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RGC > SEC Filings for RGC > Form 10-Q on 5-Aug-2014All Recent SEC Filings

Show all filings for REGAL ENTERTAINMENT GROUP

Form 10-Q for REGAL ENTERTAINMENT GROUP


5-Aug-2014

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 24, 2014 with the Commission (File No. 001-31315) for the Company's fiscal year ended December 26, 2013. 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 7,349 screens in 574 theatres in 42 states along with Guam, Saipan, American Samoa and the District of Columbia as of June 26, 2014. 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


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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 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 26, 2013 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 26, 2013 and incorporated by reference herein. As of June 26, 2014, 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 26, 2013, please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources" included in Part II, Item 7 of our annual report on Form 10-K for the fiscal year ended December 26, 2013 and incorporated herein by reference.

Our business strategy focuses on enhancing our position in the motion picture exhibition industry by distributing value to our stockholders, realizing selective growth opportunities through new theatre construction, managing, expanding and upgrading our existing asset base with new technologies and customer amenities 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 two quarters ended June 26, 2014 ("Fiscal 2014 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 2014 Period totaled approximately $69.9 million.



•         During the Fiscal 2014 Period, we continued to actively manage our
          asset base by opening one new theatre with 12 screens and closing seven
          underperforming theatres with 57 screens, ending the Fiscal 2014 Period
          with 574 theatres and 7,349 screens.



•         During the Fiscal 2014 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. These concepts include (1) the
          installation of additional premium screens, including additional IMAX®
          digital projection systems and our proprietary large screen format,
          RPXSM, which allows us to offer our patrons all-digital, large format
          premium experiences at select theatre locations, (2) the expansion of
          our food and alcoholic beverage offerings to additional theatre
          locations, and (3) a continued focus on improved customer amenities,
          including the installation of luxury reclining seats in approximately
          275 auditoriums by the end of fiscal 2014 and experimentation with
          various other customer engagement and marketing initiatives. The
          product-driven success of our IMAX® screens and growing portfolio of
          RPXSM screens, coupled with the broadening of our food and alcoholic
          beverage offerings, and experimentation with other customer amenities
          and engagement initiatives, allow us to deliver a premium movie-going
          experience for our customers. We believe this


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strategy will enable us to differentiate our services and build brand loyalty, which we believe will provide us the opportunity for incremental revenue and cash flows.

Recent Developments

On July 10, 2014, the State of New York approved a sales tax refund claim filed by the Company to recover sales taxes paid on certain nontaxable purchases made by the Company during the fiscal 2008 through fiscal 2012 periods. The refund totaled approximately $17.4 million, including interest. The Company will record the refund during the third quarter of fiscal 2014.

On July 24, 2014, the Company declared a cash dividend of $0.22 per share on each share of the Company's Class A and Class B common stock (including outstanding restricted stock), payable on September 15, 2014, to stockholders of record on September 5, 2014.

Results of Operations

Based on our review of industry sources, North American box office revenues for the time period that corresponds to Regal's second fiscal quarter of 2014 were estimated to have decreased by approximately six to seven percent in comparison to the second fiscal quarter of 2013. The industry's box office results for the second quarter of 2014 were negatively impacted by difficult comparisons generated from strong attendance from the breadth and commercial success of the overall film slate during the second 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 June 26, 2014 ("Q2 2014 Period"), the quarter ended June 27, 2013 ("Q2 2013 Period"), the Fiscal 2014 Period, and the two quarters ended June 27, 2013 ("Fiscal 2013 Period") (dollars in millions, except average ticket prices and average concessions per patron):


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                             Q2 2014 Period         Q2 2013 Period        Fiscal 2014 Period        Fiscal 2013 Period
                                        % of                   % of                      % of                      % of
                              $       Revenue        $       Revenue         $         Revenue         $         Revenue
Revenues:
Admissions                $ 517.0       67.1 %   $ 571.0      67.8  %   $  1,006.6      67.2  %   $  1,007.6      67.8  %
Concessions                 212.3       27.6       227.7      27.0           413.0      27.6           399.5      26.9
Other operating revenues     41.0        5.3        43.6       5.2            77.6       5.2            78.0       5.3
Total revenues              770.3      100.0       842.3     100.0         1,497.2     100.0         1,485.1     100.0
Operating expenses:
Film rental and
advertising costs(1)        273.5       52.9       309.9      54.3           528.5      52.5           525.8      52.2
Cost of concessions(2)       28.3       13.3        31.5      13.8            54.6      13.2            55.4      13.9
Rent expense(3)             106.3       13.8       104.6      12.4           210.9      14.1           204.2      13.7
Other operating
expenses(3)                 203.1       26.4       205.4      24.4           404.2      27.0           389.0      26.2
General and
administrative expenses
(including share-based
compensation expense
of $2.3 and $2.5 for the
Q2 2014 Period and the Q2
2013 Period,
respectively, and $4.2
and $4.8 for the Fiscal
2014 Period and the
Fiscal 2013 Period,
respectively)(3)             18.3        2.4        19.6       2.3            36.9       2.5            37.6       2.5
Depreciation and
amortization(3)              51.0        6.6        51.0       6.1           102.4       6.8            98.2       6.6
Net gain on disposal and
impairment of operating
assets(3)                     4.0        0.5         3.2       0.4             3.6      (0.2 )           0.6         -
Total operating
expenses(3)                 684.5       88.9       725.2      86.1         1,341.1      89.6         1,310.8      88.3
Income from operations(3)    85.8       11.1       117.1      13.9           156.1      10.4           174.3      11.7
Interest expense, net(3)     30.4        3.9        36.6       4.3            64.7       4.3            71.5       4.8
Loss on extinguishment of
debt(3)                      10.5        1.4        30.7       3.6            62.4       4.2            30.7       2.1
Earnings recognized from
NCM(3)                       (3.5 )      0.5        (4.4 )     0.5           (16.8 )     1.1           (14.2 )     1.0
Other, net(3)                (7.8 )      1.0        (8.7 )    (1.0 )         (11.0 )     0.7           (14.2 )     1.0
Provision for income
taxes(3)                     22.4        2.9        26.8       3.2            24.3       1.6            42.0       2.8
Net income attributable
to controlling
interest(3)               $  33.8        4.4     $  36.1       4.3      $     32.6      (2.2 )    $     58.6       3.9
Attendance (in thousands)  56,085          *      62,281         *         111,221         *         111,926         *
Average ticket price(4)   $  9.22          *     $  9.17         *      $     9.05         *      $     9.00         *
Average concessions per
patron(5)                 $  3.79          *     $  3.66         *      $     3.71         *      $     3.57         *



* 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 Q2 2014 Period, total admissions revenues decreased $54.0 million, or 9.5%, to $517.0 million, from $571.0 million in the Q2 2013 Period. A 9.9% decrease in attendance (approximately $56.5 million of total admissions revenues), partially offset by a 0.5% increase in average ticket prices (approximately $2.5 million of total admissions


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revenues), led to the overall decrease in the Q2 2014 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 Q2 2014 Period in comparison to that of the Q2 2013 Period was negatively impacted by strong attendance generated by the commercial appeal of the overall film slate during the Q2 2013 Period, including most notably, Iron Man 3. For the Q2 2014 Period, the 0.5% 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 Q2 2014 Period. Based on our review of certain industry sources, the decrease in our admissions revenues on a per screen basis was slightly greater than the industry's per screen results for the Q2 2014 Period as compared to the Q2 2013 Period. We believe the greater than industry decrease in admissions revenues on a per screen basis in the Q2 2014 Period was attributable to geographical differences in film product performance, premium format film performance and investment in new theatres and customer amenities offered by our competitors.

Total admissions revenues decreased $1.0 million, or 0.1%, during the Fiscal 2014 Period to $1,006.6 million, from $1,007.6 million in the Fiscal 2013 Period. A 0.6% decrease in attendance (approximately $6.0 million of total admissions revenues), partially offset by a 0.6% increase in average ticket prices (approximately $5.0 million of total admissions revenues) led to the decline in the Fiscal 2014 Period admissions revenues. The decrease in attendance during the Fiscal 2014 Period was negatively impacted by strong attendance generated by the commercial appeal of the overall film slate during the Fiscal 2013 Period, partially offset by the favorable impact of the inclusion of the 513 screens from Hollywood Theaters for the entire Fiscal 2014 Period. The Hollywood Theaters screens accounted for 6.2 million attendees and contributed to approximately $47.2 million of total admissions revenues during the Fiscal 2014 Period in comparison to 3.5 million attendees and $27.2 million of total admissions revenues during the Fiscal 2013 Period. For the Fiscal 2014 Period, the 0.6% 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 2014 Period.

Concessions

During the Q2 2014 Period, total concessions revenues decreased $15.4 million, or 6.8%, to $212.3 million, from $227.7 million in the Q2 2013 Period. Average concessions revenues per patron during the Q2 2014 Period increased 3.6%, to $3.79, from $3.66 in the Q2 2013 Period. A 9.9% decrease in attendance (approximately $22.5 million of total concessions revenues), partially offset by a 3.6% increase in average concessions per patron (approximately $7.1 million of total concessions revenues), led to the overall decrease in the Q2 2014 Period concessions revenues. Total concessions revenues increased $13.5 million, or 3.4%, to $413.0 million in the Fiscal 2014 Period, from $399.5 million in the Fiscal 2013 Period. Average concessions revenues per patron during the Fiscal 2014 Period increased 3.9%, to $3.71, from $3.57 in the Fiscal 2013 Period. A 3.9% increase in average concessions revenues per patron (approximately $15.9 million of total concessions revenues), partially offset by a 0.6% decrease in attendance (approximately $2.4 million of total concessions revenues) led to the increase in the Fiscal 2014 Period concessions revenues. The increase in average concessions revenues per patron for the Q2 2014 Period and the Fiscal 2014 Period was primarily attributable to an increase in popcorn and beverage sales volume per patron, selective price increases during the period and to a lesser extent, the continued rollout of our expanded food menu.

Other Operating Revenues

During the Q2 2014 Period, other operating revenues decreased $2.6 million, or 6.0%, to $41.0 million, from $43.6 million in the Q2 2013 Period. Other operating revenues decreased $0.4 million, or 0.5%, to $77.6 million during the Fiscal 2014 Period, from $78.0 million in the Fiscal 2013 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, other theatre revenues (consisting of theatre rentals, internet ticketing surcharges, arcade games and other) and revenues related to our gift card and discount ticket programs. The decrease in other operating revenues during the Q2 2014 Period was principally due to decreases in revenues from our vendor marketing programs (approximately $2.0 million), a decrease in revenues related to our gift card and discount ticket programs (approximately $1.8 million), partially offset by a net increase National CineMedia revenues (approximately $0.9 million). During the Fiscal 2014 Period, the net decline in other operating revenues was primarily due to a decrease in revenues related to our gift card and discount ticket programs (approximately $3.6 million), decreases in revenues from our vendor marketing programs (approximately $1.0 million), partially offset by increases in other theatre revenues (approximately $2.2 million) and National CineMedia revenues (approximately $2.2 million).


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Film Rental and Advertising Costs

Film rental and advertising costs as a percentage of admissions revenues for the Q2 2014 Period decreased to 52.9% from 54.3% in the Q2 2013 Period. Film rental and advertising costs as a percentage of admissions revenues for the Fiscal 2014 Period increased to 52.5% from 52.2% in the Fiscal 2013 Period. The decrease in film rental and advertising costs as a percentage of box office revenues during the Q2 2014 Period was primarily attributable to higher film costs associated with the success of the top tier films exhibited during the Q2 2013 Period, partially offset by a slight increase in advertising and promotional costs during the Q2 2014 Period. The increase in film rental and advertising costs as a percentage of box office revenues during the Fiscal 2014 Period was primarily attributable to an increase in advertising and promotional costs coupled with higher film costs associated with the success of the top tier films exhibited during the first quarter of fiscal 2014.

Cost of Concessions

During the Q2 2014 Period, cost of concessions decreased $3.2 million, or 10.2%, to $28.3 million as compared to $31.5 million in the Q2 2013 Period. Cost of concessions decreased $0.8 million, or 1.4%, to $54.6 million during the Fiscal 2014 Period, from $55.4 million in the Fiscal 2013 Period. Cost of concessions as a percentage of concessions revenues for the Q2 2014 Period was approximately 13.3% compared to 13.8% during the Q2 2013 Period. For the Fiscal 2014 Period, cost of concessions as a percentage of concessions revenues was approximately 13.2% compared to 13.9% for the Fiscal 2013 Period. The decrease in cost of concessions as a percentage of concessions revenues during the Q2 2014 Period and the Fiscal 2014 Period was primarily related to an increase in the amount of vendor marketing revenues recorded as a reduction of cost of concessions and the impact of the aforementioned price increases during the period.

Rent Expense

During the Q2 2014 Period, rent expense increased $1.7 million, or 1.6%, to $106.3 million, from $104.6 million in the Q2 2013 Period. During the Fiscal 2014 Period, rent expense totaled $210.9 million, an increase of $6.7 million, or 3.3%, from $204.2 million in the Fiscal 2013 Period. The increase in rent expense during the Q2 2014 Period was primarily attributable to incremental rent associated with the opening of eight new theatres with 104 screens subsequent to the end of the Q2 2013 Period, partially offset by the closure of 11 theatres with 98 screens since the end of the Q2 2013 Period. The increase in rent expense during the Fiscal 2014 Period was primarily attributable to incremental rent (approximately $2.5 million) associated with the leases acquired as part of the Hollywood Theaters acquisition and the opening of eight new theatres with 104 screens subsequent to the end of the Fiscal 2013 Period, partially offset by the closure of 11 theatres with 98 screens since the end of the Fiscal 2013 Period.

Other Operating Expenses

Other operating expenses decreased $2.3 million, or 1.1%, to $203.1 million in the Q2 2014 Period, from $205.4 million in the Q2 2013 Period. During the Fiscal 2014 Period, other operating expenses increased $15.2 million, or 3.9%, to $404.2 million, from $389.0 million in the Fiscal 2013 Period. The decrease in other operating expenses during the Q2 2014 Period was attributable to decreased costs (approximately $1.5 million) associated with lower premium format film revenues during the Q2 2014 Period, partially offset by increases in certain non-rent occupancy costs (approximately $1.4 million). During the Fiscal 2014 Period, the increase in other operating expenses was primarily attributable to increases in theatre level payroll expenses (approximately $6.2 million) and certain non-rent occupancy costs (approximately $9.4 million), which included the impact of the 513 screens from Hollywood Theaters, partially offset by decreased costs (approximately $2.3 million) associated with lower premium format film revenues during the Fiscal 2014 Period.

General and Administrative Expenses

For the Q2 2014 Period, general and administrative expenses decreased $1.3 million, or 6.6%, to $18.3 million as compared to $19.6 million in the Q2 2013 Period. General and administrative expenses decreased $0.7 million, or 1.9%, to $36.9 million during the Fiscal 2014 Period, from $37.6 million in the Fiscal 2013 Period. The decrease in general and administrative expenses during the Q2 2014 Period and the Fiscal 2014 Period was primarily attributable to lower legal and professional fees associated with the Q2 2013 Period acquisition of Hollywood Theaters, lower corporate payroll and travel costs and slightly lower share-based compensation expense during such periods.

Depreciation and Amortization

Depreciation and amortization expense of $51.0 million during the Q2 2014 Period was consistent with that of the Q2 2013 Period. During the Fiscal 2014 Period, depreciation and amortization expense increased $4.2 million, or 4.3%, to $102.4


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million, from $98.2 million in the Fiscal 2013 Period. The increase in depreciation and amortization expense during the Fiscal 2014 Period was primarily related to incremental depreciation and amortization expense associated with the addition of the 513 screens from Hollywood Theaters.

Income from Operations

During the Q2 2014 Period, income from operations decreased $31.3 million, or 26.7%, to $85.8 million, from $117.1 million in the Q2 2013 Period. Income from operations decreased $18.2 million, or 10.4%, to $156.1 million in the Fiscal 2014 Period, from $174.3 million in the Fiscal 2013 Period. The decrease in income from operations during the Q2 2014 Period was primarily attributable to a decrease in total revenues, partially offset by decreases in certain variable operating expense line items described above. The decrease in income from operations during the Fiscal 2014 Period was primarily attributable to increases in certain variable operating expense line items described above (which included the impact of the 513 screens from Hollywood Theaters), partially offset by a slight increase in total revenues.

Interest Expense, net

Net interest expense totaled $30.4 million for the Q2 2014 Period, which represents a decrease of $6.2 million, or 16.9%, from $36.6 million in the Q2 2013 Period. During the Fiscal 2014 Period, net interest expense decreased $6.8 million, or 9.5%, to $64.7 million, from $71.5 million in the Fiscal 2013 Period. The decrease in net interest expense during the Q2 2014 Period and Fiscal 2014 Period was principally due to interest savings associated with the refinance of approximately $711.4 million aggregate principal amount of the Company's 91/8% Senior Notes and 85/8% Senior Notes with the March 2014 issuance of our 53/4% Senior Notes Due 2022 and to a lesser extent, 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 June 2013 issuance of our 53/4% Senior Notes Due 2023.

Earnings Recognized from NCM

Earnings recognized from NCM decreased $0.9 million, or 20.5%, to $3.5 million in the Q2 2014 Period, from $4.4 million in the Q2 2013 Period. Earnings recognized from NCM increased $2.6 million, or 18.3%, to $16.8 million in the Fiscal 2014 Period, from $14.2 million in the Fiscal 2013 Period. The decrease in earnings recognized from National CineMedia during the Q2 2014 Period was . . .

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