Description
Filed with the SEC from July 12 to July 18:
Six Flags (SIX)
Pentwater Capital Management has 2,372,700 shares (4.4%), after selling 586,406 from May 15 through July 6 for $46.50 to $54.63 per share. Pentwater had brought 11,400 shares from May 17 through July 10 at $43.90 to $53.03 each.
BUSINESS OVERVIEW
Introduction
We own and operate regional theme, water and zoological parks and are the largest regional theme park operator in the world. Of the 19 parks we currently own or operate, 17 are located in the United States, one is located in Mexico City, Mexico and one is located in Montreal, Canada. In the United States, we currently own or operate parks in the top 10 designated market areas. Our 19 parks serve an aggregate population of approximately 100 million people and 170 million people within a radius of 50 miles and 100 miles, respectively, with some of the highest per capita gross domestic product in the United States. Our parks occupy approximately 4,400 acres of land and in addition, we own approximately 1,300 acres of potentially developable land.
In 1998, we acquired the former Six Flags Entertainment Corporation ("Former SFEC", a corporation that has been merged out of existence and that has always been a separate corporation from Holdings), which had operated regional theme parks under the Six Flags name for nearly forty years and established an internationally recognized brand name. We have ownership of the "Six Flags" brand name in the United States and foreign countries throughout the world. To capitalize on this name recognition, 17 of our parks are branded as "Six Flags" parks.
We hold exclusive long-term licenses for theme park usage throughout the United States (except the Las Vegas metropolitan area), Canada, Mexico and other countries of certain Warner Bros. and DC Comics characters. These characters include Bugs Bunny , Daffy Duck , Tweety Bird , Yosemite Sam , Batman , Superman and others. In addition, we have certain rights to use the Hanna-Barbera and Cartoon Network characters, including Yogi Bear , Scooby-Doo , The Flintstones and others. We use these characters to market our parks and to provide an enhanced family entertainment experience. Our licenses include the right to sell merchandise featuring the characters at the parks, and to use the characters in our advertising, as walk-around characters and in theming for rides, attractions and retail outlets. We believe using these characters promotes increased attendance, supports higher ticket prices, increases lengths-of-stay and enhances in-park sales.
Our parks are located in geographically diverse markets across North America and they generally offer a broad selection of state-of-the-art and traditional thrill rides, water attractions, themed areas, concerts and shows, restaurants, game venues and retail outlets, and thereby provide a complete family-oriented entertainment experience. In the aggregate, during 2011 our theme parks offered approximately 800 rides, including over 120 roller coasters, making us the leading provider of "thrill rides" in the industry.
We believe that our parks benefit from limited direct theme park competition. In addition, a limited supply of real estate appropriate for theme park development, high initial capital investment requirements, and long development lead-time and zoning restrictions provides each of our parks with a significant degree of protection from competitive new theme park openings. Based on our knowledge of the development of other theme parks in the United States, we estimate that it would cost $300 million to $500 million and would take a minimum of two years to construct a new regional theme park comparable to one of our major Six Flags-branded theme parks.
Chapter 11 Reorganization and Related Subsequent Events
On June 13, 2009, Six Flags, Inc. ("SFI"), Six Flags Operations Inc. ("SFO") and Six Flags Theme Parks Inc. ("SFTP") and certain of SFTP's domestic subsidiaries (the "SFTP Subsidiaries" and, collectively with SFI, SFO and SFTP, the "Debtors") filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") (Case No. 09-12019) (the "Chapter 11 Filing"). SFI's subsidiaries that own interests in Six Flags Over Texas ("SFOT") and Six Flags Over Georgia (including Six Flags White Water Atlanta) ("SFOG" and together with SFOT, the "Partnership Parks") and the parks in Canada and Mexico were not debtors in the Chapter 11 Filing.
Operational Changes
During 2011, we (i) added seven new roller coasters at different parks including a Green Lantern-themed stand-up coaster at Six Flags Great Adventure (Jackson, NJ), and two new coasters at Six Flags Magic Mountain (Valencia, CA) increasing the park's coaster count to 18 making it the "Coaster Capital of the World;" (ii) added a Sky Screamer swing ride at Six Flags Discovery Kingdom (Vallejo, CA) and Six Flags St. Louis (Eureka, MO); (iii) re-launched the New Texas Giant at Six Flags Over Texas (Arlington, TX); (iv) added Riptide Bay, a water park expansion at Six Flags Great America (Gurnee, IL); (v) added an all new state of the art Laser Show Spectacular to Six Flags Fiesta Texas (San Antonio, TX); (vi) continued our efficient and targeted marketing strategies including reduced marketing expenditures and focused on our breadth of product and value proposition; (vii) maintained focus on containing our operating expenses; (viii) implemented a more targeted ticket discounting philosophy to improve ticket yields; (ix) improved and expanded upon our branded product offerings and guest-service focused staffing initiatives in order to continue to drive guest spending growth; and (x) continued our efforts to grow profitable sponsorship and international revenue opportunities.
Additionally in 2011, we attained record guest satisfaction scores in overall guest satisfaction, cleanliness, safety, and value based on guest surveys.
Planned initiatives for 2012 include: (i) adding the world's tallest vertical drop ride at Six Flags Magic Mountain (Valencia, CA) and a new launch coaster at Six Flags Discovery Kingdom (Vallejo, CA); (ii) adding a new wing coaster at Six Flags Great America (Gurnee, IL) and a colossal boomerang coaster at Six Flags New England (Agawam, MA); (iii) introducing a stand-up coaster to Six Flags America (outside of Washington D.C.); (iv) adding a Sky Screamer ride at Six Flags Great Adventure (Jackson, NJ), Six Flags Fiesta Texas (San Antonio, TX), and La Ronde (Montreal, Canada); (v) adding a looping body slide at Six Flags Hurricane Harbor in Eureka, MO and adding a King Cobra waterslide at Six Flags Hurricane Harbor in Jackson, NJ as well as a Nordic-themed waterslide complex at The Great Escape and Splashwater Kingdom (Queensbury, NY); (vi) adding a variety of family rides, shows and attractions at several parks, including Six Flags Mexico (Mexico City, Mexico), La Ronde (Montreal, Canada), Six Flags Over Texas (Arlington, TX), Six Flags Fiesta Texas (San Antonio, TX), and a 45th anniversary tribute at Six Flags Over Georgia (Austell, GA); (vii) continuing our targeted marketing strategies including focusing on our breadth of product and value proposition; (viii) maintaining focus on containing our operating expenses; (ix) continuing our more targeted approach to ticket discounting; (x) improving and expanding upon our branded product offerings and guest-service focused staffing initiatives in order to continue to drive guest spending growth; and (xi) continuing our efforts to grow profitable sponsorship and international revenue opportunities.
Partnership Park Arrangements
In 1998, we acquired the former Six Flags Entertainment Corporation ("Former SFEC", a corporation that has been merged out of existence and that has always been a separate corporation from Holdings). In connection with our 1998 acquisition of Former SFEC, we guaranteed certain obligations relating to the Partnership Parks. These obligations continue until 2027, in the case of SFOG, and 2028, in the case of SFOT. Among such obligations are (i) minimum annual distributions (including rent) of approximately $65.1 million in 2012 (subject to cost of living adjustments in subsequent years) to the limited partners in the Partnerships Parks (based on our ownership of units as of December 31, 2011, our share of the distribution will be approximately $28.1 million), (ii) minimum capital expenditures at each park during rolling five-year periods based generally on 6% of park revenues, and (iii) an annual offer to purchase a maximum number of 5% per year (accumulating to the extent not purchased in any given year) of limited partnership units at the Specified Prices described below.
After payment of the minimum distribution, we are entitled to a management fee equal to 3% of prior year gross revenues and, thereafter, any additional cash will be distributed first to management fee in arrears, repayment of any interest and principal on intercompany loans with any additional cash being distributed 95% to us, in the case of SFOG, and 92.5% to us, in the case of SFOT.
The purchase price for the annual offer to purchase a maximum number of 5% per year of limited partnership units in the Partnership Parks is based on the greater of (i) a total equity value of $250.0 million (in the case of SFOG) and $374.8 million (in the case of SFOT) or (ii) a value derived by multiplying the weighted-average four-year EBITDA of the park by 8.0 (in the case of SFOG) and 8.5 (in the case of SFOT) (the "Specified Prices"). As of December 31, 2011, we owned approximately 29.7% and 53.0% of the Georgia limited partner units and Texas Limited Partner units, respectively. In 2027 and 2028, we will have the option to purchase all remaining units in the Georgia limited partner and the Texas limited partner, respectively, at a price based on the Specified Prices set forth above, increased by a cost of living adjustment. The maximum number of units that we could be required to purchase for both parks in 2012 would result in an aggregate payment by us of approximately $350.2 million, representing 70.3% and 47.0% of the units of the Georgia limited partner and the Texas limited partner, respectively.
In connection with our acquisition of Former SFEC, we entered into the Subordinated Indemnity Agreement with certain of the Company's entities, Time Warner and an affiliate of Time Warner, pursuant to which, among other things, we transferred to Time Warner (which has guaranteed all of our obligations under the Partnership Park arrangements) record title to the corporations which own the entities that have purchased and will purchase limited partnership units of the Partnership Parks, and we received an assignment from Time Warner of all cash flow received on such limited partnership units, and we otherwise control such entities. In addition, we issued preferred stock of the managing partner of the partnerships to Time Warner. In the event of a default by us under the Subordinated Indemnity Agreement or of our obligations to our partners in the Partnership Parks, these arrangements would permit Time Warner to take full control of both the entities that own limited partnership units and the managing partner. If we satisfy all such obligations, Time Warner is required to transfer to us the entire equity interests of these entities. We incurred approximately $11.2 million of capital expenditures at the Partnership Parks for the 2011 season and intend to incur approximately $5.0 million of capital expenditures at these parks for the 2012 season, an amount in excess of the minimum required expenditure. Cash flows from operations at the Partnership Parks will be used to satisfy the annual distribution and capital expenditure requirements, before any funds are required from us. The two partnerships generated approximately $61.1 million of cash in 2011 from operating activities after deduction of capital expenditures and excluding the impact of short-term intercompany advances from or payments to Holdings. At December 31, 2011, we had total loans receivable outstanding of $239.3 million from the partnerships that own the Partnership Parks, primarily to fund the acquisition of Six Flags White Water Atlanta, and to make capital improvements and distributions to the limited partners.
Pursuant to the 2011 annual offer, we purchased 0.61 units from the Texas partnership for approximately $0.9 million in May 2011 and no units from the Georgia partnership. With respect to the 2011 "put" obligations, no borrowing occurred during 2011 under the TW Loan, a $150 million multi-draw term loan facility, which was terminated on December 20, 2011, in connection with the New Credit Facility. The $300 million accordion feature on the Term Loan B under the New Credit Facility is available for borrowing for future "put" obligations if necessary.
Marketing and Promotion
We attract visitors through multi-media marketing and promotional programs for each of our parks. The national programs are designed to market and enhance the Six Flags brand name. Regional and local programs are tailored to address the different characteristics of their respective markets and to maximize the impact of specific park attractions and product introductions. All marketing and promotional programs are updated or completely changed each year to address new developments. These initiatives are supervised by our Senior Vice President, Marketing, with the assistance of our senior management and advertising and promotion agencies.
We also develop alliance, sponsorship and co-marketing relationships with well-known national, regional and local consumer goods companies and retailers to supplement our advertising efforts and to provide attendance incentives in the form of discounts. We also arrange for popular local radio and television programs to be filmed or broadcast live from our parks.
Group sales represented approximately 28% of aggregate attendance in each of the 2011 and 2010 seasons at our parks. Each park has a group sales manager and a sales staff dedicated to selling multiple group sales and pre-sold ticket programs through a variety of methods, including online promotions, direct mail, telemarketing and personal sales calls.
Season pass sales establish an attendance base in advance of the season, thus reducing exposure to inclement weather. In general, a season pass attendee contributes higher aggregate profitability to the Company over the course of a year compared to a single day ticket visitor because a season pass holder pays a higher ticket price and contributes to in-park guest spending over multiple visits. Additionally, season pass holders often bring paying guests and generate "word-of-mouth" advertising for the parks. During the 2011 and 2010 seasons, season pass attendance constituted approximately 35% and 32%, respectively, of the total attendance at our parks.
We offer discounts on season pass and multi-visit tickets, tickets for specific dates and tickets to affiliated groups such as businesses, schools and religious, fraternal and similar organizations.
We also implement promotional programs as a means of targeting specific market segments and geographic locations not generally reached through group or retail sales efforts. The promotional programs utilize coupons, sweepstakes, reward incentives and rebates to attract additional visitors. These programs are implemented through online promotions, direct mail, telemarketing, direct response media, sponsorship marketing and targeted multi-media programs. The special promotional offers are usually for a limited time and offer a reduced admission price or provide some additional incentive to purchase a ticket.
Licenses
We have the exclusive right on a long-term basis to theme park usage of the Warner Bros. and DC Comics animated characters throughout the United States (except for the Las Vegas metropolitan area), Canada, Mexico and certain other countries. In particular, our license agreements entitle us to use, subject to customary approval rights of Warner Bros. and, in limited circumstances, approval rights of certain third parties, all animated, cartoon and comic book characters that Warner Bros. and DC Comics have the right to license, including Batman, Superman, Bugs Bunny, Daffy Duck, Tweety Bird and Yosemite Sam, and include the right to sell merchandise using the characters. In addition, certain Hanna-Barbera characters including Yogi Bear, Scooby-Doo and The Flintstones are available for our use at certain of our theme parks. In addition to basic license fees ($3.3 million for Warner Bros. and $0.3 million for Hanna-Barbera and other licenses in 2011), we are required to pay a royalty fee on merchandise manufactured by or for us and sold that uses the licensed characters. The royalty fee is generally equal to 12% of the final landed cost to Six Flags of the merchandise. Warner Bros. and Hanna-Barbera have the right to terminate their license agreements under certain circumstances, including if any persons involved in the movie or television industries obtain control of us or, in the case of Warner Bros., upon a default under the Subordinated Indemnity Agreement.
In connection with our investment in dick clark productions, inc. ("DCP"), we obtained a license to use stills and clips from the DCP library, which includes the Golden Globes, the American Music Awards, the Academy of Country Music Awards, So You Think You Can Dance, American Bandstand and Dick Clark's New Year's Rockin' Eve, in our parks as well as for the promotion and advertising of our parks. In certain cases, our right to use these properties is subject to the consent of third parties with interests in such properties. The term of the license is for the longer of seven years or the date that we cease to hold 50% of our original investment in DCP.
Park Operations
We currently operate in geographically diverse markets in North America. Each park is managed by a park president who reports to a senior vice president of the Company. The park president is responsible for all operations and management of the individual park. Local advertising, ticket sales, community relations and hiring and training of personnel are the responsibility of individual park management in coordination with corporate support teams.
Each park president also directs a full-time, on-site management team. Each management team includes senior personnel responsible for operations and maintenance, in-park food, beverage, merchandising and games, marketing and promotion, sponsorships, human resources and finance. Finance directors at our parks report to a corporate vice president of the Company, and with their support staff provide financial services to their respective parks and park management teams. Park management compensation structures are designed to provide financial incentives for individual park managers to execute our strategy and to maximize revenues and free cash flow.
Our parks are generally open daily from Memorial Day through Labor Day. In addition, most of our parks are open during weekends prior to and following their daily seasons, often in conjunction with themed events, such as Fright Fest® and Holiday in the Park®. Due to their location, certain parks have longer operating seasons. Typically, the parks charge a basic daily admission price, which allows unlimited use of all rides and attractions, although in certain cases special rides and attractions require the payment of an additional fee.
See Note 17 to the Consolidated Financial Statements for information concerning revenues and long-lived assets by domestic and international categories.
Capital Improvements
We regularly make capital investments for new rides and attractions at our parks. We purchase both new and used rides and attractions. In addition, we rotate rides among parks to provide fresh attractions. We believe that the selective introduction of new rides and attractions, including family entertainment attractions, is an important factor in promoting each of the parks in order to achieve market penetration and encourage longer visits, which lead to increased attendance and in-park sales. For examples of our planned initiatives for 2012, see "Operational Changes" above.
CEO BACKGROUND
John W. Baker has served as a Director of the Company since May 2010. Since February 2009, Mr. Baker has served as Senior Vice President, Enterprise Effectiveness at Caesars Entertainment Corporation, which owns and operates over 50 casinos, hotels, and seven golf courses under several brands. In this capacity, he oversees the company's Strategic Sourcing, Continuous Improvement, Corporate Real Estate and Program Management Office activities. Mr. Baker joined Caesars Entertainment Corporation (then Harrah's Entertainment Inc.) in 2005 as the Executive Associate to the Chairman, President and CEO. Prior to that, he was President and COO of HomeGain, Inc., a national online real estate services company, and was Senior Vice President and General Manager at Wells Fargo. He also held various positions with Booz, Allen & Hamilton over a ten year period. Mr. Baker's experience in general operations management and cost reduction and restructuring from his current and prior positions and his entertainment related experience make him highly qualified to serve as a director.
Kurt M. Cellar has served as a Director of the Company since May 2010. Since January 2008, Mr. Cellar has been the President of Corner Pocket Investors, LLC. He has also been a consultant to companies in a variety of industries as well as a private investor. From 1999 to 2008, Mr. Cellar worked for the hedge fund Bay Harbour Management, L.C. He was partner and portfolio manager from 2003 until his departure. Prior to Bay Harbour, Mr. Cellar was with the private equity firm Remy Investors. Before that, he was a strategy consultant at LEK/Alcar. He is currently a director of Aventine Renewable Energy, Home Buyers Warranty, Hawaiian Telecom, Inc., U.S. Concrete Inc. and Vertis Communications. Within the last five years, Mr. Cellar was also a member of the Board of Directors of The Penn Traffic Company, where he was a member of the Compensation Committee, and RCN Corporation, where he was a member of the Compensation and Audit Committees. Mr. Cellar is well qualified to serve on the Board based on his significant accounting and financial experience and his other public company board experience.
Charles A. Koppelman has served as a Director of the Company since May 2010. Since 2005, Mr. Koppelman has served as Executive Chairman and Principal Executive Officer of Martha Stewart Living Omnimedia Inc. and he has served as a director of the company since 2004. Mr. Koppelman currently serves as Chairman and Chief Executive Officer of CAK Entertainment Inc., a music and entertainment business, and is a director and serves on the Compensation Committee of Las Vegas Sands. From 1990 to 1994, he served first as Chairman and Chief Executive Officer of EMI Music Publishing and then from 1994 to 1997 as Chairman and Chief Executive Officer of EMI Records Group, North America. Mr. Koppelman is also a former director of Steve Madden Ltd., and served as Chairman of the Board of that company from 2000 to 2004. Mr. Koppelman's business acumen acquired from his extensive experience with media and entertainment companies together with his branding experience make him highly qualified to serve on the Board.
Jon L. Luther has served as a Director of the Company since May 2010. Mr. Luther served as Chief Executive Officer of Dunkin' Brands from January 2003 to January 2009 and Chairman from March 2006 to January 2009. In January 2009, he assumed the role of Executive Chairman and, in 2010, became non-Executive Chairman. Mr. Luther is on the Board of Directors of The Culinary Institute of America and also serves as Treasurer and a member of its Executive Committee. He is also currently serving as a director and member of the Compensation Committee of Brinker International as well as Chairman for the International Franchise Association and as a member of its Executive Committee. Mr. Luther brings to the Board executive leadership experience and vast business experience and expertise in the food and beverage segment as well as in brand marketing.
Usman Nabi has served as a Director of the Company since May 2010. Mr. Nabi is a Senior Partner at H Partners Management, an investment management firm. Prior to joining H Partners in 2006, Mr. Nabi was at Perry Capital, the Carlyle Group, and Lazard Freres. Mr. Nabi is a Board Director of Global Glimpse, a nonprofit organization committed to creating global leadership opportunities for America's youth. As a Senior Partner at H Partners Management, Mr. Nabi brings to the Board a keen business and financial sense and strong investment experience especially in the leisure sector.
Stephen D. Owens has served as a Director of the Company since May 2010. Mr. Owens is co-founder and Managing Director of Staple Street Capital, a private equity firm. Prior to founding Staple Street Capital, Mr. Owens was a Managing Director at The Carlyle Group in the firm's U.S. Buyout team. While at Carlyle, Mr. Owens co-founded the firm's Global Consumer & Retail Group, was a senior member of the firm's Global Communications & Media Group, and executed and oversaw investments in the business services and transportation sectors. Previously, Mr. Owens was a principal investor and investment banker with Lehman Brothers in their New York and Hong Kong offices. Mr. Owens' business and finance experience including helping to create value in multi-location consumer-facing businesses, qualifies him to serve on the Board.
James Reid-Anderson has served as Chairman, President and Chief Executive Officer of the Company since August 2010. Prior to joining the Company, Mr. Reid-Anderson was an adviser to Apollo Management L.P., a private equity investment firm, commencing January 2010, and from December 2008 to March 2010 was an adviser to the managing board of Siemens AG, a worldwide manufacturer and supplier of electronics and electrical engineering in the industrial, energy and healthcare sectors. From May through November 2008, he was a member of Siemens AG's managing board and Chief Executive Officer of Siemens' Healthcare Sector, and from November 2007 through April 2008 he was the Chief Executive Officer of Siemens' Healthcare Diagnostics unit. Prior to the sale of the company to Siemens, Mr. Reid-Anderson served as Chairman, President and Chief Executive Officer of Dade Behring Inc., a company that manufactured testing equipment and supplies for the medical diagnostics industry, which he joined in August 1996. Dade Behring emerged from Chapter 11 reorganization in September 2002. He previously held roles of increasing importance at PepsiCo, Grand Metropolitan (now Diageo) and Mobil. He is a director of Stericycle, Inc., where he is a member of the Compensation Committee, and previously served as a director of Brightpoint Inc. from July through September 2010. Mr. Reid-Anderson is also a fellow of the U.K. Association of Chartered Certified Accountants. Mr. Reid-Anderson's prior experience as Chairman, President and Chief Executive Officer of Dade Behring, a restructured public company, as well as his extensive operational, international and financial background, makes him especially qualified to serve as Chairman and lead the Company to operational and financial success.
Richard W. Roedel has been a Director of the Company since December 2010. Mr. Roedel also serves as a director of Brightpoint, Inc., IHS, Inc., Sealy Corporation, Lorillard, Inc. and Luna Innovations Incorporated. Mr. Roedel is Chairman of the Audit Committee of Sealy and Lorillard as well as a member of the Audit Committee of IHS. Mr. Roedel also serves as the Lead Independent Director of Lorillard, Non-Executive Chairman of Luna, and Chairman of the Compensation Committee of Brightpoint. He is also a director of the Association of Audit Committee Members, Inc., a not-for-profit organization dedicated to strengthening audit committees, and Broadview Network Holdings, Inc., a private company with publicly traded debt. Mr. Roedel was a director and Chairman of the Audit Committee of Dade Behring Holdings, Inc. from October 2002 until November 2007 when Dade was acquired by Siemens AG. Mr. Roedel served in various capacities at Take-Two Interactive Software, Inc. from November 2002 to June 2005, including chairman and chief executive officer. From 1971 through 2000, he was employed by BDO Seidman LLP, becoming an audit partner in 1980, later being promoted in 1990 to managing partner in Chicago and then managing partner in New York in 1994, and finally, in 1999, to chairman and chief executive officer. As a result of these and other professional experiences, Mr. Roedel has extensive experience in finance, accounting and operations and in public company board and committee practices, which make him well-qualified to serve on the Board.
MANAGEMENT DISCUSSION FROM LATEST 10K
Overview
We own and operate regional theme, water and zoological parks and are the largest regional theme park operator in the world. Of the 19 parks we currently own or operate, 17 are located in the United States, one is located in Mexico City, Mexico and one is located in Montreal, Canada. Our parks are located in geographically diverse markets across North America and they generally offer a broad selection of state-of-the-art and traditional thrill rides, water attractions, themed areas, concerts and shows, restaurants, game venues and retail outlets, thereby providing a complete family-oriented entertainment experience. We work continuously to improve our parks and our guests' experiences and to meet our guests' evolving needs and preferences.
Our revenue is primarily derived from (i) the sale of tickets for entrance to our parks (approximately 53% of revenue in 2011), (ii) the sale of food, merchandise, games and attractions inside our parks, and (iii) and sponsorship, licensing and other fees. Revenues from ticket sales and park sales is primarily impacted by park attendance. Revenues from sponsorship, licensing and other fees can be impacted by the term, timing and extent of services and fees under these arrangements, which can result in fluctuations from year to year. During 2011, our park earnings before interest, tax expense, depreciation and amortization (Park EBITDA) improved as a result of increased revenues and lower cash operating costs. While attendance during 2011 only slightly increased, per capita guest spending improved as a result of the success of improved pricing, along with our season pass and group sales marketing initiatives. Our cash operating costs decreased primarily as a result of our ongoing focus on operational efficiency.
Our principal costs of operations include salaries and wages, employee benefits, advertising, outside services, maintenance, utilities and insurance. A large portion of our expenses is relatively fixed because our costs for full-time employees, maintenance, utilities, advertising and insurance do not vary significantly with attendance.
Critical Accounting Policies
In the ordinary course of business, we make a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of the Consolidated Financial Statements in conformity with GAAP. Results could differ significantly from those estimates under different assumptions and conditions. We believe that the following discussion addresses our critical accounting policies, which are those that are most important to the portrayal of our consolidated financial condition and results and require management's most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
Accounting for the Chapter 11 Filing
We follow the accounting prescribed by FASB ASC 852, which provides guidance for periods subsequent to a Chapter 11 filing regarding the presentation of liabilities that are and are not subject to compromise by the Bankruptcy Court proceedings, as well as the treatment of interest expense and presentation of costs associated with the proceedings.
In accordance with FASB ASC 852, debt discounts or premiums as well as debt issuance costs should be viewed as valuations of the related debt. When the debt has become an allowed claim and the allowed claim differs from the carrying amount of the debt, the recorded carrying amount should be adjusted to the allowed claim. During the second quarter of 2009, we wrote-off costs that were associated with unsecured debt that was included in liabilities subject to compromise at April 30, 2010. Premiums and discounts as well as debt issuance cost on debt that was not subject to compromise, such as fully secured claims, were not adjusted.
Because the former stockholders of SFI owned less than 50% of the voting shares after SFI emerged from bankruptcy, we adopted fresh start accounting effective May 1, 2010 whereby our assets and liabilities were recorded at their estimated fair value using the principles of purchase accounting contained in FASB ASC Topic 805. The difference between our estimated fair value and our identifiable assets and liabilities was recorded as goodwill. See Note 1(b) to the Consolidated Financial Statements for a discussion of application of fresh start accounting and effects of the Plan. The implementation of the Plan and the application of fresh start accounting as discussed in Note 1(b) to the Consolidated Financial Statements results in financial statements that are not comparable to financial statements in periods prior to emergence.
Property and Equipment
With the adoption of fresh start accounting on April 30, 2010, property and equipment was revalued based on the new replacement cost less depreciation valuation methodology. See Note 1(b) to the Consolidated Financial Statements for assumptions used in determining the fair value of property and equipment under fresh start accounting. Property and equipment additions are recorded at cost and the carrying value is depreciated on a straight-line basis over the estimated useful lives of those assets. Changes in circumstances such as technological advances, changes to our business model or changes in our capital strategy could result in the actual useful lives differing from our estimates. In those cases in which we determine that the useful life of property and equipment should be shortened, we depreciate the remaining net book value in excess of the salvage value over the revised remaining useful life, thereby increasing depreciation expense evenly through the remaining expected life.
Valuation of Long-Lived Assets
Long-lived assets totaled $2,314.5 million at December 31, 2011, consisting of property and equipment ($1,291.8 million), goodwill ($630.2 million) and other intangible assets ($392.5 million). With our adoption of fresh start accounting upon emergence, assets were initially revalued based on the fair values of long-lived assets. See Note 1(b) to the Consolidated Financial Statements for assumptions used in determining fair value of long-lived assets under fresh start accounting.
Goodwill and intangible assets with indefinite useful lives are tested for impairment annually, or more frequently if indicators are identified that an asset may be impaired. We identify our reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units. We then determine the fair value of each reporting unit and compare it to the carrying amount of the reporting unit. We are a single reporting unit. For each year, the fair value of the single reporting unit exceeded our carrying amount (based on a comparison of the market price of our common stock to the carrying amount of our stockholders' equity (deficit)). Accordingly, no impairment was required.
If the fair value of the reporting unit were to be less than the carrying amount, we would compare the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all of the assets (recognized and unrecognized) and liabilities of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or group of assets to future net cash flows expected to be generated by the asset or group of assets. If such assets are not considered to be fully recoverable, any impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
In connection with the Chapter 11 Filing, we rejected the lease with the Kentucky State Fair Board relating to our Louisville park and ceased operating the park. In the first quarter of 2010, we classified the results of operations for the Louisville park as discontinued operations. We recorded a $36.9 million impairment of the Louisville park assets, including $0.6 million of inventory and prepaid expenses, as part of discontinued operations in the statement of operations for the year ended December 31, 2009.
Accounting for Income Taxes
As part of the process of preparing the Consolidated Financial Statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciation periods for our property and equipment and deferred revenue, for tax and financial accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets (primarily net operating and capital loss carryforwards) will be recovered by way of offset against taxable income. To the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must reflect such amount as income tax expense in the consolidated statements of operations.
Significant management judgment is required in determining our provision or benefit for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have recorded a valuation allowance of $426.6 million, $420.1 million, $450.0 million and $612.4 million at December 31, 2011, December 31, 2010, April 30, 2010 and December 31, 2009, respectively, due to uncertainties related to our ability to utilize some of our deferred tax assets, primarily consisting of certain net operating and capital loss carryforwards and tax credits, before they expire. The valuation allowance at December 31, 2011, December 31, 2010, April 30, 2010 and December 31, 2009 is based on our estimates of taxable income solely from the reversal of existing deferred tax liabilities by jurisdiction in which we operate and the period over which deferred tax assets reverse. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to increase or decrease our valuation allowance which could materially impact our consolidated financial position and results of operations.
Variables that will impact whether our deferred tax assets will be utilized prior to their expiration include, among other things, attendance, per capita spending and other revenues, capital expenditures, levels of debt, interest rates, operating expenses, sales of assets, and changes in state or federal tax laws. In determining the valuation allowance we do not consider, and under generally accepted accounting principles cannot consider, the possible changes in state or federal tax laws until the laws change. To the extent we reduce capital expenditures, our future accelerated tax deductions for our rides and equipment will be reduced, and our interest expense deductions would decrease as the debt balances are reduced by cash flow that previously would have been utilized for capital expenditures. Increases in capital expenditures without corresponding increases in net revenues would reduce short-term taxable income and increase the likelihood of additional valuation allowances being required as net operating loss carryforwards expire prior to their utilization. Conversely, increases in revenues in excess of operating expenses would reduce the likelihood of additional valuation allowances being required as the short-term taxable income would increase net operating loss carryforwards prior to their expiration. See Note 3(s) to the Consolidated Financial Statements. Subsequent to our emergence from Chapter 11 proceedings, our profitability has increased which may allow for us to begin to project future taxable income after 2012 and assess our valuation allowance as well.
Recent Events
On December 20, 2011, we entered into a new $1,135.0 million credit agreement (the "New Credit Facility"), which replaced the First Lien Amendment and related facilities. The New Credit Facility is comprised of a $200.0 million revolving credit loan facility (the "New Revolving Loan"), a $75.0 million Tranche A Term Loan facility (the "Term Loan A") and an $860.0 million Tranche B Term Loan facility (the "Term Loan B" and together with the Term Loan A, the "New Term Loans"). In certain circumstances, the Term Loan B can be increased by $300.0 million. The proceeds from the $935.0 million New Term Loans were used, along with $15.0 million of existing cash, to retire the $950 million Senior Term Loan. Also in connection with the New Credit Facility, the TW Loan and associated guarantee were terminated. We incurred approximately $25 million in fees and expenses in connection with the New Credit Facility and the repayment of the Senior Term Loan, and we expect annual cash savings to be approximately $13 million. In connection with the New Credit Facility, we recorded an aggregate $46.5 million loss on debt extinguishment for the year ended December 31, 2011. See Note 8 to the Consolidated Financial Statements.
On May 5, 2011, Holdings' Board of Directors approved a two-for-one stock split of Holdings' common stock effective in the form of a stock dividend of one share of common stock for each outstanding share of common stock. The record date for the stock split was June 15, 2011 and the additional shares of common stock were distributed on June 27, 2011. In accordance with the provisions of our stock benefit plans and as determined by Holdings' Board of Directors, the number of shares available for issuance, the number of shares subject to outstanding equity awards and the exercise prices of outstanding stock option awards were adjusted to equitably reflect the two-for-one stock split. All Successor share and per share amounts presented herein have been retroactively adjusted to reflect the stock split. No retroactive adjustments were required for the Predecessor share and per share amounts as all Predecessor common stock, preferred stock purchase rights, PIERS and ownership interests were cancelled on the Effective Date as described in Note 1 to the Consolidated Financial Statements.
One of our fundamental business goals is to generate superior returns for our stockholders over the long term. As part of our strategy to achieve this goal, we declared and paid quarterly cash dividends during 2011. On February 8, 2012, Holdings announced that its Board of Directors approved an increase to the quarterly cash dividend from $0.06 per common share to $0.60 per common share. The Board of Directors declared the first quarter 2012 dividend of $0.60 per common share will be payable on March 12, 2012 to stockholders of record on March 1, 2012. In addition, in February 2011, we initiated a stock repurchase plan (the "First Stock Repurchase Plan"), which permitted Holdings to repurchase up to $60 million shares of its common stock over a three-year period, as a sound use of our cash and a responsible way to enhance shareholder value. During the year ended December 31, 2011, Holdings repurchased an aggregate of 1,617,000 shares at a cumulative price of approximately $60.0 million under the First Stock Repurchase Plan. As of December 31, 2011, the First Stock Repurchase Plan was substantially completed. On January 3, 2012, Holdings' Board of Directors approved a new stock repurchase plan that permits Holdings to repurchase up to $250.0 million in shares of Holdings' common stock over a four-year period (the "Second Stock Repurchase Plan"). As of February 15, 2012, Holdings has repurchased approximately 160,000 shares at a cumulative price of approximately $6.9 million under the Second Stock Repurchase Plan.
Year Ended December 31, 2011 vs. Year Ended December 31, 2010
Revenue. Revenue in 2011 increased $37.3 million (4%) to $1,013.2 million compared to $975.9 million in 2010 reflecting increased per capita guest spending. Per capita guest spending, which excludes sponsorship, licensing, accommodations at the Six Flags Great Escape Lodge and other fees, increased $1.78 (5%) to $39.33 in 2011 compared to $37.55 in 2010. Admissions revenue per capita increased $1.24 (6%) to $22.30 in 2011 compared to $21.06 in 2010, and was driven primarily by improved yield on single day tickets and season pass pricing coupled with a favorable exchange rate impact on admissions revenue per capita at our parks in Mexico City and Montreal of $0.09. Increased revenues from rentals, food and beverage, retail, paid attractions and catering during 2011 resulted in a $0.54 (3%) increase in non-admissions per capita guest spending compared to the prior year period, of which approximately $0.05 was attributable to the stronger Mexican peso and Canadian dollar.
Operating Expenses. Operating expenses for 2011 decreased $10.3 million (3%) compared to operating expenses in 2010. This decrease was primarily driven by decreases in (i) salaries, wages and benefits ($5.7 million), (ii) utilities ($3.3 million), (iii) contract shows ($1.8 million), and (iv) royalty expense ($1.4 million). These decreases were primarily related to our ongoing cost reduction program, our planned reduction in low margin operating days and a reduction in operating days due to adverse weather and were partially offset by an unfavorable exchange rate impact at our parks in Mexico City and Montreal ($1.7 million).
Selling, general and administrative. Selling, general and administrative expenses for 2011 increased $25.4 million (13%) compared to 2010. The increase primarily reflects an increase in non-cash stock-based compensation ($34.9 million) partially offset by (i) a decrease in advertising expense ($6.7 million) and (ii) a decrease in consulting services ($2.7 million).
Costs of products sold. Costs of products sold in 2011 decreased $1.8 million (2%) compared to 2010, primarily due to our strategic decision to replace external vendors with in-house operations, which led to an improvement in gross margins.
Depreciation and amortization. Depreciation and amortization expense for 2011 increased $5.0 million (3%) compared to 2010. The increase was primarily attributable to the full year amortization of the intangible assets that were recorded as a result of the application of fresh start accounting.
Loss on disposal of assets. Loss on disposal of assets decreased by $6.0 million in 2011 compared to 2010 primarily due to the write-off of a project that was terminated at our park in Jackson, New Jersey in 2010.
Interest expense, net. Interest expense, net, for 2011 decreased $62.8 million (49%) compared to 2010, primarily reflecting the $45.3 million of interest accrued on the $400 million outstanding aggregate principal amount of the 2016 Notes to record the liability at the probable estimated allowed claim as of March 31, 2010, as well as a reduction in debt resulting from (i) the confirmation of the Plan, (ii) the August 2010 prepayment on the Exit First Lien Term Loan, and (iii) the December 2010 debt refinancing transaction.
Equity in loss (income) of investee. The $2.3 million increase in equity in loss of investee in 2011 compared to 2010 is attributable to our investment in DCP and their reduced net income in 2011 primarily related to increased costs from their ongoing lawsuit with the Hollywood Foreign Press and increased interest expense.
Loss on debt extinguishment. The $46.5 million loss on debt extinguishment in 2011 was recognized on the repayment in full and termination of the $950.0 million Senior Term Loan and the termination of the TW Loan in December 2011 in conjunction with the New Credit Facility.
The $18.5 million loss on debt extinguishment in 2010 was primarily the result of the $17.5 million loss recognized on the repayment in full, and termination, of the $250.0 million senior secured second lien term loan facility in December 2010 in conjunction with the First Lien Amendment. In addition, a $957,000 net loss on debt extinguishment was recognized in August 2010 as a result of the $25.0 million prepayment made on the Exit First Lien Term Loan.
Restructure costs. During 2011, restructure costs incurred were attributable to a $23.7 million settlement reached with our former Executive Vice President and Chief Financial Officer during May 2011. During the year ended December 31, 2011, we recorded $25.1 million of restructuring charges for the aforementioned settlement and related costs after consideration of amounts previously accrued. During 2010, restructure costs were $37.4 million, consisting primarily of severance and other costs related to our former Chief Executive Officer and other executives leaving the Company, a company-wide workforce reduction and contract terminations related to our new strategic direction.
Reorganization items, net. During 2011, we incurred $2.5 million of reorganization items for costs and expenses directly related to the reorganization including fees associated with advisors to the Debtors, certain creditors and the Creditors' Committee (as such term is defined the Plan). During 2010, the $812.0 million favorable impact of reorganization items was due to the $1,087.5 million gain on settlement of liabilities subject to compromise recognized on the Effective Date, partially offset by $178.5 million of fresh start accounting adjustments and $89.6 million of other costs and expenses directly related to the reorganization.
Income tax (benefit) expense. Income tax benefit was $8.1 million for 2011 compared to an income tax expense of $123.8 million for 2010, primarily reflecting the utilization of net operating loss ("NOL") carryforwards. At December 31, 2011, we estimate we have approximately $1.1 billion of NOL carryforwards for federal income tax purposes and $4.5 billion of NOL carryforwards for state income tax purposes. See Note 3(s) and Note 11 to the Consolidated Financial Statements.
Year Ended December 31, 2010 vs. Year Ended December 31, 2009
Revenue. Revenue in 2010 increased $77.0 million, or 9%, to $975.9 million compared to $898.9 million in 2009. Of this increase, $14.7 million was attributable to revenues related to the Six Flags Great Escape Lodge (the "Lodge"), which we consolidated as of January 1, 2010 due to the adoption of new accounting rules. Excluding the consolidation of the Lodge, total revenues increased $62.3 million, or 7% in 2010 compared to 2009, reflecting increased attendance, per capita guest spending and sponsorship revenues. Attendance in 2010 was 24.3 million, a 4% increase over attendance in 2009, due to strong season pass visitation and higher group sales. Per capita guest spending, which excludes sponsorship, licensing, Lodge accommodations and other fees, increased 2% to $37.55 in 2010 compared to $36.84 in 2009. Admissions revenue per capita increased 2% to $21.06 in 2010 compared to $20.74 in 2009, reflecting improved yield on single day tickets and a favorable exchange rate impact of $0.12 attributable to our Montreal and Mexico City parks. Increased revenues from food and beverage, rentals, retail, parking and other in-park offerings resulted in a 2% or $0.39 increase in non-admissions per capita guest spending in 2010 compared to 2009, of which approximately $0.10 was attributable to the exchange rate impact at our Montreal and Mexico City parks.
Operating Expenses. Operating expenses for 2010 decreased $5.6 million (1%) compared to operating expenses in 2009. This decrease was primarily driven by decreases in (i) salaries, wages and benefits ($7.4 million) primarily related to our ongoing focus on cost elimination, and reductions in expenses related to the Company's pension plan that was frozen in 2006, (ii) repairs and maintenance costs ($6.1 million) primarily related to a large number of non-routine projects in 2009, and (iii) outside consulting and professional services ($2.7 million), partially offset by (i) expenses of the Lodge ($7.2 million) and (ii) and increase in expenses related to the exchange rate impact at our parks in Montreal and Mexico City ($2.7 million).
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Overview
General
We own and operate regional theme, water and zoological parks and are the largest regional theme park operator in the world. Of the 19 parks we currently own or operate, 17 are located in the United States, one is located in Mexico City, Mexico and one is located in Montreal, Canada. Our parks are located in geographically diverse markets across North America and they generally offer a broad selection of state-of-the-art and traditional thrill rides, water attractions, themed areas, concerts and shows, restaurants, game venues and retail outlets, thereby providing a complete family-oriented entertainment experience. We work continuously to improve our parks and our guests’ experiences and to meet our guests’ evolving needs and preferences.
Results of operations for the three-month periods ended March 31, 2012 and 2011 are not indicative of the results expected for the full year. In particular, our park operations contribute a significant majority of their annual revenue during the period from Memorial Day to Labor Day each year while expenses are incurred year round.
Our revenue is primarily derived from the sale of tickets for entrance to our parks (approximately 44% and 43% of total revenues in the first three months of 2012 and 2011, respectively) and the sale of food and beverages, merchandise, games and attractions, parking and other services inside our parks, as well as sponsorship, licensing and other fees.
Our principal costs of operations include salaries and wages, employee benefits, advertising, third party services, repairs and maintenance, utilities and insurance. A large portion of our expenses is relatively fixed. Costs for full-time employees, repairs and maintenance, utilities, advertising and insurance do not vary significantly with attendance.
Recent Events
On December 20, 2011, we entered into a new $1,135.0 million credit agreement (the “New Credit Facility”), which replaced the Exit First Lien Facility. The New Credit Facility is comprised of a $200.0 million revolving credit loan facility (the “Revolving Loan”), a $75.0 million Tranche A Term Loan facility (the “Term Loan A”) and an $860.0 million Tranche B Term Loan facility (the “Term Loan B” and together with the Term Loan A, the “Term Loans”). In certain circumstances, the Term Loan B can be increased by $300.0 million. The proceeds from the $935.0 million Term Loans were used, along with $15.0 million of existing cash, to retire the $950 million senior term loan from the prior facility. Also in connection with the New Credit Facility, the TW Loan and associated guarantee were terminated. We incurred approximately $25 million in fees and expenses in connection with the New Credit Facility and the repayment of the $950 million senior term loan, and we expect annual cash savings to be approximately $13 million. In connection with the New Credit Facility, we recorded an aggregate $46.5 million loss on debt extinguishment for the year ended December 31, 2011. See Note 6 to the Condensed Consolidated Financial Statements .
On February 8, 2012, Holdings announced that its Board of Directors approved an increase to the quarterly cash dividend from $0.06 per common share to $0.60 per common share. The Board of Directors declared the first quarter 2012 dividend of $0.60 per common share which was paid on March 12, 2012 to stockholders of record on March 1, 2012. In connection with the dividend increase, Holdings’ Board of Directors granted dividend equivalent rights (DERs) to holders of unvested stock options. At February 8, 2012, approximately 5.0 million unvested stock options were outstanding. As stockholders are paid cash dividends, the DERs will accrue dividends which will be distributed to stock option holders upon the vesting of their stock option award. Holdings will distribute the DERs’ accumulated accrued dividends in either cash or shares of common stock. In addition, Holdings’ Board of Directors granted similar DERs payable in shares of common stock if and when any shares are granted under the stock-based compensation performance award program based on the EBITDA performance of the Company in 2013 - 2015. See Note 2(i) to the Condensed Consolidated Financial Statements.
In February 2011, we initiated a stock repurchase plan (the “First Stock Repurchase Plan”), which permitted Holdings to repurchase up to $60 million shares of its common stock over a three-year period, as a sound use of our cash and a responsible way to enhance shareholder value. During the year ended December 31, 2011, Holdings repurchased an aggregate of 1,617,000 shares at a cumulative price of approximately $60.0 million under the First Stock Repurchase Plan. As of December 31, 2011, the First Stock Repurchase Plan was substantially completed. On January 3, 2012, Holdings’ Board of Directors approved a new stock repurchase plan that permits Holdings to repurchase up to $250.0 million in shares of Holdings’ common stock over a four-year period (the “Second Stock Repurchase Plan”). During the three months ended March 31, 2012, Holdings repurchased approximately 970,000 shares at a cumulative price of approximately $44.5 million under the Second Stock Repurchase Plan.
Basis of Presentation
We follow the accounting prescribed by FASB ASC 852, which provides guidance for periods subsequent to a Chapter 11 filing regarding, among other things, the presentation of liabilities that are and are not subject to compromise by the Bankruptcy Court proceedings, as well as the treatment of interest expense and presentation of costs associated with the proceedings.
The implementation of the Plan and the application of fresh start accounting as discussed in Note 1 to the Condensed Consolidated Financial Statements contained in this Quarterly Report results in financial statements that are not comparable to financial statements in periods prior to emergence.
Critical Accounting Policies
In the ordinary course of business, we make a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles. The 2011 Annual Report discusses our most critical accounting policies. Since December 31, 2011, there have been no material developments with respect to any critical accounting policies discussed in the 2011 Annual Report.
Three Months Ended March 31, 2012 vs. Three Months Ended March 31, 2011
Revenue in the first quarter of 2012 totaled $66.4 million compared to $61.3 million for the first quarter of 2011, representing an 8% increase. The increase in revenues is attributable to a slight increase in attendance coupled with a $3.17 (7%) increase in total revenue per capita (representing total revenue divided by total attendance). Per capita guest spending, which excludes sponsorship, licensing, Six Flags Great Escape Lodge & Indoor Waterpark accommodations and other fees, increased $3.14 (8%) to $41.71 in the first quarter of 2012 from $38.57 in the first quarter of 2011. In the first quarter of 2012, we received business interruption insurance proceeds from a claim relating to Hurricane Irene totaling $3.0 million. Excluding the insurance proceeds benefit and foreign currency exchange rate impacts, total guest spending per capita increased $1.56 (4%).
Admissions revenue per capita increased $2.10 (10%) in the first quarter of 2012 compared to the prior year period, and was driven primarily by (i) a 6% increase in constant currency ticket yields, (ii) a 1% increase in attendance, (iii) and the ticket related portion of the Hurricane Irene insurance proceeds. Increased revenues from food and beverage, rentals, games, retail and other guest services resulted in a $1.04 (6%) increase in non-admissions per capita guest spending in the first quarter of 2012 including the non-admission portion of the insurance proceeds.
Operating expenses for the first quarter of 2012 increased $1.3 million (2%) compared to operating expenses in the prior year period. The increase was primarily driven by increases in salaries, wages and benefits ($2.7 million) partially offset by decreases in (i) utilities ($0.6 million) and (ii) the favorable exchange rate impact on expenses related to our parks located in Mexico City and Montreal ($0.4 million).
Selling, general and administrative expenses for the first quarter of 2012 increased $2.5 million (6%) compared to the first quarter of 2011. The increase primarily reflects increases in (i) salaries, wages and benefits ($3.9 million) primarily related to increased stock-based compensation, partially offset by (i) decreased marketing expenses ($1.0 million) and (ii) the favorable exchange rate impact on expenses related to our parks located in Mexico City and Montreal ($0.2 million).
Cost of products sold in the first quarter of 2012 increased $0.2 million (3%) compared to the same quarter of the prior year primarily due to increased revenues in food and beverage and retail.
Depreciation and amortization expense for the first quarter of 2012 decreased $2.5 million (6%) compared to the first quarter of 2011. The decrease in depreciation and amortization expense is attributable to property and equipment that was fully depreciated prior to the first quarter of 2012.
Loss on disposal of assets decreased by $0.3 million in the first quarter of 2012 compared to the prior year quarter primarily related to a gain recognized from insurance proceeds received in the first quarter of 2012 for certain assets damaged by Hurricane Irene during the third quarter of 2011 partially offset by increased write offs of assets taken out of service.
Interest expense, net decreased $5.2 million (31%) for the first quarter of 2012 compared to the prior year quarter, primarily reflecting a reduction in debt outstanding and reduced interest rates resulting from the December 2011 debt refinancing transaction.
Restructure costs of $26.6 million were incurred in the first quarter of 2011 while no restructure costs were incurred in the first quarter of 2012. During the first quarter of 2011, restructure costs incurred were attributable to a $23.7 million settlement reached with our former Executive Vice President and Chief Financial Officer in May 2011. During the first quarter of 2011, we recorded $26.6 million of restructuring charges to reflect the full settlement and related costs after consideration of amounts previously accrued.
Income tax benefit was $3.8 million for the first quarter of 2012 compared to a $7.1 million income tax benefit for the first quarter of 2011, primarily reflecting the lower pre-tax loss in 2012 versus the prior year period and the impact of our expected utilization of net operating loss carryforwards in 2012 that will reduce the valuation allowance.
Liquidity, Capital Commitments and Resources
On an annual basis, our principal sources of liquidity are cash generated from operations, funds from borrowings and existing cash on hand. Our principal uses of cash include the funding of working capital obligations, debt service, investments in parks (including capital projects), common stock dividends, payments to our partners in the Partnership Parks, and common stock repurchases.
On February 8, 2012, Holdings announced that its Board of Directors approved an increase to the quarterly cash dividend from $0.06 per common share to $0.60 per common share. During the three-month periods ended March 31, 2012 and 2011, Holdings paid $32.6 million and $1.7 million, respectively, in cash dividends on its common stock. The amount and timing of any future dividends payable on Holdings’ common stock are within the sole discretion of Holdings’ Board of Directors . We currently anticipate paying approximately $135.0 million in cash dividends on our common stock for the 2012 calendar year.
In February 2011, we initiated the First Stock Repurchase Plan, which permitted Holdings to repurchase up to $60 million shares of its common stock over a three-year period. During the year ended December 31, 2011, Holdings repurchased an aggregate of 1,617,000 shares at a cumulative price of approximately $60.0 million and the First Stock Repurchase Plan was substantially completed. On January 3, 2012, Holdings’ Board of Directors approved the Second Repurchase Plan, which permits Holdings to repurchase up to $250.0 million in shares of Holdings’ common stock over a four-year period. During the three months ended March 31, 2012, Holdings repurchased approximately 970,000 shares at a cumulative price of approximately $44.5 million under the Second Stock Repurchase Plan.
We believe that, based on historical and anticipated operating results, cash flows from operations, available unrestricted cash and available amounts under the New Credit Facility will be adequate to meet our liquidity needs, including anticipated requirements for working capital, capital expenditures, common stock dividends, scheduled debt requirements, obligations under arrangements relating to the Partnership Parks and common stock repurchases.
Our current and future liquidity is greatly dependent upon our operating results, which are driven largely by overall economic conditions as well as the price and perceived quality of the entertainment experience at our parks. Our liquidity could also be adversely affected by a disruption in the availability of credit as well as unfavorable weather, contagious diseases, such as swine or avian flu, accidents or the occurrence of an event or condition at our parks, including terrorist acts or threats, negative publicity or significant local competitive events, that could significantly reduce paid attendance and, therefore, revenue at any of our parks. While we work with local police authorities on security-related precautions to prevent certain types of disturbances, we can make no assurance that these precautions will be able to prevent these types of occurrences. However, we believe that our ownership of many parks in different geographic locations reduces the effects of adverse weather or these other types of occurrences on our consolidated results. If such an adverse event were to occur, we may be unable to borrow under the Revolving Loan or be required to repay amounts outstanding under the New Credit Facility and/or may need to seek additional financing. In addition, we expect that we may be required to refinance all or a significant portion of our existing debt on or prior to maturity and potentially seek additional financing. The degree to which we are leveraged could adversely affect our ability to obtain any additional financing. See “Cautionary Note Regarding Forward-Looking Statements” and “Item 1A. Risk Factors” in the 2011 Annual Report.
As of March 31, 2012, our total indebtedness, net of discount, was approximately $956.5 million. Based on (i) non-revolving credit debt outstanding on March 31, 2012, (ii) anticipated levels of working capital revolving borrowings during 2012, and (iii) estimated interest rates for floating-rate debt, we anticipate annual cash interest payments will aggregate $42.0 million for the 2012 calendar year. Under the New Credit Facility, approximately 87% of the Term Loans are not due until December 2018. We currently plan on spending approximately 9% of revenues on capital expenditures for the 2012 calendar year.
As of March 31, 2012, we had approximately $69.4 million of unrestricted cash and $181.8 million available for borrowing under the Revolving Loan. Our ability to borrow under the Revolving Loan is dependent upon compliance with certain conditions, including a maximum senior leverage maintenance covenant and a minimum interest coverage covenant and the absence of any material adverse change in our business or financial condition. If we were to become unable to borrow under the Revolving Loan, we would likely be unable to pay in full our off-season obligations. A default under the Revolving Loan could permit the lenders under the New Credit Facility to accelerate the obligations thereunder. The Revolving Loan expires on December 20, 2016. The terms and availability of the New Credit Facility and other indebtedness are not affected by changes in the ratings issued by rating agencies in respect of our indebtedness.
For a more detailed description of our indebtedness, see Note 6 to the Condensed Consolidated Financial Statements contained in this Quarterly Report .
During the three-month period ended March 31, 2012, net cash used in operating activities before reorganization items was $42.3 million. Net cash used in investing activities in the first three months of 2012 was $50.7 million, consisting primarily of $36.3 million in capital expenditures and $15.1 million in purchases of restricted-use investment securities primarily related to the $15.0 million we were required to deposit into escrow as a source of funds in the event Timer Warner Inc. is required to honor its guarantee under the Subordinated Indemnity Agreement (see Note 7 to the Condensed Consolidated Financial Statements contained in this Quarterly Report) , partially offset by insurance proceeds from insurance claims related to Hurricane Irene. Net cash used in financing activities in the first three months of 2012 was $71.1 million, primarily attributable to stock repurchases totaling $44.5 million and the payment of $32.6 million in cash dividends partially offset by proceeds from stock option exercises.
Since our business is both seasonal in nature and involves significant levels of cash transactions, our net operating cash flows are largely driven by attendance and per capita spending levels because much of our cash-based expenses are relatively fixed and do not vary significantly with either attendance or per capita spending. These cash-based operating expenses include salaries and wages, employee benefits, advertising, third party services, repairs and maintenance, utilities and insurance.
CONF CALL
Nancy Krejsa
Good morning and welcome to our second quarter call. With me are Jim Reid-Anderson, Chairman, President and CEO; Al Weber, Chief Operating Officer; and John Duffey, our Chief Financial Officer.
We're going to begin today's call with prepared comments, and then open the call to your questions. Our comments will include forward-looking statements within the meaning of the Federal Securities Laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those described in such statements, and the company undertakes no obligation to update or revise these statements.
Also during the call we will share or discuss non-GAAP financial measures, you may find a detailed discussion of business risks, reconciliations of our non-GAAP financial measures to GAAP financial measures in the company's annual report, quarterly reports or other forms filed and furnished with the SEC.
At this time, I will turn the call over to Jim.
Jim Reid-Anderson
Thank you very much, Nancy, and good morning to everyone on the call. As you can see from our press release, the second quarter was just fantastic for Six Flags, as we drove our ninth straight quarter of growth.
We grew revenue 11%, EBITDA 24% and cash EPS by 60%. On an LTM basis, the company generated $4 of cash earnings per share and achieved a new industry-high modified EBITDA margin of 38.7%.
Our success is directly linked to consistent execution of our strategy. We delivered exciting, innovative news in every park and launched clear and effective sales and marketing programs that helped us attract an incremental 1 million guests to our park in the quarter.
In the area of admissions pricing, we continue to benefit from strong ticket yield due to higher front gate pricing and improved fencing of discounts. On a per capita basis, these gains were offset by higher penetration of season pass visitation. Further penetration of season pass sales is one of our key initiatives.
Although the higher mix of season pass attendance put downward pressure on our per capita spending figures, season pass holders typically generate higher aggregate cash flow for the company than single-day visitors. Over the course of a year, season pass holders spend more than single day visitors on ticket as well as in-park items like food and merchandize.
I am extremely pleased with our success in this important initiative and you can observe the magnitude of our success from our strong revenue, EBITDA and cash flow performance in the quarter and from our deferred revenue balance at the end of June 2012, which was up $19 million to $106 million, which is a 22% increase from a year ago.
We continue to believe we have a multi-year opportunity to improve ticket yields and further penetrate season pass sales. And going forward, we believe these will be the largest contributors to our revenue profit and cash flow growth.
We also continue to see nice growth in our in-park sales with an increase of $17 million, 12% over prior year. We were pleased with this growth, given the higher attendance by season pass holders, who typically spend less per visit than single-day visitors.
Our growth comes from innovative new offerings. For example, this year we have successfully extended our Flash Pass product to all of our water parks. We also introduced a USB memory stick, which allows guests to conveniently store photos of their friends and family on our rides, and our guests absolutely love this new concept.
We've also launched exciting new food concept such as Macho Nacho, Cowabunga Burger, and of course my personal favorite, which is Kickin Chicken. You actually have to go to our park to try these chicken tenders with our special buffalo sauce. Now, sorry, clearly I am getting carried away here, so let me move on.
In summary, our second quarter performance is a reflection of execution. Two years ago we developed a strategy that would help us consistently grow revenue, increase profitability, improve guest satisfaction, strengthen innovation and build employee morale. And I really could not be more pleased with our progress to date.
Our operational performance is excellent, our financial results stellar and our capital allocation strategy is clearly working well. I think you're going to enjoy hearing more details regarding our financial performance.
So at this time, I'm going to hand over to John, to provide more details on Q2. John?
John Duffey
Thank you, Jim, and good morning to everyone on the call. As Jim mentioned, we are very pleased with our second quarter and year-to-date performance.
As we had indicated on the first quarter call, our strategy to increase season pass sales has worked very well and this positive trend continued throughout the second quarter. The increase in season pass sales along with the marketing of our new rides and attraction, significantly contributed to our double-digit attendance growth in the quarter.
In addition, as a result of the calendar shift, the second quarter this year ended on a Saturday versus a Thursday last year. The benefit of the extra Friday and Saturday at the end of June, when compared to the loss of a Friday and Saturday at the beginning of April, represented approximately one-fourth of our year-over-year attendance gain in the quarter. The calendar shift will reverse in the back half of the year when we will lose an equivalent weekend.
The strong revenue growth of 10.7% in the quarter was primarily driven by a $20 million or 10.7% increase in ticket revenue and a $17 million or 12.3% increase in in-park revenues. This was partially offset by a small decline in sponsorship revenue.
Total guest spending per capita for the quarter decreased $0.30 or 0.8% from prior year. This decline came from a $0.31 or 1% decline in admission revenue per capita to $21.97. Now, this slight decline was a result of our success in driving strong season pass attendance, which offset a solid non-season pass admission per capita increase from our pricing initiatives.
In-park per capita revenue of $17.08 was up slightly over prior year, which was excellent performance, given our strong season pass attendance. Year-to-date revenue increased $41 million or 10.3% due to a 10.8% increase in admissions revenue and an 11.6% increase in in-park revenues, partially offset by lower sponsorship revenue.
As a result of strong season pass unit sales growth, deferred revenue at June 30, 2012 was $106.2 million as compared to $86.8 million at June 30, 2011, an increase of $19.4 million. This revenue will be recognized in the third and fourth quarters.
Cash operating expenses increased approximately $8 million or 4% in the quarter versus prior year and were up $9 million or 3% year-to-date. The increase in expenses was primarily the result of additional seasonal labor and employee merit increases, partially offset by other operating expense savings.
We were very pleased with our record adjusted EBITDA of $141 million in the quarter. The strong attendance, revenue growth and focus on leveraging our operating cost structure contributed to an adjusted EBITDA growth of $27 million or 23.7% in the quarter.
Year-to-date adjusted EBITDA was $95 million, a $30 million or 47.1% increase over the comparable period in 2011. LTM adjusted EBITDA was $381 million and our LTM modified EBITDA margin was 38.7%, up 320 basis points over the 12 months ending June 2011, and up approximately 130 basis points from our 2011 full year margin.
The company repurchased 1.1 million shares of its stock in the quarter for approximately $54 million, which increased the total year-to-date share repurchases to 2.1 million shares for approximately $98 million.
We generated $58 million of cash in the quarter after paying approximately $54 million for stock repurchases and $32 million in dividends. So adjusting for these non-operating net outflows, the company generated over $144 million of cash in the quarter.
Cash EPS for the quarter was $1.78, an increase of $0.67 or 60% over prior year. LTM cash EPS is now $4, an increase of $0.89 over the prior year LTM.
Our reported net debt as of June 30 was $828 million, which consisted of net reported debt of $956 million, less unrestricted cash of $128 million. There are no outstanding borrowings on the revolver.
Finally, I want to comment on our strong financial position and capital allocation strategy. Our net leverage is now at 2.2 times compared to 2.6 times in June, 2011. The current low level of leverage is approximately half the leverage level when the company emerged from its restructuring two years ago, and is the lowest of any comparable company in our industry. We have no significant debt maturities until 2018 and access to significant liquidity. I feel very good about our financial position.
In addition, we have received very favorable feedback from shareholders on our capital allocation. In the past 12 months, we have paid $71 million in cash dividends and repurchased a total of 2.5 million at a cost of $117 million, which represents an average share repurchase price of $46 per share. This reflects our management and board's strong alignment with shareholders.
So now, I'd like to turn the call back over to Jim.
Jim Reid-Anderson
Thanks very much, John. I'm really pleased with our progress through the first half of 2012. Our performance through June certainly bolsters our view that our strategy around pricing, season pass sales and using every park right on track. The outstanding performance in the quarter as well as our very positive trend in season pass sales provides good momentum into the second half of the year.
We are very focused on continuing to execute effectively throughout the back half of the year. We are also already well into planning for our 2013 season, including of course more exciting news in every park. And with all of our initiatives, we continue to have our sight laser focused on achieving our aspirational target of $500 million of modified EBITDA by 2015.
The foundation of our success has been excellent execution of the strategy we established two years ago, that includes delighting our guest, innovative news in every park every year, improving the efficiency of our operations, delivering on our financial goals, building a high performance organization, and integrating safety and quality in all we do.
Successful execution will ensure we can continue to drive a strong financial performance, fund all appropriate business investments and return excess cash to our shareholders via dividends and share buybacks. Our goal is to delight, not only our guests, but also our loyal shareholders.
At this point, could you please open the call up for any questions.
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Fund Letters
