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SIX > SEC Filings for SIX > Form 10-Q on 30-Apr-2014All Recent SEC Filings

Show all filings for SIX FLAGS ENTERTAINMENT CORP

Form 10-Q for SIX FLAGS ENTERTAINMENT CORP


30-Apr-2014

Quarterly Report


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

The following discussion and analysis contains forward-looking statements that are based on our current beliefs, expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are, by their nature, subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results could differ materially from those anticipated in these forward-looking statements. Please see the discussion regarding forward-looking statements included under the caption "Cautionary Note Regarding Forward-Looking Statements" included elsewhere in this Quarterly Report on Form 10-Q (the "Quarterly Report") and "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2013 (the "2013 Annual Report") for further discussion of the uncertainties, risks and assumptions associated with these statements.
The following discussion and analysis presents information that we believe is relevant to an assessment and understanding of our consolidated financial position and results of operations. This information should be read in conjunction with our unaudited condensed consolidated financial statements, and the notes thereto, and other financial data included elsewhere in this Quarterly Report. The following information should also be read in conjunction with our audited consolidated financial statements, and the notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2013 Annual Report.
Overview
General
We are the largest regional theme park operator in the world based on the number of parks we operate. Of our 18 regional theme and water parks, 16 are located in the United States, one is located in Mexico City, Mexico and one is located in Montreal, Canada. Our parks are located in geographically diverse markets across North America and they generally offer a broad selection of state-of-the-art and traditional thrill rides, water attractions, themed areas, concerts and shows, restaurants, game venues and retail outlets, thereby providing a complete family-oriented entertainment experience. We work continuously to improve our parks and our guests' experiences and to meet our guests' evolving needs and preferences.
The results of operations for the three months ended March 31, 2014 and March 31, 2013 are not indicative of the results expected for the full year. In particular, our park operations generate a significant majority of their annual revenue during the period from Memorial Day to Labor Day each year while expenses are incurred year round.
Our revenue is primarily derived from (i) the sale of tickets for entrance to our parks (which accounted for approximately 47% of total revenues during the three months ended March 31, 2014 and March 31, 2013), (ii) the sale of food and beverages, merchandise, games and attractions, parking and other services inside our parks and (iii) sponsorship, licensing and other fees. Revenues from ticket sales and in park sales are primarily impacted by park attendance. Revenues from sponsorship, licensing and other fees can be impacted by the term, timing and extent of services and fees under these arrangements, which can result in fluctuations from year to year. During the first three months of 2014, our park earnings before interest, taxes, depreciation and amortization ("Park EBITDA") declined as a result of decreased revenues partially offset by a decrease in expenses. The decrease in revenue was driven by a 24% decrease in attendance primarily related to the shift in the timing of the Easter holiday from the first quarter in 2013 to the second quarter in 2014, partially offset by an 11% increase in total revenue per capita (representing total revenue divided by total attendance). Our cash operating costs decreased primarily as a result of
(i) decreases in salaries, wages and benefits due to a decrease in operating days related to the shift in the timing of the Easter holiday, (ii) a reduction in advertising costs related to the later openings of several of our parks, also due to the Easter shift, and (iii) a reduction in insurance costs related to a reserve increase recorded in the three months ended March 31, 2013. Our principal costs of operations include salaries and wages, employee benefits, advertising, third party services, repairs and maintenance, utilities and insurance. A large portion of our expenses is relatively fixed as our costs for full-time employees, maintenance, utilities, advertising and insurance do not vary significantly with attendance. Recent Events
We have signed an agreement to help develop a Six Flags-branded theme park in the United Arab Emirates. The agreement does not require us to make any capital investments in the park. As compensation for our management services, the exclusivity rights granted, and the rights to use our brand, Six Flags will receive fees over the design and development period as well as an ongoing remuneration once the park opens to the public.


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Critical Accounting Policies and Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the date the financial statements and the reported amounts of revenues and expenses earned and incurred during the reporting period. We evaluate our estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which we believe to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in these estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods. With respect to our critical accounting policies and estimates, there have been no material developments or changes from the policies and estimates discussed in our 2013 Annual Report.


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Results of Operations
Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013
The following table sets forth summary financial information for the three
months ended March 31, 2014 and March 31, 2013:
                                                              Three Months Ended            Percentage
(Amounts in thousands, except per capita data)         March 31, 2014     March 31, 2013    Change (%)
Total revenue                                         $       73,718     $       87,521        (16 )%
Operating expenses                                            81,628             84,219         (3 )%
Selling, general and administrative                           34,334             39,698        (14 )%
Costs of products sold                                         6,243              7,925        (21 )%
Depreciation and amortization                                 27,694             35,146        (21 )%
Loss on disposal of assets                                     1,792              1,070         67  %
Interest expense, net                                         18,029             18,397         (2 )%
Other expense, net                                              (190 )             (422 )      (55 )%
Loss before income taxes                                     (95,812 )          (98,512 )       (3 )%
Income tax benefit                                           (34,611 )          (36,399 )       (5 )%
Net loss                                              $      (61,201 )   $      (62,113 )       (1 )%

Other Data:
Attendance                                                     1,388              1,821        (24 )%
Total revenue per capita                              $        53.13     $        48.06         11  %

Revenue
Revenue for the three months ended March 31, 2014 totaled $73.7 million, a 16% decrease compared to $87.5 million for the three months ended March 31, 2013. The decrease in revenue is primarily attributable to a 24% decrease in attendance partially offset by a $5.07, or 11%, increase in total revenue per capita, calculated as total revenue divided by total attendance. The decrease in attendance was primarily driven by a reduction in operating days due to the shift in the timing of the Easter holiday from the first quarter in 2013 to the second quarter in 2014 as well as the adverse impact of cooler temperatures and increased precipitation at our Texas parks during the three months ended March 31, 2014 relative to the comparable period in the prior year. Total per capita guest spending, which excludes sponsorship, licensing, Six Flags Great Escape Lodge & Indoor Waterpark accommodations and other fees, increased $3.03, or 7%, to $43.86 during the three months ended March 31, 2014 from $40.83 during the three months ended March 31, 2013.
Admissions revenue per capita increased $2.21, or 10%, during the three months ended March 31, 2014 relative to the comparable period in the prior year. The increase in admissions revenue per capita was primarily driven by continued improvements in pricing, including the reduction of discounts. Non-admissions per capita guest spending increased $0.82, or 5%, during the three months ended March 31, 2014 relative to the comparable period in the prior year primarily as a result of the success of our All-Season Dining Pass. Operating Expenses
Operating expenses for the three months ended March 31, 2014 decreased $2.6 million, or 3%, relative to the comparable period in the prior year primarily as a result of (i) a $2.2 million reduction in salaries, wages and benefits and
(ii) a $1.3 million reduction in costs associated with maintenance, operating supplies and operating taxes, primarily driven by the reduced operating days and later opening of several of our parks resulting from the shift in the timing of the Easter holiday. These reductions were partially offset by a $0.8 million increase in utility costs resulting from the impact of higher heating fuel costs and usage related to cooler temperatures at the majority of our parks. Selling, general and administrative expenses Selling, general and administrative expenses for the three months ended March 31, 2014 decreased $5.4 million, or 14%, compared to the three months ended March 31, 2013 primarily as a result of (i) a $2.2 million reduction in salaries, wages and benefits primarily related to decreased stock-based compensation, (ii) a $2.1 million savings in advertising expenses due to the


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later opening of many of our parks as a result of the shift in the timing of the Easter holiday, and (iii) a $1.3 million reduction in accrued insurance reserves.
Cost of products sold
Cost of products sold in the three months ended March 31, 2014 decreased $1.7 million, or 21%, compared to the three months ended March 31, 2013. The decrease in cost of products sold was primarily volume related and was driven by the reduction in attendance discussed above. Cost of products sold as a percentage of non-admission revenue for the three months ended March 31, 2014 decreased slightly relative to the comparable period in the prior year. Depreciation and amortization expense
Depreciation and amortization expense for the three months ended March 31, 2014 decreased $7.5 million, or 21%, compared to the three months ended March 31, 2013. The continued reduction of depreciation and amortization expense is primarily the result of annual depreciation expense outpacing annual capital expenditures each year since our emergence from Chapter 11 in 2010. Additionally, certain property, equipment and identifiable intangibles became fully depreciated and amortized during 2013, which also contributed to the reduction in depreciation and amortization expense during the three months ended March 31, 2014.
Loss on disposal of assets
Loss on disposal of assets increased by $0.7 million, or 67%, for the three months ended March 31, 2014 relative to the comparable period in the prior year as a result of the disposal of certain assets during the current year in conjunction with the implementation of our ongoing capital program. Interest expense, net
Interest expense, net decreased $0.4 million, or 2%, for the three months ended March 31, 2014 relative to the comparable period in the prior year as a result of a lower debt balance outstanding throughout the three months ended March 31, 2014 compared to the three months ended March 31, 2013. Income Tax Benefit
Income tax benefit was $34.6 million for the three months ended March 31, 2014 compared to $36.4 million for the three months ended March 31, 2013. The decrease in income tax benefit was primarily the result of a higher effective tax rate driven by income tax expense recognized for discrete items related to increases in certain state valuation allowances. Liquidity, Capital Commitments and Resources On an annual basis, our principal sources of liquidity are cash generated from operations, funds from borrowings and existing cash on hand. Our principal uses of cash include the funding of working capital obligations, debt service, investments in parks (including capital projects), common stock dividends, payments to our partners in the Partnership Parks and common stock repurchases. In November 2013, Holdings' Board of Directors increased the quarterly cash dividend from $0.45 per share of common stock to $0.47 per share of common stock. During the three months ended March 31, 2014 and March 31, 2013, Holdings paid $44.9 million and $45.2 million, respectively, in cash dividends on its common stock. The amount and timing of any future dividends payable on Holdings' common stock are within the sole discretion of Holdings' Board of Directors. Based on (i) our current number of shares outstanding and (ii) estimates of share repurchases, restricted stock vesting and option exercises, we currently anticipate paying approximately $185.0 million in total cash dividends on our common stock for the 2014 calendar year.
On January 3, 2012, Holdings' Board of Directors approved a new stock repurchase program that permitted Holdings to repurchase up to $250.0 million in shares of Holdings' common stock over a four-year period (the "January 2012 Stock Repurchase Plan"). During the year ended December 31, 2012, Holding repurchased an aggregate of 8,499,000 shares at a cumulative price of approximately $232.0 million under the January 2012 Stock Repurchase Plan. As of January 4, 2013, Holdings had repurchased an additional 578,000 shares at a cumulative price of approximately $18.0 million and an average price per share of $31.16 to complete the permitted repurchases under the January 2012 Stock Repurchase Plan. On December 11, 2012, Holdings' Board of Directors approved a new stock repurchase program that permitted Holdings to repurchase up to $500.0 million in shares of Holdings' common stock over a three-year period (the "December 2012 Stock Repurchase Plan"). As of December 31, 2013, Holdings had repurchased 14,775,000 shares at a cumulative price of


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approximately $500.0 million and an average price per share of $33.84 to complete the permitted repurchases under the December 2012 Stock Repurchase Plan.
On November 20, 2013, Holdings' Board of Directors approved a new stock repurchase program that permits Holdings to repurchase up to $500.0 million in shares of Holdings' common stock (the "November 2013 Stock Repurchase Plan"). As of April 25, 2014, Holdings had repurchased 270,000 shares at a cumulative price of approximately $10.4 million and an average price per share of $38.43 under the November 2013 Stock Repurchase Plan leaving approximately $489.6 million for permitted repurchases.
All of the foregoing share and per share amounts have been adjusted to reflect the 2011 Stock Split and the 2013 Stock Split.
Based on historical and anticipated operating results, we believe that cash flows from operations, available unrestricted cash, and amounts available under the 2011 Credit Facility will be adequate to meet our liquidity needs, including any anticipated requirements for working capital, capital expenditures, common stock dividends, scheduled debt service, obligations under arrangements relating to the Partnership Parks and discretionary common stock repurchases. Additionally, based on our current federal net operating loss carryforwards, we believe we will continue to pay minimal United States cash taxes for the next three to four years.
Our current and future liquidity is greatly dependent upon our operating results, which are driven largely by overall economic conditions as well as the price and perceived quality of the entertainment experience at our parks. Our liquidity could also be adversely affected by a disruption in the availability of credit as well as unfavorable weather, contagious diseases, such as swine or avian flu, accidents or the occurrence of an event or condition at our parks, including terrorist acts or threats inside or outside of our parks, negative publicity or significant local competitive events, which could significantly reduce paid attendance and, therefore, revenue at any of our parks. While we work with local police authorities on security-related precautions to prevent certain types of disturbances, we can make no assurance that these precautions will be able to prevent these types of occurrences. However, we believe that our ownership of many parks in different geographic locations reduces the effects of adverse weather and these other types of occurrences on our consolidated results. If such an adverse event were to occur, we may be unable to borrow under the Revolving Loan or may be required to repay amounts outstanding under the 2011 Credit Facility and/or may need to seek additional financing. In addition, we expect that we may be required to refinance all or a significant portion of our existing debt on or prior to maturity and potentially seek additional financing. The degree to which we are leveraged could adversely affect our ability to obtain any additional financing. See "Cautionary Note Regarding Forward-Looking Statements" and "Item 1A. Risk Factors" in the 2013 Annual Report.
As of March 31, 2014, our total indebtedness, net of discount, was approximately $1,399.3 million. Based on (i) non-revolving credit debt outstanding on that date, (ii) anticipated levels of working capital revolving borrowings during 2014, (iii) estimated interest rates for floating-rate debt and (iv) the 2021 Notes, we anticipate annual cash interest payments of approximately $67.0 million during 2014 and 2015. Under the 2011 Credit Facility, approximately 95% of the Term Loan B is not due until December 2018.
As of March 31, 2014, we had approximately $22.4 million of unrestricted cash and $179.2 million available for borrowing under the Revolving Loan. Our ability to borrow under the Revolving Loan is dependent upon compliance with certain conditions, including a maximum senior leverage maintenance covenant, a minimum interest coverage covenant and the absence of any material adverse change in our business or financial condition. If we were to become unable to borrow under the Revolving Loan, and we failed to meet our projected results from operations significantly, we might be unable to pay in full our off-season obligations. A default under the Revolving Loan could permit the lenders under the 2011 Credit Facility to accelerate the obligations thereunder. The Revolving Loan expires on December 20, 2016. The terms and availability of the 2011 Credit Facility and other indebtedness are not affected by changes in the ratings issued by rating agencies in respect of our indebtedness. For a more detailed description of our indebtedness, see Note 4 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report.
We currently plan on spending approximately 9% of current year revenues on capital expenditures during the 2014 calendar year.
During the three months ended March 31, 2014, net cash used in operating activities was $59.9 million. Net cash used in investing activities during the three months ended March 31, 2014 was $41.9 million, consisting primarily of $42.3 million in capital expenditures. Net cash used in financing activities during the three months ended March 31, 2014 was $44.8 million, primarily attributable to the payment of $44.9 million in cash dividends and the repurchase of shares of our common stock totaling $4.8 million partially offset by proceeds from stock option exercises.
Since our business is both seasonal in nature and involves significant levels of cash transactions, our net operating cash flows are largely driven by attendance and per capita spending levels because most of our cash-based expenses are relatively


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fixed and do not vary significantly with either attendance or per capita spending. These cash-based operating expenses include salaries and wages, employee benefits, advertising, third party services, repairs and maintenance, utilities and insurance.

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