10K- Analysis- Example Cedar-Fair PDF

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10K Report for Financial Accounting (Prof. Pardo) Company: Cedar Fair, L.P. ID Number: 34-1560655 Name of CEO: Matthew A. Ouimet Location of Home Office Sandusky, Ohio, USA Ending Date of Latest Fiscal Year: December 31st, 2011 Main Geographic Area of Activity: Theme parks located throughout the United States (Ohio, California, Pennsylvania, Virginia, North Carolina, Minnesota, Missouri, Michigan) and Canada (Toronto). Name of Independent Auditors: Deloitte & Touche LLP Most Recent Price of the Company’s Stock: $34.05 (as of 11/23/12) Dividend (Distribution) per Limited Partner Unit/Date: (In US Dollars) 12/17/12 9/17/12 6/15/12 3/15/12 12/15/11 9/15/11 6/15/11 3/15/11 0.40

0.40

0.40

0.40

0.70

0.12

0.10

0.08

Company Background Cedar Fair’s history began with the development of the Cedar Point theme park located in Sandusky, Ohio on the shores of Lake Erie. Originally opened in 1870, Cedar Point has developed into one of the world’s leading theme parks with many record-breaking roller coasters and thrill rides. The park boasts 15 roller coasters and has been named the best amusement park in the world for 14 consecutive years by Amusement Today magazine. Additionally, the Cedar Fair also operates a waterpark, restaurants, hotels, boat marinas, and the causeway that connects Cedar Point to the mainland.

In 1978, Cedar Point acquired Valleyfair, a theme park in Minnesota, and using elements from the names of both parks, a new partnership known as Cedar Fair went public in 1987. In the following years, Cedar Fair continued to acquire additional theme parks, with one of their largest purchases being Knott’s Berry Farm in 1997. In 2006, Cedar Fair made a major move by acquiring five Paramount theme parks from CBS in a transaction valued at over $1 billion dollars. All told, the company currently owns and operates 11 amusement parks, 6 outdoor water parks, 1 indoor water park, and 5 hotels. In 2011, these theme parks had a combined 23 million visitors. The company has made the development of new thrill rides a key component of their competitive strategy. This has been reflected by their substantial investment and development of world-class thrill rides, especially at Cedar Point. The park’s flagship roller coaster, Millennium Force, which has a drop of 300 feet and reaches 93 miles per hour, has been voted in the top 2 steel coasters worldwide every year since 2001 by the Golden Ticket Awards. The acquisition of Paramount Parks had a major impact on Cedar Fair’s finances. The acquisition and subsequent economic downturn saddled the company with over $2 billion dollars in debt. The company was also hit hard by the subsequent economic downturn, and was nearly taken over by an outside private equity firm in 2010. Currently, the company has still has “substantial indebtedness”, with $1,577.6 million dollars of debt as of the end of 2011, and $1,561.1 million of that debt considered to be “substantial long-term debt”. In 2012, longtime CEO Dick Kinzel retired and was replaced by Matt Ouimet as CEO of Cedar Fair. The economic performance of the company has improved in recent years, and this has been reflected in the company’s stock price, which reached an all-time high in November 2012. Industry and Outlook Cedar Fair is part of the Amusement Park industry, which according to the International Association of Amusement Parks and Attractions (IAAPA) generates $12 billion dollars in revenues annually in North America. Overall, Cedar Fair operates four of the top 20 theme parks (by attendance) in North America, with Knott’s Berry Farm, Canada’s Wonderland, King’s Point, and Cedar Point all ranking in the top 20. Overall, the industry has had a difficult time since the Great Recession as families and individuals have been forced to cut back on vacations and discretionary spending. However, recent years have shown signs of an improving economy as

attendance and revenues have been increasing. According to AECOM Consulting, the theme park industry in America is experiencing a “solid growth” thanks in part to a “continued, slow economic recovery from the recession”. Attendance across all parks was up 2.9% for 2011. Cedar Fair parks kept pace with a 2.6% increase in 2011. Through the first three quarters of 2012, Cedar Fair continued to show growth as attendance figures and revenue set new records. Key Accounting Policies Cedar Fair maintains several accounting policies that have been tailored towards the theme park business. First, their business is highly seasonal, with most of business operations occurring between Memorial Day and Labor Day. In order to represent this imbalance, seasonal operating costs are expensed over the operating season, and costs occurred prior to the season are deferred and amortized over the entire season. Cedar Fair uses a lower of cost to market FIFO accounting system. Property and equipment are recorded at cost. Anything related to maintaining equipment in its original condition is expensed, while improvements and upgrades are capitalized. This is important, as Cedar Fair is constantly upgrading and improving their ride selection in order to remain competitive with other forms of entertainment. Depreciation is handled on a straight-line basis, and the useful life for each asset is calculated via a “composite method” where assets with similar estimated lives are grouped together. Each group or “pool” of assets is then depreciated on an aggregate basis. According to the report, Cedar Fair has a different average useful life for different composite groups such as Land Improvements (21 years), Buildings (25 years), Rides (18 years), and Equipment (9 years). For recognition of revenue, multi-day passes (such as season passes) are recognized over the estimated number of visits for each kind of ticket. This estimate may be adjusted periodically during the season. Other revenues are recognized on a daily basis, based on actual guest spending. Revenue from next season’s tickets and season passes is deferred and then recognized during the following year. Management Notes Cedar Fair acquires its revenue through three main avenues: Admissions, Food/Merchandise/Games, and Hotels/Food/Merchandise outside of park gates. The

principal costs of Cedar Fair are relatively fixed regardless of the number of guests; therefore, Cedar Fair’s goal should be to maximize attendance as much as possible. Each park in the Cedar Fair chain is run autonomously, under an individual park General Manager. Company management then reviews each park on a propertyby-property basis. The performance figures for each park were not disclosed in the 10K report, but the report states that the parks all have “similar growth trends”. According to the report, the company “improves revenues and profitability by continuing to make substantial capital investments in our park and resort facilities”. This effort is reflected in their capital investment of over $90 million dollars in 2011. Much of these funds went towards the construction of the “Leviathan” mega-coaster at Canada’s Wonderland. Additionally, the company added dinosaur attractions at four of its parks and installed two additional “WindSeeker” thrill rides at Carowinds and King’s Dominion. An important consideration for Cedar Fair is its substantial long-term debt of over $1.5 billion dollars, much of it acquired during its purchase of Paramount Parks in 2006. As noted in the report, this debt may limit the company’s future borrowing capability, decrease their flexibility, and possibly cause difficulty in re-financing their debt. Additionally, they may be forced to sell assets or delay capital expenditures in order to pay off their debt. For example, the park sold excess land near Canada’s Wonderland in order to retire $53.8 million dollars in debt. Cedar Fair issued $405 million dollars of notes in July 2010 in order to refinance their debts. Additionally the company acquired a $1,175 million loan in 2010 with a yearly amortization of $11.8 million which is scheduled to mature in 2017. The company has significant long-term debt coming due in the next few years, as summarized by the following table: Total

2012

Long-Term

2,246.4

172.3

229.6

207.8

1636.7

Capital Lease

58 78

58 28.1

19.8

12.3

17.8

258.4

249.4

220.1

1654.5

2382.4

2013-14

2015-16

2017-

According to the Statement of Cash Flows, the company has had to spend over $100 million dollars per year on financing activities. Much of this money has gone towards debt payments.

Summary of Risk Factors: Cedar Fair has to deal with a variety of risk factors in its operations. A major risk factor is that it has to compete with many other kinds of entertainment for a consumer’s discretionary spending. Sports, movies, vacations, video games, and other amusement park companies all present heavy competition. Furthermore, as discretionary spending is often the first to be cut during tough times, the entire business is vulnerable to general economic trends and downturns. The outdoor nature of the company’s theme parks makes them vulnerable to weather conditions, and any sort of unusual weather can adversely affect park attendance. This is further exacerbated by the company’s short seasonal operating season. Guest safety is a primary concern of Cedar Fair, however the possibility exists that there may be an accident on one of their rides. This may result in substantial negative publicity and reduced attendance. Even if an accident occurs at a competitor’s theme park, it may affect the general public’s attitudes towards all theme parks in general. Furthermore, the company may not have enough insurance to cover a catastrophic accident, and in case of an accident may have difficulties acquiring more insurance in the future. Results of Operations: 2011 vs. 2010 Overall, Cedar Fair showed improvement in 2011 compared to 2010. Attendance and per-capita spending both increased, leading to a 5% increase in net revenues. This translated into a large increase in Operating Income. Most importantly, net income went from negative $31.567 million in 2010 to $72.158 million in 2011, a difference of $103.725 million dollars. As a result, cash and cash equivalents had a net increase of over $25 million dollars for 2011. However, there are some negative signs in Cedar Fair’s 2011 results. Costs of Goods Sold, Operating Expenses, and administrative costs all increased. Expanded operating hours along with higher attendance led to increased labor costs and costs of operating supplies. Accounting Notes and Analysis The company is on track to provide $1.60 per share in distributions for 2012,

in additional to investing funds towards new rides and paying down their debts. Therefore, the company’s finances will remain stressed for some time. As long as the company remains highly leveraged, it is still at risk. A major factor in the company’s finances is that it is highly leveraged with a debt ratio of 0.92 and a debt to equity ratio of 9.71. This means that most of the company’s assets have been financed through debt, and increases the risks of the company’s operations. Also, the company has a negative working capital, making it difficult for the company to pay short-term creditors. In other words, the company does not have enough current assets to meet its short-term liabilities. Additionally, the company’s low Interest Coverage Ratio means that the company may have a tough time meeting its substantial interest expense. There is some good news, however. The company gets high profit margins on its sales, with a Gross Profit Margin of 0.91 in both 2011 and 2010. The Operating Income Margin increased from 2010 to 2011, in line with the company’s other positive results in 2011. This could also indicate that the company is doing a better job of handling its costs and expenses. The amount of cash and cash equivalents also increased from 2010 to 2011, which should make the company more liquid and able to meet its short-term obligations. The company was able to reduce its long-term debt by nearly $40 million dollars in 2011, which is a small percentage of the overall total but still a step in the right direction. For the accounting cycle, the company has a total operating cycle of approximately 133 days. This roughly fits with the seasonal nature of the company’s business in the summer months. Most of that time is taken up as part of the Average Number of Days to Sell Inventory, as the Days Sales Outstanding rate is fairly low at 3.54 days. These totals were slightly higher in 2011 than in 2010. From an investor’s point of view, the company did a much better job in 2011, as its Return on Equity increased to 0.49. Furthermore, the high expected distributions in 2012 and beyond should also draw investor interest. The company does have a high Price/Earnings ratio, but that could be due to the high amount of leverage that it currently faces. In conclusion, while the company faces significant challenges regarding its long-term debt, there are enough positive recent trends to make up for it. If the company can continue to increase its attendance and revenues, it should be able to start working on paying down the debt. Although costly, the company’s strategy of

heavy investment in new attractions seems to be paying off and in fact may be necessary to attract consumer’s entertainment dollars in a competitive market....