange rates from the strengthening U.S. dollar on our Canadian operations (approximately $4.1 million) during 2013.

Operating costs and expenses increased $31.7 million, or 5%, to $716.5 million versus $684.8 million for 2012. The increase in costs and expenses was the result of a $3.2 million decrease in cost of goods sold, a $20.9 million increase in operating expenses, and a $14.1 million increase in selling, general and administrative costs. As a percent of net revenues, operating expenses decreased by 61 basis points year-over-year. The 3% decrease in cost of goods sold was primarily driven by food and beverage efficiency initiatives. Operating expenses increased primarily due to higher normal operating and maintenance expenses, enhancements to park infrastructure, and increased employment related costs including performance bonuses. The increase in selling, general and administrative costs was primarily due to increases in full time labor and benefits costs including incentive compensation, and advertising agency and consumer relationship management database development costs.

The increase in expenses for the fiscal year also reflects the positive impact of currency exchange rates from the strengthening U.S. dollar on our Canadian operations (approximately $1.7 million) during 2013.

Depreciation and amortization expense decreased $3.8 million due to several significant assets being fully depreciated at the end of 2012. The $8.7 million gain on sale of other assets relates to the sale of one of our non-core water parks during the year. Loss on impairment/retirement of fixed assets in 2013 totaled $2.5 million for the retirement of assets at several of our properties. During 2012, two non-core assets were sold at a total gain of $6.6 million, which was recorded in gain on sale of other assets. Loss on impairment/retirement of fixed assets for 2012 totaled $30.3 million, which reflected a non-cash charge of $25.0 million for the partial impairment of operating and non-operating assets at Wildwater Kingdom, along with retirements at several of our properties. After depreciation, amortization, gain on sale of other assets, loss on impairment / retirement of fixed assets, and all other non-cash costs, operating income for 2013 increased $68.1 million to $301.8 million compared with operating income for 2012 of $233.7 million.

Interest expense for the year decreased $7.5 million to $103.1 million from $110.6 million in the prior year. The decrease in interest expense was due to the settlement of our Canadian cross-currency swaps in the first quarter of 2012, a decrease in non-cash amortization expense resulting from the write-off of loan fees related to our prior credit agreement, a decrease in revolver interest due to lower average borrowings and a lower effective interest rate from the March 2013 refinancing.

During 2013, the net effect of our swaps was recorded as a charge to earnings of $6.9 million compared to a benefit to earnings of $1.5 million in 2012. The difference reflects the regularly scheduled amortization of amounts in Accumulated Other Comprehensive Income ("AOCI") and the write-off of amounts related to de-designated swaps, which were partially offset by gains from marking the ineffective and de-designated swaps to market during the year. During 2013, we also recognized a $28.9 million charge to earnings for unrealized/realized foreign currency losses, which included a $29.1 million unrealized foreign currency loss on the U.S.-dollar denominated debt held at our Canadian property. Additionally, due to our March 2013 refinancing, loan fees related to our 2010 and 2011 financings were written off, resulting in a $34.6 million charge to earnings in the current year-to-date period.

A provision for taxes of $20.2 million was recorded in 2013, consisting of a provision for income taxes of $10.6 million and a provision for PTP taxes of $9.6 million. This compares with a provision for taxes of $31.7 million in 2012, consisting of a provision for income taxes of $23.0 million and a provision for PTP taxes of $8.8 million. The change in provision for income taxes was primarily due to the impact of currency exchange rates on pre-tax income.

After interest expense and provision for taxes, net income for 2013 totaled $108.2 million, or $1.94 per diluted limited partner unit, compared with net income of $101.9 million, or $1.82 per unit, a year ago.

We believe Adjusted EBITDA is a meaningful measure of our operating results (for additional information regarding Adjusted EBITDA, including how we define and use Adjusted EBITDA, as well as a reconciliation from net income, see Note 6 in Item 6, "Selected Financial Data," on pages 14-15). In 2013, Adjusted EBITDA increased $34.5 million, or 9%, to $425.4 million, with our Adjusted EBITDA margin (Adjusted EBITDA divided by net revenues) increasing 90 bps to 37.5% from 36.6% in 2012. The increase in Adjusted EBITDA was primarily due to the success of high-margin revenue initiatives during the year, such as growth in our premium-benefit offerings and our admission pricing, combined with another year of growth in our season pass base and a continued focus on controlling operating costs at the park level.


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Results of Operations

2012 vs. 2011

The following table presents key operating and financial information for the
years ended December 31, 2012 and 2011 (amounts in thousands, except per capita
spending and percentages):
                                                                                                   Increase (Decrease)
                                                    12/31/12              12/31/11                   $                  %

Net revenues                                    $   1,068,454         $   1,028,472         $       39,982             3.9  %
Operating costs and expenses                          684,762               663,334                 21,428             3.2  %
Depreciation and amortization                         126,306               125,837                    469             0.4  %
Loss on impairment/retirement of fixed
assets                                                 30,336                11,355                 18,981             N/M
Gain on sale of other assets                           (6,625 )                   -                 (6,625 )           N/M
Operating income                                $     233,675         $     227,946         $        5,729             2.5  %
Other Data:
Adjusted EBITDA (1)                             $     390,954         $     374,576         $       16,378             4.4  %
Adjusted EBITDA margin                                   36.6 %                36.4 %                    -             0.2  %
Attendance                                             23,300                23,386                    (86 )          (0.4 )%
Per capita spending                             $       41.95         $       40.03         $         1.92             4.8  %
Out-of-park revenues                            $     116,767         $     117,556         $         (789 )          (0.7 )%
N/M - Not meaningful


(1) for additional information regarding Adjusted EBITDA, including how we define and use Adjusted EBITDA, as well as a reconciliation from net income, see Item 6, "Selected Financial Data," on pages 14-15.

Consolidated net revenues totaled $1,068.5 million in 2012, increasing $40.0 million, from $1,028.5 million in 2011. The 4% increase in revenues reflects a 5%, or $1.92, increase in average in-park guest per capita spending compared with a year ago and a less than 1%, or 0.1 million visit, decrease in attendance. In-park guest per capita spending represents the amount spent per attendee to gain admission to a park, plus all amounts spent while inside the park gates. The increase in per capita spending was primarily due to new premium benefit offerings and the positive impact of new customer messaging and dynamic pricing. The slight decrease in attendance for 2012 compared to 2011 was largely due to less than favorable weather that the parks experienced during the fourth quarter of 2012. Despite the slight decrease in overall attendance, the parks experienced growth in the number of season passes sold, as well as season pass visits, which was a focus of management heading into the 2012 season. The growth in season-pass visits was the result of an increased marketing focus toward season passes at several of our parks, resulting in a record number of season passes sold in 2012.

The increase in 2012 revenues was somewhat offset by a decrease of less than 1%, . . .

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