CEDAR FAIR, L.P. Business Overview: We generate our revenues from sales of (1) admission to our amusement parks and water parks, (2) food, merchandise and games both inside and outside our parks, and (3) accommodations, extra-charge products, and other revenue sources. Our principal costs and expenses, which include salaries and wages, operating supplies, maintenance, advertising, utilities and insurance, are relatively fixed for an operating season and do not vary significantly with attendance.
Each of our properties is overseen by a general manager and operates autonomously. Management reviews operating results, evaluates performance and makes operating decisions, including allocating resources, on a property-by-property basis.
Along with attendance and in-park per capita spending statistics, 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, Regional Vice Presidents and the general managers. Impact of COVID-19 Pandemic Due to the coronavirus (COVID-19) pandemic, onMarch 13, 2020 , we announced the closure of certain parks and the decision to delay the opening of other parks in response to the federal and local recommendations and restrictions to mitigate the spread of COVID-19. As ofMay 6, 2020 , all our parks remain closed. Even after our parks are able to reopen, there may be longer-term negative impacts to our business, results of operations and financial condition as a result of the COVID-19 pandemic, including changes in consumer behavior and preferences causing significant volatility or reductions in demand for or interest in our parks, damage to our brand and reputation, increases in operating expenses to comply with additional hygiene-related protocols, limitations on our ability to recruit and train sufficient employees to staff our parks, limitations on our employees' ability to work and travel, and significant changes in the economic or political conditions in areas in which we operate. Despite our efforts to manage these impacts, their ultimate impact may be material, and will depend on factors beyond our knowledge or control, including the duration and severity of the COVID-19 pandemic and actions taken to contain its spread and mitigate its public health effects. See Risk Factors within Part II for additional detail.
Since closing our parks, we have taken the following proactive measures to reduce operating expenses and cash outflows: • Eliminated nearly all of our seasonal and part-time labor costs until our
parks prepare to reopen,
• Suspended all advertising and marketing expenses, and reduced general and
administrative expenses and other park-level operating expenses to better
align with the disruption in operations while still remaining in readiness
position to reopen parks,
• Reduced the CEO's base salary by 40% and the base salaries of all other
executives by 25%, effective April 27, 2020 ,
• Deferred base salaries for all other salaried employees by 25%, subject to
minimum thresholds or other statutory limitations,
• Reduced scheduled hours for full-time hourly employees by 25% to 30 hours
per week, and
• Suspended cash retainer fees for our Board of Directors until business
conditions improve.
To provide incremental liquidity and enhanced financial flexibility, we have
taken proactive steps to reduce our capital spending for calendar year 2020,
including the suspension of at least $75-100 million of non-essential capital
projects planned for the 2020 and 2021 operating seasons. As of the date of this
Form 10-Q, we anticipate spending $85-100 million on capital improvements in
calendar year 2020.
In addition, the Board of Directors has determined that it is in the best interests of unitholders for us to preserve liquidity by suspending the quarterly distribution.
Given the uncertainty around the timing of the parks reopening, and in order to ensure our season pass holders receive a full season of value, we also recently announced we have paused collections of guest payments on installment purchase products, and that we have extended the usage privileges of 2020 season passes through the 2021 season to compensate for lost access to the parks in the current year. In addition, we have taken steps to secure additional liquidity and address any potential debt covenant issues in the event that the effects of the COVID-19 pandemic continue. OnApril 27, 2020 , we issued$1.0 billion of 5.500% senior secured notes due 2025 and further amended the Amended 2017 Credit Agreement to suspend and revise certain financial covenants, and to adjust the interest rate on and reflect additional commitments and capacity for our revolving credit facility. See the Subsequent Event footnote at Note 15 for further details.
As a result of these steps, we have concluded that we will have sufficient liquidity to satisfy our obligations and remain in compliance with our debt covenants for the next twelve months.
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Critical Accounting Policies: Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited condensed consolidated financial statements, which were prepared in accordance with accounting principles generally accepted inthe 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 unaudited condensed consolidated financial statements. Beyond estimates in the normal course of business, management has also made significant estimates and assumptions related to the COVID-19 pandemic to determine our liquidity requirements and estimate the impact on our business, including financial results in the near and long-term. Actual results could differ significantly from those estimates under different assumptions and conditions. Management believes that judgment and estimates related to the following critical accounting policies could materially affect our unaudited condensed consolidated financial statements: •Impairment of Long-Lived Assets •Accounting for Business Combinations •Goodwill and Other Intangible Assets •Self-Insurance Reserves •Revenue Recognition • Income Taxes
In the first quarter of 2020, there were no changes in the above critical
accounting policies from those previously disclosed in our Annual Report on Form
10-K for the year ended
Adjusted EBITDA: We believe that Adjusted EBITDA (earnings before interest, taxes, depreciation, amortization, other non-cash items, and adjustments as defined in the Amended 2017 Credit Agreement and prior credit agreements) is a meaningful measure as it is widely used by analysts, investors and comparable companies in our industry to evaluate our operating performance on a consistent basis, as well as more easily compare our results with those of other companies in our industry. Further, management believes 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 is provided in the discussion of results of operations that follows as a supplemental measure of our operating results and is not intended to be a substitute for operating income, net income or cash flows from operating activities as defined under generally accepted accounting principles. In addition, Adjusted EBITDA may not be comparable to similarly titled measures of other companies.
The table below sets forth a reconciliation of Adjusted EBITDA to net loss for
the three-month periods ended
Three months ended
(In thousands) March 29, 2020 March 31, 2019
Net loss $ (215,977 ) $ (83,673 )
Interest expense 27,219 20,920
Interest income (348 ) (233 )
Benefit for taxes (49,007 ) (19,985 )
Depreciation and amortization 5,088 13,589
EBITDA (233,025 ) (69,382 )
Net effect of swaps 19,779 6,379
Non-cash foreign currency loss (gain) 34,203 (8,664 )
Non-cash equity compensation expense (4,794 ) 2,543
Loss on impairment / retirement of fixed assets, net 6,767 1,424
Loss on impairment of goodwill and other intangibles 88,181 -
Gain on sale of investment - (617 )
Other (1) 224 159
Adjusted EBITDA $ (88,665 ) $ (68,158 ) (1) Consists of certain costs as defined in our Amended 2017 Credit Agreement and
prior credit agreements. These items are excluded from the calculation of
Adjusted EBITDA and have included certain legal expenses and severance
expenses. This balance also includes unrealized gains and losses on
short-term investments.
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Results of Operations: We believe the following are key operational measures in our managerial and operational reporting, and they are used as major factors in significant operational decisions as they are primary drivers of our financial and operational performance: Attendance is defined as the number of guest visits to our amusement parks and separately gated outdoor water parks. In-park per capita spending is calculated as revenues generated within our amusement parks and separately gated outdoor water parks along with related tolls and parking revenues (in-park revenues), divided by total attendance. Out-of-park revenues are defined as revenues from resort, marina, sponsorship, online transaction fees charged to customers and all other out-of-park operations. Net revenues consist of in-park revenues and out-of-park revenues less amounts remitted to outside parties under concessionaire arrangements (see Note 4
).
Three months endedMarch 29, 2020 Operating results for the first quarter are historically less than 5% of our full-year revenues and attendance. First quarter results typically include normal off-season operating, maintenance and administrative expenses at our ten seasonal amusement parks and two of our separately gated outdoor water parks, daily operations atKnott's Berry Farm which is open year-round, limited operations at the recently acquired Schlitterbahn parks which are open during portions of March, andCastaway Bay , which is generally open daily fromMemorial Day toLabor Day plus a limited daily schedule for the balance of the year. The results for the fiscal three-month period endedMarch 29, 2020 are not directly comparable with the results for the fiscal three-month period endedMarch 31, 2019 . The current period included results from the operations of the recently acquired Schlitterbahn parks. In addition, the three-month period endedMarch 29, 2020 included two weeks of disrupted operations as a result of the COVID-19 pandemic resulting in 39 lost scheduled operating days, including the closure ofKnott's Berry Farm and the Schlitterbahn parks, and the postponed opening ofCalifornia's Great America,Carowinds and Kings Dominion (the "COVID-19 closure"). Therefore, the fiscal three-month period endedMarch 29, 2020 included a total of 90 operating days (including 16 of the 26 scheduled operating days at the Schlitterbahn parks) compared with 101 operating days for the prior period.
The following table presents key financial information for the three months
ended
Three months ended Increase (Decrease)
March 29, 2020 March 31, 2019 $ %
(Amounts in thousands)
Net revenues $ 53,635 $ 66,977 $ (13,342 ) (19.9 )%
Operating costs and expenses 137,562 137,520 42 - %
Depreciation and amortization 5,088 13,589 (8,501 ) (62.6 )%
Loss on impairment / retirement of
fixed assets, net 6,767 1,424 5,343 N/M
Loss on impairment of goodwill and
other intangibles 88,181 - 88,181 N/M
Gain on sale of investment - (617 ) 617 N/M
Operating loss $ (183,963 ) $ (84,939 ) $ (99,024 ) (116.6 )%
N/M - Not meaningful
Other Data:
Adjusted EBITDA (1) $ (88,665 ) $ (68,158 ) $ (20,507 ) 30.1 %
(1) For additional information regarding Adjusted EBITDA, including how we define
and use Adjusted EBITDA, as well as a reconciliation to net loss, see page
36.
For the three months endedMarch 29, 2020 , net revenues decreased 19.9%, or$13.3 million , to$53.6 million , from$67.0 million for the three months endedMarch 31, 2019 due to the impact of the COVID-19 closure. Prior to the COVID-19 closure,Knott's Berry Farm was producing net revenues in excess of the prior year by greater than 15%, reflecting the impact of increases in attendance, in-park per capita spending and out-of-park revenues. The Schlitterbahn parks contributed$0.9 million of net revenues during the three months endedMarch 29, 2020 . Currency exchange rates had an immaterial impact on net revenues for the quarter as our Canadian park was not operating during the period. Operating costs and expenses for the three months endedMarch 29, 2020 were comparable to the three months endedMarch 31, 2019 . This was the result of a$1.3 million decrease in cost of goods sold, an$8.2 million increase in operating expenses and a$6.9 million decrease in SG&A expense. The decrease in cost of goods sold was due to the decline in sales volume from the COVID-19 closure. The$8.2 million increase in operating expenses was attributable to the inclusion of$6.0 million of operating expenses for the Schlitterbahn parks, as well as a planned increase in full-time head count at a few of our parks. Seasonal wages did not fluctuate materially due to rate increases atKnott's Berry Farm offset by a decrease in labor hours from the COVID-19 closure. The$6.9 million decrease in SG&A expense was attributable to a decline in the anticipated payout of outstanding 37
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performance units and the value of outstanding deferred units, both of which are part of our equity-based compensation plans. The increase in operating costs and expenses was not materially impacted by foreign currency exchange rates during the first quarter. Depreciation and amortization expense for the three months endedMarch 29, 2020 decreased$8.5 million compared with the three months endedMarch 31, 2019 due to the prior period change in estimated useful life of a long-lived asset at Kings Dominion, as well as less depreciation expense recognized in the current period due to the COVID-19 closure. The loss on impairment / retirement of fixed assets for the three months endedMarch 29, 2020 was$6.8 million compared with$1.4 million for the three months endedMarch 31, 2019 . The current period included a$2.7 million impairment charge with respect to the Schlitterbahn parks' long-lived assets triggered by the anticipated impacts of the COVID-19 pandemic (see Note 5 ), as well as the impairment of two specific assets during the first quarter of 2020. Similarly, the loss on impairment of goodwill and other intangibles for the three months endedMarch 29, 2020 included a$73.6 million ,$6.8 million and$7.9 million impairment of goodwill at the Schlitterbahn parks, goodwill atDorney Park , and the Schlitterbahn trade name, respectively, triggered by the anticipated impacts of the COVID-19 pandemic (see
Note 6 ). During the first quarter of 2019, a
After the items above, the operating loss for the three months endedMarch 29, 2020 increased$99.0 million to$184.0 million compared with an$84.9 million operating loss for the three months endedMarch 31, 2019 . Interest expense for the three months endedMarch 29, 2020 increased$6.3 million due to interest incurred on the 2029 senior notes issued inJune 2019 . The net effect of our swaps resulted in a charge to earnings of$19.8 million for the three months endedMarch 29, 2020 compared with a$6.4 million charge to earnings for the three months endedMarch 31, 2019 . The difference was attributable to the change in fair market value movements in our swap portfolio. During the current period, we also recognized a$34.2 million net charge to earnings for foreign currency gains and losses compared with an$8.7 million net benefit to earnings for the three months endedMarch 31, 2019 . Both amounts primarily represent remeasurement of theU.S. -dollar denominated debt recorded at our Canadian entity from theU.S. -dollar to the legal entity's functional currency. During the three months endedMarch 29, 2020 , a benefit for taxes of$49.0 million was recorded to account for PTP taxes and federal, state, local and foreign income taxes compared with a benefit for taxes of$20.0 million for the three months endedMarch 31, 2019 . The increase in benefit for taxes was attributable to an increase in pretax loss from our taxable subsidiaries, as well as expected benefits from the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), which was signed into law onMarch 27, 2020 . The CARES Act resulted in various changes to theU.S. tax law, including, among other things, allowing net operating losses arising in tax years 2018 through 2020 to be carried back to the preceding five taxable years and removing the limitation that such losses only offset 80% of taxable income. As a result of this change, we expect to recognize two benefits. First, we expect to carryback the 2020 losses incurred by our corporate subsidiaries, which will result in the refund of a portion of federal income taxes paid during the carryback period of approximately$78.9 million . Second, as ofMarch 29, 2020 , the annual effective tax rate included a net benefit of$29.0 million from carrying back the projected 2020 losses of the corporate subsidiaries. This tax benefit represents an estimated$45.3 million incremental benefit of tax loss carrybacks for periods when the federal income tax rate was greater than 21% resulting in an additional tax benefit if such losses are used to offset income at the current 21% corporate income tax rate. The estimated$45.3 million benefit was decreased by$16.3 million for a projected valuation allowance on foreign tax credits originally utilized during the carryback period which would be released as a result of the loss carryback but which are not expected to be utilized. After the items above, net loss for the three months endedMarch 29, 2020 totaled$216.0 million , or$3.83 per diluted limited partner unit, compared with a net loss of$83.7 million , or$1.49 per diluted limited partner unit, for the three months endedMarch 31, 2019 . For the three months endedMarch 29, 2020 , Adjusted EBITDA loss increased$20.5 million to$88.7 million from$68.2 million for the three months endedMarch 31, 2019 . The increase in Adjusted EBITDA loss was due to decreased net revenues attributable to the COVID-19 closure. 38
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Liquidity and Capital Resources: The working capital ratio (current assets divided by current liabilities) was 0.5 as ofMarch 29, 2020 and 0.6 as ofMarch 31, 2019 . As ofMarch 29, 2020 , our working capital accounts were at normal seasonal levels, in particular receivables for our installment purchase plans, inventories and deferred revenue for season-long products. For purposes of preparing our financial statements, as ofMarch 29, 2020 , we estimated that some or all of our parks may remain closed throughout 2020 due to the imposition of external operating restrictions or due to the time it may take to implement additional hygiene protocols and prepare our parks for operation. As a result, we estimated that the following working capital amounts would be realized greater than 12 months from the balance sheet date and have been classified as non-current as ofMarch 29, 2020 . These amounts represent our best estimate and include material assumptions, including the time frame to reopen our parks, which may differ materially as the COVID-19 pandemic and the related actions taken to contain its spread progress.
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