NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND BASIS OF PRESENTATION
Regal Entertainment Group (the "Company," "Regal," "we" or "us") is the parent company of Regal Entertainment Holdings, Inc. ("REH"), which is the parent company of Regal Cinemas Corporation ("Regal Cinemas") and its subsidiaries. Regal Cinemas’ subsidiaries include Regal Cinemas, Inc. ("RCI") and its subsidiaries, which include Edwards Theatres, Inc. ("Edwards") and United Artists Theatre Company ("United Artists"). The terms Regal or the Company, REH, Regal Cinemas, RCI, Edwards and United Artists shall be deemed to include the respective subsidiaries of such entities when used in discussions included herein regarding the current operations or assets of such entities. Majority-owned subsidiaries that the Company controls are consolidated, while those affiliates of which the Company owns between
20%
and
50%
and does not control are accounted for under the equity method. Those affiliates of which the Company owns less than
20%
are generally accounted for under the cost method, unless the Company is deemed to have the ability to exercise significant influence over the affiliate, in which case the Company would account for its investment under the equity method. The results of these subsidiaries and affiliates are included in the unaudited condensed consolidated financial statements effective with their formation or from their dates of acquisition. Intercompany balances and transactions are eliminated in consolidation.
Regal operates one of the largest and most geographically diverse theatre circuits in the United States, consisting of
7,315
screens in
561
theatres in
43
states along with Guam, Saipan, American Samoa and the District of Columbia as of
September 30, 2017
.
For a discussion of significant transactions that have occurred through
December 31, 2016
, please refer to the notes to the consolidated financial statements included in Part II, Item 8 of our annual report on Form 10-K filed on February 27, 2017 with the Securities and Exchange Commission (the "Commission") (File No. 001-31315) for the fiscal year ended
December 31, 2016
(the "
2016
Audited Consolidated Financial Statements"). For a summary of our significant accounting policies, please refer to Note 2 to the
2016
Audited Consolidated Financial Statements.
The Company has prepared the unaudited condensed consolidated balance sheet as of
September 30, 2017
, the unaudited condensed consolidated statements of income and comprehensive income for the quarters and three quarters ended
September 30, 2017
and
September 30, 2016
, and the unaudited condensed consolidated statements of cash flows for the three quarters ended
September 30, 2017
and
September 30, 2016
in accordance with U.S. generally accepted accounting principles for interim financial information and the rules and regulations of the Commission. Accordingly, certain information and footnote disclosures typically included in an annual report have been condensed or omitted for this quarterly report. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly in all material respects the financial position, results of operations and cash flows for all periods presented have been made. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from these estimates. The
December 31, 2016
unaudited condensed consolidated balance sheet information is derived from the
2016
Audited Consolidated Financial Statements. These unaudited condensed consolidated financial statements should be read in conjunction with the
2016
Audited Consolidated Financial Statements and notes thereto. The results of operations for the quarter and three quarters ended
September 30, 2017
are not necessarily indicative of the operating results that may be achieved for the full
2017
year.
2. ACQUISITIONS
On April 13, 2017, the Company completed the acquisition of
two
theatres with
41
screens located in Houston, Texas from Santikos Theaters, Inc. for an aggregate net cash purchase price of
$29.8 million
. In addition, on April 18, 2017, the Company purchased a parcel of land located in Montgomery County, Texas from an entity affiliated with Santikos Theaters, Inc. for a net cash purchase price of approximately
$7.3 million
. On May 18, 2017, the Company completed the acquisition of
seven
theatres with
93
screens located in Kansas and Oklahoma from Warren Theatres for an aggregate net cash purchase price, before post-closing adjustments, of
$134.5 million
. The Company incurred approximately
$1.7 million
in transaction costs associated with these acquisitions, which are reflected in "general and administrative expenses" in the accompanying unaudited condensed consolidated statements of income for the three quarters ended September 30, 2017.
The transactions have been accounted for using the acquisition method of accounting in accordance with Accounting Standards Codification ("ASC") 805,
Business Combinations
, which requires allocation of the purchase price to the estimated fair values of assets and liabilities acquired in each transaction. The allocation of purchase price is based on management’s judgment after evaluating several factors, including preliminary valuation assessments. Because the values assigned to assets
acquired and liabilities assumed are based on preliminary estimates of fair value available as of the date of this quarterly report on Form 10-Q, amounts may be adjusted during the measurement period of up to twelve months from the respective dates of acquisition as further information becomes available. Any changes in the fair values of assets acquired and liabilities assumed during the measurement period may result in adjustments to goodwill. The allocation of purchase price is preliminary and subject to changes as appraisals of tangible and intangible assets and liabilities including working capital are finalized, purchase price adjustments are completed and additional information regarding the tax bases of assets and liabilities at the acquisition date becomes available. The following is a summary of a preliminary allocation of the aggregate purchase price to the estimated fair values of the assets acquired and liabilities assumed at the respective dates of acquisition (in millions):
|
|
|
|
|
Current assets
|
$
|
2.1
|
|
Land
|
28.8
|
|
Buildings, equipment and leasehold improvements
|
115.7
|
|
Noncompete agreements
|
2.7
|
|
Goodwill (1)
|
26.2
|
|
Other assets
|
0.1
|
|
Current liabilities
|
(4.0
|
)
|
Total purchase price
|
$
|
171.6
|
|
________________________________
(1) Goodwill represents the excess aggregate purchase price over the amounts assigned to assets acquired, including intangible assets, and liabilities assumed and is fully deductible for tax purposes.
The results of operations of the acquired theatre operations have been included in the Company's consolidated financial statements for periods subsequent to the respective acquisition dates. The acquisitions contributed approximately
$19.0 million
and
$34.2 million
of total revenues for the quarter and three quarters ended September 30, 2017, respectively. Net income was an immaterial amount for the quarter and three quarters ended September 30, 2017.
The following unaudited pro forma results of operations for the three quarters ended September 30, 2017 and the quarter and three quarters September 30, 2016 assume the acquisitions occurred as of the beginning of fiscal 2016. The pro forma results have been prepared for comparative purposes only and do not purport to indicate the results of operations which would actually have occurred had the combination been in effect on the dates indicated, or which may occur in the future. Pro forma results for the quarter ended September 30, 2017 are not presented below because the results for the acquisitions are included in the September 30, 2017 unaudited condensed consolidated statement of income for the entire quarterly period.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per share data)
|
Quarter Ended
September 30, 2016
|
|
Three Quarters Ended
September 30, 2017
|
|
Three Quarters Ended
September 30, 2016
|
Revenues
|
$
|
836.5
|
|
|
$
|
2,334.4
|
|
|
$
|
2,458.9
|
|
Income from operations
|
88.1
|
|
|
181.4
|
|
|
247.2
|
|
Net income attributable to controlling interest
|
42.8
|
|
|
83.6
|
|
|
118.2
|
|
Diluted earnings per share
|
$
|
0.27
|
|
|
$
|
0.53
|
|
|
$
|
0.8
|
|
3. INVESTMENTS
Investment in National CineMedia, LLC
We maintain an investment in National CineMedia, LLC ("National CineMedia" or "NCM"). National CineMedia provides in-theatre advertising for its theatrical exhibition partners, which include us, AMC Entertainment, Inc. ("AMC") and Cinemark, Inc. ("Cinemark"). The formation of National CineMedia, related IPO of National CineMedia, Inc. ("NCM, Inc.") and other related transactions are further described in Note 4 to the
2016
Audited Consolidated Financial Statements.
We account for our investment in National CineMedia following the equity method of accounting and such investment is included as a component of "Other Non-Current Assets" in the accompanying unaudited condensed consolidated balance sheets. From time to time, the Company receives additional newly issued common units of National CineMedia ("Additional Investments Tranche") as a result of the adjustment provisions of the Common Unit Adjustment Agreement (as defined and more fully discussed in Note 4 to the 2016 Audited Consolidated Financial Statements). The Company follows the guidance in
ASC 323-10-35-29 (formerly EITF 02-18,
Accounting for Subsequent Investments in an Investee after Suspension of Equity Loss Recognition
) by analogy, which also refers to AICPA Technical Practice Aid 2220.14, which indicates that if a subsequent investment is made in an equity method investee that has experienced significant losses, the investor must determine if the subsequent investment constitutes funding of prior losses. The Company concluded that the construction or acquisition of new theatres that has led to the common unit adjustments included in its Additional Investments Tranche equates to making additional investments in National CineMedia. The Company evaluated the receipt of the additional common units in National CineMedia and the assets exchanged for these additional units and has determined that the right to use its incremental new screens would not be considered funding of prior losses. As such, the Additional Investments Tranche is accounted for separately from the Company’s Initial Investment Tranche (as defined and described more fully in Note 4 to the
2016
Audited Consolidated Financial Statements) following the equity method with undistributed equity earnings included as a component of "Earnings recognized from NCM" in the accompanying unaudited condensed consolidated financial statements.
Below is a summary of activity with National CineMedia included in the Company’s unaudited condensed consolidated financial statements as of and for the three quarters ended
September 30, 2017
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of the period ended
|
|
For the period ended
|
|
Investment
in
NCM
|
|
Deferred
Revenue
|
|
Cash
Received
|
|
Earnings
recognized
from NCM
|
|
Other
NCM
Revenues
|
Balance as of and for the period ended December 31, 2016
|
$
|
162.0
|
|
|
$
|
(425.0
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Receipt of additional common units(1)
|
6.3
|
|
|
(6.3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Receipt of excess cash distributions(2)
|
(8.2
|
)
|
|
—
|
|
|
19.9
|
|
|
(11.7
|
)
|
|
—
|
|
Receipt under tax receivable agreement(2)
|
(3.1
|
)
|
|
—
|
|
|
7.6
|
|
|
(4.5
|
)
|
|
—
|
|
Revenues earned under ESA(3)
|
—
|
|
|
—
|
|
|
12.7
|
|
|
—
|
|
|
(12.7
|
)
|
Amortization of deferred revenue(4)
|
—
|
|
|
9.6
|
|
|
—
|
|
|
—
|
|
|
(9.6
|
)
|
Equity income attributable to additional common units(5)
|
3.4
|
|
|
—
|
|
|
—
|
|
|
(3.4
|
)
|
|
—
|
|
Change in interest loss(6)
|
(5.6
|
)
|
|
—
|
|
|
—
|
|
|
5.6
|
|
|
—
|
|
Balance as of and for the period ended September 30, 2017
|
$
|
154.8
|
|
|
$
|
(421.7
|
)
|
|
$
|
40.2
|
|
|
$
|
(14.0
|
)
|
|
$
|
(22.3
|
)
|
________________________________
|
|
(1)
|
On March 16, 2017, we received from National CineMedia approximately
0.5 million
newly issued common units of National CineMedia in accordance with the annual adjustment provisions of the Common Unit Adjustment Agreement. The Company recorded the additional common units (Additional Investments Tranche) at fair value using the available closing stock price of NCM, Inc. as of the date on which the units were issued. With respect to the common units issued on March 16, 2017, the Company recorded an increase to its investment in National CineMedia of
$6.3 million
with a corresponding increase to deferred revenue. Such deferred revenue amount is being amortized to advertising revenue over the remaining term of the exhibitor services agreement, between RCI and National CineMedia ("ESA"), following the units of revenue method as described in (4) below. This transaction increased our ownership share in National CineMedia to approximately
27.6 million
common units. On a fully diluted basis, we own a
17.9%
interest in NCM, Inc. as of
September 30, 2017
.
|
|
|
(2)
|
During the three quarters ended
September 30, 2017
, the Company received
$27.5 million
in cash distributions from National CineMedia, exclusive of receipts for services performed under the ESA (including payments of
$7.6 million
received under the tax receivable agreement described in Note 4 to the
2016
Audited Consolidated Financial Statements of the Company). Approximately
$11.3 million
of these cash distributions received during the three quarters ended
September 30, 2017
were attributable to the Additional Investments Tranche and were recognized as a reduction in our investment in National CineMedia. The remaining amounts were recognized in equity earnings during the period and have been included as components of "Earnings recognized from NCM" in the accompanying unaudited condensed consolidated financial statements.
|
|
|
(3)
|
The Company recorded other revenues, excluding the amortization of deferred revenue, of approximately
$12.7 million
for the three quarters ended
September 30, 2017
pertaining to our agreements with National CineMedia, including per patron and per digital screen theatre access fees (net of payments of
$9.2 million
for the three quarters ended
September 30, 2017
for on-screen advertising time provided to our beverage concessionaire) and other NCM revenues. These advertising revenues are presented as a component of "Other operating revenues" in the Company’s unaudited condensed consolidated financial statements.
|
|
|
(4)
|
Amounts represent amortization of ESA modification fees received from NCM to advertising revenue utilizing the units of revenue amortization method. These advertising revenues are presented as a component of "Other operating revenues" in the Company’s unaudited condensed consolidated financial statements.
|
|
|
(5)
|
Amounts represent the Company’s share in the net gain (loss) of National CineMedia with respect to the Additional Investments Tranche. Such amounts have been included as a component of "Earnings recognized from NCM" in the unaudited condensed consolidated financial statements.
|
|
|
(6)
|
The Company recorded a non-cash change in interest loss of
$5.6 million
during the quarter ended March 31, 2017 to adjust the Company's investment balance due to NCM's issuance of common units to other founding members, at a price per share below the Company's average carrying amount per share. Such amount has been included as a component of "Earnings recognized from NCM" in the unaudited condensed consolidated financial statements.
|
As of
September 30, 2017
, approximately
$2.1 million
and
$0.7 million
due from/to National CineMedia were included in "Trade and other receivables, net" and "Accounts payable," respectively. As of
December 31, 2016
, approximately
$2.8 million
and
$1.3 million
due from/to National CineMedia were included in "Trade and other receivables, net" and "Accounts payable," respectively.
As of the date of this quarterly report on Form 10-Q (this "Form 10-Q"), no summarized financial information for National CineMedia was available for the quarterly period ended
September 30, 2017
. Summarized unaudited consolidated statements of income information for National CineMedia for the quarters and two quarters ended June 29, 2017 and June 30, 2016 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
June 29, 2017
|
|
Quarter Ended
June 30, 2016
|
|
Two Quarters Ended
June 29, 2017
|
|
Two Quarters Ended
June 30, 2016
|
Revenues
|
$
|
97.1
|
|
|
$
|
115.4
|
|
|
$
|
169.0
|
|
|
$
|
191.6
|
|
Income from operations
|
28.3
|
|
|
46.5
|
|
|
33.4
|
|
|
52.3
|
|
Net loss
|
15.4
|
|
|
33.2
|
|
|
7.5
|
|
|
25.7
|
|
Investment in Digital Cinema Implementation Partners
We maintain an investment in Digital Cinema Implementation Partners, LLC, a Delaware limited liability company ("DCIP"). DCIP is a joint venture company formed by Regal, AMC and Cinemark. DCIP funds the cost of digital projection equipment principally through the collection of virtual print fees from motion picture studios and equipment lease payments from participating exhibitors, including us. In addition to its U.S. digital deployment, DCIP actively manages the deployment of over
1,800
digital systems in Canada for Canadian Digital Cinema Partnership, a joint venture between Cineplex Inc. and Empire Theatres Limited.
Regal holds a
46.7%
economic interest in DCIP as of
September 30, 2017
and a
one-third
voting interest along with each of AMC and Cinemark. Since the Company does not have a controlling financial interest in DCIP or any of its subsidiaries, it accounts for its investment in DCIP under the equity method of accounting. The Company’s investment in DCIP is included as a component of "Other Non-Current Assets" in the accompanying unaudited condensed consolidated balance sheets. The change in the carrying amount of our investment in DCIP for the three quarters ended
September 30, 2017
is as follows (in millions):
|
|
|
|
|
Balance as of December 31, 2016
|
$
|
193.2
|
|
Equity contributions
|
0.4
|
|
Equity in earnings of DCIP(1)
|
32.2
|
|
Receipt of cash distributions
|
(8.4
|
)
|
Change in fair value of equity method investee interest rate swap transactions
|
0.1
|
|
Balance as of September 30, 2017
|
$
|
217.5
|
|
________________________________
|
|
(1)
|
Represents the Company’s share of the net income of DCIP. Such amount is presented as a component of “Equity in income of non-consolidated entities and other, net” in the accompanying unaudited condensed consolidated statement of income.
|
In accordance with the master equipment lease agreement (the "Master Lease"), the digital projection systems are leased from a subsidiary of DCIP under a
twelve
-year term with
ten one-year
fair value renewal options. The Master Lease also contains a fair value purchase option. As of
September 30, 2017
, under the Master Lease, the Company pays annual minimum rent of
$1,000
per digital projection system through the end of the lease term. The Company considers the
$1,000
rent payment to be a minimum rental, and accordingly, records such rent on a straight-line basis in its consolidated financial statements. The Company is also subject to various types of other rent if such digital projection systems do not meet minimum performance requirements, as outlined in the Master Lease. Certain of the other rent payments are subject to either a monthly or an annual
maximum. The Company accounts for the Master Lease as an operating lease for accounting purposes. During each of the three quarters ended
September 30, 2017
and
September 30, 2016
, the Company incurred total rent expense of approximately
$4.0 million
associated with the leased digital projection systems. Such rent expense is presented as a component of "Other operating expenses" in the Company's unaudited consolidated statements of income.
Summarized unaudited consolidated statements of operations information for DCIP for the quarters and three quarters ended
September 30, 2017
and
September 30, 2016
is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
September 30, 2017
|
|
Quarter Ended
September 30, 2016
|
|
Three Quarters Ended
September 30, 2017
|
|
Three Quarters Ended
September 30, 2016
|
Net revenues
|
$
|
40.0
|
|
|
$
|
48.3
|
|
|
$
|
132.5
|
|
|
$
|
133.7
|
|
Income from operations
|
22.7
|
|
|
31.2
|
|
|
80.6
|
|
|
82.4
|
|
Net income
|
19.7
|
|
|
26.9
|
|
|
69.5
|
|
|
67.7
|
|
Investment in Open Road Films
On August 4, 2017, the Company sold all of its
50%
equity interest in Open Road Films to a third party for total proceeds of approximately
$14.0 million
. In accordance with the purchase agreement, approximately
$3.7 million
of the net proceeds received were in satisfaction of various receivables and other amounts due to the Company related to film marketing services provided to Open Road Films prior to the closing date. As a result of the sale, the Company recorded a gain of approximately
$17.8 million
, representing the difference between the net proceeds received of
$10.3 million
(after satisfaction of the above amounts due the Company) and the carrying amount of the Company's investment in Open Road Films (approximately
$(7.5) million
) as of the closing date. Also effective with closing, the Company and Open Road Films entered into a new marketing agreement with respect to films released by Open Road Films after the closing date.
4. DEBT OBLIGATIONS
Debt obligations at
September 30, 2017
and
December 31, 2016
consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Regal Cinemas Amended Senior Credit Facility, net of debt discount
|
$
|
1,099.9
|
|
|
$
|
954.7
|
|
Regal 5
3
/
4
% Senior Notes Due 2022
|
775.0
|
|
|
775.0
|
|
Regal 5
3
/
4
% Senior Notes Due 2025
|
250.0
|
|
|
250.0
|
|
Regal 5
3
/
4
% Senior Notes Due 2023
|
250.0
|
|
|
250.0
|
|
Lease financing arrangements, weighted average interest rate of 11.22%, maturing in various installments through November 2028
|
91.4
|
|
|
97.1
|
|
Capital lease obligations, 7.8% to 10.7%, maturing in various installments through December 2030
|
7.6
|
|
|
9.2
|
|
Other
|
4.2
|
|
|
4.1
|
|
Total debt obligations
|
2,478.1
|
|
|
2,340.1
|
|
Less current portion
|
26.7
|
|
|
25.5
|
|
Less debt issuance costs, net of accumulated amortization of $21.1 and $18.5, respectively
|
24.4
|
|
|
25.8
|
|
Total debt obligations, less current portion and debt issuance costs
|
$
|
2,427.0
|
|
|
$
|
2,288.8
|
|
Regal Cinemas Seventh Amended and Restated Credit Agreement
—As described further in Note 5 to the
2016
Audited Consolidated Financial Statements, on April 2, 2015, Regal Cinemas entered into a seventh amended and restated credit agreement (the “Amended Senior Credit Facility”), with Credit Suisse AG as Administrative Agent (“Credit Suisse AG”) and the lenders party thereto, which amended, restated and refinanced the sixth amended and restated credit agreement (the “Prior Senior Credit Facility”). The Amended Senior Credit Facility consisted of a term loan facility (the “Term Facility”) in an aggregate principal amount of
$965.8 million
with a final maturity date in April 2022 and a revolving credit facility (the “Revolving Facility”) in an aggregate principal amount of
$85.0 million
with a final maturity date in April 2020. The Term Facility amortized in equal quarterly installments in an aggregate annual amount equal to
1.0%
of the original principal amount of the Term Facility, with the balance payable on the Term Facility maturity date. Proceeds from the Term Facility
(approximately
$963.3 million
, net of debt discount) were applied to refinance the term loan under the Prior Senior Credit Facility, which had an aggregate outstanding principal balance of approximately
$963.2 million
.
On June 1, 2016, Regal Cinemas entered into a permitted secured refinancing agreement with REH, the guarantors party thereto, Credit Suisse AG and the lenders party thereto (the "June 2016 Refinancing Agreement"). Pursuant to the June 2016 Refinancing Agreement, Regal Cinemas consummated a permitted secured refinancing of the Term Facility under the Amended Senior Credit Facility, which had an aggregate principal balance of approximately
$958.5 million
, and in accordance therewith, received term loans in an aggregate principal amount of approximately
$958.5 million
with a final maturity date in April 2022. Together with other amounts provided by Regal Cinemas, proceeds of the term loans were applied to repay all of the outstanding principal and accrued and unpaid interest on the Term Facility under the Amended Senior Credit Facility. In connection with the execution of the June 2016 Refinancing Agreement, the Company recorded a loss on debt extinguishment of approximately
$1.5 million
during the quarter ended June 30, 2016.
On December 2, 2016, Regal Cinemas entered into a permitted secured refinancing agreement (the “December 2016 Refinancing Agreement”) with REH, the guarantors party thereto, Credit Suisse AG and the lenders party thereto. Pursuant to the December 2016 Refinancing Agreement, Regal Cinemas consummated a permitted secured refinancing of the Term Facility, which had an aggregate principal balance of approximately
$956.1 million
, and in accordance therewith, received term loans in an aggregate principal amount of approximately
$956.1 million
with a final maturity date in April 2022. Together with other amounts provided by Regal Cinemas, proceeds of the term loans were applied to repay all of the outstanding principal and accrued and unpaid interest on the Term Facility under the Amended Senior Credit Facility. In connection with the execution of the December 2016 Refinancing Agreement, the Company recorded a loss on debt extinguishment of approximately
$1.4 million
during the quarter ended December 31, 2016.
On June 6, 2017, Regal Cinemas entered into a permitted secured refinancing and incremental joinder agreement (the “June 2017 Refinancing Agreement”) with REH, the guarantors party thereto, Credit Suisse AG and the lenders party thereto. Pursuant to the June 2017 Refinancing Agreement, Regal Cinemas consummated a permitted secured refinancing of the Term Facility, which had an aggregate principal balance of approximately
$953.7 million
, and in accordance therewith, received term loans in an aggregate principal amount of approximately
$953.7 million
with a final maturity date in April 2022 (the “Refinanced Term Loans”). Together with other amounts provided by Regal Cinemas, proceeds of the Refinanced Term Loans were applied to repay all of the outstanding principal and accrued and unpaid interest on the existing term facility under the Amended Senior Credit Facility in effect immediately prior to the making of the Refinanced Term Loans.
Pursuant to the June 2017 Refinancing Agreement, Regal Cinemas also exercised the “accordion” feature under the Amended Senior Credit Facility to increase the aggregate amount of term loans thereunder by
$150.0 million
(the “2017 Accordion”). The “accordion” feature provides Regal Cinemas with the option to borrow additional term loans under the Amended Senior Credit Facility in an amount of up to
$200.0 million
, plus additional amounts as would not cause the consolidated total leverage ratio to exceed
3.00
:1.00, in each case, subject to lenders providing additional commitments for such amounts and the satisfaction of certain other customary conditions. The entire
$150.0 million
under the 2017 Accordion was fully drawn on June 6, 2017 on the same terms as the Refinanced Term Loans (such amounts drawn, the “Incremental Term Loans”, and together with the Refinanced Term Loans, the “New Term Loans”). A portion of the proceeds of the Incremental Term Loans were used by Regal Cinemas to pay fees and expenses related to the June 2017 Refinancing Agreement, with the remainder used to partially fund the acquisitions described in Note 2—"Acquisitions."
The New Term Loans amortize in equal quarterly installments in an aggregate annual amount equal to
1.0%
of the original principal amount of the New Term Loans, with the balance payable on the maturity date of the New Term Loans. The June 2017 Refinancing Agreement also amends the Amended Senior Credit Facility by reducing the interest rate on the New Term Loans, by providing, at Regal Cinemas’ option, either a base rate or an adjusted LIBOR rate plus, in each case, an applicable margin. Such applicable margin will be either
1.00%
in the case of base rate loans or
2.00%
in the case of
LIBOR
rate loans. The June 2017 Refinancing Agreement also provides for a
1%
prepayment premium applicable in the event that Regal Cinemas enters into a refinancing or amendment of the New Term Loans on or prior to the six-month anniversary of the closing of the June 2017 Refinancing Agreement that, in either case, has the effect of reducing the interest rate on the New Term Loans.
In connection with the execution of the June 2017 Refinancing Agreement, the Company recorded a loss on debt extinguishment of approximately
$1.3 million
during the quarter ended June 30, 2017.
No
amounts have been drawn on the Revolving Facility. As of
September 30, 2017
, we had approximately
$2.7 million
outstanding in letters of credit, leaving approximately
$82.3 million
available for drawing under the Revolving Facility. The obligations of Regal Cinemas are secured by, among other things, a lien on substantially all of its tangible and intangible personal property (including but not limited to accounts receivable, inventory, equipment, general intangibles, investment
property, deposit and securities accounts, and intellectual property) and certain owned real property. The obligations under the Amended Senior Credit Facility are also guaranteed by certain subsidiaries of Regal Cinemas and secured by a lien on all or substantially all of such subsidiaries’ personal property and certain owned real property pursuant to that certain second amended and restated guaranty and collateral agreement, dated as of May 19, 2010, among Regal Cinemas, certain subsidiaries of Regal Cinemas party thereto and Credit Suisse AG (the “Amended Guaranty Agreement”). The obligations are further guaranteed by Regal Entertainment Holdings, Inc., on a limited recourse basis, with such guaranty being secured by a lien on the capital stock of Regal Cinemas.
Borrowings under the Amended Senior Credit Facility bear interest, at Regal Cinemas’ option, at either a
base rate
or an adjusted
LIBOR
rate (as defined in the Amended Senior Credit Facility) plus, in each case, an applicable margin of
1.00%
in the case of base rate loans or
2.00%
in the case of
LIBOR
rate loans. Interest is payable (a) in the case of
base rate
loans, quarterly in arrears, and (b) in the case of
LIBOR
rate loans, at the end of each interest period, but in no event less often than every
3 months
.
As of
September 30, 2017
and
December 31, 2016
, borrowings of
$1,099.9 million
(net of debt discount) and
$954.7 million
(net of debt discount), respectively, were outstanding under the New Term Loans at an effective interest rate of
3.40%
(as of
September 30, 2017
) and
3.56%
(as of
December 31, 2016
), after the impact of the interest rate swaps described in Note 11—"Derivative Instruments" is taken into account.
For further discussion of the Amended Senior Credit Facility, please refer to Note 5 to the
2016
Audited Consolidated Financial Statements and incorporated by reference herein.
Regal 5
3
/
4
% Senior Notes Due 2022—
On March 11, 2014, Regal issued
$775.0 million
in aggregate principal amount of its 5
3
/
4
% senior notes due 2022 (the “5
3
/
4
% Senior Notes Due 2022”) in a registered public offering. The 5
3
/
4
% Senior Notes Due 2022 bear interest at a rate of
5.75%
per year, payable semiannually in arrears on March 15 and September 15 of each year, beginning September 15, 2014. The 5
3
/
4
% Senior Notes Due 2022 will mature on March 15, 2022.
The 5
3
/
4
% Senior Notes Due 2022 are the Company’s senior unsecured obligations and rank equal in right of payment with all of the Company’s existing and future senior unsecured indebtedness and prior to all of the Company’s future subordinated indebtedness. The 5
3
/
4
% Senior Notes Due 2022 are effectively subordinated to all of the Company’s future secured indebtedness to the extent of the value of the collateral securing that indebtedness and structurally subordinated to all existing and future indebtedness and other liabilities of the Company’s subsidiaries. None of the Company’s subsidiaries guaranty any of the Company’s obligations with respect to the 5
3
/
4
% Senior Notes Due 2022.
For further discussion of the 5
3
/
4
% Senior Notes Due 2022, please refer to Note 5 to the
2016
Audited Consolidated Financial Statements and incorporated by reference herein.
Regal 5
3
/
4
% Senior Notes Due 2025—
On January 17, 2013, Regal issued
$250.0 million
in aggregate principal amount of its 5
3
/
4
% senior notes due 2025 (the "5
3
/
4
% Senior Notes Due 2025") in a registered public offering. The 5
3
/
4
% Senior Notes Due 2025 bear interest at a rate of
5.75%
per year, payable semiannually in arrears on February 1 and August 1 of each year, beginning August 1, 2013. The 5
3
/
4
% Senior Notes Due 2025 will mature on February 1, 2025.
The 5
3
/
4
% Senior Notes Due 2025 are the Company's senior unsecured obligations. They rank equal in right of payment with all of the Company's existing and future senior unsecured indebtedness and prior to all of the Company's future subordinated indebtedness. The 5
3
/
4
% Senior Notes Due 2025 are effectively subordinated to all of the Company's future secured indebtedness to the extent of the value of the collateral securing that indebtedness and structurally subordinated to all existing and future indebtedness and other liabilities of the Company's subsidiaries. None of the Company's subsidiaries guaranty any of the Company's obligations with respect to the 5
3
/
4
% Senior Notes Due 2025.
For further discussion of the 5
3
/
4
% Senior Notes Due 2025, please refer to Note 5 to the
2016
Audited Consolidated Financial Statements and incorporated by reference herein.
Regal 5
3
/
4
% Senior Notes Due 2023—
On June 13, 2013, Regal issued
$250.0 million
in aggregate principal amount of its 5
3
/
4
% senior notes due 2023 (the "5
3
/
4
% Senior Notes Due 2023") in a registered public offering. The 5
3
/
4
% Senior Notes Due 2023 bear interest at a rate of
5.75%
per year, payable semiannually in arrears on June 15 and December 15 of each year, beginning December 15, 2013. The 5
3
/
4
% Senior Notes Due 2023 will mature on June 15, 2023.
The 5
3
/
4
% Senior Notes Due 2023 are the Company’s senior unsecured obligations. They rank equal in right of payment with all of the Company’s existing and future senior unsecured indebtedness and prior to all of the Company’s future subordinated indebtedness. The 5
3
/
4
% Senior Notes Due 2023 are effectively subordinated to all of the Company’s future secured indebtedness to the extent of the value of the collateral securing that indebtedness and structurally subordinated to all existing and future indebtedness and other liabilities of the Company’s subsidiaries. None of the Company’s subsidiaries guaranty any of the Company’s obligations with respect to the 5
3
/
4
% Senior Notes Due 2023.
For further discussion of the 5
3
/
4
% Senior Notes Due 2023, please refer to Note 5 to the
2016
Audited Consolidated Financial Statements and incorporated by reference herein.
Lease Financing Arrangements—
These obligations primarily represent lease financing obligations resulting from the requirements of ASC Subtopic 840-40.
Other Long-Term Obligations—
Other long-term obligations, including capital lease obligations, not explicitly discussed herein are described in Note 5 to the
2016
Audited Consolidated Financial Statements and incorporated by reference herein.
Covenant Compliance—
As of
September 30, 2017
, we were in full compliance with all agreements, including all related covenants, governing our outstanding debt obligations.
5. INCOME TAXES
The provision for income taxes of
$12.6 million
and
$29.2 million
for the quarters ended
September 30, 2017
and
September 30, 2016
, respectively, reflect effective tax rates of approximately
52.5%
and
40.8%
, respectively. The provision for income taxes of
$61.3 million
and
$81.4 million
for the three quarters ended
September 30, 2017
and
September 30, 2016
, respectively, reflect effective tax rates of approximately
42.4%
and
41.1%
, respectively. The increase in the effective tax rate for the quarter and three quarters ended September 30, 2017 is primarily attributable to the nondeductible goodwill impairment charge of approximately
$7.3 million
recorded during the quarter ended September 30, 2017 described further in Note 12—"Fair Value of Financial Instruments." The effective tax rates for all periods presented also reflect the impact of certain non-deductible expenses and income tax credits.
In assessing the realizable value of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which these temporary differences become deductible. The Company has recorded a valuation allowance against deferred tax assets of
$23.5 million
and
$34.5 million
as of
September 30, 2017
and December 31, 2016, respectively, as management believes it is more likely than not that certain deferred tax assets will not be realized in future tax periods. Future reductions in the valuation allowance associated with a change in management's determination of the Company's ability to realize these deferred tax assets will result in a decrease in the provision for income taxes. During the three quarters ended
September 30, 2017
, the valuation allowance was decreased by
$11.0 million
related to a reduction in certain state net operating losses in connection with the settlement of state tax positions.
Total unrecognized tax benefits at
September 30, 2017
and December 31, 2016 were
$6.2 million
and
$10.9 million
, respectively. The total net unrecognized tax benefits that would affect the effective tax rate if recognized at
September 30, 2017
and December 31, 2016 were
$3.9 million
and
$5.4 million
, respectively.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits as a component of income tax expense. As of
September 30, 2017
and December 31, 2016, the Company has accrued gross interest and penalties of approximately
$2.1 million
and
$1.8 million
, respectively.
The Company and its subsidiaries collectively file income tax returns in the U.S. federal jurisdiction and various state and U.S. territory jurisdictions. The Company is not subject to U.S. federal or U.S. Territory examinations before 2014, and with limited exceptions, state examinations before 2012. However, the taxing authorities still have the ability to review the propriety of tax attributes created in closed tax years if such tax attributes are utilized in an open tax year. During the quarter ended September 30, 2017, the Company settled an Internal Revenue Service ("IRS") examination of its 2014 federal income tax return. The settlement did not have a material impact on the Company’s financial statements. Also during the quarter ended September 30, 2017, the Company was notified that the IRS would examine its 2015 federal tax return. The Company is in the process of providing information requested by the IRS with respect to such tax year. As the exam process is in the early stages,
the Company has not been notified of any items that are being disputed by the IRS. Management believes that it has provided adequate provision for income taxes relative to the tax year under examination.
6. CAPITAL STOCK AND SHARE-BASED COMPENSATION
Capital Stock
As of
September 30, 2017
, the Company’s authorized capital stock consisted of:
•
500,000,000
shares of Class A common stock, par value
$0.001
per share;
•
200,000,000
shares of Class B common stock, par value
$0.001
per share; and
•
50,000,000
shares of preferred stock, par value
$0.001
per share.
Of the authorized shares of Class A common stock,
18.0 million
shares were sold in connection with the Company’s initial public offering in May 2002. The Company’s Class A common stock is listed on the New York Stock Exchange under the trading symbol "RGC." As of
September 30, 2017
,
133,307,114
shares of Class A common stock were outstanding. Of the authorized shares of Class B common stock,
23,708,639
shares were outstanding as of
September 30, 2017
, all of which are beneficially owned by The Anschutz Corporation ("Anschutz"). Each share of Class B common stock converts into a single share of Class A common stock at the option of the holder or upon certain transfers of a holder’s Class B common stock. Each holder of Class B common stock is entitled to ten votes for each outstanding share of Class B common stock owned by that stockholder on every matter properly submitted to the stockholders for their vote. Of the authorized shares of the preferred stock,
no
shares were issued and outstanding as of
September 30, 2017
. The Class A common stock is entitled to a single vote for each outstanding share of Class A common stock on every matter properly submitted to the stockholders for a vote. Except as required by law, the Class A and Class B common stock vote together as a single class on all matters submitted to the stockholders. The material terms and provisions of the Company's certificate of incorporation affecting the relative rights of the Class A common stock and the Class B common stock are described in Note 9 to the
2016
Audited Consolidated Financial Statements, incorporated by reference herein.
As of
September 30, 2017
, Anschutz owned
18,440,000
shares of our issued and outstanding Class A Common Stock, representing approximately
13.8%
of our Class A common stock issued and outstanding, which together with the
23,708,639
shares of our Class B common stock owned by Anschutz, represents approximately
69.0%
of the combined voting power of the outstanding shares of Class A common stock and Class B common stock as of
September 30, 2017
.
Share Repurchase Program
During the quarter ended September 30, 2017, the Company's Board of Directors authorized a share repurchase program, which provided for the authorization of the Company to repurchase up to
$50.0 million
of its outstanding Class A common stock through the first quarter of 2019. Repurchases can be made at management's discretion from time to time as market conditions warrant, through open market purchases, privately negotiated transactions, or otherwise, in accordance with all applicable securities laws and regulations. Treasury shares are retired upon repurchase. At retirement, the Company records treasury stock purchases at cost with any excess of cost over par value recorded as a reduction of additional paid-in capital. The Company made
no
repurchases of its outstanding Class A common stock during the quarter ended September 30, 2017.
Warrants
No
warrants to acquire the Company’s Class A or Class B common stock were outstanding as of
September 30, 2017
.
Share-Based Compensation
In 2002, the Company established the Regal Entertainment Group Stock Incentive Plan (as amended, the "Incentive Plan"), which provides for the granting of incentive stock options and non-qualified stock options to officers, employees and consultants of the Company. As described below under "Restricted Stock" and "Performance Share Units," the Incentive Plan also provides for grants of restricted stock and performance shares that are subject to restrictions and risks of forfeiture. Readers should refer to Note 9 to the
2016
Audited Consolidated Financial Statements for additional information related to these awards and the Incentive Plan.
On May 9, 2012, the stockholders of Regal approved amendments to the Incentive Plan increasing the number of shares of Class A common stock authorized for issuance under the Incentive Plan by a total of
5,000,000
shares and extending the term of the Incentive Plan to May 9, 2022. As of
September 30, 2017
,
3,776,946
shares remain available for future issuance under the Incentive Plan.
Restricted Stock
As described further in Note 9 to the
2016
Audited Consolidated Financial Statements, the Incentive Plan also provides for restricted stock awards to officers, directors and key employees. Under the Incentive Plan, shares of Class A common stock of the Company may be granted at nominal cost to officers, directors and key employees, subject to a continued employment/service restriction. On January 11, 2017,
217,366
restricted shares were granted under the Incentive Plan at nominal cost to officers, directors and key employees. These awards vest
25%
at the end of each year for
4 years
(in the case of officers and key employees) and vest
100%
at the end of
one year
(in the case of directors). The closing price of the Company’s Class A common stock on the date of the grant was
$22.10
per share. The Company assumed a forfeiture rate of
6%
for such restricted stock awards.
During the three quarters ended
September 30, 2017
, the Company withheld approximately
166,761
shares of restricted stock at an aggregate cost of approximately
$3.6 million
, as permitted by the applicable equity award agreements, to satisfy employee tax withholding requirements related to the vesting of
493,516
restricted stock awards. In addition, during the three quarters ended
September 30, 2017
,
205,677
performance shares (originally granted on January 8, 2014) were effectively converted to shares of restricted common stock, as threshold performance goals for these awards were satisfied on January 8, 2017, the calculation date. These awards are scheduled to fully vest on January 8, 2018, the
one year anniversary
of the calculation date.
During the quarters ended
September 30, 2017
and
September 30, 2016
, the Company recognized approximately
$1.1 million
and
$1.2 million
, respectively, of share-based compensation expense related to restricted share grants. During the three quarters ended
September 30, 2017
and
September 30, 2016
, the Company recognized approximately
$3.2 million
and
$3.1 million
, respectively, of share-based compensation expense related to restricted share grants. Such expense is presented as a component of "General and administrative expenses." The compensation expense for these awards was determined based on the market price of the Company's stock at the date of grant applied to the total numbers of shares that were anticipated to fully vest. As of
September 30, 2017
, we have unrecognized compensation expense of
$5.5 million
associated with restricted stock awards, which is expected to be recognized through January 11, 2021.
The following table represents the restricted stock activity for the three quarters ended
September 30, 2017
:
|
|
|
|
Unvested shares at beginning of period
|
765,952
|
|
Granted during the period
|
217,366
|
|
Vested during the period
|
(493,516
|
)
|
Forfeited during the period
|
(29,447
|
)
|
Conversion of performance shares during the period
|
205,677
|
|
Unvested shares at end of period
|
666,032
|
|
During the three quarters ended
September 30, 2017
, the Company paid
three
cash dividends of
$0.22
on each share of outstanding restricted stock totaling approximately
$0.5 million
. During the three quarters ended
September 30, 2016
, the Company paid
three
cash dividends of
$0.22
on each share of outstanding restricted stock totaling approximately
$0.6 million
.
Performance Share Units
The Incentive Plan also provides for grants in the form of performance share units to officers, directors and key employees. Performance share agreements are entered into between the Company and each grantee of performance share units.
In 2009, the Company adopted an amended and restated form of performance share agreement (each, a "Performance Agreement" and collectively, the "Performance Agreements"). Pursuant to the terms and conditions of the Performance Agreements, grantees will be issued shares of restricted common stock of the Company in an amount determined by the attainment of Company performance criteria set forth in each Performance Agreement. The shares of restricted common stock received upon attainment of the performance criteria will be subject to further vesting over a period of time, provided the grantee remains a service provider to the Company during such period. On January 11, 2017,
235,356
performance shares were
granted under the Incentive Plan at nominal cost to officers and key employees. Under the Performance Agreement, which is described further in the section entitled "Compensation Discussion and Analysis — Elements of Compensation — Performance Shares," of our 2017 proxy statement filed with the Commission on April 10, 2017, each performance share represents the right to receive from
0%
to
150%
of the target numbers of shares of restricted Class A common stock. The number of shares of restricted common stock earned will be determined based on the attainment of specified performance goals by January 11, 2020 (the
third anniversary
of the grant date for the January 11, 2017 grant) set forth in the applicable Performance Agreement. Such performance shares vest on January 11, 2021 (the
fourth anniversary
of the grant date for the January 11, 2017 grant). The shares are subject to the terms and conditions of the Incentive Plan. The closing price of the Company’s Class A common stock on the date of the grant was
$22.10
per share, which approximates the grant date fair value of the awards. The Company assumed a forfeiture rate of
9%
for such performance share awards.
During each of the quarters ended
September 30, 2017
and
September 30, 2016
, the Company recognized approximately
$1.3 million
of share-based compensation expense related to performance share grants. During the three quarters ended
September 30, 2017
and
September 30, 2016
, the Company recognized approximately
$3.7 million
and
$3.5 million
, respectively, of share-based compensation expense related to performance share grants. Such expense is presented as a component of "General and administrative expenses." As of
September 30, 2017
, we have unrecognized compensation expense of
$7.4 million
associated with performance share units, which is expected to be recognized through January 11, 2021. During the three quarters ended
September 30, 2017
,
205,677
performance share awards (originally granted on January 8, 2014) were converted to shares of restricted common stock, as threshold performance goals for these awards were satisfied on January 8, 2017, the calculation date.
The following table summarizes information about the Company’s number of performance shares for the three quarters ended
September 30, 2017
:
|
|
|
|
Unvested shares at beginning of period
|
698,709
|
|
Granted (based on target) during the period
|
235,356
|
|
Cancelled/forfeited during the period
|
(28,333
|
)
|
Conversion to restricted shares during the period
|
(205,677
|
)
|
Unvested shares at end of period
|
700,055
|
|
In connection with the conversion of the above
205,677
performance shares, during the three quarters ended
September 30, 2017
, the Company paid cumulative cash dividends of
$3.64
(representing the sum of all cash dividends paid from January 8, 2014 through January 8, 2017) on each performance share converted, totaling approximately
$0.7 million
. The above table does not reflect the maximum or minimum number of shares of restricted stock contingently issuable. An additional
0.4 million
shares of restricted stock could be issued if the performance criteria maximums are met.
7. COMMITMENTS AND CONTINGENCIES
The Company is presently involved in various judicial, administrative, regulatory and arbitration proceedings concerning matters arising in the ordinary course of business operations, including but not limited to, personal injury claims, landlord-tenant, antitrust, vendor and other third party disputes, tax disputes, employment and other contractual matters, some of which are described below. Many of these proceedings are at preliminary stages, and many of these cases seek an indeterminate amount of damages. The Company's theatre operations are also subject to federal, state and local laws governing such matters as wages, working conditions, citizenship and health and sanitation and environmental protection requirements.
On October 9, 2012, staff at the San Francisco Regional Water Quality Board (the "Regional Board") notified United Artists Theatre Circuit, Inc. (“UATC”), an indirect, wholly owned subsidiary of the Company, that the Regional Board was contemplating issuing a cleanup and abatement order to UATC with respect to a property in Santa Clara, California that UATC owned and then leased during the 1960s and 1970s. On June 25, 2013, the Regional Board issued a tentative order to UATC setting out proposed site clean-up requirements for UATC with respect to the property. According to the Regional Board, the property in question has been contaminated by dry-cleaning facilities that operated at the property in question from approximately 1961 until 1996. The Regional Board also issued a tentative order to the current property owner, who has been conducting site investigation and remediation activities at the site for several years. UATC submitted comments to the Regional Board on July 28, 2013, objecting to the tentative order. The Regional Board considered the matter at its regular meeting on September 11, 2013 and adopted the tentative order with only minor changes. On October 11, 2013, UATC filed a petition with the State Water Resources Control Board (“the State Board”) for review of the Regional Board’s order. The State Board failed to act on the petition and hence by operation of law it was deemed denied, and UATC filed a petition for writ of mandamus with
the California Superior Court seeking review and modification of the order. On September 29, 2017, the Superior Court ruled in UATC’s favor and granted its Petition for a Writ of Mandamus challenging the cleanup and abatement order, and remanded the matter to the Regional Board for further proceedings in light of the Superior Court’s opinion. At this point, it is not known whether the Regional Board will appeal the court’s ruling or whether it will attempt to include UATC in a new order upon remand. In either case, UATC intends to continue to vigorously defend this matter. UATC has been cooperating with the Regional Board while it appeals the Regional Board's cleanup and abatement order. To that end, UATC and the current property owner jointly submitted, and on October 27, 2015, the Regional Board approved, a Remedial Action Plan (“RAP”) to remediate the dry-cleaner contamination. We believe that we are, and were during the period in question described in this paragraph, in compliance with such applicable laws and regulations.
On January 28, 2016, Regional Board staff contacted UATC’s counsel in the Santa Clara matter to ascertain whether he would be representing UATC in connection with the cleanup of a drycleaner-impacted property located in Millbrae, California that the Regional Board believes UATC or related entities formerly owned during the dry-cleaning operations. Counsel subsequently responded in the affirmative. The Company has received no further communications from the Regional Board on this matter.
On May 5, 2014, NCM, Inc. announced that it had entered into a merger agreement to acquire Screenvision, LLC ("Screenvision"). On November 3, 2014, the United States Department of Justice (the "DOJ") filed an antitrust lawsuit seeking to enjoin the proposed merger between NCM, Inc. and Screenvision. On March 16, 2015, NCM, Inc. announced that it had agreed with Screenvision to terminate the merger agreement. On March 17, 2015, the Company was notified by the DOJ that it had opened an investigation into potential anticompetitive conduct by and coordination among NCM, Inc., National CineMedia, Regal, AMC and Cinemark (the “DOJ Notice”). In addition, the DOJ Notice requested that the Company preserve all documents and information since January 1, 2011 relating to movie clearances or communications or cooperation between and among AMC, Regal and Cinemark or their participation in NCM. On May 28, 2015, the Company received a civil investigative demand (the “CID”) from the DOJ as part of an investigation into potentially anticompetitive conduct under Sections 1 and 2 of the Sherman Act, 15 U.S.C. § 1 and § 2. The Company has also received investigative demands from the antitrust sections of various state attorneys general regarding movie clearances and Regal's various joint venture investments, including National CineMedia. The CID and various state investigative demands require the Company to produce documents and answer interrogatories. The Company may receive additional investigative demands from the DOJ and state attorneys general regarding these or related matters. The Company continues to cooperate with these investigations and any other related Federal or state investigations to the extent any are undertaken. The DOJ and various state investigations may also give rise to lawsuits filed against the Company related to clearances and the Company’s investments in its various joint ventures. While we do not believe that the Company has engaged in any violation of Federal or state antitrust or competition laws during its participation in NCM and other joint ventures, we can provide no assurances as to the scope, timing or outcome of the DOJ’s or any other state or Federal governmental reviews of the Company’s conduct.
In situations where management believes that a loss arising from judicial, administrative, regulatory and arbitration proceedings is probable and can reasonably be estimated, the Company records the amount of the loss, or the minimum estimated liability when the loss is estimated using a range and no amount within the range is more probable than another. As additional information becomes available, any potential liability related to these proceedings is assessed and the estimates are revised, if necessary. The amounts reserved for such proceedings totaled approximately
$3.3 million
and
$3.5 million
as of
September 30, 2017
and December 31, 2016, respectively. Management believes any additional liability with respect to these claims and disputes will not be material in the aggregate to the Company’s consolidated financial position, results of operations or cash flows. Under ASC Topic 450,
Contingencies—Loss Contingencies
, an event is "reasonably possible" if "the chance of the future event or events occurring is more than remote but less than likely" and an event is "remote" if "the chance of the future event or events occurring is slight." Thus, references to the upper end of the range of reasonably possible loss for cases in which the Company is able to estimate a range of reasonably possible loss mean the upper end of the range of loss for cases for which the Company believes the risk of loss is more than slight. Management is unable to estimate a range of reasonably possible loss for cases described herein in which damages have not been specified and (i) the proceedings are in early stages, (ii) there is uncertainty as to the likelihood of a class being certified or the ultimate size of the class, (iii) there is uncertainty as to the outcome of pending appeals or motions, (iv) there are significant factual issues to be resolved, and/or (v) there are novel legal issues presented. However, for these cases, management does not believe, based on currently available information, that the outcomes of these proceedings will have a material adverse effect on the Company’s financial condition, though the outcomes could be material to the Company’s operating results for any particular period, depending, in part, upon the operating results for such period.
Our theatres must comply with Title III of the Americans with Disabilities Act of 1990 (the "ADA") to the extent that such properties are "public accommodations" and/or "commercial facilities" as defined by the ADA. Compliance with the ADA
requires that public accommodations "reasonably accommodate" individuals with disabilities and that new construction or alterations made to "commercial facilities" conform to accessibility guidelines unless "structurally impracticable" for new construction or technically infeasible for alterations. Non-compliance with the ADA could result in the imposition of injunctive relief, fines, awards of damages to private litigants and additional capital expenditures to remedy such non-compliance. The Company believes that it is in substantial compliance with all current applicable regulations relating to accommodations for the disabled. The Company intends to comply with future regulations in this regard and except as set forth above, does not currently anticipate that compliance will require the Company to expend substantial funds.
8. RELATED PARTY TRANSACTIONS
During each of the quarters ended
September 30, 2017
and
September 30, 2016
, Regal Cinemas received less than
$0.1 million
from an Anschutz affiliate for rent and other expenses related to a theatre facility. During the three quarters ended
September 30, 2017
and
September 30, 2016
, Regal Cinemas received approximately
$0.2 million
and
$0.1 million
, respectively, from an Anschutz affiliate for rent and other expenses related to a theatre facility.
During each of the quarters ended
September 30, 2017
and
September 30, 2016
, the Company received approximately
$0.1 million
from an Anschutz affiliate for management fees related to a theatre site in Los Angeles, California. During each of the three quarters ended
September 30, 2017
and
September 30, 2016
, the Company received approximately
$0.5 million
from an Anschutz affiliate for management fees related to a theatre site in Los Angeles, California.
Please also refer to Note 3—"Investments" for a discussion of other related party transactions associated with our various investments in non-consolidated entities.
9. EARNINGS PER SHARE
We compute earnings per share of Class A and Class B common stock using the two-class method. Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares and, if dilutive, common stock equivalents outstanding during the period. Potential common stock equivalents consist of the incremental common shares issuable upon the vesting of restricted stock and performance share units. The dilutive effect of outstanding restricted stock and performance share units is reflected in diluted earnings per share by application of the treasury-stock method. In addition, the computation of the diluted earnings per share of Class A common stock assumes the conversion of Class B common stock, while the diluted earnings per share of Class B common stock does not assume the conversion of those shares.
The rights, including the liquidation and dividend rights, of the holders of our Class A and Class B common stock are identical, except with respect to voting. The earnings for the periods presented are allocated based on the contractual participation rights of the Class A and Class B common shares. As the liquidation and dividend rights are identical, the earnings are allocated on a proportionate basis. Further, as we assume the conversion of Class B common stock in the computation of the diluted earnings per share of Class A common stock, the earnings are equal to net income attributable to controlling interest for that computation.
The following table sets forth the computation of basic and diluted earnings per share of Class A and Class B common stock (in millions, except share and per share data):
|
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|
|
|
|
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|
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|
|
Quarter Ended
September 30, 2017
|
|
Quarter Ended
September 30, 2016
|
|
Three Quarters Ended
September 30, 2017
|
|
Three Quarters Ended
September 30, 2016
|
|
Class A
|
|
Class B
|
|
Class A
|
|
Class B
|
|
Class A
|
|
Class B
|
|
Class A
|
|
Class B
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of earnings
|
$
|
9.7
|
|
|
$
|
1.7
|
|
|
$
|
35.9
|
|
|
$
|
6.4
|
|
|
$
|
70.8
|
|
|
$
|
12.6
|
|
|
$
|
98.8
|
|
|
$
|
17.7
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding (in thousands)
|
132,641
|
|
|
23,709
|
|
|
132,314
|
|
|
23,709
|
|
|
132,623
|
|
|
23,709
|
|
|
132,286
|
|
|
23,709
|
|
Basic earnings per share
|
$
|
0.07
|
|
|
$
|
0.07
|
|
|
$
|
0.27
|
|
|
$
|
0.27
|
|
|
$
|
0.53
|
|
|
$
|
0.53
|
|
|
$
|
0.75
|
|
|
$
|
0.75
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of earnings for basic computation
|
$
|
9.7
|
|
|
$
|
1.7
|
|
|
$
|
35.9
|
|
|
$
|
6.4
|
|
|
$
|
70.8
|
|
|
$
|
12.6
|
|
|
$
|
98.8
|
|
|
$
|
17.7
|
|
Reallocation of earnings as a result of conversion of Class B to Class A shares
|
1.7
|
|
|
—
|
|
|
6.4
|
|
|
—
|
|
|
12.6
|
|
|
—
|
|
|
17.7
|
|
|
—
|
|
Reallocation of earnings to Class B shares for effect of other dilutive securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
Allocation of earnings
|
$
|
11.4
|
|
|
$
|
1.7
|
|
|
$
|
42.3
|
|
|
$
|
6.4
|
|
|
$
|
83.4
|
|
|
$
|
12.6
|
|
|
$
|
116.5
|
|
|
$
|
17.6
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in basic computation (in thousands)
|
132,641
|
|
|
23,709
|
|
|
132,314
|
|
|
23,709
|
|
|
132,623
|
|
|
23,709
|
|
|
132,286
|
|
|
23,709
|
|
Weighted average effect of dilutive securities (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Class B to Class A common shares outstanding
|
23,709
|
|
|
—
|
|
|
23,709
|
|
|
—
|
|
|
23,709
|
|
|
—
|
|
|
23,709
|
|
|
—
|
|
Restricted stock and performance shares
|
528
|
|
|
—
|
|
|
841
|
|
|
—
|
|
|
623
|
|
|
—
|
|
|
764
|
|
|
—
|
|
Number of shares used in per share computations (in thousands)
|
156,878
|
|
|
23,709
|
|
|
156,864
|
|
|
23,709
|
|
|
156,955
|
|
|
23,709
|
|
|
156,759
|
|
|
23,709
|
|
Diluted earnings per share
|
$
|
0.07
|
|
|
$
|
0.07
|
|
|
$
|
0.27
|
|
|
$
|
0.27
|
|
|
$
|
0.53
|
|
|
$
|
0.53
|
|
|
$
|
0.74
|
|
|
$
|
0.74
|
|
10. RECENT ACCOUNTING PRONOUNCEMENTS
Adoption of New Accounting Pronouncements
In March 2016, the FASB issued ASU 2016-07,
Investments – Equity Method and Joint Ventures (Topic 323)
. The purpose of ASU 2016-07 is to eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment was held. ASU 2016-07 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years and early adoption is permitted. The Company's adoption of ASU 2016-07 during the quarter ended March 31, 2017 had no impact on the Company's consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09,
Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, which relates to the accounting for employee share-based payments. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax
consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years and early adoption is permitted. The Company's adoption of ASU 2016-09 had the impact of reducing income tax expense by approximately
$1.3 million
pertaining to excess tax benefits related to vesting of
493,516
restricted stock awards and to a lesser extent, dividends paid on restricted stock during the three quarters ended September 30, 2017. Historically, such excess tax benefits would have been recorded as a component of additional paid-in capital.
In October 2016, the FASB issued ASU 2016-17,
Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control
, which requires when assessing which party is the primary beneficiary in a VIE, the decision maker considers interests held by entities under common control on a proportionate basis instead of treating those interests as if they were that of the decision maker itself, as current U.S. GAAP requires. ASU 2016-17 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years and early adoption is permitted. The Company's adoption of ASU 2016-17 during the quarter ended March 31, 2017 had no impact on the Company's consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04,
Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. The purpose of ASU 2017-04 is to simplify the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment should be applied on a prospective basis. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, including interim periods within that year. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company early adopted ASU 2017-04 in connection with its interim goodwill impairment test performed during the quarter ended September 30, 2017 as further described in Note 12—"Fair Value of Financial Instruments."
Recently Issued FASB Accounting Standard Codification Updates
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The standard permits the use of either the retrospective or modified retrospective transition method. ASU 2014-09 was originally effective for annual and interim reporting periods beginning after December 15, 2016. However, the standard was deferred by ASU 2015-14, issued by the FASB in August 2015, and is now effective for fiscal years beginning on or after December 15, 2017, including interim reporting periods within that reporting period, with early adoption permitted as of the original effective date. In addition, amendments in subsequent Accounting Standards Updates have either clarified or revised guidance as set forth in ASU 2014-09, including ASU 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus
Agent Considerations (Reporting Revenues Gross versus Net)
, ASU 2016-10,
Revenue from Contracts with Customers : Identifying Performance Obligations and Licensing
and
ASU 2016-12,
Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients.
The Company has selected the modified retrospective method for adoption of ASU 2014-09 and its related ASU amendments. Under this method, we will recognize the cumulative effect of the changes in retained earnings at the date of adoption (January 1, 2018), but will not restate prior periods.
The Company believes that the adoption of ASU 2014-09 and its related ASU amendments will primarily impact its accounting for its (i) loyalty program, (ii) gift cards and bulk tickets, including commissions paid to third parties, (iii) customer incentives, (iv) the classification of internet ticketing surcharges and (v) amounts recorded as deferred revenue and the method of amortization for the advanced payment received in connection with the 2007 National CineMedia ESA modification and subsequent receipts of common units of National CineMedia pursuant to the provisions of the Common Unit Adjustment Agreement. While we do not believe the adoption of ASU 2014-09 will have a material impact on our net income or cash flows from operations, we do expect the standard to materially impact the timing and classification of revenues and related expenses in the following key areas:
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|
•
|
First, we believe the advanced payment received in connection with the 2007 National CineMedia ESA modification and subsequent receipts of common units of National CineMedia pursuant to the provisions of the Common Unit Adjustment Agreement, each as described in Note 3—"Investments," include a significant financing component under ASU 2014-09 and expect that as a result, advertising revenues will increase materially with a similar offsetting increase in non-cash interest expense beginning in fiscal year 2018.
C
urrently, the Company utilizes the units of revenue method to amortize such amounts and will change its amortization to a straight-line method under ASU 2014-09. We do not expect these changes to have a material impact on our net income or cash flows from operations.
|
|
|
•
|
Second, under ASU 2014-09, the Company expects to record internet ticketing surcharge fees based on the gross transaction price as opposed to current accounting where we record such fees net of third-party commission or service fees. This change will have the effect of materially increasing other operating revenues and other operating expenses, but will have no impact on net income or cash flows from operations.
|
|
|
•
|
Third, with respect to our gift card and bulk ticket programs, the adoption of ASU 2014-09 is not expected to have a material impact on the annual revenue we currently recognize from these programs, but it will change the method in which we recognize revenue from gift cards and bulk tickets. The Company currently recognizes revenue associated with gift cards and bulk tickets when redeemed, or when the likelihood of redemption becomes remote. We currently recognize unredeemed gift cards and bulk tickets as revenue (known as "breakage" in our industry) based on historical experience, when the likelihood of redemption is remote. Under ASU 2014-09, the Company expects to recognize revenue from unredeemed gift cards and bulk tickets following the proportional method where revenue is recognized in proportion to the pattern of rights exercised by the customer when the Company expects to be entitled to breakage and that it is probable that a significant revenue reversal would not occur for any estimated breakage amounts. With respect to gift card commissions paid to third parties, under ASU 2014-09, the Company will begin to amortize the commission fees over the expected redemption period as opposed to current accounting where such gift card commissions are expensed as incurred. We do not expect these changes to have a material impact on our net income or cash flows from operations.
|
|
|
•
|
Finally, with respect to other areas impacted by ASU 2014-09 such as our loyalty program and customer incentives, we do not expect those accounting changes to have a material impact on our net income or cash flows from operations.
|
The Company is currently finalizing its review of ASU 2014-09 and its related ASU amendments to determine necessary adjustments to existing accounting policies and to support an evaluation of the overall impact on the Company’s consolidated results of operations and financial condition.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. ASU 2016-02 establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is evaluating the impact that ASU 2016-02 will have on its consolidated financial statements and related disclosures and believes that the significance of its future minimum rental payments will result in a material increase in ROU assets and lease liabilities.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
. The purpose of ASU 2016-15 is to reduce the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within that year. The Company is evaluating the impact that ASU 2016-15 will have on its consolidated financial statements and related disclosures.
In October 2016, the FASB issued ASU 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
, which requires that an entity recognize the income tax consequences of intra-entity transfers of assets other than inventory at the time of the transfer instead of deferring the tax consequences until the asset has been sold to an outside party, as current U.S. GAAP requires. ASU 2016-16 is effective for annual periods, and interim periods therein, beginning after December 15, 2017. Early application is permitted in any interim or annual period. The Company is evaluating the impact that ASU 2016-16 will have on its consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
. The purpose of ASU 2017-01 is to clarify the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within that year. The amendments in ASU 2017-01 should be applied prospectively on or after the effective date. Early adoption is permitted. The Company does not expect that the adoption of ASU 2017-01 will have a material impact on its consolidated financial statements and related disclosures.
In August 2017, the FASB issued ASU 2017-12,
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
, which is intended to simplify and amend the application of hedge accounting to more clearly portray the economics of an entity’s risk management strategies in its financial statements. ASU 2017-12 also amends the presentation and disclosure requirements and changes how entities assess hedge effectiveness. The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition with a cumulative effect adjustment recorded to opening retained earnings as of the initial adoption date. The Company is evaluating the impact that ASU 2017-12 will have on its consolidated financial statements and related disclosures.
11. DERIVATIVE INSTRUMENTS
From time to time, Regal Cinemas enters into hedging relationships via interest rate swap agreements to hedge against interest rate exposure of its variable rate debt obligations under the Amended Senior Credit Facility. Certain of these interest rate swaps qualify for cash flow hedge accounting treatment, and as such, the change in the fair values of the interest rate swaps is recorded on the Company's consolidated balance sheet as an asset or liability with the effective portion of the interest rate swaps' gains or losses reported as a component of other comprehensive income and the ineffective portion reported in earnings. As interest expense is accrued on the debt obligation, amounts in accumulated other comprehensive income/loss related to the interest rate swaps will be reclassified into earnings. In the event that an interest rate swap is terminated or de-designated prior to maturity, gains or losses accumulated in other comprehensive income or loss remain deferred and are reclassified into earnings in the periods during which the hedged forecasted transaction affects earnings. See Note 12—"Fair Value of Financial Instruments" for discussion of the Company’s interest rate swaps’ fair value estimation methods and assumptions.
Below is a summary of Regal Cinemas' current interest rate swap agreements as of
September 30, 2017
:
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|
|
|
|
|
|
|
|
|
|
|
|
Nominal Amount
|
|
Effective Date
|
|
Fixed Rate
|
|
Receive Rate
|
|
Expiration Date
|
Designated as Cash Flow Hedge
|
Gross Fair Value at September 30, 2017
|
Balance Sheet Location
|
$200.0 million
|
|
June 30, 2015
|
|
2.165%
|
|
1-month LIBOR
|
|
June 30, 2018
|
No
|
$(1.2) million
|
See Note 12
|
$250.0 million
|
|
June 30, 2018
|
|
1.908%
|
|
1-month LIBOR
|
|
June 30, 2022
|
Yes
|
$0.4 million
|
See Note 12
|
$200.0 million
|
|
December 31, 2018
|
|
1.900%
|
|
1-month LIBOR
|
|
December 31, 2021
|
Yes
|
$0.4 million
|
See Note 12
|
On April 2, 2015, Regal Cinemas amended
two
of its existing interest rate swap agreements originally designated as cash flow hedges on
$350.0 million
of variable rate debt obligations. Since the terms of the interest rate swaps designated in the original cash flow hedge relationships changed with these amendments, we de-designated the original hedge relationships and re-designated the amended interest rate swaps in new cash flow hedge relationships as of the amendment date of April 2, 2015. On December 31, 2016,
one
of these interest rate swap agreements designated to hedge
$150.0 million
of variable rate debt obligations expired.
In connection with the June 2017 Refinancing Agreement described further in Note 4—"Debt Obligations,” no amendment or modification was made to the Company's interest swap agreement expiring on June 30, 2018 (originally designated to hedge
$200.0 million
of variable rate debt obligations). As a result, the interest rate swap no longer met the highly effective qualification for cash flow hedge accounting and accordingly, the remaining hedge relationship was de-designated effective June 6, 2017. Since the interest rate swap no longer qualifies for cash flow hedge accounting treatment, the change in its fair value since de-designation is recorded on the Company’s unaudited condensed consolidated balance sheet as an asset or liability with the interest rate swap's gain or loss reported as a component of interest expense during the period of change. We estimate that
$0.9 million
of deferred pre-tax losses attributable to this interest rate swap will be reclassified into earnings as interest expense through June 30, 2018 as the underlying hedged transaction occurs.
As detailed in the table above, on August 9, 2017, Regal Cinemas entered into two additional hedging relationships via
two
distinct interest rate swap agreements with effective dates beginning on June 30, 2018 and December 31, 2018 and maturity terms ending on June 30, 2022 and December 31, 2021, respectively. These swaps were designated as cash flow hedges and will require Regal Cinemas to pay interest at fixed rates ranging from
1.90%
to
1.908%
and receive interest at a variable rate. The interest rate swaps are designated to hedge
$450.0 million
of variable rate debt obligations.
The following tables show the effective portion of gains and losses on derivative instruments designated and qualifying in cash flow hedges recognized in other comprehensive income (loss), and amounts reclassified from accumulated other comprehensive loss to interest expense for the periods indicated (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax Gain (Loss) Recognized in Other Comprehensive Income (Loss) (Effective Portion)
|
|
|
Quarter Ended
September 30, 2017
|
Quarter Ended
September 30, 2016
|
Three Quarters Ended
September 30, 2017
|
Three Quarters Ended
September 30, 2016
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
0.7
|
|
$
|
(0.6
|
)
|
$
|
(0.1
|
)
|
$
|
(4.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax Amounts Reclassified from Accumulated Other Comprehensive Loss into Interest Expense, net
|
|
|
Quarter Ended
September 30, 2017
|
Quarter Ended
September 30, 2016
|
Three Quarters Ended
September 30, 2017
|
Three Quarters Ended
September 30, 2016
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
0.4
|
|
$
|
1.5
|
|
$
|
2.3
|
|
$
|
4.9
|
|
The changes in accumulated other comprehensive loss, net associated with the Company’s interest rate swap arrangements for the quarters and three quarters ended September 30, 2017 and September 30, 2016 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
|
Quarter Ended
September 30, 2017
|
|
Quarter Ended
September 30, 2016
|
Accumulated other comprehensive loss, net, beginning of period
|
|
$
|
(0.7
|
)
|
|
$
|
(2.8
|
)
|
Change in fair value of interest rate swap transactions (effective portion), net of taxes of $0.3 and $0.2, respectively
|
|
0.4
|
|
|
(0.4
|
)
|
Amounts reclassified from accumulated other comprehensive loss to interest expense, net of taxes of $0.2 and $0.6, respectively
|
|
0.2
|
|
|
0.9
|
|
Accumulated other comprehensive loss, net, end of period
|
|
$
|
(0.1
|
)
|
|
$
|
(2.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
|
Three Quarters Ended
September 30, 2017
|
|
Three Quarters Ended
September 30, 2016
|
Accumulated other comprehensive loss, net, beginning of period
|
|
$
|
(1.4
|
)
|
|
$
|
(2.7
|
)
|
Change in fair value of interest rate swap transactions (effective portion), net of taxes of $0 and $1.6, respectively
|
|
(0.1
|
)
|
|
(2.5
|
)
|
Amounts reclassified from accumulated other comprehensive loss to interest expense, net of taxes of $0.9 and $2.0, respectively
|
|
1.4
|
|
|
2.9
|
|
Accumulated other comprehensive loss, net, end of period
|
|
$
|
(0.1
|
)
|
|
$
|
(2.3
|
)
|
The following table sets forth the effect of our interest rate swap arrangements on our unaudited condensed statements of income for the quarters and three quarters ended September 30, 2017 and September 30, 2016 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax Gain (Loss) Recognized in Interest Expense, net
|
|
|
Quarter Ended
September 30, 2017
|
Quarter Ended
September 30, 2016
|
Three Quarters Ended
September 30, 2017
|
Three Quarters Ended
September 30, 2016
|
Derivatives designated as cash flow hedges (ineffective portion):
|
|
|
|
|
|
Interest rate swaps(1)
|
|
$
|
—
|
|
$
|
0.5
|
|
$
|
0.7
|
|
$
|
2.0
|
|
|
|
|
|
|
|
Derivatives
not
designated as cash flow hedges:
|
|
|
|
|
|
Interest rate swap(2)
|
|
$
|
0.4
|
|
$
|
—
|
|
$
|
0.6
|
|
$
|
—
|
|
________________________________
|
|
(1)
|
Amounts represent the ineffective portion of the change in fair value of the hedging derivatives and are recorded as a reduction of interest expense in the consolidated financial statements.
|
|
|
(2)
|
Amounts represent the change in fair value of the former hedging derivative and is recorded as a reduction of interest expense in the consolidated financial statements subsequent to the de-designation date of June 6, 2017.
|
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the entity transacts. The inputs used to develop these fair value measurements are established in a hierarchy, which ranks the quality and reliability of the information used to determine fair value. The fair value classification is based on levels of inputs. Assets and liabilities that are carried at fair value are classified and disclosed in one of the following categories described in ASC Topic 820, Fair Value Measurements and Disclosures:
Level 1 Inputs:
Quoted market prices in active markets for identical assets or liabilities.
Level 2 Inputs:
Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3 Inputs:
Unobservable inputs that are not corroborated by market data.
The following tables summarize the fair value hierarchy of the Company’s financial assets and liabilities carried at fair value on a recurring basis as of
September 30, 2017
and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at September 30, 2017
|
|
Balance Sheet Location
|
Total Carrying
Value at
September 30, 2017
|
|
Quoted prices in
active market
(Level 1)
|
|
Significant other
observable inputs
(Level 2)
|
|
Significant
unobservable inputs
(Level 3)
|
|
|
(in millions)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps designated as cash flow hedges (1)
|
Other Non-Current Assets
|
$
|
0.9
|
|
|
$
|
—
|
|
|
$
|
0.9
|
|
|
$
|
—
|
|
Total assets at fair value
|
|
$
|
0.9
|
|
|
$
|
—
|
|
|
$
|
0.9
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap designated as cash flow hedge(1)
|
Accrued Expenses
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
|
$
|
—
|
|
Interest rate swap
not
designated as cash flow hedge (1)
|
Accrued Expenses
|
$
|
1.2
|
|
|
$
|
—
|
|
|
$
|
1.2
|
|
|
$
|
—
|
|
Total liabilities at fair value
|
|
$
|
1.3
|
|
|
$
|
—
|
|
|
$
|
1.3
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Carrying
Value at
December 31, 2016
|
|
Fair Value Measurements at December 31, 2016
|
|
Balance Sheet Location
|
Quoted prices in
active market
(Level 1)
|
|
Significant other
observable inputs
(Level 2)
|
|
Significant
unobservable inputs
(Level 3)
|
|
|
|
|
(in millions)
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Interest rate swap designated as cash flow hedge(1)
|
Accrued Expenses
|
$
|
2.3
|
|
|
$
|
—
|
|
|
$
|
2.3
|
|
|
$
|
—
|
|
Interest rate swap designated as cash flow hedge(1)
|
Other Non-Current Liabilities
|
$
|
0.7
|
|
|
$
|
—
|
|
|
$
|
0.7
|
|
|
$
|
—
|
|
Total liabilities at fair value
|
|
$
|
3.0
|
|
|
$
|
—
|
|
|
$
|
3.0
|
|
|
$
|
—
|
|
________________________________
|
|
(1)
|
The fair value of the Company’s interest rate swaps described in Note 11—"Derivative Instruments" is based on Level 2 inputs, which include observable inputs such as dealer quoted prices for similar assets or liabilities, and represents the estimated amount Regal Cinemas would receive or pay to terminate the agreement taking into consideration various factors, including current interest rates, credit risk and counterparty credit risk. The counterparty to the Company’s interest rate swaps is a major financial institution. The Company evaluates the bond rating of the financial institution and believes that credit risk is at an acceptably low level.
|
There were no changes in valuation techniques during the period. There were
no
transfers in or out of Level 3 during the three quarters ended
September 30, 2017
and
September 30, 2016
, respectively.
In addition, the Company is required to disclose the fair value of financial instruments that are not recognized in the statement of financial position for which it is practicable to estimate that value. The methods and assumptions used to estimate the fair value of each class of financial instrument are as follows:
Cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities:
The carrying amounts approximate fair value because of the short maturity of these instruments.
Long-Lived Assets, Intangible Assets and Other Investments
As further described in Note 2 to the
2016
Audited Consolidated Financial Statements and incorporated by reference herein, the Company regularly reviews long-lived assets (primarily property and equipment), intangible assets and investments in non-consolidated entities, for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. When the estimated fair value is determined to be lower than the carrying value of the asset, an impairment charge is recorded to write the asset down to its estimated fair value.
The Company’s analysis relative to long-lived assets resulted in the recording of impairment charges of
$7.0 million
and
$6.4 million
, respectively, for the three quarters ended
September 30, 2017
and
September 30, 2016
. The long-lived asset impairment charges recorded were specific to theatres that were directly and individually impacted by increased competition, adverse changes in market demographics or adverse changes in the development or the conditions of the areas surrounding the theatres we deemed other than temporary.
The Company evaluates goodwill for impairment annually or more frequently as specific events or circumstances dictate. After considering various industry specific factors, the Company conducted an interim goodwill impairment assessment during the quarter ended September 30, 2017, which indicated that the carrying value of one of its reporting units exceeded its estimated fair value. As a result, the Company recorded a goodwill impairment charge of approximately
$7.3 million
. Also, during the quarter ended September 30, 2017, the Company recorded a favorable lease impairment charge of approximately
$1.4 million
related to a theatre scheduled to be closed. The Company did not record an impairment of any other intangible assets or investments in non-consolidated subsidiaries accounted for under the equity method for the quarters and three quarters ended
September 30, 2017
and
September 30, 2016
.
Long term obligations, excluding capital lease obligations, lease financing arrangements and other:
The fair value of the Amended Senior Credit Facility described in Note 4—"Debt Obligations," which consists of the New Term Loans and the Revolving Facility, is estimated based on quoted prices (Level 2 inputs as described in ASC Topic 820) as of
September 30, 2017
and
December 31, 2016
. The associated interest rates are based on floating rates identified by
reference to market rates and are assumed to approximate fair value. The fair values of the 5
3
/
4
% Senior Notes Due 2022, the 5
3
/
4
% Senior Notes Due 2025 and the 5
3
/
4
% Senior Notes Due 2023 were estimated based on quoted prices (Level 1 inputs as described in ASC Topic 820) for these issuances as of
September 30, 2017
and
December 31, 2016
. The aggregate carrying values and fair values of long-term debt at
September 30, 2017
and
December 31, 2016
consist of the following:
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
(in millions)
|
Carrying value
|
$
|
2,374.9
|
|
|
$
|
2,229.7
|
|
Fair value
|
$
|
2,406.0
|
|
|
$
|
2,287.1
|
|
13. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET
The following tables present for the three quarters ended
September 30, 2017
and
September 30, 2016
, respectively, the change in accumulated other comprehensive loss, net of tax, by component (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Equity method investee interest rate swaps
|
|
Total
|
Balance as of December 31, 2016
|
$
|
(1.4
|
)
|
|
$
|
0.1
|
|
|
$
|
(1.3
|
)
|
Other comprehensive income (loss), net of tax
|
|
|
|
|
|
Change in fair value of interest rate swap transaction
|
(0.1
|
)
|
|
—
|
|
|
(0.1
|
)
|
Amounts reclassified to net income from interest rate swap
|
1.4
|
|
|
—
|
|
|
1.4
|
|
Change in fair value of equity method investee interest rate swaps
|
—
|
|
|
0.1
|
|
|
0.1
|
|
Total other comprehensive income (loss), net of tax
|
1.3
|
|
|
0.1
|
|
|
1.4
|
|
Balance as of September 30, 2017
|
$
|
(0.1
|
)
|
|
$
|
0.2
|
|
|
$
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Available for sale securities
|
|
Equity method investee interest rate swaps
|
|
Total
|
Balance as of December 31, 2015
|
$
|
(2.7
|
)
|
|
$
|
0.5
|
|
|
$
|
0.1
|
|
|
$
|
(2.1
|
)
|
Other comprehensive income (loss), net of tax
|
|
|
|
|
|
|
|
Change in fair value of interest rate swap transactions
|
(2.5
|
)
|
|
—
|
|
|
—
|
|
|
(2.5
|
)
|
Amounts reclassified to net income from interest rate swaps
|
2.9
|
|
|
—
|
|
|
—
|
|
|
2.9
|
|
Reclassification adjustment for gain on sale of available for sale securities recognized in net income
|
—
|
|
|
(0.5
|
)
|
|
—
|
|
|
(0.5
|
)
|
Change in fair value of equity method investee interest rate swaps
|
—
|
|
|
—
|
|
|
(0.5
|
)
|
|
(0.5
|
)
|
Total other comprehensive income (loss), net of tax
|
0.4
|
|
|
(0.5
|
)
|
|
(0.5
|
)
|
|
(0.6
|
)
|
Balance as of September 30, 2016
|
$
|
(2.3
|
)
|
|
$
|
—
|
|
|
$
|
(0.4
|
)
|
|
$
|
(2.7
|
)
|
14. SUBSEQUENT EVENTS
Declaration of Quarterly Dividend
On
October 24, 2017
, 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
December 15, 2017
, to stockholders of record on
December 4, 2017
.
Amended and Restated Performance Share Agreements and Amended and Restated Employment Agreements
Based on the recommendations of the Compensation Committee of the Board of Directors and our outside compensation consultant, Pay Governance, the Company amended and restated the Performance Agreements to amend the
number of shares of Common Stock that are to be vested in the event of termination of employment upon death, disability or a change of control. The changes to the Performance Agreements will apply to all existing performance share grants as well as any future performance share grants. Contemporaneously with the amendment and restatement of the Performance Agreements, the Board of Directors approved changes to the employment agreements with our named executive officers.