UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended: December 31, 2012
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number 1-9444
CEDAR FAIR, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE | 34-1560655 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
One Cedar Point Drive | ||
Sandusky, Ohio | 44870-5259 | |
(Address of principal executive office) | (Zip Code) | |
Registrant's telephone number, including area code: (419) 626-0830 |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |||
Depositary Units (Representing Limited Partner Interests) | New York Stock Exchange | |||
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | x | Accelerated filer | o | |||
Non-accelerated filer | o (Do not check if a smaller reporting company) | Smaller reporting company | o | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The aggregate market value of Depositary Units held by non-affiliates of the Registrant based on the closing price of such units on June 29, 2012 of $29.97 per unit was approximately $1,610,275,543.
Number of Depositary Units representing limited partner interests outstanding as of February 15, 2013: 55,621,713
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates by reference certain information from the Registrant's definitive proxy statement to be used in connection with its annual meeting of unitholders to be held in June 2013.
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The Exhibit Index is located on page 69
Page 1 of 76 pages
CEDAR FAIR, L.P.
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PART I
ITEM 1. BUSINESS.
Introduction
Cedar Fair, L.P. (together with its affiliated companies, the "Partnership") is a publicly traded Delaware limited partnership formed in 1987 and managed by Cedar Fair Management, Inc., an Ohio corporation (the "General Partner") whose shares are held by an Ohio trust. The Partnership is one of the largest regional amusement park operators in the world and owns eleven amusement parks, four outdoor water parks, one indoor water park and five hotels.
In 2012, the Partnership entertained more than 23 million visitors. All of the Partnership's parks are family-oriented, with recreational facilities for people of all ages, and provide clean and attractive environments with exciting rides and entertainment. The amusement parks include: Cedar Point, located on Lake Erie between Cleveland and Toledo in Sandusky, Ohio; Kings Island near Cincinnati, Ohio; Canada's Wonderland near Toronto, Canada; Dorney Park & Wildwater Kingdom (“Dorney Park”), located near Allentown in South Whitehall Township, Pennsylvania; Valleyfair, located near Minneapolis/St. Paul in Shakopee, Minnesota; Michigan's Adventure located near Muskegon, Michigan; Kings Dominion near Richmond, Virginia; Carowinds in Charlotte, North Carolina; Worlds of Fun located in Kansas City, Missouri; Knott's Berry Farm, located near Los Angeles in Buena Park, California; and California's Great America (“Great America”) located in Santa Clara, California. Additionally, the Partnership has a contract to manage and operate Gilroy Gardens Family Theme Park in Gilroy, California.
The Partnership also owns and operates the Castaway Bay Indoor Waterpark Resort in Sandusky, Ohio, and four separately gated outdoor water parks. Two of the outdoor water parks are located adjacent to Cedar Point and Knott's Berry Farm, the third is in Palm Springs, California, and the fourth is Wildwater Kingdom (formerly known as Geauga Lake) located near Cleveland in Aurora, Ohio. All rides and attractions at the amusement and water parks are owned and operated by the Partnership.
The Partnership's seasonal amusement parks are generally open during weekends beginning in April or May, and then daily from Memorial Day until Labor Day, after which they are open during weekends in September and, in most cases, October. The four outdoor water parks also operate seasonally, generally from Memorial Day to Labor Day, plus some additional weekends before and after this period. As a result, virtually all of the operating revenues of these parks are generated during an approximately 130- to 140-day operating season. Knott's Berry Farm is open daily on a year-round basis. Castaway Bay is generally open daily from Memorial Day to Labor Day, plus a limited daily schedule for the balance of the year. Each park charges a basic daily admission price, which allows unlimited use of most rides and attractions.
The demographic groups that are most important to the parks are young people ages 12 through 24 and families. Families are believed to be attracted by a combination of rides, live entertainment and the clean, wholesome atmosphere. Young people are believed to be attracted by the action-packed rides. During their operating season, the parks conduct active television, radio, newspaper and internet advertising campaigns in their major market areas geared toward these two groups.
Description of Parks
Cedar Point
Cedar Fair's flagship park, Cedar Point, was first developed as a recreational area in 1870. Located on a peninsula in Sandusky, Ohio bordered by Lake Erie and Sandusky Bay, it's approximately 60 miles west of Cleveland and 100 miles southeast of Detroit. Cedar Point is believed to be the largest seasonal amusement park in the United States, measured by the number of rides and attractions and the hourly ride capacity. For 15 consecutive years Cedar Point has been voted the "Best Amusement Park in the World" in Amusement Today's international survey. Attractive to both families and thrill-seekers, the park features 15 world-class roller coasters, including many record-breakers, and four children's areas. Cedar Point serves a six-state region which includes nearly all of Ohio and Michigan, western Pennsylvania and New York, northern West Virginia and Indiana, as well as southwestern Ontario, Canada. The park's total market area includes approximately 26 million people, and the major areas of dominant influence (Cleveland, Detroit, Toledo, Akron, Columbus, Grand Rapids, Flint and Lansing) include approximately 15 million people.
Located adjacent to the park is Soak City, a separately gated water park that features more than 20 water rides and attractions, as well as Challenge Park, which features several extra-charge attractions including a 18-hole themed miniature golf course and two go-kart tracks.
Wildwater Kingdom, located near Cleveland, Ohio, is a seasonal water-park that is operated as a division of Cedar Point. The park offers many water rides and attractions, including numerous water slides, a giant wave pool, a lazy river inner tube ride and two children's areas, as well as various food and merchandise shops.
Cedar Point also owns and operates four hotels. The park's only year-round hotel is Castaway Bay Indoor Waterpark Resort, which is located at the Causeway entrance to the park. Castaway Bay features a tropical Caribbean theme with 237 hotel rooms centered around a 38,000-square-foot indoor water park. The park's largest hotel, the historic Hotel Breakers, has more than 600 guest rooms. Hotel Breakers has various dining and lounge facilities, a private beach, lake swimming, a conference/meeting center, an indoor pool and two outdoor pools. Located near the Causeway entrance to the park, Breakers Express is a 350-room, limited-service seasonal hotel. In addition to Hotel Breakers and Breakers
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Express, Cedar Point offers the lake-front Sandcastle Suites Hotel, which features 187 suites, a courtyard pool, tennis courts and a contemporary waterfront restaurant.
Cedar Point also owns and operates the Cedar Point Marina, Castaway Bay Marina and Camper Village. Cedar Point Marina is one of the largest full-service marinas on the Great Lakes and provides dock facilities for more than 740 boats, including floating docks and full guest amenities. In addition, Cedar Point Marina features two restaurants accessible by the general public. Castaway Bay Marina is a full-service marina featuring 180 slips. Camper Village includes more than 100 RV campsites and Lighthouse Point, which offers lake-front cottages, cabins and full-service RV campsites.
The Partnership, through a wholly owned subsidiary, owns and operates the Cedar Point Causeway across Sandusky Bay. This Causeway is a major access route to Cedar Point. The Partnership also owns dormitory facilities located near the park that house approximately 3,500 of the park's approximately 4,100 seasonal and part-time employees.
Knott's Berry Farm
Knott's Berry Farm, located near Los Angeles in Buena Park, California, first opened in 1920 and was acquired by the Partnership in late 1997. The park is one of several year-round theme parks in Southern California and serves a total market area of approximately 20 million people centered in Orange County and a large national and international tourism population.
The park is renowned for its seasonal events, including a special Christmas promotion, “Knott's Merry Farm,” and a Halloween event called “Knott's Scary Farm,” which has been held for more than 40 years and is annually rated one of the best Halloween events in the industry by Amusement Today's international survey.
The Partnership also owns and operates two water parks in California. Adjacent to Knott's Berry Farm is “Knott's Soak City-Orange County,” a separately gated seasonal water park that features more than 20 water rides and attractions. “Knott's Soak City-Palm Springs” is a 17-acre seasonal water park, located in Palm Springs, California, that offers 20 separate water rides and attractions, including 13 water slides, a giant wave pool, a lazy river inner tube ride and a children's activity area, as well as various food and merchandise shops.
The Partnership also owns and operates the Knott's Berry Farm Hotel, a 320-room, full-service hotel located adjacent to Knott's Berry Farm, which features a pool, tennis courts and meeting/banquet facilities.
Canada's Wonderland
Canada's Wonderland, a combination amusement and water park located near Toronto in Vaughan, Ontario, first opened in 1981 and was acquired by the Partnership in June of 2006. It contains more than 200 attractions, including 16 roller coasters, and is one of the most attended regional amusement parks in North America. Canada's Wonderland is in a culturally diverse metropolitan market with large populations of different ethnicities and national origins. Each year, numerous cultural festivals featuring renowned music artists from across the world perform in the Kingswood Music Theatre located within the park. The park's total market area includes approximately 9 million people.
Kings Island
Kings Island, a combination amusement and water park located near Cincinnati, Ohio, first opened in 1972 and was acquired by the Partnership in June of 2006. Kings Island is one of the largest seasonal amusement parks in the United States, measured by the number of rides and attractions and the hourly ride capacity. The park features a children's area that has been named the "Best Kids' Area in the World" for 12 consecutive years by Amusement Today.
The park's total market area includes approximately 15 million people, and the major areas of dominant influence in this market area, which are Cincinnati, Dayton and Columbus, Ohio, Louisville and Lexington, Kentucky, and Indianapolis, Indiana, include approximately 8 million people.
Dorney Park
Dorney Park, a combination amusement and water park located near Allentown in South Whitehall Township, Pennsylvania, was first developed as a summer resort area in 1884 and was acquired by the Partnership in 1992. Dorney Park is one of the largest amusement parks in the Northeastern United States and serves a total market area of approximately 35 million people. The park's major markets include Philadelphia, New Jersey, New York City, Lancaster, Harrisburg, York, Scranton, Wilkes-Barre, Hazleton and the Lehigh Valley.
Kings Dominion
Kings Dominion, a combination amusement and water park located near Richmond, Virginia, first opened in 1975 and was acquired by the Partnership in June of 2006. The park's total market area includes approximately 19 million people and the major areas of dominant influence in this market area, which are Richmond and Norfolk, Virginia, Raleigh, North Carolina, Baltimore, Maryland and Washington, D.C, include approximately 12 million people.
Additionally, the park offers Kings Dominion Campground, a camping area featuring a swimming pool, playground, volleyball courts, miniature golf, and laundry facilities. The campground also offers a free shuttle service between the campground and amusement park.
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The Partnership also owns a dormitory facility located adjacent to Kings Dominion that houses up to 440 of the park's approximately 3,100 seasonal employees.
Carowinds
Carowinds, a combination amusement and water park located in Charlotte, North Carolina, first opened in 1973 and was acquired by the Partnership in June of 2006. Carowinds' major markets include Charlotte, Greensboro, and Raleigh, North Carolina as well as Greenville and Columbia, South Carolina. The park's total market area includes approximately 14 million people.
The park also offers Camp Wilderness Resort, a camping area that features a convenience and merchandise store, laundry facilities, and a swimming pool. The campground has more than 140 RV sites, 56 spacious tent and pop-up sites, and 15 luxury cabins. The campground also offers a free shuttle service between the campground and amusement park.
Great America
Great America, a combination amusement and water park located in Santa Clara, California, first opened in 1976 and was acquired by the Partnership in June of 2006. The park's total market area includes approximately 13 million people and draws its visitors primarily from San Jose, San Francisco, Sacramento, Modesto and Monterey, among other cities in northern California.
Valleyfair
Valleyfair, which opened in 1976 and was acquired by the Partnership's predecessor in 1978, is a combination amusement and water park located near Minneapolis-St. Paul in Shakopee, Minnesota. It is the largest amusement park in Minnesota. Valleyfair's market area is centered in Minneapolis-St. Paul, which has a population of approximately 3 million, but the park also draws visitors from other areas in Minnesota and surrounding states with a combined population base of 9 million people.
The Partnership also owns a dormitory facility located adjacent to Valleyfair that houses up to 420 of the park's approximately 1,750 seasonal employees.
Worlds of Fun
Worlds of Fun, which opened in 1973, and Oceans of Fun, which opened in 1982, were acquired by the Partnership in 1995. Located in Kansas City, Missouri, Worlds of Fun serves a total market area of approximately 7 million people centered in Kansas City, as well as most of Missouri and portions of Kansas and Nebraska.
Oceans of Fun is located adjacent to Worlds of Fun, and beginning in the 2013 season is included in the park's admission fee. Oceans of Fun features a wide variety of water attractions, including numerous water slides, a giant wave pool, a lazy river inner tube ride and children's areas, as well as various food and merchandise shops.
Worlds of Fun also features Worlds of Fun Village, an upscale camping area that offers overnight guest accommodations next to the park in 20 wood-side cottages, 22 log cabins and 80 deluxe RV sites. Also, included within the Village is a clubhouse with a swimming pool and arcade games.
Michigan's Adventure
Michigan's Adventure, which was acquired by the Partnership in 2001, is the largest amusement park in Michigan. The combination amusement and water park located near Muskegon, Michigan serves a total market area of approximately 5 million people, principally from central and western Michigan and eastern Indiana.
CAPITAL EXPENDITURES AND WORKING CAPITAL
The Partnership believes that annual park attendance is influenced by the investment in new attractions from year to year. Capital expenditures are planned on a seasonal basis with the majority of such capital expenditures made in the period from October through May, prior to the beginning of the peak operating season. Capital expenditures made in a calendar year may differ materially from amounts identified with a particular operating season because of timing considerations such as weather conditions, site preparation requirements and availability of ride components, which may result in accelerated or delayed expenditures around calendar year-end.
During the operating season, the Partnership carries significant receivables and inventories of food and merchandise, as well as payables and payroll-related accruals. Amounts are substantially reduced in non-operating periods. Seasonal working capital needs are funded with revolving credit facilities, which are established at levels sufficient to accommodate the Partnership's peak borrowing requirements in April and May as the seasonal parks complete preparations for opening. Revolving credit borrowings are reduced daily with the Partnership's positive cash flow during the seasonal operating period.
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COMPETITION
In general, the Partnership competes for discretionary spending with all aspects of the recreation industry within its primary market areas, including several destination and regional amusement parks. The Partnership also competes with other forms of entertainment and recreational activities, including movies, sports events, restaurants and vacation travel.
The principal competitive factors in the amusement park industry include the uniqueness and perceived quality of the rides and attractions in a particular park, its proximity to metropolitan areas, the atmosphere and cleanliness of the park, and the quality and variety of the food and entertainment available. The Partnership believes that its amusement parks feature a sufficient quality and variety of rides and attractions, restaurants, gift shops and family atmosphere to make them highly competitive with other parks and forms of entertainment.
GOVERNMENT REGULATION
The Partnership's properties and operations are subject to a variety of federal, state and local environmental, health and safety laws and regulations. Currently, the Partnership believes it is in substantial compliance with applicable requirements under these laws and regulations. However, such requirements have generally become more strict over time, and there can be no assurance that new requirements, changes in enforcement policies or newly discovered conditions relating to its properties or operations will not require significant expenditures in the future.
All rides are run and inspected daily by both the Partnership's maintenance and ride operations personnel before being put into operation. The parks are also periodically inspected by the Partnership's insurance carrier and, at all parks except Valleyfair, Worlds of Fun, and Carowinds' South Carolina rides, by state or county ride-safety inspectors. Valleyfair, Worlds of Fun and Carowinds each contract with a third party to inspect its rides per Minnesota, Missouri, and South Carolina law, respectively, and submit the third-party report to the respective state agency.
EMPLOYEES
The Partnership has approximately 1,700 full-time employees. During the operating season, the Partnership employs in aggregate approximately 41,000 seasonal and part-time employees, many of whom are high school and college students. Approximately 3,500 of Cedar Point's seasonal employees, 400 of Valleyfair's seasonal employees, and 440 of Kings Dominion's seasonal employees live in dormitories owned by the Partnership. The Partnership maintains training programs for all new employees and believes that its relations with its employees are good.
AVAILABLE INFORMATION
Copies of the Partnership's annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K and all amendments to those reports as filed or furnished with the SEC are available without charge upon written request to the Partnership's Investor Relations Office or through its website (www.cedarfair.com).
You may read and copy any materials filed with the SEC at the SEC's Public Reference Room at Headquarters Office, 100 F Street, N.E., Room 1580, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site at http://www.sec.gov that contains the Partnership's reports, proxy statements and other information.
See Item 6 for Selected Financial Data, including net revenues, net income (loss) and total assets.
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SUPPLEMENTAL ITEM. Executive Officers of Cedar Fair
Name | Age | Position(s) | |||
Matthew A. Ouimet | 54 | Matt Ouimet has served as Chief Executive Officer since January 2012. Prior to that, he served as President of Cedar Fair since June 2011. Before joining Cedar Fair, Matt served as President and Chief Operating Officer for Corinthian Colleges from July 2009 to October 2010 and as Executive Vice President – Operations from January 2009 to June 2009. Prior to joining Corinthian Colleges, he served as President, Hotel Group for Starwood Hotels and Resorts Worldwide from August 2006 to September 2008. | |||
Richard A. Zimmerman | 52 | Richard Zimmerman has served as Chief Operating Officer since October of 2011. Prior to that, he served as Executive Vice President since November 2010, previously serving as Regional Vice President since June 2007. Before serving as Executive Vice President, he served as Vice President and General Manager of Kings Dominion since 1998. | |||
Brian C. Witherow | 46 | Brian Witherow has served as Executive Vice President and Chief Financial Officer since January 2012. Prior to that, he served as Vice President and Corporate Controller beginning in July 2005. He served as Corporate Treasurer from May 2004 to June 2005 and as Corporate Director of Investor Relations from 1995 through 2004. | |||
H. Philip Bender | 57 | Phil Bender has served as Executive Vice President, Operations, since November 2010, previously serving as Regional Vice President beginning in June 2006. Prior to that, he served as Vice President & General Manager of Worlds of Fun / Oceans of Fun since the end of 2000. | |||
Robert A. Decker | 52 | Rob Decker has served as Corporate Vice President of Planning & Design since the end of 2002. Prior to that, he served as Corporate Director of Planning and Design since 1999. | |||
Craig J. Freeman | 59 | Craig Freeman has served as Corporate Vice President of Administration since September 2005. Prior to that, he served as Vice President and General Manager of Knott's Camp Snoopy at the Mall of America from 1996 through 2005. | |||
Duffield E. Milkie | 47 | Duff Milkie has served as Corporate Vice President and General Counsel since February 2008 and Corporate Secretary since February 2012. Prior to that, he was a partner in the law firm of Wickens, Herzer, Panza, Cook, & Batista since 1998. | |||
David R. Hoffman | 44 | Dave Hoffman has served as Senior Vice President and Chief Accounting Officer since January 2012. Prior to that, he served as Vice President of Finance and Corporate Tax since November 2010. He served as Vice President of Corporate Tax from October 2006 until November 2010. Before joining Cedar Fair in 2006, he served as a tax consultant with Ernst & Young. | |||
Kelley Semmelroth | 48 | Kelley Semmelroth has served as Executive Vice President and Chief Marketing Officer since February 2012. Prior to joining Cedar Fair, Kelley served as Senior Vice President, Marketing Planning Director for TD Bank beginning in 2010. From 2005 to 2010, Kelley served as Senior Vice President of Brand Strategy and Management at Bank of America. | |||
ITEM 1A. RISK FACTORS.
We compete for discretionary spending and discretionary free-time with many other entertainment alternatives and are subject to factors that generally affect the recreation and leisure industry, including general economic conditions.
Our parks compete for discretionary spending and discretionary free-time with other amusement, water and theme parks and with other types of recreational activities and forms of entertainment, including movies, sporting events, restaurants and vacation travel. Our business is also subject to factors that generally affect the recreation and leisure industries and are not within our control. Such factors include, but are not limited to, general economic conditions, including relative fuel prices, and changes in consumer tastes and spending habits. The continued uncertainty regarding regional economic conditions and any deterioration in the economy generally may adversely impact attendance figures and guest spending patterns at our parks, and disproportionately affect different demographics of our target customers within our core markets. For example, group sales and season-pass sales, which represent a significant portion of our revenues, are disproportionately affected by general economic conditions. Both attendance and guest per capita spending at our parks are key drivers of our revenues and profitability, and reductions in either can directly and negatively affect revenues and profitability.
The uncertain economic conditions, such as high unemployment rates, have affected our guests' levels of discretionary spending. A continued decrease in discretionary spending due to decreases in consumer confidence in the economy, a continued economic slowdown or further deterioration in the economy could adversely affect the frequency with which our guests choose to attend our amusement parks and the amount
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that our guests spend on our products when they visit. The continued materialization of these risks could lead to a decrease in our revenues, operating income and cash flows.
Bad or extreme weather conditions can adversely impact attendance at our parks, which in turn would reduce our revenues.
Because most of the attractions at our parks are outdoors, attendance at our parks can be adversely affected by continuous bad or extreme weather and by forecasts of bad or mixed weather conditions, which would negatively affect our revenues. We believe that our ownership of many parks in different geographic locations reduces, but does not completely eliminate, the effect that adverse weather can have on our consolidated results.
The operating season at most of our parks is of limited duration, which can magnify the impact of adverse conditions or events occurring within that operating season.
Ten of our amusement parks are seasonal, generally operating during a portion of April or May, then daily from Memorial Day through Labor Day, and during weekends in September and, in most cases, October. Our outdoor water parks also operate seasonally, generally from Memorial Day through Labor Day and during some additional weekends before and after that period. Most of our revenues are generated during this 130- to 140-day annual operating season. As a result, when conditions or events described as risk factors occur during the operating season, particularly during the peak vacation months of July and August or the important fall season, there is only a limited period of time during which the impact of those conditions or events can be mitigated. Accordingly, the timing of such conditions or events may have a disproportionately adverse effect upon our revenues.
Our growth strategy may not achieve the anticipated results.
Our future success will depend on our ability to grow our business, including capital investments to improve our parks through new rides and attractions, as well as in-park product offerings and product offerings outside of our parks. Our growth and innovation strategies require significant commitments of management resources and capital investments and may not grow our revenues at the rate we expect or at all. As a result, we may not be able to recover the costs incurred in developing our new projects and initiatives or to realize their intended or projected benefits, which could have a material adverse effect our business, financial condition or results of operations.
Cyber-security risks and the failure to maintain the integrity of internal or customer data could result in damages to our reputation and/or subject us to costs, fines or lawsuits.
In the normal course of business, we collect and retain large volumes of internal and customer data, including credit card numbers and other personally identifiable information, which is used for target marketing and promotional purposes, and our various information technology systems enter, process, summarize and report such data. We also maintain personally identifiable information about our employees. The integrity and protection of such data is critical to our business, and our guests and employees have a high expectation that we will adequately protect their personal information. The regulatory environment, as well as the requirements imposed on us by the credit card industry, governing information, security and privacy laws is increasingly demanding and continues to evolve. Maintaining compliance with applicable security and privacy regulations may increase our operating costs and/or adversely impact our ability to market our parks, products and services to our guests. Furthermore, if a person is able to circumvent our security measures, he or she could destroy or steal valuable information or disrupt our operations. Although we have not had any cyber-security incidents resulting in a breach, any security breach could expose us to risks of data loss, which could harm our reputation and result in remedial and other costs, fines or lawsuits. Although we carry liability insurance to cover this risk, there can be no assurance that our coverage will be adequate to cover liabilities, or that we will be able to obtain adequate coverage should a catastrophic incident occur.
Our business depends on our ability to meet our workforce needs.
Our success depends on our ability to attract, motivate and retain qualified employees to keep pace with our needs. If we are unable to do so, our results of operations and cash flows may be adversely affected. In addition, we employ a significant seasonal workforce. We recruit year-round to fill thousands of seasonal staffing positions each season and work to manage seasonal wages and the timing of the hiring process to ensure the appropriate workforce is in place. There is no assurance that we will be able to recruit and hire adequate seasonal personnel as the business requires or that we will not experience material increases in the cost of securing our seasonal workforce in the future.
Increased costs of labor and employee health and welfare benefits may impact our results of operations.
Labor is a primary component in the cost of operating our business. We devote significant resources to recruiting and training our managers and employees. Increased labor costs, due to competition, increased minimum wage or employee benefit costs, including health care costs, or otherwise, could adversely impact our operating expenses. The Patient Protection and Affordable Care Act of 2010 and proposed amendments thereto contain provisions which could materially impact our future health-care costs. While the legislation’s ultimate impact is not yet known, it is possible that these changes could significantly increase our labor costs, which would adversely affect our operating results and cash flows.
If we lose key personnel, our business may be adversely affected.
Our success depends in part upon a number of key employees, including our senior management team, whose members have been involved in the leisure and hospitality industries for an average of more than 20 years. The loss of the services of our key employees could have a materially adverse effect on our business.
The high fixed cost structure of amusement park operations can result in significantly lower margins if revenues decline.
A large portion of our expenses is relatively fixed because the costs for full-time employees, maintenance, utilities, advertising and insurance do not vary significantly with attendance. These fixed costs may increase at a greater rate than our revenues and may not be able to be reduced at the same rate as declining revenues. If cost-cutting efforts are insufficient to offset declines in revenues or are impracticable, we could experience a material decline in margins, revenues, profitability and cash flows. Such effects can be especially pronounced during periods of economic contraction or slow economic growth.
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There is a risk of accidents occurring at amusement parks, which may reduce attendance and negatively impact our revenues.
The safety of our guests and employees is one of our top priorities. All of our amusement parks feature thrill rides. There are inherent risks involved with these attractions, and an accident or a serious injury at any of our amusement parks may result in negative publicity and could reduce attendance and result in decreased revenues. In addition, accidents or injuries at parks operated by our competitors could influence the general attitudes of amusement park patrons and adversely affect attendance at our amusement parks.
Unanticipated construction delays in completing capital improvement projects in our parks and resort facilities, or significant ride downtime, can adversely affect our revenues.
A principal competitive factor for an amusement park is the uniqueness and perceived quality of its rides and attractions in a particular market area. Accordingly, the regular addition of new rides and attractions is important, and a key element of our revenue growth is strategic capital spending on new rides and attractions. Any construction delays or ride down-time can adversely affect our attendance and our ability to realize revenue growth.
Instability in general economic conditions throughout the world could impact our profitability and liquidity while increasing our exposure to counter-party risk.
Unfavorable general economic conditions, such as high unemployment rates, a constrained credit market, and higher prices for consumer goods, may hinder the ability of those with which we do business, including vendors, concessionaires and customers, to satisfy their obligations to us. Our exposure to credit losses will depend on the financial condition of our vendors, concessionaires and customers and other factors beyond our control, such as deteriorating conditions in the world economy or in the theme/amusement park industry. Market turmoil, coupled with a reduction of business activity, generally increases our risks related to our status as an unsecured creditor of most of our vendors, concessionaires and customers. Credit losses, if significant, would have a material adverse effect on our business, financial condition and results of operations. Moreover, these issues could also increase the counter-party risk inherent in our business, including with our suppliers, vendors and financial institutions with which we enter into hedging agreements and long-term debt agreements, such as our credit facilities. The soundness of these counter-parties could adversely affect us. In this difficult economic environment, our credit evaluations may be inaccurate and we cannot assure you that credit performance will not be materially worse than anticipated, and, as a result, materially and adversely affect our business, financial position and results of operations.
Our debt agreements contain restrictions that could limit our flexibility in operating our business.
Our credit agreement and the indenture governing our notes contain, and any future indebtedness of ours will likely contain, a number of covenants that could impose significant operating and financial restrictions on us, including restrictions on our and our subsidiaries' ability to, among other things:
• | pay distributions on or make distributions in respect of our capital stock or units or make other restricted payments; |
• | incur additional debt or issue certain preferred equity; |
• | make certain investments; |
• | sell certain assets; |
• | create restrictions on distributions from restricted subsidiaries; |
• | create liens on certain assets to secure debt; |
• | consolidate, merge, amalgamate, sell or otherwise dispose of all or substantially all of our assets; |
• | enter into certain transactions with our affiliates; and |
• | designate our subsidiaries as unrestricted subsidiaries. |
Our credit agreement requires us to meet certain maximum leverage ratios and minimum fixed charge coverage ratios and the failure to do so may constitute an event of default under our credit agreement. As a result of these covenants, we could be limited in the manner in which we conduct our business, and we may be unable to engage in favorable business activities or finance future operations or capital needs. The most critical of these ratios is the Consolidated Leverage Ratio. The maximum allowed ratio, as set forth in our credit agreement, is 6.00x Consolidated Total Debt (excluding revolving debt)-to-Consolidated EBITDA. Based on 2012 results, our Consolidated Total Debt (excluding revolving debt)-to-Consolidated EBITDA ratio at December 31, 2012 was in compliance with the covenant at 3.94x, providing $133.6 million of Consolidated EBITDA cushion on the Consolidated Leverage Ratio. In spite of this sizable cushion, to the extent that our 2013 attendance levels are negatively impacted by deteriorating economic and market conditions, and Consolidated EBITDA falls below approximately $256 million, based on debt levels at December 31, 2012, our ability to satisfy the Consolidated Leverage Ratio would be difficult.
Our credit agreement and the indenture governing our notes also contain liquidity ratios that govern restricted payments, including our ability to declare and pay partnership distributions. Under the terms of the credit agreement, beginning in 2012 our ability to make restricted payments is permitted based on an Excess-Cash-Flow formula, should our pro-forma Consolidated Leverage Ratio be less than or equal to 4.50x Consolidated Total Debt (excluding revolving debt)-to-Consolidated EBITDA (as defined), measured on a quarterly basis. Under the terms of the indenture governing our notes, our ability to make restricted payments in 2012 and beyond is permitted should our trailing-twelve-month Total-Indebtedness-to-Consolidated-Cash-Flow Ratio be less than or equal to 4.75x Consolidated Total Indebtedness (including average revolving debt)-to-Consolidated EBITDA, measured on a quarterly basis. As of December 31, 2012, Total-Indebtedness-to-Consolidated-Cash-Flow Ratio was 4.08x, providing $55.0 million of Consolidated Cash Flow cushion on the ratio.
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Variable rate indebtedness subjects us to the risk of higher interest rates, which could cause our future debt service obligations to increase.
As of December 31, 2012, after giving consideration to current outstanding interest-rate swap arrangements, we had $331.1 million of indebtedness under our term loan facility that accrues interest at a variable rate and $1,201.1 million that is either fixed or swapped to a fixed rate. After giving consideration to the swap agreements, certain of our borrowings may be at variable rates of interest and expose us to interest rate risk. If interest rates increase, our annual debt service obligations on any variable-rate indebtedness would increase even though the amount borrowed remained the same, and our net income would decrease.
Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and prevent us from fulfilling our obligations under our debt agreements.
We had $1,552.5 million of outstanding indebtedness as of December 31, 2012 (after giving effect to $16.4 million of outstanding letters of credit under our revolving credit facility and $3.9 million of unamortized original issue discount on our notes).
Our substantial indebtedness could have important consequences. For example, it could:
• | limit our ability to borrow money for our working capital, capital expenditures, debt service requirements, strategic initiatives or other purposes; |
• | limit our flexibility in planning or reacting to changes in business and future business operations; |
• | make it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under the agreements governing other indebtedness; |
• | limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; |
• | make us more highly leveraged than some of our competitors, which may place us at a competitive disadvantage; and |
• | require us to dedicate a substantial portion of our cash flow from operations to the repayment of our indebtedness thereby reducing funds available to us for other purposes, such as making strategic acquisitions, introducing new rides and attractions and exploiting business opportunities. |
In addition, we may not be able to generate sufficient cash flow from operations, or be able to draw under our revolving credit facility or otherwise, in an amount sufficient to fund our liquidity needs, including the payment of principal and interest on our debt obligations. If our cash flows and capital resources are insufficient to service our indebtedness, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. In addition, the terms of our existing or future debt agreements, including our credit agreement and the indenture governing our notes, may restrict us from adopting some of these alternatives. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions for fair market value or at all. Furthermore, any proceeds that we could realize from any such dispositions may not be adequate to meet our debt service obligations then due.
Despite our substantial indebtedness, we may be able to incur significant additional amounts of debt, which could further exacerbate the risks associated with our substantial indebtedness.
Turmoil in the credit and capital markets could impede our future ability to refinance our long term debt or prevent us from obtaining additional funds required to effectively operate our business, including funds from our revolving credit facility.
From 2008 through 2010, U.S. and global credit markets experienced significant disruption, making it difficult for many businesses to obtain financing on acceptable or previously customary terms. Additionally, the volatility in equity markets due to rapid and wide fluctuations in value resulted in a reduction of public offerings of equity securities. If these conditions return, our borrowing costs may increase, and it may be more difficult to secure funding for our operations, including capital expenditures for theme park attractions. These risks could also impact our long-term debt ratings which would likely increase our cost of borrowing and/or make it more difficult for us to obtain funding. These factors are particularly important given our substantial long-term debt as of December 31, 2012 of $1,536.1 million (before reduction of $3.9 million of original issue discount on our notes).
Our operations and our ownership of property subject us to environmental regulation, which creates uncertainty regarding future environmental expenditures and liabilities.
We may be required to incur costs to comply with environmental requirements, such as those relating to water resources, discharges to air, water and land; the handling and disposal of solid and hazardous waste; and the cleanup of properties affected by regulated materials. Under these and other environmental requirements we may be required to investigate and clean up hazardous or toxic substances or chemical releases from current or formerly owned or operated facilities. Environmental laws typically impose cleanup responsibility and liability without regard to whether the relevant entity knew of or caused the presence of the contaminants. The costs of investigation, remediation or removal of regulated materials may be substantial, and the presence of those substances, or the failure to remediate a property properly, may impair our ability to use, transfer or obtain financing regarding our property. We may be required to incur costs to remediate potential environmental hazards, mitigate environmental risks in the future, or comply with other environmental requirements.
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Our insurance coverage may not be adequate to cover all possible losses that we could suffer, and our insurance costs may increase.
Companies engaged in the amusement park business may be sued for substantial damages in the event of an actual or alleged accident. An accident occurring at our parks or at competing parks could reduce attendance, increase insurance premiums, and negatively impact our operating results. Although we carry liability insurance to cover this risk, there can be no assurance that our coverage will be adequate to cover liabilities, or that we will be able to obtain adequate coverage should a catastrophic incident occur.
Our tax treatment is dependent on our status as a partnership for federal income tax purposes. If the tax laws were to treat us as a corporation or we become subject to a material amount of entity-level taxation, it may substantially reduce the amount of cash available for distribution to our unitholders.
We are a limited partnership under Delaware law and are treated as a partnership for federal income tax purposes. A change in current tax law may cause us to be taxed as a corporation for federal income tax purposes or otherwise subject us to taxation as an entity. If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our entire taxable income at the corporate tax rate, rather than only on the taxable income from our corporate subsidiaries, and may be subject to additional state taxes at varying rates. Further, unitholder distributions would generally be taxed again as corporate distributions or dividends and no income, gains, losses, or deductions would flow through to unitholders. Because additional entity level taxes would be imposed upon us as a corporation, our cash available for distribution could be substantially reduced. Although we are not currently aware of any legislative proposal that would adversely impact our treatment as a partnership, we are unable to predict whether any changes or other proposals will ultimately be enacted.
Other factors, including local events, natural disasters and terrorist activities, can adversely impact park attendance and our revenues.
Lower attendance may result from various local events, natural disasters or terrorist activities, all of which are outside of our control.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
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ITEM 2. PROPERTIES.
Cedar Point and Soak City are located on approximately 365 acres, virtually all of which have been developed, on the Cedar Point peninsula in Sandusky, Ohio. Wildwater Kingdom, located near Cleveland, Ohio, is situated on approximately 670 total acres, of which 65 acres have been developed and are in use at the water park and an additional 65 acres are available for future expansion. The remaining acreage is available for sale or for future development.
The Partnership also owns approximately 100 acres of property on the mainland adjoining the approach to the Cedar Point Causeway. The Breakers Express hotel, the Castaway Bay Indoor Waterpark Resort and adjoining TGI Friday's restaurant, Castaway Bay Marina and two seasonal-employee housing complexes are located on this property.
The Partnership controls, through ownership or an easement, a six-mile public highway and owns approximately 38 acres of vacant land adjacent to this highway, which is a secondary access route to Cedar Point and serves about 250 private residences. The roadway is maintained by the Partnership pursuant to deed provisions. The Cedar Point Causeway, a four-lane roadway across Sandusky Bay, is the principal access road to Cedar Point and is owned by a subsidiary of the Partnership.
Knott's Berry Farm and Knott's Soak City-Orange County, located in California, are situated on approximately 147 acres and 13 acres, respectively, virtually all of which have been developed. Knott's Soak City-Palm Springs is located on 23 acres, of which 17 acres have been developed and 6 acres remain available for future expansion.
Kings Island, located in Ohio, is situated on approximately 677 acres, of which 349 acres have been developed and 328 acres remain available for future expansion.
Canada's Wonderland, located near Toronto in Vaughn, Ontario, is situated on approximately 290 acres, virtually all of which have been developed.
Kings Dominion, located in Virginia, is situated on approximately 738 acres, of which 279 acres have been developed and 459 acres remain available for future expansion.
Dorney Park, located in Pennsylvania, is situated on approximately 208 acres, of which 181 acres have been developed and 27 acres remain available for future expansion.
Carowinds, located in Charlotte, North Carolina, is situated on approximately 398 acres, of which 299 acres have been developed and 99 acres remain available for future expansion.
Valleyfair, located in Minnesota, is situated on approximately 180 acres, of which 113 acres have been developed and approximately 77 additional acres remain available for future expansion.
Worlds of Fun, located in Missouri, is situated on approximately 330 acres, of which 230 acres have been developed and 100 acres remain available for future expansion or other uses.
Great America, located in California, is situated on approximately 165 acres, virtually all of which have been developed.
Michigan's Adventure, located in Michigan, is situated on approximately 250 acres, of which 119 acres have been developed and 131 acres remain available for future expansion.
The Partnership, through its subsidiary Cedar Point of Michigan, Inc., also owns approximately 450 acres of land in southern Michigan. This land is currently under contract to be sold.
All of the Partnership's property is owned in fee simple, with the exception of Great America in Santa Clara, California, and encumbered by the Partnership's credit agreement. The Partnership leases the land at Great America from the City of Santa Clara through a long-term lease agreement that is renewable in 2039 with options to terminate at the Partnership's discretion. The Partnership considers its properties to be well maintained, in good condition and adequate for its present uses and business requirements.
ITEM 3. LEGAL PROCEEDINGS.
Jacob T. Falfas vs. Cedar Fair, L.P.
On July 23, 2010, Jacob T. (Jack) Falfas, the former Chief Operating Officer, filed a demand for private arbitration as provided by his employment agreement. In that demand, Mr. Falfas disputed the Partnership's position that he had resigned in June 2010, alleging instead that his employment with the Partnership was terminated without cause. That dispute went to private arbitration, and on February 28, 2011, an arbitration panel ruled 2-to-1 in favor of Mr. Falfas finding that he did not resign but was terminated without cause. Rather than fashioning a remedy consistent with the employment agreement, the panel ruled that Mr. Falfas should be reinstated. The Partnership believed that the arbitrators exceeded their authority by creating a remedy not legally available to Mr. Falfas under his contract with Cedar Fair. On March 21, 2011, the Partnership filed an action in Erie County Court of Common Pleas (Case No. 2011 CV 0217) seeking to have the award modified or vacated. On March 22,
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2011, Mr. Falfas commenced a related action in the Erie County Court of Common Pleas (Case No. 2011 CV 0218) demanding enforcement of the arbitration ruling. The two actions were combined into Case No. 2011 CV 0217, before Judge Roger E. Binette. On February 22, 2012 the Erie County Common Pleas Court issued a ruling partially vacating the arbitration award and declaring that Mr. Falfas was not entitled to reinstatement of his employment. The ruling also provided that in accord with paragraph 2 of the arbitration award Mr. Falfas was entitled to certain back pay and other benefits under his 2007 Amended and Restated Employment Agreement as if the employment relationship had not been severed. In March of 2012 Mr. Falfas and the Partnership both filed appeals of the Court's ruling with the Ohio Sixth District Court of Appeals in Toledo, Ohio. The parties participated in mediation on May 7, 2012 at the direction of the Court of Appeals. The mediation did not result in a settlement. As a result the matter will now proceed through the normal appeal process which typically takes six to nine months to complete. Briefs have been filed, oral arguments were held on December 12, 2012, and the parties are now awaiting a decision from the Court. The Partnership believes the liability recorded as of December 31, 2012 to be adequate and does not expect the arbitration ruling or the court order to materially affect its financial results in future periods.
The Partnership is party to various other legal actions arising in the normal course of business. The Partnership does not expect to incur any material liability by reason of such actions.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II - OTHER INFORMATION
ITEM 5. MARKET FOR REGISTRANT'S DEPOSITARY UNITS, RELATED UNITHOLDER MATTERS AND ISSUER PURCHASES OF DEPOSITARY UNITS.
Cedar Fair, L.P. Depositary Units representing limited partner interests are listed for trading on The New York Stock Exchange under the symbol “FUN.” As of January 31, 2013, there were approximately 6,700 registered holders of Cedar Fair, L.P. Depositary Units, representing limited partner interests. Attention is directed to Item 12 in this Form 10-K for information regarding the Partnership's equity incentive plans, which information is incorporated herein by reference. The cash distributions declared and the high and low prices of the Partnership's units for each quarter of the past two years are shown in the table below:
2012 | Distribution | High | Low | ||||||||
4th quarter | $ | 0.40 | $ | 37.69 | $ | 30.90 | |||||
3rd quarter | 0.40 | 34.96 | 30.06 | ||||||||
2nd quarter | 0.40 | 31.74 | 25.24 | ||||||||
1st quarter | 0.40 | 29.98 | 21.75 | ||||||||
2011 | |||||||||||
4th quarter | $ | 0.70 | $ | 23.73 | $ | 16.86 | |||||
3rd quarter | 0.12 | 21.96 | 16.44 | ||||||||
2nd quarter | 0.10 | 22.69 | 18.09 | ||||||||
1st quarter | 0.08 | 20.00 | 15.03 | ||||||||
The Partnership's credit agreement, as amended on February 25, 2011, includes provisions that allow the Partnership to make restricted payments up to $20 million at the discretion of the Board of Directors, so long as no default or event of default has occurred and is continuing. These restricted payments are not subject to any specific covenants. Additional restricted payments are allowed to be made based on an Excess-Cash-Flow formula, should the Partnership’s pro-forma Consolidated Leverage Ratio be less than or equal to 4.50x Consolidated Total Debt (excluding the revolving debt)-to-Consolidated EBITDA, measured on a quarterly basis. Per the terms of the indenture governing the Partnership's notes, the ability to make restricted payments is permitted should the Partnership's trailing-twelve-month Total-Indebtedness-to-Consolidated-Cash-Flow Ratio be less than or equal to 4.75x Consolidated Total Indebtedness (including average revolving debt)-to-Consolidated EBITDA, measured on a quarterly basis.
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Unitholder Return Performance Graph
The graph below shows a comparison of the five-year cumulative total return (assuming all distributions/dividends reinvested) on Cedar Fair, L.P. limited partnership units, the S&P 500 Index, the S&P 400 Index and the S&P - Movies and Entertainment Index, assuming investment of $100 on December 31, 2007.
Base Period | Return | |||||||||||||||||||||||||
2007 | 2008 | 2009 | 2010 | 2011 | 2012 | |||||||||||||||||||||
Cedar Fair, L.P. | $ | 100.00 | $ | 65.00 | $ | 67.27 | $ | 90.89 | $ | 135.09 | $ | 221.22 | ||||||||||||||
S&P 500 | 100.00 | 63.00 | 79.67 | 91.66 | 93.59 | 106.14 | ||||||||||||||||||||
S&P 400 | 100.00 | 63.77 | 87.61 | 110.95 | 109.03 | 126.55 | ||||||||||||||||||||
S&P Movies and Entertainment | 100.00 | 58.13 | 30.44 | 25.34 | 28.22 | 37.99 | ||||||||||||||||||||
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ITEM 6. SELECTED FINANCIAL DATA.
2012 (2) | 2011 | 2010 (3) | 2009 (4) | 2008 (5) | ||||||||||||||||
(In thousands, except per unit and per capita amounts) | ||||||||||||||||||||
Statement of Operations | ||||||||||||||||||||
Net revenues | $ | 1,068,454 | $ | 1,028,472 | $ | 977,592 | $ | 916,075 | $ | 996,232 | ||||||||||
Operating income (1) | 232,642 | 236,736 | 151,669 | 183,890 | 134,521 | |||||||||||||||
Income (loss) before taxes (1) | 132,581 | 81,963 | (30,382 | ) | 48,754 | 5,369 | ||||||||||||||
Net income (loss) (1) | 101,216 | 70,746 | (33,052 | ) | 34,184 | 6,380 | ||||||||||||||
Net income (loss) per unit - basic (1) | 1.82 | 1.28 | (0.60 | ) | 0.62 | 0.12 | ||||||||||||||
Net income (loss) per unit - diluted (1) | 1.81 | 1.27 | (0.60 | ) | 0.61 | 0.12 | ||||||||||||||
Balance Sheet Data | ||||||||||||||||||||
Total assets (1) | $ | 2,027,622 | $ | 2,055,958 | $ | 2,065,877 | $ | 2,130,932 | $ | 2,173,229 | ||||||||||
Working capital (deficit) | 2,904 | (104,928 | ) | (98,518 | ) | (70,212 | ) | (50,705 | ) | |||||||||||
Long-term debt | 1,532,180 | 1,556,379 | 1,579,703 | 1,626,346 | 1,724,075 | |||||||||||||||
Partners' equity (1) | 159,260 | 141,800 | 121,628 | 113,839 | 94,008 | |||||||||||||||
Distributions | ||||||||||||||||||||
Declared per limited partner unit | $ | 1.60 | $ | 1.00 | $ | 0.25 | $ | 1.23 | $ | 1.92 | ||||||||||
Paid per limited partner unit | 1.60 | 1.00 | 0.25 | 1.23 | 1.92 | |||||||||||||||
Other Data | ||||||||||||||||||||
Depreciation and amortization (1) | $ | 127,339 | $ | 125,837 | $ | 128,856 | $ | 134,398 | $ | 125,240 | ||||||||||
Adjusted EBITDA (6) | 390,954 | 374,576 | 359,231 | 316,512 | 355,890 | |||||||||||||||
Capital expenditures | 96,232 | 90,190 | 71,706 | 69,136 | 83,481 | |||||||||||||||
Combined attendance (7) | 23,300 | 23,386 | 22,794 | 21,136 | 22,720 | |||||||||||||||
Combined in-park guest per capita spending (8) | $ | 41.95 | $ | 40.03 | $ | 39.21 | $ | 39.56 | $ | 40.13 | ||||||||||
Notes:
(1) | Historical figures have been adjusted to reflect changes due to the immaterial restatement as described in Note 13 to the Consolidated Financial Statements in Item 8. |
(2) | Operating results for 2012 include a non-cash charge of $25.0 million for the impairment of long-lived assets at Wildwater Kingdom. |
(3) | Operating results for 2010 include a loss on debt extinguishment of $35.3 million and a non-cash charge of $62.0 million for the impairment of long-lived assets at Great America, the majority of which were originally recorded with the PPI acquisition. |
(4) | Operating results for 2009 include a gain of $23.1 million for the sale of excess land near Canada's Wonderland and a $4.5 million non-cash charge for the impairment of trade-names originally recorded with the PPI acquisition. |
(5) | Operating results for 2008 include an $87.0 million non-cash charge for the impairment of goodwill and other indefinite-lived intangibles originally recorded with the PPI acquisition in 2006. |
(6) | Adjusted EBITDA represents earnings before interest, taxes, depreciation, amortization, other non-cash items, and adjustments as defined in our current credit agreement. Adjusted EBITDA is not a measurement of operating performance computed in accordance with GAAP and should not be considered as a substitute for operating income, net income or cash flows from operating activities computed in accordance with GAAP. We believe that Adjusted EBITDA is a meaningful measure of park-level operating profitability and we use it for measuring returns on capital investments, evaluating potential acquisitions, determining awards under incentive compensation plans, and calculating compliance with certain loan covenants. Adjusted EBITDA may not be comparable to similarly titled measures of other companies. A reconciliation of net income (loss) to Adjusted EBITDA is provided below. |
(7) | Combined attendance includes attendance figures from the eleven amusement parks, all separately gated outdoor water parks, and Star Trek: The Experience, which closed in September 2008. |
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(8) | Combined in-park guest per capita spending ("per capita spending") includes all amusement park, outdoor water park, causeway tolls and parking revenues for the amusement park and water park operating seasons. Revenues from indoor water park, hotel, campground, marina and other out-of-park operations are excluded from per capita statistics. |
Reconciliation of Net Income (Loss) to Adjusted EBITDA:
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
(In thousands ) | ||||||||||||||||||||
Net income (loss) | $ | 101,216 | $ | 70,746 | $ | (33,052 | ) | $ | 34,184 | $ | 6,380 | |||||||||
Interest expense | 110,619 | 157,185 | 150,285 | 124,706 | 129,561 | |||||||||||||||
Interest income | (68 | ) | (157 | ) | (1,154 | ) | (44 | ) | (970 | ) | ||||||||||
Provision (benefit) for taxes | 31,365 | 11,217 | 2,670 | 14,570 | (1,011 | ) | ||||||||||||||
Depreciation and amortization | 127,339 | 125,837 | 128,856 | 134,398 | 125,240 | |||||||||||||||
EBITDA | 370,471 | 364,828 | 247,605 | 307,814 | 259,200 | |||||||||||||||
Loss on early extinguishment of debt | — | — | 35,289 | — | — | |||||||||||||||
Other expense, net | — | — | — | — | 361 | |||||||||||||||
Net effect of swaps | (1,492 | ) | (13,119 | ) | 18,194 | 9,170 | — | |||||||||||||
Unrealized foreign currency (gain) loss | (9,181 | ) | 9,830 | (17,464 | ) | — | — | |||||||||||||
Equity-based compensation | 3,265 | (239 | ) | (89 | ) | (26 | ) | 716 | ||||||||||||
Loss on impairment of goodwill and other intangibles | — | — | 2,293 | 4,500 | 86,988 | |||||||||||||||
Loss on impairment/retirement of fixed assets, net | 30,336 | 2,565 | 62,752 | 244 | 8,425 | |||||||||||||||
Gain on sale of other assets | (6,625 | ) | — | — | (23,098 | ) | — | |||||||||||||
Terminated merger costs | — | 230 | 10,375 | 5,619 | — | |||||||||||||||
Refinancing costs | — | 955 | — | 832 | 200 | |||||||||||||||
Licensing dispute settlement costs | — | — | — | 1,980 | — | |||||||||||||||
Class action settlement costs | — | — | 276 | 9,477 | — | |||||||||||||||
Other non-recurring costs (1) | 4,180 | 9,526 | — | — | — | |||||||||||||||
Adjusted EBITDA | $ | 390,954 | $ | 374,576 | $ | 359,231 | $ | 316,512 | $ | 355,890 | ||||||||||
(1) | Other non-recurring costs as defined in the 2010 Amended Credit Agreement, include litigation expenses and costs for SEC compliance matters related to Special Meeting requests, costs associated with the relocation of a future ride, and costs associated with the transition to a new advertising agency. |
ITEM 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
Business Overview
We generate our revenues primarily from sales of (1) admission to our parks, (2) food, merchandise and games inside our parks, and (3) hotel rooms, food and other attractions outside our parks. Our principal costs and expenses, which include salaries and wages, advertising, maintenance, operating supplies, utilities and insurance, are relatively fixed and do not vary significantly with attendance.
Each of our properties is run by a park general manager and operates autonomously. Management reviews operating results, evaluates performance and makes operating decisions, including the allocation of resources, on a property-by-property basis.
Discrete financial information and operating results are prepared at the individual park level for use by the CEO, who is the Chief Operating Decision Maker (CODM), as well as by the Chief Financial Officer, the Chief Operating Officer, the Executive Vice President, Operations, and the park general managers.
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The following table presents certain financial data expressed as a percent of total net revenues and selective statistical information for the periods indicated.
For the years ended December 31, | 2012 | 2011 | 2010 | |||||||||||||||||||
( amounts in millions, except attendance, per capita spending and percentages) | ||||||||||||||||||||||
Net revenues: | ||||||||||||||||||||||
Admissions | $ | 612.1 | 57.3 | % | $ | 596.0 | 57.9 | % | $ | 568.8 | 58.2 | % | ||||||||||
Food, merchandise and games | 342.2 | 32.0 | % | 349.5 | 34.0 | % | 337.3 | 34.5 | % | |||||||||||||
Accommodations and other | 114.1 | 10.7 | % | 83.0 | 8.1 | % | 71.5 | 7.3 | % | |||||||||||||
Net revenues | 1,068.4 | 100.0 | % | 1,028.5 | 100.0 | % | 977.6 | 100.0 | % | |||||||||||||
Operating costs and expenses | 684.7 | 64.1 | % | 663.3 | 64.5 | % | 632.0 | 64.6 | % | |||||||||||||
Depreciation and amortization | 127.3 | 11.9 | % | 125.8 | 12.2 | % | 128.9 | 13.2 | % | |||||||||||||
Loss on impairment of goodwill and other intangibles | — | — | % | — | — | % | 2.3 | 0.2 | % | |||||||||||||
Loss on impairment / retirement of fixed assets | 30.3 | 2.8 | % | 2.6 | 0.3 | % | 62.8 | 6.4 | % | |||||||||||||
Gain on sale of other assets | (6.6 | ) | (0.6 | )% | — | — | % | — | — | % | ||||||||||||
Operating income | 232.7 | 21.8 | % | 236.8 | 23.0 | % | 151.6 | 15.5 | % | |||||||||||||
Interest and other expense, net | 110.6 | 10.3 | % | 158.0 | 15.4 | % | 149.2 | 15.3 | % | |||||||||||||
Net effect of swaps | (1.5 | ) | (0.1 | )% | (13.1 | ) | (1.3 | )% | 18.2 | 1.9 | % | |||||||||||
Loss on early debt extinguishment | — | — | % | — | — | % | 35.3 | 3.6 | % | |||||||||||||
Unrealized / realized foreign currency (gain) loss | (9.0 | ) | (0.8 | )% | 9.9 | 1.0 | % | (20.6 | ) | (2.1 | )% | |||||||||||
Provision for taxes | 31.4 | 2.9 | % | 11.2 | 1.1 | % | 2.6 | 0.3 | % | |||||||||||||
Net income (loss) | $ | 101.2 | 9.5 | % | $ | 70.8 | 6.9 | % | $ | (33.1 | ) | (3.4 | )% | |||||||||
Other data: | ||||||||||||||||||||||
Combined attendance (in thousands) | 23,300 | 23,386 | 22,794 | |||||||||||||||||||
Combined in-park guest per capita spending | $ | 41.95 | $ | 40.03 | $ | 39.21 | ||||||||||||||||
Critical Accounting Policies
Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which were prepared in accordance with accounting principles generally accepted in the United States of America. These principles require us to make judgments, estimates and assumptions during the normal course of business that affect the amounts reported in the Consolidated Financial Statements and related notes. The following discussion addresses our critical accounting policies, which are those that are most important to the portrayal of our financial condition and operating results or involve a higher degree of judgment and complexity (see Note 2 to our Consolidated Financial Statements for a complete discussion of our significant accounting policies). Application of the critical accounting policies described below involves the exercise of judgment and the use of assumptions as to future uncertainties, and, as a result, actual results could differ from these estimates and assumptions.
Property and Equipment
Property and equipment are recorded at cost. Expenditures made to maintain such assets in their original operating condition are expensed as incurred, and improvements and upgrades are capitalized. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets. The composite method is used for the group of assets acquired as a whole in 1983, as well as for the groups of like assets of each subsequent business acquisition. The unit method is used for all individual assets purchased.
Upon the normal retirement of an asset within a composite group, our practice generally had been to extend the depreciable life of that composite group beyond its original estimated useful life. In conjunction with the preparation of our financial statements for the three months ended July 1, 2012, management determined that this methodology was not appropriate. As a result, we revised the useful lives of our composite groups to their original estimated useful life (ascribed upon acquisition) and corrected previously computed depreciation expense (and accumulated depreciation). We evaluated the amount and nature of these adjustments and concluded that they were not material to either our prior annual or quarterly financial statements. Nonetheless, the historical financial statement amounts included in this filing have been updated for this corrected estimate.
As part of a routine review by the Division of Corporation Finance of the SEC of the Partnership's Form 10-K for the year ended December 31, 2011, the Partnership received staff comments on December 20, 2012 and January 30, 2013. The Partnership is responding to the staff comments received on January 30, 2013 that requests information related to our use of the composite method of depreciation for acquired assets. The
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Partnership has determined that it is preferable to change from the composite method of depreciation to the unit method of depreciation with the change expected to be effective January 1, 2013. The Partnership believes that pursuant to generally accepted accounting principles, changing from the composite method of depreciation to the unit method of depreciation is a change in accounting estimate that is effected by a change in accounting principle, which should be accounted for prospectively. This prospective application will result in the discontinuance of the composite method of depreciation for all prior acquisitions with the existing net book value of each composite pool allocated to the remaining individual assets (units) in that pool with each unit assigned an appropriate remaining useful life on an individual unit basis. Once under the unit method of depreciation, all gains or losses on prospective asset retirements will result in an adjustment to earnings rather than to accumulated depreciation which is the case for normal retirements under the composite method of depreciation. We are in the process of determining the impact of this change. Based on our analysis to date, we do not believe such a change will have a material effect on our financial position or liquidity in future periods, but it is possible that future asset retirements could have a material impact on earnings in the periods such items occur.
Impairment of Long-Lived Assets
The carrying values of long-lived assets, including property and equipment, are reviewed whenever events or changes in circumstances indicate that the carrying values of the assets may not be recoverable. An impairment loss may be recognized when estimated undiscounted future cash flows expected to result from the use of the assets, including disposition, are less than the carrying value of the assets. The measurement of the impairment loss to be recognized is based on the difference between the fair value and the carrying amounts of the assets. Fair value is generally determined based on a discounted cash flow analysis. In order to determine if an asset has been impaired, assets are grouped and tested at the lowest level for which identifiable, independent cash flows are available.
The determination of both undiscounted and discounted cash flows requires management to make significant estimates and consider an anticipated course of action as of the balance sheet date. Subsequent changes in estimated undiscounted and discounted cash flows arising from changes in anticipated actions could impact the determination of whether impairment exists, the amount of the impairment charge recorded and whether the effects could materially impact the consolidated financial statements.
At the end of the third quarter of 2012, the Partnership concluded based on 2012 operating results through the third quarter and updated forecasts, that a review of the carrying value of operating long-lived assets at Wildwater Kingdom was warranted. After performing its review, the Partnership determined that a portion of the park's fixed assets were impaired. Also, at the end of the third quarter of 2012, the Partnership concluded that market conditions had changed on the adjacent non-operating land of Wildwater Kingdom. After performing its review of the updated market value of the land, the Partnership determined the land was impaired. The Partnership recognized a total of $25.0 million of fixed-asset impairment for operating and non-operating assets during the third quarter of 2012.
There was no impairment of long-lived assets in 2011.
Goodwill and Other Intangible Assets
Goodwill and other indefinite-lived intangible assets, including trade-names, are reviewed for impairment annually, or more frequently if indicators of impairment exist. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in expected future cash flows; a sustained, significant decline in equity price and market capitalization; a significant adverse change in legal factors or in the business climate; unanticipated competition; the testing for recoverability of a significant asset group within a reporting unit; and slower growth rates. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on our consolidated financial statements.
An impairment loss may be recognized if the carrying value of the reporting unit is higher than its fair value, which is estimated using both an income (discounted cash flow) and market approach. The amount of impairment is determined by comparing the implied fair value of reporting unit goodwill to the carrying value of the goodwill in the same manner as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill is less than the recorded goodwill, an impairment charge is recorded for the difference. Goodwill and trade-names have been assigned at the reporting unit, or park level, for purposes of impairment testing.
Until December 2010, goodwill related to parks acquired prior to 2006 was tested annually for impairment as of October 1, while goodwill and other indefinite-lived intangibles, including trade-name intangibles, related to the PPI acquisition in 2006 were tested annually for impairment as of April 1. Effective in December 2010, we changed the date of our annual goodwill impairment tests from April 1 and October 1 to December 31 to more closely align the impairment testing procedures with our long-range planning and forecasting process, which occurs in the fourth quarter each year. We believe the change is preferable since the long-term cash flow projections are a key component in performing our annual impairment tests of goodwill. In addition, we changed the date of our annual impairment test for other indefinite-lived intangibles from April 1 to December 31.
For both 2012 and 2011, we completed the review of goodwill and other indefinite-lived intangibles as of December 31, 2012 and December 31, 2011, respectively, and determined the goodwill was not impaired at either balance sheet date.
The change in accounting principle related to changing the annual goodwill impairment testing date did not delay, accelerate, avoid or cause an impairment charge. As it was impracticable to objectively determine operating and valuation estimates for periods prior to December 31, 2010, we have prospectively applied the change in the annual goodwill impairment testing date from December 31, 2010.
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It is possible that our assumptions about future performance, as well as the economic outlook and related conclusions regarding the valuation of our reporting units (parks), could change adversely, which may result in additional impairment that would have a material effect on our financial position and results of operations in future periods. At December 31, 2012, all reporting units with goodwill had fair values in excess of their carrying values by greater than 10%.
Self-Insurance Reserves
Reserves are recorded for the estimated amounts of guest and employee claims and expenses incurred each period that are not covered by insurance. Reserves are established for both identified claims and incurred but not reported (IBNR) claims. Such amounts are accrued for when claim amounts become probable and estimable. Reserves for identified claims are based upon our own historical claims experience and third-party estimates of settlement costs. Reserves for IBNR claims, which are not material to our consolidated financial statements, are based upon our own claims data history, as well as industry averages. All reserves are periodically reviewed for changes in facts and circumstances and adjustments are made as necessary.
Derivative Financial Instruments
Derivative financial instruments are only used within our overall risk management program to manage certain interest rate and foreign currency risks from time to time. We do not use derivative financial instruments for trading purposes.
Derivative financial instruments used in hedging transactions are assessed both at inception and quarterly thereafter to ensure they are effective in offsetting changes in the cash flows of the related underlying exposures. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the change in fair value of the derivative instrument is reported as a component of “Other comprehensive income (loss)” and reclassified into earnings in the period during which the hedged transaction affects earnings. Changes in fair value of derivative instruments that do not qualify as effective hedging activities are reported as “Net effect of swaps” in the consolidated statement of operations. Additionally, the “Accumulated other comprehensive income (loss)” related to interest rate swaps that become ineffective is amortized over the remaining life of the interest rate swap, and reported as a component of “Net effect of swaps” in the consolidated statements of operations.
Revenue Recognition
Revenues on multi-day admission tickets are recognized over the estimated number of visits expected for each type of ticket, and are adjusted periodically during the season. All other revenues are recognized on a daily basis based on actual guest spending at our facilities, or over the park operating season in the case of certain marina revenues and certain sponsorship revenues. Revenues on admission tickets for the next operating season, including season passes, are deferred in the year received and recognized as revenue in the following operating season.
Admission revenues include amounts paid to gain admission into our parks, including parking fees. Revenues related to extra-charge attractions, including our premium benefit offerings, are included in Accommodations and other revenue.
Income Taxes
The Partnership's legal structure includes both partnerships and corporate subsidiaries. As a publicly traded partnership, the Partnership is subject to an entity-level tax (the "PTP tax"). Accordingly, the Partnership itself is not subject to corporate income taxes; rather, the Partnership's tax attributes (except those of the corporate subsidiaries) are included in the tax returns of its partners. The Partnership's corporate subsidiaries are subject to entity-level income taxes. The Partnership's "Provision for taxes" includes both the PTP tax and the income taxes from the corporate subsidiaries.
The Partnership's corporate subsidiaries account for income taxes under the asset and liability method. Accordingly, deferred tax assets and liabilities are recognized for the future book and tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are determined using enacted tax rate expected to apply in the year in which those temporary differences are expected to be recovered or settled.
The Partnership records a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion, or all, of a deferred tax asset will not be realized. Through December 31, 2011, the Partnership had recorded a $17.3 million valuation allowance related to the deferred tax asset for foreign tax credit carryforwards. The need for this allowance was based on several factors including the accumulated federal net operating loss carryforward, the ten-year carryforward period allowed for excess foreign tax credits, experience to date of foreign tax credit limitations, and management's long term estimates of domestic and foreign source income.
During 2012, we claimed and received refunds of $10.4 million for foreign taxes paid in previous years. The recovery of prior year taxes resulted in a redetermination of the foreign tax credit carryforwards and a $6.1 million reduction in the valuation allowance related to these carryforwards. Also during 2012, we continued to utilize the federal tax net operating loss carryforward and updated our long term estimates of domestic and foreign source income. Based on these updated estimates, we believe no additional adjustments to the valuation allowance was warranted. The total valuation allowance reduction results in a $6.0 million tax benefit in 2012. As of December 31, 2012, we had $31.2 million of deferred tax assets associated with the foreign tax credit carryforwards and an $11.3 million related valuation allowance.
There is inherent uncertainty in the estimates used to project the amount of foreign tax credit carryforwards that are more likely than not to be realized. It is possible that our future income projections, as well as the economic outlook and related conclusions regarding the valuation
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allowance could change, which may result in additional valuation allowance being recorded or may result in additional valuation allowance reductions, which may have a material negative or positive effect on our reported financial position and results of operations in future periods.
Results of Operations
2012 vs. 2011
The following table presents key operating and financial information for the years ended December 31, 2012 and 2011 (amounts in thousands, except per capita spending and percentages):
Increase (Decrease) | |||||||||||||||
12/31/12 | 12/31/11 | $ | % | ||||||||||||
Net revenues | $ | 1,068,454 | $ | 1,028,472 | $ | 39,982 | 3.9 | % | |||||||
Operating costs and expenses | 684,762 | 663,334 | 21,428 | 3.2 | % | ||||||||||
Depreciation and amortization | 127,339 | 125,837 | 1,502 | 1.2 | % | ||||||||||
Loss on impairment/retirement of fixed assets | 30,336 | 2,565 | 27,771 | N/M | |||||||||||
Gain on sale of other assets | (6,625 | ) | — | (6,625 | ) | N/M | |||||||||
Operating income | $ | 232,642 | $ | 236,736 | $ | (4,094 | ) | (1.7 | )% | ||||||
Other Data: | |||||||||||||||
Adjusted EBITDA (1) | $ | 390,954 | $ | 374,576 | $ | 16,378 | 4.4 | % | |||||||
Adjusted EBITDA margin | 36.6 | % | 36.4 | % | — | 0.2 | % | ||||||||
Attendance | 23,300 | 23,386 | (86 | ) | (0.4 | )% | |||||||||
Per capita spending | $ | 41.95 | $ | 40.03 | $ | 1.92 | 4.8 | % | |||||||
Out-of-park revenues | $ | 116,767 | $ | 117,556 | $ | (789 | ) | (0.7 | )% | ||||||
N/M - Not meaningful | |||||||||||||||
(1) for additional information regarding Adjusted EBITDA, including how we define and use Adjusted EBITDA, as well as a reconciliation from net income, see Item 6, "Selected Financial Data," on pages 15-16. | |||||||||||||||
Consolidated net revenues totaled $1,068.5 million in 2012, increasing $40.0 million, from $1,028.5 million in 2011. The 4% increase in revenues reflects a 5%, or $1.92, increase in average in-park guest per capita spending compared with a year ago and a less than 1%, or 0.1 million-visit, decrease in attendance. In-park guest per capita spending represents the amount spent per attendee to gain admission to a park, plus all amounts spent while inside the park gates. The increase in per capita spending was primarily due to new premium benefit offerings and the positive impact of new customer messaging and dynamic pricing. The slight decrease in attendance for 2012 compared to 2011 was largely due to less than favorable weather that the parks experienced during the fourth quarter of 2012. Despite the slight decrease in overall attendance, the parks experienced growth in the number of season passes sold, as well as season pass visits, which was a focus of management heading into the 2012 season. The growth in season-pass visits was the result of an increased marketing focus toward season passes at several of our parks, resulting in a record number of season passes sold in 2012.
The increase in 2012 revenues was somewhat offset by a decrease of less than 1%, or approximately $0.8 million, in out-of-park revenues, which represents the sale of hotel rooms, food, merchandise and other complementary activities located outside of the park gates. The decrease in out-of-park revenues was primarily driven by softness in our overall hotel properties performance in 2012. The increase in revenues for the fiscal year also reflects the negative impact of currency exchange rates and the weakening U.S. dollar on our Canadian operations (approximately $4.0 million) during 2012.
Operating costs and expenses increased $21.4 million, or 3%, to $684.7 million versus $663.3 million for 2011 and were in line with expectations. The increase in costs and expenses was the result of a $3.0 million increase in cost of goods sold, a $20.5 million increase in operating expenses, offset somewhat by a $2.1 decrease in selling, general and administrative costs. The 3% increase in cost of goods sold is consistent with anticipated cost increases associated with our efforts to improve the quality of food and other product offerings at the parks in 2012. Operating expenses increased due to several factors, including higher employment-related costs, higher operating supply costs, and higher self-insurance expenses. Employment-related costs increased approximately $11.0 million due to normal merit increases, increases in health-related benefit costs, additional staffing levels associated with new premium benefit offerings and other initiatives aimed at improving the overall guest experience, and non-recurring severance payments. Operating supplies and expenses increased approximately $4.6 million due primarily to initiatives to expand or enhance live entertainment at the parks, as well as incremental costs associated with our new e-commerce platform. During the year, public liability and workers compensation expense increased $3.3 million due to claim settlements and an increase in our reserves based on management's estimates of future claims. The decrease in selling, general and administrative costs was due to a decrease in employment-related costs ($1.5 million) and professional and administrative costs ($7.6 million), offset by an increase in operating supplies ($4.8 million) and advertising fees ($2.4 million). The decrease in employment costs was primarily due to a decrease in costs associated with a legal accrual made
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in 2011, offset somewhat by higher wages and benefits due to normal merit increases and additional staffing. Professional and administrative fees decreased primarily due to a reduction in litigation expenses and costs for SEC compliance matters related to Special Meeting requests in 2011. The operating supplies and advertising increases were due to incremental costs to support 2012 operating initiatives including general infrastructure improvements. The overall increase in costs and expenses also reflects the positive impact of exchange rates on our Canadian operations ($1.3 million) during 2012.
The loss on impairment/retirement of fixed assets, net, during 2012 totaled $30.3 million, reflects a non-cash charge of $25.0 million for the partial impairment of operating and non-operating assets at Wildwater Kingdom along with losses on other retirements in the normal course of business. During 2012, two non-core assets were sold at gains totaling $6.6 million. In 2011, a charge of $2.6 million for the retirement of fixed assets in the normal course of business was recorded.
Depreciation and amortization expense for 2012 increased $1.5 million compared with 2011 due to the increase in capital spending in 2012 when compared with the prior year. After depreciation and amortization, as well as impairment charges and all other non-cash costs, operating income for 2012 decreased $4.1 million to $232.7 million from $236.8 million in 2011.
Interest expense for the year decreased $46.6 million to $110.6 million from $157.2 million in 2011. The reduction in interest expense was primarily attributable to an approximate 300 basis point (bps) decline in our effective interest rate, the result of lower fixed rates on London InterBank Offered Rate (LIBOR) within our interest-rate swap contracts. The average fixed LIBOR rate in our swap agreements declined from 5.62% in 2011 to 2.48% in 2012. Additionally during 2012, $25.0 million of term debt principal payments were made, reducing our average debt outstanding.
During 2012, the net effect of our swaps was recorded as a benefit to earnings of $1.5 million compared to a benefit to earnings of $13.1 million in 2011. The difference reflects the regularly scheduled amortization of amounts in Accumulated Other Comprehensive Income ("AOCI") related to the swaps, which were offset by gains from marking the ineffective and de-designated swaps to market and foreign currency gains related to the U.S.-dollar denominated Canadian term loan in the current period. During 2012, we also recognized a $9.0 million net benefit to earnings for unrealized/realized foreign currency gains, which included a $9.2 million unrealized foreign currency gain on the U.S.-dollar denominated debt held at our Canadian property.
A provision for taxes of $31.3 million was recorded in 2012, consisting of a provision for the tax attributes of our corporate subsidiaries of $22.6 million and a provision for publicly traded partnership (PTP) taxes of $8.7 million. This compares with a provision for taxes of $11.2 million in 2011, consisting of a provision for the tax attributes of our corporate subsidiaries of $2.9 million and a provision for PTP taxes of $8.3 million.
After interest expense and provision for taxes, net income for the period totaled $101.2 million, or $1.81 per diluted limited partner unit, compared with net income of $70.7 million, or $1.27 per unit, a year ago.
We believe Adjusted EBITDA is a meaningful measure of our operating results (for additional information regarding Adjusted EBITDA, including how we define and use Adjusted EBITDA, as well as a reconciliation from net income, see Note 6 in Item 6, “Selected Financial Data,” on pages 15-16). In 2012, Adjusted EBITDA increased $16.4 million, or 4%, to $391.0 million, with our Adjusted EBITDA margin (Adjusted EBITDA divided by net revenues) increasing 20 bps to 36.6% from 36.4% in 2011. The increase in Adjusted EBITDA was due to the increase in revenues resulting from the successful introduction of our new premium benefit offerings and dynamic pricing initiatives, as well as the successful expansion of our season pass base.
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Results of Operations
2011 vs. 2010
The following table presents key operating and financial information for the years ended December 31, 2011 and 2010 (amounts in thousands, except per capita spending and percentages):
Increase (Decrease) | |||||||||||||||
12/31/11 | 12/31/10 | $ | % | ||||||||||||
Net revenues | $ | 1,028,472 | $ | 977,592 | $ | 50,880 | 5.2 | % | |||||||
Operating costs and expenses | 663,334 | 632,022 | 31,312 | 5.0 | % | ||||||||||
Depreciation and amortization | 125,837 | 128,856 | (3,019 | ) | (2.3 | )% | |||||||||
Loss on impairment of goodwill and other intangibles | — | 2,293 | (2,293 | ) | N/M | ||||||||||
Loss on impairment/retirement of fixed assets | 2,565 | 62,752 | (60,187 | ) | N/M | ||||||||||
Operating income | $ | 236,736 | $ | 151,669 | $ | 85,067 | 56.1 | % | |||||||
Other Data: | |||||||||||||||
Adjusted EBITDA (1) | $ | 374,576 | $ | 359,231 | $ | 15,345 | 4.3 | % | |||||||
Adjusted EBITDA margin | 36.4 | % | 36.7 | % | — | (0.3 | )% | ||||||||
Attendance | 23,386 | 22,794 | 592 | 2.6 | % | ||||||||||
Per capita spending | $ | 40.03 | $ | 39.21 | $ | 0.82 | 2.1 | % | |||||||
Out-of-park revenues | $ | 117,556 | $ | 108,761 | $ | 8,795 | 8.1 | % | |||||||
N/M - Not meaningful | |||||||||||||||
(1) for additional information regarding Adjusted EBITDA, including how we define and use Adjusted EBITDA, as well as a reconciliation from net income, see Item 6, "Selected Financial Data," on pages 15-16. | |||||||||||||||
Consolidated net revenues totaled $1,028.5 million in 2011, increasing $50.9 million, from $977.6 million in 2010. The 5% increase in revenues reflects a 3%, or 0.6 million-visit, increase in attendance from a year ago and a 2%, or $0.82, increase in average in-park guest per capita spending for the year. In-park guest per capita spending represents the amount spent per attendee to gain admission to a park, plus all amounts spent while inside the park gates. The improved attendance for 2011 compared to 2010 was largely due to increases in season passes sold and season-pass visits. The growth in season-pass visits was the result of an increased marketing focus toward season passes at several of our parks, resulting in a significant increase in the number of season passes sold.
The increase in 2011 revenues also reflects an increase of 8%, or approximately $8.8 million, in out-of-park revenues, which represents the sale of hotel rooms, food, merchandise and other complementary activities located outside of the park gates. The increase in out-of-park revenues was primarily driven by an increase in occupancy and average-daily-room rates at most of our hotel properties. The increase in revenues for the fiscal year also reflects the impact of currency exchange rates and the weakening U.S. dollar on our Canadian operations (approximately $7.5 million) during 2011.
Operating costs and expenses increased $31.3 million, or 5%, to $663.3 million versus $632.0 million for 2010 and were in line with expectations. The increase in costs and expenses was the result of a $5.4 million increase in cost of goods sold, a $19.4 million increase in operating expenses, and a $6.4 increase in selling, general and administrative costs. The increase in operating expenses was primarily attributable to higher wages of $11.5 million, $4.8 million of higher maintenance costs and $2.6 million of higher operating supply costs. The cost of operating supplies trended up primarily as a result of higher attendance. The increase in wages was largely due to increased seasonal labor hours as a result of expanded operating hours at several parks, additional attractions and guest services, and the overall effect of increased attendance. The increase in selling, general and administrative costs reflects the impact of $9.7 million of non-recurring costs incurred in 2011, including litigation expenses and costs for SEC compliance matters related to Special Meeting requests, as well as costs associated with the relocation of a future ride and costs associated with the transition to a new advertising agency. Additionally, selling, general and administrative costs increased due to an increase in costs associated with our long-term executive compensation plans resulting in large part from the increase in the market price of our units during the period. The 2011-to-2010 comparison was impacted by approximately $10.4 million of expense recorded in 2010 for the terminated merger and a $2.5 million non-recurring payroll tax credit received in 2010. The overall increase in costs and expenses also reflects the negative impact of exchange rates on our Canadian operations ($2.9 million) during 2011.
During 2011, we recognized $2.6 million in non-cash charges for the retirement of assets in the normal course of business. This compares to a non-cash charge of $62.0 million at Great America for the partial impairment of its fixed assets and a $0.8 million charge for asset retirements across all properties. Additionally, non-cash charges of $1.4 million and $0.9 million were recorded during the second and fourth quarters of 2010, respectively, for the partial impairment of trade-names originally recorded at the time of the PPI acquisition. Although the acquisition of the PPI parks continues to meet our collective operating and profitability goals, the performance of certain acquired parks fell below our original expectations in 2010, which when coupled with a higher cost of capital, resulted in the impairment charges recorded in 2010. It is important to
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note that each of the acquired PPI parks produces positive cash flow, and that trade-name write-downs and fixed asset impairment losses do not affect cash, Adjusted EBITDA or liquidity.
Depreciation and amortization expense for 2011 decreased $3.0 million resulting primarily from the impairment charge taken on the fixed assets of California's Great America at the end of 2010. After depreciation and amortization, as well as impairment charges and all other operating costs, operating income for 2011 increased $85.0 million to $236.7 million from $151.7 million in 2010.
Interest expense for the 2011 increased $6.9 million to $157.2 million from $150.3 million in 2010, primarily due to an increase in the amortization of loan fees of $4.3 million, which were incurred as a result of the July 2010 debt refinancing, as well as the February 2011 amendment to the credit agreement. Additionally, interest expense increased due to higher average interest-rates as a result of refinancing a portion of term debt with the bond indenture in July 2010. This increase in rates was slightly offset by a decline in rates on our derivative portfolio during the fourth quarter of 2011, as $1.0 billion of derivatives matured and were replaced by derivatives with lower effective interest rates. Also, as the result of the July 2010 refinancing, a $35.3 million loss on the early extinguishment of debt was recognized and recorded in the statement of operations for 2010.
During 2011, the net effect of our swaps increased $31.3 million to a non-cash benefit to earnings of $13.1 million, reflecting gains from marking the ineffective and de-designated swaps to market, offset somewhat by the regularly scheduled amortization of amounts in "Accumulated Other Comprehensive Income" ("AOCI") related to the swaps and foreign currency losses related to the U.S.-dollar denominated Canadian term loan in the current period. During the year, we also recognized a $9.9 million charge to earnings for unrealized/realized foreign currency losses, $8.8 million of which represents unrealized foreign currency losses on the U.S.-dollar denominated notes issued in July 2010 and held by our Canadian subsidiary.
A provision for taxes of $11.2 million was recorded in 2011, consisting of a provision for the tax attributes of our corporate subsidiaries of $2.9 million and a provision for publicly traded partnership (PTP) taxes of $8.3 million. This compares with a provision for taxes of $2.7 million in 2010, consisting of a benefit of $5.2 million for corporate subsidiaries and a provision of $7.9 million for PTP taxes.
After interest expense and provision for taxes, net income for 2011 totaled $70.7 million, or $1.27 per diluted limited partner unit, compared with net loss of $33.1 million, or $0.60 per unit, in 2010.
In 2011, Adjusted EBITDA (for additional information regarding Adjusted EBITDA, including how we define and use Adjusted EBITDA, as well as a reconciliation from net income, see Note 6 in Item 6, “Selected Financial Data,” on pages 15-16) increased $15.4 million, or 4%, to $374.6 million, with our Adjusted EBITDA margin (Adjusted EBITDA divided by net revenues) decreasing 30 bps to 36.4% from 36.7% in 2010. The margin compression was primarily the result of a shift in the mix of operating profit in 2011 toward our lower margin parks.
Financial Condition
With respect to both liquidity and cash flow, we ended 2012 in sound condition. The working capital ratio (current assets divided by current liabilities) of 1.0 at December 31, 2012 was the result of our highly seasonal business. Receivables and inventories are at normally low seasonal levels and credit facilities are in place to fund current liabilities, capital expenditures, partnership distributions, and pre-opening expenses as required.
Operating Activities
Net cash from operating activities in 2012 increased $67.7 million to $285.9 million from $218.2 million in 2011. The increase in operating cash flows between years was primarily attributable to the increase in the operating results of our parks in 2012 over 2011 and deferred taxes, somewhat offset by a negative change in working capital.
Net cash from operating activities in 2011 increased $36.1 million to $218.2 million from $182.1 million in 2010. The increase in operating cash flows between years was primarily attributable to the increase in the operating results of our parks in 2011 and the positive change in working capital.
Investing Activities
Investing activities consist principally of capital investments we make in our parks and resort properties. During 2012, we sold two non-core assets and received net proceeds of $16.0 million. Total cash spent on capital expenditures was $96.2 million in 2012. Including the effect of the two asset sales, net cash used for investing activities in 2012 totaled $80.2 million, compared to $90.2 million in 2011 and $71.7 million in 2010. The 2012 capital expenditures plan was larger than the prior year. The change between 2011 and 2010 was due to the timing of capital expenditures for rides being placed into service for the 2012 season.
Historically, we have been able to improve our revenues and profitability by continuing to make substantial capital investments in our park and resort facilities. This has enabled us to maintain or increase attendance levels, as well as to generate increases in guest per capita spending and revenues from guest accommodations. For the 2013 operating season, we will be investing approximately 9% of net revenues in marketable capital investments across our properties, with the highlight of the 2013 program being the addition of GateKeeper, a 164-foot-tall winged-steel coaster, at Cedar Point. In addition to GateKeeper, the tallest and fastest wooden coaster in Northern California, called Gold Stryker, will be making its debut at California's Great America.
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In addition to these new thrill rides, we are also investing in other capital improvements across our parks, including the introduction of new dinosaur attractions at Carowinds, Valleyfair and Worlds of Fun. Additionally, we will be combining Worlds of Fun and Oceans of Fun into a single admission ticket, while significantly upgrading the water park attractions at Oceans of Fun. Finally, we will also be enhancing entertainment offerings and continuing our infrastructure upgrades across our properties.
Financing Activities
Net cash utilized for financing activities in 2012 totaled $163.0 million, compared with $100.7 million in 2011 and $112.7 in 2010. An increase in distribution payments in 2012 ($88.8 million vs. $55.3 million in 2011) and the settlement of a Canadian cross-currency derivative contract in the first quarter of 2012 ($50.5 million) were somewhat offset by an increase in cash from operating activities. Net cash utilized for financing activities in 2011, which reflected the February 2011 refinancing of our debt, decreased $12.0 million compared with 2010. An increase in distribution payments in 2011 ($55.3 million vs. $13.8 million in 2010) was somewhat offset by an increase in cash from operating activities.
Liquidity and Capital Resources
In July 2010, we issued $405 million of 9.125% senior unsecured notes (the "notes") in a private placement, including $5.6 million of original issue discount to yield 9.375%. The notes mature in 2018. Concurrently with this offering, we entered into a new $1,435 million credit agreement (the "2010 Credit Agreement"), which includes a $1,175 million senior secured term loan facility and a $260 million senior secured revolving credit facility. The net proceeds from the offering of the notes, along with borrowings under the 2010 Credit Agreement, were used to repay in full all amounts outstanding under our previous credit facilities. On February 25, 2011, we amended the 2010 Credit Agreement (as so amended, the "Amended 2010 Credit Agreement") and extended the maturity date of the U.S. term loan portion of the credit facilities by one year. Certain terms of the amendment are described below.
Terms of the 2010 Credit Agreement include a $260 million revolving credit facility. Under the agreement, the Canadian portion of the revolving credit facility has a limit of $15 million. U.S. denominated loans made under the revolving credit facility bear interest at a rate of LIBOR plus 400 bps (with no LIBOR floor). Canadian denominated loans made under the Canadian portion of the facility also bear interest at a rate of LIBOR plus 400 bps (with no LIBOR floor). The revolving credit facility, which matures in July 2015, also provides for the issuance of documentary and standby letters of credit.
The extended U.S. term loan, as amended on February 25, 2011, amortizes at $11.8 million per year and matures in December 2017. In May 2012, the Partnership prepaid $16 million of long-term debt to meet its obligation under the Excess Cash Flow ("ECF") provision of the Credit Agreement. As a result of this prepayment, as well as additional optional long-term debt prepayments made in August 2011 and September 2012 of $18 million and $9 million, respectively, the Partnership has no scheduled term-debt principal payments until the first quarter of 2015. The extended U.S. term loan bears interest at a rate of LIBOR plus 300 bps, with a LIBOR floor of 100 bps. Until our amendment to the 2010 Credit Agreement, the U.S. term loan bore interest at a rate of LIBOR plus 400 bps, with a LIBOR floor of 150 bps.
At December 31, 2012, we had $1,131.1 million of variable-rate term debt, $401.1 million of the fixed-rate notes, and no borrowings outstanding under our revolving credit facility. After letters of credit, which totaled $16.4 million at December 31, 2012, we had $243.6 million of available borrowings under our revolving credit facility. Of our total term debt outstanding at the end of the year, none is scheduled to mature within the next twelve months.
Our $405 million face value of notes require semi-annual interest payments in February and August, with the principal due in full on August 1, 2018. The notes may be redeemed, in whole or in part, at any time prior to August 1, 2014 at a price equal to 100% of the principal amount of the notes redeemed plus a “make-whole” premium together with accrued and unpaid interest, if any, to the redemption date. Thereafter, the notes may be redeemed, in whole or in part, at various prices depending on the date redeemed. Prior to August 1, 2013, up to 35% of the notes may be redeemed with the net cash proceeds of certain equity offerings at 109.125%.
In 2006, we entered into several fixed-rate interest rate swap agreements totaling $1.0 billion. The weighted average fixed-LIBOR rate on those interest rate swaps, which matured in October 2011, was 5.6%. Based upon our scheduled quarterly regression analysis testing for the effectiveness of the accounting treatment of these swaps, as well as changes in the forward interest rate yield curves used in that testing, the swaps were deemed to be ineffective beginning in October 2009 and continued through their maturity. This resulted in the swaps not qualifying for hedge accounting during the fourth quarter of 2009 through October of 2011.
In 2007, we entered into two cross-currency swap agreements, which matured in February 2012 and effectively converted $268.7 million of term debt at the time, and the associated interest payments, from U.S. dollar denominated debt at a rate of LIBOR plus 200 bps to 6.3% fixed-rate Canadian dollar denominated debt. As a result of paying down the underlying Canadian term debt with net proceeds from the sale of surplus land near Canada’s Wonderland in August 2009, the notional amounts of the underlying debt and the cross-currency swaps no longer matched. Because of the mismatch of the notional amounts, we determined the swaps would no longer be highly effective going forward, resulting in the de-designation of the swaps as of the end of August 2009. Based on the change in currency exchange rates from the time we originally entered into the cross-currency swap agreements in 2007, the termination liability of the swaps has increased steadily over time. In order to minimize further downside risk to the swaps' termination value, in May 2011 we entered into several foreign currency swap agreements to fix the exchange rate on 50% of the liability. In July 2011, we fixed the exchange rate on another 25% of the swap liability, leaving only 25% exposed to further fluctuations in currency exchange rates. Based on currency exchange rates in place at the termination date and the exchange rates contracted in the foreign currency swap agreements, the cash termination costs of the cross-currency swaps totaled $50.5 million on February 17, 2012.
24
In addition to the above mentioned covenants and provisions, the Amended 2010 Credit Agreement contains an initial three-year requirement that at least 50% of our aggregate term debt and senior notes be subject to either a fixed interest rate or interest rate protection. As of December 31, 2012, we were in compliance with this requirement as discussed below.
In order to maintain fixed interest costs on a portion of our domestic term debt beyond the expiration of the swaps that matured in October 2011, in September 2010 we entered into several forward-starting swap agreements that effectively convert a total of $600 million of LIBOR based variable-rate debt to fixed rates beginning in October 2011. The weighted average fixed rate on these LIBOR based interest rate swaps, which mature in December 2015, is 2.57%.
In order to monetize the difference in the LIBOR floors, in March 2011 we entered into several additional forward-starting basis-rate swap agreements ("March 2011 swaps") that, when combined with the September 2010 swaps, effectively convert $600 million of variable-rate debt to fixed rates beginning in October 2011. The September 2010 swaps and the March 2011 swaps, which have been jointly designated as cash flow hedges, mature in December 2015 and fix LIBOR at a weighted average rate of 2.46%.
On May 2, 2011, we entered into four additional forward-starting interest-rate swap agreements ("May 2011 forward-starting swaps") that effectively convert another $200 million of variable-rate debt to fixed rates beginning in October 2011. These swaps, which have been designated as cash flow hedges, mature in December 2015 and fix LIBOR at a weighted average rate of 2.54%. The fair market value of all $800 million of forward-starting swap agreements at December 31, 2012 was a liability of $32.3 million, which was recorded in "Derivative Liability" on the consolidated balance sheet.
The following table presents our September 2010 swaps, March 2011 swaps, and May 2011 forward-starting swaps, which became effective October 1, 2011 and mature December 15, 2015, along with their notional amounts and their effective fixed interest rates.
($'s in thousands) | Forward-Starting Interest Rate Swaps | |||||
Notional Amounts | LIBOR Rate | |||||
$ | 200,000 | 2.40 | % | |||
75,000 | 2.43 | % | ||||
50,000 | 2.42 | % | ||||
150,000 | 2.55 | % | ||||
50,000 | 2.42 | % | ||||
50,000 | 2.55 | % | ||||
25,000 | 2.43 | % | ||||
50,000 | 2.54 | % | ||||
30,000 | 2.54 | % | ||||
70,000 | 2.54 | % | ||||
50,000 | 2.54 | % | ||||
Total $'s / Average Rate | $ | 800,000 | 2.48 | % | ||
The Amended 2010 Credit Agreement requires us to maintain specified financial ratios, which if breached for any reason, including a decline in operating results due to economic or weather conditions, could result in an event of default under the agreement. The most critical of these ratios is the Consolidated Leverage Ratio. At the end of 2012, this ratio was set at 6.00x Consolidated Total Debt (excluding the revolving debt)-to-Consolidated EBITDA. As of December 31, 2012, our Consolidated Total Debt (excluding revolving debt)-to-Consolidated EBITDA ratio was 3.94x, providing $133.6 million of Consolidated EBITDA cushion on the Consolidated Leverage Ratio. We were also in compliance with all other covenants under the Amended 2010 Credit Agreement as of December 31, 2012.
The Amended 2010 Credit Agreement, also includes provisions that allow us to make restricted payments up to $20 million annually, at the discretion of the Board of Directors, so long as no default or event of default has occurred and is continuing. These restricted payments are not subject to any specific covenants. Additional restricted payments are allowed to be made based on an excess-cash-flow formula, should our pro-forma consolidated leverage ratio be less than or equal to 4.50x Consolidated Total Debt (excluding the revolving debt)-to-Consolidated EBITDA (as defined), measured on a quarterly basis. Per the terms of the indenture governing our notes, our ability to make restricted payments is permitted should our trailing-twelve-month Total-Indebtedness-to-Consolidated-Cash-Flow Ratio be less than or equal to 4.75x Consolidated Total Indebtedness (including average revolving debt)-to-Consolidated EBITDA, measured on a quarterly basis. In accordance with these provisions, on November 6, 2012, we announced the declaration of a distribution of $0.40 per limited partner unit, which was paid on December 17, 2012, bringing the total distributions paid in fiscal 2012 distribution to $1.60 per unit.
Existing credit facilities and cash flows from operations are expected to be sufficient to meet working capital needs, debt service, partnership distributions and planned capital expenditures for the foreseeable future.
25
Contractual Obligations
The following table summarizes certain obligations (on an undiscounted basis) at December 31, 2012 (in millions):
Payments Due by Period | |||||||||||||||||||
2018 - | |||||||||||||||||||
Total | 2013 | 2014-2015 | 2016-2017 | Thereafter | |||||||||||||||
Long-term debt (1) | $ | 2,067.3 | $ | 103.5 | $ | 216.7 | $ | 1,267.1 | $ | 480.0 | |||||||||
Capital expenditures (2) | 83.8 | 78.7 | 5.1 | — | — | ||||||||||||||
Lease & other obligations (3) | 160.1 | 16.8 | 14.2 | 11.1 | 118.0 | ||||||||||||||
Total | $ | 2,311.2 | $ | 199.0 | $ | 236.0 | $ | 1,278.2 | $ | 598.0 | |||||||||
(1) | Represents maturities and mandatory prepayments on long-term debt obligations, plus contractual interest payments on all debt. See Note 5 in “Notes to Consolidated Financial Statements” for further information. |
(2) | Represents contractual obligations in place at year-end for the purchase of new rides and attractions. Obligations not denominated in U.S. dollars have been converted based on the currency exchange rates as of December 31, 2012. |
(3) | Represents contractual lease and purchase obligations in place at year-end. |
Off-Balance Sheet Arrangements
We had $16.4 million of letters of credit, which are primarily in place to backstop insurance arrangements, outstanding on our revolving credit facility as of December 31, 2012. We have no other significant off-balance sheet financing arrangements.
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risks from fluctuations in interest rates, and to a lesser extent on currency exchange rates on our operations in Canada and, from time to time, on imported rides and equipment. The objective of our financial risk management is to reduce the potential negative impact of interest rate and foreign currency exchange rate fluctuations to acceptable levels. We do not acquire market risk sensitive instruments for trading purposes.
We manage interest rate risk through the use of a combination of fixed-rate long-term debt, interest rate swaps that fix a portion of our variable-rate long-term debt, and variable-rate borrowings under our revolving credit facility. Translation exposures with regard to our Canadian operations are not hedged.
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the change in fair value of the derivative instrument is reported as a component of “Other comprehensive income (loss)” and reclassified into earnings in the period during which the hedged transaction affects earnings. Changes in fair value of derivative instruments that do not qualify as effective hedging activities are reported as “Net effect of swaps” in the consolidated statement of operations. Additionally, the “Other comprehensive income (loss)” related to interest rate swaps that become ineffective is amortized over the remaining life of the interest rate swap, and reported as a component of “Net effect of swaps” in the consolidated statement of operations.
After considering the impact of interest rate swap agreements, at December 31, 2012, approximately $1.2 billion of our outstanding long-term debt represents fixed-rate debt and approximately $331.1 million represents variable-rate debt. Assuming an average balance on our revolving credit borrowings of approximately $61 million, a hypothetical 100 bps increase in 30-day LIBOR on our variable-rate debt would lead to an increase of approximately $2.6 million in annual cash interest costs due to the impact of our fixed-rate swap agreements.
A uniform 10% strengthening of the U.S. dollar relative to the Canadian dollar would result in a $5.3 million decrease in annual operating income.
Impact of Inflation
Substantial increases in costs and expenses could impact our operating results to the extent such increases could not be passed along to our guests. In particular, increases in labor, supplies, taxes, and utility expenses could have an impact on our operating results. The majority of our employees are seasonal and are paid hourly rates which are consistent with federal and state minimum wage laws. Historically, we have been able to pass along cost increases to guests through increases in admission, food, merchandise and other prices, and we believe that we will continue to have the ability to do so over the long term. We believe that the effects of inflation, if any, on our operating results and financial condition have been and will continue to be minor.
26
Forward Looking Statements
Some of the statements contained in this report (including the “Management's Discussion and Analysis of Financial Condition and Results of Operations” section) that are not historical in nature are forward-looking statements within the meaning of Section 27A of the Securities and Exchange Act of 1933 and Section 21E of the Securities and Exchange Act of 1934, including statements as to our expectations, beliefs and strategies regarding the future. These forward-looking statements may involve risks and uncertainties that are difficult to predict, may be beyond our control and could cause actual results to differ materially from those described in such statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Important factors, including those listed under Item 1A in this Form 10-K could adversely affect our future financial performance and cause actual results, or our beliefs or strategies, to differ materially from our expectations. We do not undertake any obligation to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after the filing date of this document.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information appearing under the subheading “Quantitative and Qualitative Disclosures About Market Risk” under the heading “Management's Discussion and Analysis of Financial Condition and Results of Operations” on page 26 of this Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Quarterly operating results for 2012 and 2011 are presented in the table below (in thousands, except per unit amounts):
Net income | Net income | |||||||||||||||||||
(loss) per | (loss) per | |||||||||||||||||||
Operating income | Net income | limited partner | limited partner | |||||||||||||||||
(Unaudited) | Net revenues | (loss) | (loss) | unit-basic | unit-diluted | |||||||||||||||
2012 | ||||||||||||||||||||
1st Quarter | $ | 28,198 | $ | (69,329 | ) | $ | (65,415 | ) | $ | (1.18 | ) | $ | (1.18 | ) | ||||||
2nd Quarter | 357,606 | 86,905 | 36,322 | 0.65 | 0.65 | |||||||||||||||
3rd Quarter (1) | 553,445 | 204,041 | 140,688 | 2.53 | 2.51 | |||||||||||||||
4th Quarter | 129,205 | 11,025 | (10,379 | ) | (0.19 | ) | (0.19 | ) | ||||||||||||
$ | 1,068,454 | $ | 232,642 | $ | 101,216 | $ | 1.82 | $ | 1.81 | |||||||||||
2011 | ||||||||||||||||||||
1st Quarter | $ | 26,869 | $ | (67,506 | ) | $ | (84,926 | ) | $ | (1.53 | ) | $ | (1.53 | ) | ||||||
2nd Quarter | 284,490 | 51,783 | 4,282 | 0.08 | 0.08 | |||||||||||||||
3rd Quarter | 572,268 | 245,752 | 152,218 | 2.75 | 2.73 | |||||||||||||||
4th Quarter | 144,845 | 6,707 | (828 | ) | (0.01 | ) | (0.01 | ) | ||||||||||||
$ | 1,028,472 | $ | 236,736 | $ | 70,746 | $ | 1.28 | $ | 1.27 | |||||||||||
(1) The third quarter of 2012 included a non-cash charge of $25 million for the impairment of long-lived assets at Wildwater Kingdom.
Note: | To assure that our highly seasonal operations will not result in misleading comparisons of interim periods, the Partnership has adopted the following reporting procedures: (a) seasonal operating costs are expensed over the operating season, including some costs incurred prior to the season, which are deferred and amortized over the season, and (b) all other costs are expensed as incurred or ratably over the entire year. |
27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Unitholders of Cedar Fair, L.P.
Sandusky, Ohio
We have audited the accompanying consolidated balance sheets of Cedar Fair, L.P. and subsidiaries (the "Partnership") as of December 31, 2012 and 2011, and the related consolidated statements of operations and comprehensive income, partners' equity, and cash flows for each of the three years in the period ended December 31, 2012. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Cedar Fair, L.P. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Partnership's internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2013 expressed an unqualified opinion on the Partnership's internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Cleveland, Ohio
February 25, 2013
28
CEDAR FAIR, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands)
12/31/2012 | 12/31/2011 | |||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 78,830 | $ | 35,524 | ||||
Receivables | 18,192 | 7,611 | ||||||
Inventories | 27,840 | 33,069 | ||||||
Current deferred tax asset | 8,184 | 10,345 | ||||||
Other current assets | 8,060 | 11,966 | ||||||
141,106 | 98,515 | |||||||
Property and Equipment: | ||||||||
Land | 303,348 | 312,859 | ||||||
Land improvements | 339,081 | 333,423 | ||||||
Buildings | 584,854 | 579,136 | ||||||
Rides and equipment | 1,450,231 | 1,423,370 | ||||||
Construction in progress | 28,971 | 33,892 | ||||||
2,706,485 | 2,682,680 | |||||||
Less accumulated depreciation | (1,154,456 | ) | (1,063,188 | ) | ||||
1,552,029 | 1,619,492 | |||||||
Goodwill | 246,221 | 243,490 | ||||||
Other Intangibles, net | 40,652 | 40,273 | ||||||
Other Assets | 47,614 | 54,188 | ||||||
$ | 2,027,622 | $ | 2,055,958 | |||||
LIABILITIES AND PARTNERS’ EQUITY | ||||||||
Current Liabilities: | ||||||||
Current maturities of long-term debt | $ | — | $ | 15,921 | ||||
Accounts payable | 10,734 | 12,856 | ||||||
Deferred revenue | 39,485 | 29,594 | ||||||
Accrued interest | 15,512 | 15,762 | ||||||
Accrued taxes | 17,813 | 16,008 | ||||||
Accrued salaries, wages and benefits | 24,836 | 33,388 | ||||||
Self-insurance reserves | 23,906 | 21,243 | ||||||
Current derivative liability | — | 50,772 | ||||||
Other accrued liabilities | 5,916 | 7,899 | ||||||
138,202 | 203,443 | |||||||
Deferred Tax Liability | 156,740 | 133,767 | ||||||
Derivative Liability | 32,260 | 32,400 | ||||||
Other Liabilities | 8,980 | 4,090 | ||||||
Long-Term Debt: | ||||||||
Term debt | 1,131,100 | 1,140,179 | ||||||
Notes | 401,080 | 400,279 | ||||||
1,532,180 | 1,540,458 | |||||||
Commitments and Contingencies (Note 10) | ||||||||
Partners’ Equity: | ||||||||
Special L.P. interests | 5,290 | 5,290 | ||||||
General partner | 1 | — | ||||||
Limited partners, 55,618, and 55,346 outstanding at December 31, 2012 and December 31, 2011, respectively | 182,469 | 165,518 | ||||||
Accumulated other comprehensive loss | (28,500 | ) | (29,008 | ) | ||||
159,260 | 141,800 | |||||||
$ | 2,027,622 | $ | 2,055,958 | |||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
29
CEDAR FAIR, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands, except per unit amounts)
For the years ended December 31, | 2012 | 2011 | 2010 | |||||||||
Net revenues: | ||||||||||||
Admissions | $ | 612,069 | $ | 596,042 | $ | 568,762 | ||||||
Food, merchandise and games | 342,214 | 349,436 | 337,356 | |||||||||
Accommodations and other | 114,171 | 82,994 | 71,474 | |||||||||
1,068,454 | 1,028,472 | 977,592 | ||||||||||
Costs and expenses: | ||||||||||||
Cost of food, merchandise and games revenues | 95,048 | 92,057 | 86,619 | |||||||||
Operating expenses | 451,403 | 430,851 | 411,402 | |||||||||
Selling, general and administrative | 138,311 | 140,426 | 134,001 | |||||||||
Depreciation and amortization | 127,339 | 125,837 | 128,856 | |||||||||
Loss on impairment of goodwill and other intangibles | — | — | 2,293 | |||||||||
Loss on impairment / retirement of fixed assets, net | 30,336 | 2,565 | 62,752 | |||||||||
Gain on sale of other assets | (6,625 | ) | — | — | ||||||||
835,812 | 791,736 | 825,923 | ||||||||||
Operating income | 232,642 | 236,736 | 151,669 | |||||||||
Interest expense | 110,619 | 157,185 | 150,285 | |||||||||
Net effect of swaps | (1,492 | ) | (13,119 | ) | 18,194 | |||||||
Loss on early debt extinguishment | — | — | 35,289 | |||||||||
Unrealized/realized foreign currency (gain) loss | (8,998 | ) | 9,909 | (20,563 | ) | |||||||
Other (income) expense | (68 | ) | 798 | (1,154 | ) | |||||||
Income (loss) before taxes | 132,581 | 81,963 | (30,382 | ) | ||||||||
Provision for taxes | 31,365 | 11,217 | 2,670 | |||||||||
Net income (loss) | 101,216 | 70,746 | (33,052 | ) | ||||||||
Net income allocated to general partner | 1 | 1 | — | |||||||||
Net income (loss) allocated to limited partners | $ | 101,215 | $ | 70,745 | $ | (33,052 | ) | |||||
Net income (loss) | 101,216 | 70,746 | (33,052 | ) | ||||||||
Other comprehensive income (loss), (net of tax): | ||||||||||||
Cumulative foreign currency translation adjustment | 369 | 933 | (6,475 | ) | ||||||||
Unrealized income on cash flow hedging derivatives | 139 | 3,767 | 60,048 | |||||||||
Other comprehensive income, (net of tax) | 508 | 4,700 | 53,573 | |||||||||
Total comprehensive income | $ | 101,724 | $ | 75,446 | $ | 20,521 | ||||||
Basic earnings (loss) per limited partner unit: | ||||||||||||
Weighted average limited partner units outstanding | 55,518 | 55,345 | 55,316 | |||||||||
Net income (loss) per limited partner unit | $ | 1.82 | $ | 1.28 | $ | (0.60 | ) | |||||
Diluted earnings per limited partner unit: | ||||||||||||
Weighted average limited partner units outstanding | 55,895 | 55,886 | 55,316 | |||||||||
Net income (loss) per limited partner unit | $ | 1.81 | $ | 1.27 | $ | (0.60 | ) | |||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
30
CEDAR FAIR, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the years ended December 31, | 2012 | 2011 | 2010 | |||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
Net income (loss) | $ | 101,216 | $ | 70,746 | $ | (33,052 | ) | |||||
Adjustments to reconcile net income (loss) to net cash from operating activities: | ||||||||||||
Depreciation and amortization | 127,339 | 125,837 | 128,856 | |||||||||
Non-cash equity based compensation expense | 4,476 | (239 | ) | (89 | ) | |||||||
Loss on early debt extinguishment | — | — | 35,289 | |||||||||
Loss on impairment of goodwill and other intangibles | — | — | 2,293 | |||||||||
Loss on impairment / retirement of fixed assets, net | 30,336 | 2,565 | 62,752 | |||||||||
Gain on sale of other assets | (6,625 | ) | — | — | ||||||||
Net effect of swaps | (1,492 | ) | (13,119 | ) | 18,194 | |||||||
Amortization of debt issuance costs | 10,417 | 10,000 | 5,671 | |||||||||
Unrealized foreign currency (gain) loss on notes | (8,758 | ) | 8,753 | (17,464 | ) | |||||||
Other non-cash income | — | — | (1,893 | ) | ||||||||
Deferred income taxes | 27,110 | 4,017 | (14,664 | ) | ||||||||
Excess tax benefit from unit-based compensation expense | (1,208 | ) | — | — | ||||||||
Change in operating assets and liabilities: | ||||||||||||
(Increase) decrease in current assets | (1,420 | ) | 1,686 | (11,855 | ) | |||||||
(Increase) decrease in other assets | (2,739 | ) | 173 | 6 | ||||||||
Increase (decrease) in accounts payable | 170 | (1,144 | ) | 652 | ||||||||
Increase (decrease) in accrued taxes | 1,883 | 835 | (2,242 | ) | ||||||||
Increase (decrease) in self-insurance reserves | 2,676 | (206 | ) | (383 | ) | |||||||
(Decrease) increase in deferred revenue and other current liabilities | (1,345 | ) | 14,170 | 7,653 | ||||||||
Increase (decrease) in other liabilities | 3,897 | (5,897 | ) | 2,391 | ||||||||
Net cash from operating activities | 285,933 | 218,177 | 182,115 | |||||||||
CASH FLOWS FOR INVESTING ACTIVITIES | ||||||||||||