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Regal Entertainment Group 10-Q 2017

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32
Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549 
______________________________________________________
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017
 
Commission file number: 001-31315
______________________________________________________ 
Regal Entertainment Group
(Exact name of Registrant as Specified in Its Charter) 
Delaware
 
02-0556934
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)
 
 
 
7132 Regal Lane
 
 
Knoxville, TN
 
37918
(Address of Principal Executive Offices)
 
(Zip Code)
 
Registrant’s Telephone Number, Including Area Code: 865-922-1123
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act (Check one): 
Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o (Do not check if a smaller reporting company)
 
Smaller reporting company o
 
 
 
Emerging growth company o
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): 
Yes o No x
 
Class A Common Stock—133,324,481 shares outstanding at May 3, 2017
 
Class B Common Stock—23,708,639 shares outstanding at May 3, 2017



TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I—FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
REGAL ENTERTAINMENT GROUP
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
 
March 31, 2017
 
December 31, 2016
ASSETS
 

 
 

CURRENT ASSETS:
 

 
 

Cash and cash equivalents
$
408.8

 
$
246.5

Trade and other receivables, net
52.9

 
155.1

Inventories
23.3

 
20.9

Prepaid expenses and other current assets
28.3

 
23.4

Assets held for sale
1.0

 
1.0

TOTAL CURRENT ASSETS
514.3

 
446.9

PROPERTY AND EQUIPMENT:
 

 
 

Land
130.3

 
131.2

Buildings and leasehold improvements
2,329.9

 
2,319.7

Equipment
1,077.8

 
1,065.7

Construction in progress
14.2

 
20.2

Total property and equipment
3,552.2

 
3,536.8

Accumulated depreciation and amortization
(2,190.3
)
 
(2,146.7
)
TOTAL PROPERTY AND EQUIPMENT, NET
1,361.9

 
1,390.1

GOODWILL
327.0

 
327.0

INTANGIBLE ASSETS, NET
45.1

 
46.0

DEFERRED INCOME TAX ASSET
60.5

 
56.3

OTHER NON-CURRENT ASSETS
377.3

 
379.4

TOTAL ASSETS
$
2,686.1

 
$
2,645.7

LIABILITIES AND DEFICIT
 

 
 

CURRENT LIABILITIES:
 

 
 

Current portion of debt obligations
$
25.4

 
$
25.5

Accounts payable
177.3

 
194.8

Accrued expenses
64.0

 
70.7

Deferred revenue
207.3

 
192.7

Interest payable
8.8

 
19.9

Income taxes payable
39.1

 
6.4

TOTAL CURRENT LIABILITIES
521.9

 
510.0

LONG-TERM DEBT, LESS CURRENT PORTION
2,195.9

 
2,197.1

LEASE FINANCING ARRANGEMENTS, LESS CURRENT PORTION
81.5

 
84.8

CAPITAL LEASE OBLIGATIONS, LESS CURRENT PORTION
6.9

 
6.9

NON-CURRENT DEFERRED REVENUE
415.0

 
412.3

OTHER NON-CURRENT LIABILITIES
291.0

 
273.5

TOTAL LIABILITIES
3,512.2

 
3,484.6

COMMITMENTS AND CONTINGENCIES


 


DEFICIT:
 

 
 

Class A common stock, $0.001 par value; 500,000,000 shares authorized, 133,324,481 and 133,080,279 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively
0.1

 
0.1

Class B common stock, $0.001 par value; 200,000,000 shares authorized, 23,708,639 shares issued and outstanding at March 31, 2017 and December 31, 2016

 

Preferred stock, $0.001 par value; 50,000,000 shares authorized, none issued and outstanding

 

Additional paid-in capital (deficit)
(935.9
)
 
(934.4
)
Retained earnings
110.3

 
96.5

Accumulated other comprehensive loss, net
(0.8
)
 
(1.3
)
TOTAL STOCKHOLDERS’ DEFICIT OF REGAL ENTERTAINMENT GROUP
(826.3
)
 
(839.1
)
Noncontrolling interest
0.2

 
0.2

TOTAL DEFICIT
(826.1
)
 
(838.9
)
TOTAL LIABILITIES AND DEFICIT
$
2,686.1

 
$
2,645.7

See accompanying notes to unaudited condensed consolidated financial statements.

3


REGAL ENTERTAINMENT GROUP
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in millions, except share and per share data) 
 
Quarter Ended
March 31, 2017
 
Quarter Ended
March 31, 2016
REVENUES:
 

 
 

Admissions
$
533.2

 
$
515.7

Concessions
239.5

 
230.1

Other operating revenues
48.5

 
41.3

TOTAL REVENUES
821.2

 
787.1

OPERATING EXPENSES:
 

 
 

Film rental and advertising costs
283.1

 
277.5

Cost of concessions
30.8

 
28.8

Rent expense
106.2

 
107.5

Other operating expenses
215.7

 
211.5

General and administrative expenses (including share-based compensation of $2.2 and $1.8 for the quarters ended March 31, 2017 and 2016, respectively)
22.3

 
21.2

Depreciation and amortization
60.9

 
55.7

Net loss on disposal and impairment of operating assets and other
2.7

 
4.3

TOTAL OPERATING EXPENSES
721.7

 
706.5

INCOME FROM OPERATIONS
99.5

 
80.6

OTHER EXPENSE (INCOME):
 

 
 

Interest expense, net
30.7

 
32.5

Earnings recognized from NCM
(2.0
)
 
(12.3
)
Equity in income of non-consolidated entities and other, net
(8.3
)
 
(10.0
)
TOTAL OTHER EXPENSE, NET
20.4

 
10.2

INCOME BEFORE INCOME TAXES
79.1

 
70.4

PROVISION FOR INCOME TAXES
30.7

 
29.7

NET INCOME
48.4

 
40.7

NET (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST, NET OF TAX

 

NET INCOME ATTRIBUTABLE TO CONTROLLING INTEREST
$
48.4

 
$
40.7

EARNINGS PER SHARE OF CLASS A AND CLASS B COMMON STOCK (NOTE 8):
 

 
 

Basic
$
0.31

 
$
0.26

Diluted
$
0.31

 
$
0.26

AVERAGE SHARES OUTSTANDING (in thousands):
 

 
 

Basic
156,294

 
156,017

Diluted
157,039

 
156,773

DIVIDENDS DECLARED PER COMMON SHARE
$
0.22

 
$
0.22

 
See accompanying notes to unaudited condensed consolidated financial statements.

4


REGAL ENTERTAINMENT GROUP
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
 
 
Quarter Ended
March 31, 2017
 
Quarter Ended
March 31, 2016
NET INCOME
$
48.4

 
$
40.7

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
 

 
 

Change in fair value of interest rate swap transactions
(0.2
)
 
(1.3
)
Amounts reclassified to net income from interest rate swaps
0.6

 
1.0

Reclassification adjustment for gain on sale of available for sale securities recognized in net income

 
(0.5
)
Change in fair value of equity method investee interest rate swaps
0.1

 
(0.6
)
TOTAL OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
0.5

 
(1.4
)
TOTAL COMPREHENSIVE INCOME, NET OF TAX
48.9

 
39.3

Comprehensive (income) loss attributable to noncontrolling interest, net of tax

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO CONTROLLING INTEREST, NET OF TAX
$
48.9

 
$
39.3

 
See accompanying notes to unaudited condensed consolidated financial statements.

5


REGAL ENTERTAINMENT GROUP
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
 
Quarter Ended
March 31, 2017
 
Quarter Ended
March 31, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 

 
 

Net income
$
48.4

 
$
40.7

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
60.9

 
55.7

Amortization of debt discount
0.1

 
0.1

Amortization of debt acquisition costs
1.1

 
1.2

Share-based compensation expense
2.2

 
1.8

Deferred income tax benefit
(4.5
)
 
(4.2
)
Net loss on disposal and impairment of operating assets and other
2.7

 
4.3

Equity in income of non-consolidated entities
(2.2
)
 
(8.1
)
Gain on sale of available for sale securities

 
(1.0
)
Non-cash (gain) loss on interest rate swaps
(0.1
)
 
0.1

Non-cash rent income
(1.7
)
 
(1.7
)
Cash distributions on investments in other non-consolidated entities
8.4

 

Excess cash distribution on NCM shares
5.7

 
8.6

Landlord contributions
26.3

 
22.2

Proceeds from litigation settlement
1.0

 

Changes in operating assets and liabilities:
 

 
 

Trade and other receivables
99.6

 
109.8

Inventories
(2.4
)
 
(0.3
)
Prepaid expenses and other assets
(4.7
)
 
(6.3
)
Accounts payable
(8.8
)
 
(58.1
)
Income taxes payable
32.7

 
25.2

Deferred revenue
11.1

 
17.2

Accrued expenses and other liabilities
(26.2
)
 
(26.4
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
249.6

 
180.8

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Capital expenditures
(44.7
)
 
(31.1
)
Proceeds from disposition of assets
1.5

 
1.3

Investment in non-consolidated entities
(1.7
)
 
(0.7
)
Proceeds from sale of available for sale securities

 
3.6

NET CASH USED IN INVESTING ACTIVITIES
(44.9
)
 
(26.9
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Cash used to pay dividends
(35.3
)
 
(35.4
)
Payments on long-term obligations
(5.9
)
 
(6.9
)
Landlord contributions received from lease financing arrangements
2.5

 

Cash paid for tax withholdings and other
(3.7
)
 
(3.2
)

6


NET CASH USED IN FINANCING ACTIVITIES
(42.4
)
 
(45.5
)
NET INCREASE IN CASH AND CASH EQUIVALENTS
162.3

 
108.4

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
246.5

 
219.6

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
408.8

 
$
328.0

SUPPLEMENTAL CASH FLOW INFORMATION:
 

 
 

Cash paid for income taxes
$
1.7

 
$
4.2

Cash paid for interest, net of amounts capitalized
$
40.9

 
$
42.5

SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
 

 
 

Investment in NCM
$
6.3

 
$
9.9

Increase in property and equipment and other from lease financing arrangements
$

 
$
8.1


See accompanying notes to unaudited condensed consolidated financial statements.

7


REGAL ENTERTAINMENT GROUP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1. THE COMPANY AND BASIS OF PRESENTATION
 
Regal Entertainment Group (the "Company," "Regal," "we" or "us") is the parent company of Regal Entertainment Holdings, Inc. ("REH"), which is the parent company of Regal Cinemas Corporation ("Regal Cinemas") and its subsidiaries. Regal Cinemas’ subsidiaries include Regal Cinemas, Inc. ("RCI") and its subsidiaries, which include Edwards Theatres, Inc. ("Edwards") and United Artists Theatre Company ("United Artists"). The terms Regal or the Company, REH, Regal Cinemas, RCI, Edwards and United Artists shall be deemed to include the respective subsidiaries of such entities when used in discussions included herein regarding the current operations or assets of such entities. Majority-owned subsidiaries that the Company controls are consolidated, while those affiliates of which the Company owns between 20% and 50% and does not control are accounted for under the equity method. Those affiliates of which the Company owns less than 20% are generally accounted for under the cost method, unless the Company is deemed to have the ability to exercise significant influence over the affiliate, in which case the Company would account for its investment under the equity method. The results of these subsidiaries and affiliates are included in the unaudited condensed consolidated financial statements effective with their formation or from their dates of acquisition. Intercompany balances and transactions are eliminated in consolidation.
 
Regal operates one of the largest and most geographically diverse theatre circuits in the United States, consisting of 7,262 screens in 559 theatres in 43 states along with Guam, Saipan, American Samoa and the District of Columbia as of March 31, 2017.
 
For a discussion of significant transactions that have occurred through December 31, 2016, please refer to the notes to the consolidated financial statements included in Part II, Item 8 of our annual report on Form 10-K filed on February 27, 2017 with the Securities and Exchange Commission (the "Commission") (File No. 001-31315) for the fiscal year ended December 31, 2016 (the "2016 Audited Consolidated Financial Statements"). For a summary of our significant accounting policies, please refer to Note 2 to the 2016 Audited Consolidated Financial Statements.

The Company has prepared the unaudited condensed consolidated balance sheet as of March 31, 2017, the unaudited condensed consolidated statements of income, comprehensive income, and cash flows for the quarters ended March 31, 2017 and March 31, 2016 in accordance with U.S. generally accepted accounting principles for interim financial information and the rules and regulations of the Commission. Accordingly, certain information and footnote disclosures typically included in an annual report have been condensed or omitted for this quarterly report. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly in all material respects the financial position, results of operations and cash flows for all periods presented have been made. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes.  Actual results could differ from these estimates. The December 31, 2016 unaudited condensed consolidated balance sheet information is derived from the 2016 Audited Consolidated Financial Statements. These unaudited condensed consolidated financial statements should be read in conjunction with the 2016 Audited Consolidated Financial Statements and notes thereto. The results of operations for the quarter ended March 31, 2017 are not necessarily indicative of the operating results that may be achieved for the full 2017 year.

2. INVESTMENTS
 
Investment in National CineMedia, LLC
 
We maintain an investment in National CineMedia, LLC ("National CineMedia" or "NCM").  National CineMedia provides in-theatre advertising for its theatrical exhibition partners, which include us, AMC Entertainment, Inc. ("AMC") and Cinemark, Inc. ("Cinemark"). The formation of National CineMedia, related IPO of National CineMedia, Inc. ("NCM, Inc.") and other related transactions are further described in Note 4 to the 2016 Audited Consolidated Financial Statements.

We account for our investment in National CineMedia following the equity method of accounting and such investment is included as a component of "Other Non-Current Assets" in the accompanying unaudited condensed consolidated balance sheets. From time to time, the Company receives additional newly issued common units of National CineMedia ("Additional Investments Tranche") as a result of the adjustment provisions of the Common Unit Adjustment Agreement. The Company follows the guidance in Accounting Standards Codification ("ASC") 323-10-35-29 (formerly EITF 02-18, Accounting for Subsequent Investments in an Investee after Suspension of Equity Loss Recognition) by analogy, which also refers to AICPA Technical Practice Aid 2220.14, which indicates that if a subsequent investment is made in an equity method investee that has experienced significant losses, the investor must determine if the subsequent investment constitutes funding of prior losses. The

8


Company concluded that the construction or acquisition of new theatres that has led to the common unit adjustments included in its Additional Investments Tranche equates to making additional investments in National CineMedia. The Company evaluated the receipt of the additional common units in National CineMedia and the assets exchanged for these additional units and has determined that the right to use its incremental new screens would not be considered funding of prior losses. As such, the Additional Investments Tranche is accounted for separately from the Company’s Initial Investment Tranche (as defined and described more fully in Note 4 to the 2016 Audited Consolidated Financial Statements) following the equity method with undistributed equity earnings included as a component of "Earnings recognized from NCM" in the accompanying unaudited condensed consolidated financial statements.

Below is a summary of activity with National CineMedia included in the Company’s unaudited condensed consolidated financial statements as of and for the quarter ended March 31, 2017 (in millions):
 
As of the period ended
 
For the period ended
 
Investment
in
NCM
 
Deferred
Revenue
 
Cash
Received
 
Earnings
recognized
from NCM
 
Other
NCM
Revenues
Balance as of and for the period ended December 31, 2016
$
162.0

 
$
(425.0
)
 
$

 
$

 
$

     Receipt of additional common units(1)
6.3

 
(6.3
)
 

 

 

     Receipt of excess cash distributions(2)
(5.7
)
 

 
14.0

 
(8.3
)
 

     Revenues earned under ESA(3)

 

 
4.3

 

 
(4.3
)
     Amortization of deferred revenue(4)

 
3.1

 

 

 
(3.1
)
     Equity loss attributable to additional common units(5)
(0.7
)
 

 

 
0.7

 

     Change in interest loss(6)
(5.6
)
 

 

 
5.6

 

Balance as of and for the period ended March 31, 2017
$
156.3

 
$
(428.2
)
 
$
18.3

 
$
(2.0
)
 
$
(7.4
)
 ________________________________
(1)
On March 16, 2017, we received from National CineMedia approximately 0.5 million newly issued common units of National CineMedia in accordance with the annual adjustment provisions of the Common Unit Adjustment Agreement. The Company recorded the additional common units (Additional Investments Tranche) at fair value using the available closing stock price of NCM, Inc. as of the date on which the units were issued. With respect to the common units issued on March 16, 2017, the Company recorded an increase to its investment in National CineMedia of $6.3 million with a corresponding increase to deferred revenue. Such deferred revenue amount is being amortized to advertising revenue over the remaining term of the exhibitor services agreement, between RCI and National CineMedia ("ESA"), following the units of revenue method as described in (4) below. This transaction increased our ownership share in National CineMedia to approximately 27.6 million common units. On a fully diluted basis, we own a 17.9% interest in NCM, Inc. as of March 31, 2017.

(2)
During the quarter ended March 31, 2017, the Company received $14.0 million in cash distributions from National CineMedia, exclusive of receipts for services performed under the ESA. Approximately $5.7 million of these cash distributions received during the quarter ended March 31, 2017 were attributable to the Additional Investments Tranche and were recognized as a reduction in our investment in National CineMedia. The remaining amounts were recognized in equity earnings during the period and have been included as components of "Earnings recognized from NCM" in the accompanying unaudited condensed consolidated financial statements.

(3)
The Company recorded other revenues, excluding the amortization of deferred revenue, of approximately $4.3 million for the quarter ended March 31, 2017 pertaining to our agreements with National CineMedia, including per patron and per digital screen theatre access fees (net of payments of $3.4 million for the quarter ended March 31, 2017 for on-screen advertising time provided to our beverage concessionaire) and other NCM revenues. These advertising revenues are presented as a component of "Other operating revenues" in the Company’s unaudited condensed consolidated financial statements.

(4)
Amounts represent amortization of ESA modification fees received from NCM to advertising revenue utilizing the units of revenue amortization method. These advertising revenues are presented as a component of "Other operating revenues" in the Company’s unaudited condensed consolidated financial statements.

(5)
Amounts represent the Company’s share in the net loss of National CineMedia with respect to the Additional Investments Tranche. Such amounts have been included as a component of "Earnings recognized from NCM" in the unaudited condensed consolidated financial statements.

(6)
The Company recorded a non-cash loss of $5.6 million during the quarter ended March 31, 2017 to adjust the Company's investment balance due to NCM's issuance of common units to other founding members, at a price per share below the Company's average carrying amount per share. Such amount has been included as a component of "Earnings recognized from NCM" in the unaudited condensed consolidated financial statements.


9



As of March 31, 2017, approximately $3.0 million and $1.5 million due from/to National CineMedia were included in "Trade and other receivables, net" and "Accounts payable," respectively. As of December 31, 2016, approximately $2.8 million and $1.3 million due from/to National CineMedia were included in "Trade and other receivables, net" and "Accounts payable," respectively.
 
As of the date of this quarterly report on Form 10-Q (this "Form 10-Q"), no summarized financial information for National CineMedia was available for the quarterly period ended March 31, 2017. Summarized unaudited consolidated statements of income information for National CineMedia for the quarters ended December 29, 2016 and December 31, 2015 is as follows (in millions): 
 
Quarter Ended
December 29, 2016
 
Quarter Ended
December 31, 2015
Revenues
$
142.5

 
$
136.4

Income from operations
72.3

 
61.5

Net income
59.7

 
49.0


 Investment in Digital Cinema Implementation Partners
 
We maintain an investment in Digital Cinema Implementation Partners, LLC, a Delaware limited liability company ("DCIP").  DCIP is a joint venture company formed by Regal, AMC and Cinemark. DCIP funds the cost of digital projection equipment principally through the collection of virtual print fees from motion picture studios and equipment lease payments from participating exhibitors, including us. In addition to its U.S. digital deployment, DCIP actively manages the deployment of over 1,800 digital systems in Canada for Canadian Digital Cinema Partnership, a joint venture between Cineplex Inc. and Empire Theatres Limited.

Regal holds a 46.7% economic interest in DCIP as of March 31, 2017 and a one-third voting interest along with each of AMC and Cinemark. Since the Company does not have a controlling financial interest in DCIP or any of its subsidiaries, it accounts for its investment in DCIP under the equity method of accounting. The Company’s investment in DCIP is included as a component of "Other Non-Current Assets" in the accompanying unaudited condensed consolidated balance sheets.  The change in the carrying amount of our investment in DCIP for the quarter ended March 31, 2017 is as follows (in millions): 

Balance as of December 31, 2016
$
193.2

     Equity contributions

     Equity in earnings of DCIP(1)
11.3

     Receipt of cash distributions
(8.4
)
     Change in fair value of equity method investee interest rate swap transactions
0.2

Balance as of March 31, 2017
$
196.3

 ________________________________
(1)
Represents the Company’s share of the net income of DCIP. Such amount is presented as a component of “Equity in income of non-consolidated entities and other, net” in the accompanying unaudited condensed consolidated statement of income.

In accordance with the master equipment lease agreement (the "Master Lease"), the digital projection systems are leased from a subsidiary of DCIP under a twelve-year term with ten one-year fair value renewal options. The Master Lease also contains a fair value purchase option. As of March 31, 2017, under the Master Lease, the Company pays annual minimum rent of $1,000 per digital projection system through the end of the lease term. The Company considers the $1,000 rent payment to be a minimum rental, and accordingly, records such rent on a straight-line basis in its consolidated financial statements. The Company is also subject to various types of other rent if such digital projection systems do not meet minimum performance requirements, as outlined in the Master Lease. Certain of the other rent payments are subject to either a monthly or an annual maximum. The Company accounts for the Master Lease as an operating lease for accounting purposes. During the quarters ended March 31, 2017 and March 31, 2016, the Company incurred total rent expense of approximately $1.4 million and $1.3 million, respectively, associated with the leased digital projection systems. Such rent expense is presented as a component of "Other operating expenses" in the Company's unaudited consolidated statements of income.

Summarized unaudited consolidated statements of operations information for DCIP for the quarters ended March 31, 2017 and March 31, 2016 is as follows (in millions): 

10


 
Quarter Ended
March 31, 2017
 
Quarter Ended
March 31, 2016
Net revenues
$
45.5

 
$
40.6

Income from operations
27.9

 
23.4

Net income
24.1

 
18.5


Investment in Open Road Films
 
We maintain an investment in Open Road Films, a film distribution company jointly owned by us and AMC. We account for our investment in Open Road Films using the equity method of accounting. During the quarter ended March 31, 2017, the Company effected equity contributions of approximately $1.7 million to Open Road Films, and as of March 31, 2017, the Company had funded all of its $30.0 million capital commitment (described further in Note 4 to the 2016 Audited Consolidated Financial Statements). In addition, during the quarter ended March 31, 2017, the Company recorded equity losses in Open Road Films totaling approximately $4.2 million related to an advance and a guarantee of certain short-term obligations of Open Road Films.

As of March 31, 2017, consistent with the accounting model provided by ASC 323-10-35-22, the Company continued to suspend equity method accounting for its investment in Open Road Films, as the Company had funded its $30.0 million capital commitment and had no commitment to provide further financial support for Open Road Films. As of March 31, 2017, the Company has recognized cumulative losses in Open Road Films equal to the financial support committed to as of such date. The amount of excess losses incurred through March 31, 2017 continued to be in excess of the Company's financial commitment by approximately $46.2 million.

The Company’s investment in Open Road Films is included as a component of "Other Non-Current Liabilities" in the accompanying unaudited condensed consolidated balance sheets.  The change in the carrying amount of our investment in Open Road Films for the quarter ended March 31, 2017 is as follows (in millions): 
Balance as of December 31, 2016
$
(1.7
)
     Equity contributions
1.7

     Equity losses attributable to Open Road Films
(4.2
)
Balance as of March 31, 2017
$
(4.2
)

 Summarized unaudited consolidated statements of operations information for Open Road Films for the quarters ended March 31, 2017 and March 31, 2016 is as follows (in millions): 
 
Quarter Ended
March 31, 2017
 
Quarter Ended
March 31, 2016
Revenues
$
59.5

 
$
35.5

Income (loss) from operations
(1.6
)
 
(25.3
)
Net income (loss)
(2.5
)
 
(26.3
)

As of March 31, 2017, approximately $2.4 million due from Open Road Films was included in "Trade and other receivables, net." As of December 31, 2016, approximately $4.2 million and $2.1 million due from/to Open Road Films were included in "Trade and other receivables, net" and "Accounts payable," respectively.

3. DEBT OBLIGATIONS
 
Debt obligations at March 31, 2017 and December 31, 2016 consist of the following (in millions): 

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March 31, 2017
 
December 31, 2016
Regal Cinemas Amended Senior Credit Facility, net of debt discount
$
952.3

 
$
954.7

Regal 53/4% Senior Notes Due 2022
775.0

 
775.0

Regal 53/4% Senior Notes Due 2025
250.0

 
250.0

Regal 53/4% Senior Notes Due 2023
250.0

 
250.0

Lease financing arrangements, weighted average interest rate of 11.23% as of March 31, 2017, maturing in various installments through November 2028
94.2

 
97.1

Capital lease obligations, 7.8% to 10.7%, maturing in various installments through December 2030
8.7

 
9.2

Other
4.1

 
4.1

Total debt obligations
2,334.3

 
2,340.1

Less current portion
25.4

 
25.5

Less debt issuance costs, net of accumulated amortization of $19.7 and $18.5, respectively
24.7

 
25.8

Total debt obligations, less current portion and debt issuance costs
$
2,284.2

 
$
2,288.8

 

Regal Cinemas Seventh Amended and Restated Credit Agreement—As described further in Note 5 to the 2016 Audited Consolidated Financial Statements, on April 2, 2015, Regal Cinemas entered into a seventh amended and restated credit agreement (the “Amended Senior Credit Facility”), with Credit Suisse AG as Administrative Agent (“Credit Suisse AG”) and the lenders party thereto, which amended, restated and refinanced the sixth amended and restated credit agreement (the “Prior Senior Credit Facility”). The Amended Senior Credit Facility consisted of a term loan facility (the “Term Facility”) in an aggregate principal amount of $965.8 million with a final maturity date in April 2022 and a revolving credit facility (the “Revolving Facility”) in an aggregate principal amount of $85.0 million with a final maturity date in April 2020. The Term Facility amortized in equal quarterly installments in an aggregate annual amount equal to 1.0% of the original principal amount of the Term Facility, with the balance payable on the Term Facility maturity date. Proceeds from the Term Facility (approximately $963.3 million, net of debt discount) were applied to refinance the term loan under the Prior Senior Credit Facility, which had an aggregate outstanding principal balance of approximately $963.2 million. As a result of the amendment, the Company recorded a loss on debt extinguishment of approximately $5.7 million during the quarter ended June 30, 2015.

On June 1, 2016, Regal Cinemas entered into a permitted secured refinancing agreement with REH, the guarantors party thereto, Credit Suisse AG and the lenders party thereto (the "June 2016 Refinancing Agreement"). Pursuant to the June 2016 Refinancing Agreement, Regal Cinemas consummated a permitted secured refinancing of the Term Facility under the Amended Senior Credit Facility, which had an aggregate principal balance of approximately $958.5 million, and in accordance therewith, received term loans in an aggregate principal amount of approximately $958.5 million with a final maturity date in April 2022. Together with other amounts provided by Regal Cinemas, proceeds of the term loans were applied to repay all of the outstanding principal and accrued and unpaid interest on the Term Facility under the Amended Senior Credit Facility. In connection with the execution of the June 2016 Refinancing Agreement, the Company recorded a loss on debt extinguishment of approximately $1.5 million during the quarter ended June 30, 2016.

On December 2, 2016, Regal Cinemas entered into a permitted secured refinancing agreement (the “December 2016 Refinancing Agreement”) with REH, the guarantors party thereto, Credit Suisse AG and the lenders party thereto. The December 2016 Refinancing Agreement further amends the Amended Senior Credit Facility, which was amended by the June 2016 Refinancing Agreement. Pursuant to the December 2016 Refinancing Agreement, Regal Cinemas consummated a permitted secured refinancing of the Term Facility, which had an aggregate principal balance of approximately $956.1 million, and in accordance therewith, and received term loans in an aggregate principal amount of approximately $956.1 million with a final maturity date in April 2022 (the “New Term Loans”). Together with other amounts provided by Regal Cinemas, proceeds of the New Term Loans were applied to repay all of the outstanding principal and accrued and unpaid interest on the existing term facility under the Amended Senior Credit Facility in effect immediately prior to the making of the New Term Loans. The New Term Loans amortize in equal quarterly installments in an aggregate annual amount equal to 1.0% of the original principal amount of the New Term Loans, with the balance payable on the maturity date of the New Term Loans. The December 2016 Refinancing Agreement also amends the Amended Senior Credit Facility by reducing the interest rate on the New Term Loans, by providing, at Regal Cinemas’ option, either a base rate or an adjusted LIBOR rate (as defined in the Amended Senior Credit Facility) plus, in each case, an applicable margin. Such applicable margin will be either 1.50% in the case of base rate loans or 2.50% in the case of LIBOR rate loans. The December 2016 Refinancing Agreement also provides for a 1% prepayment premium applicable in the event that Regal Cinemas enters into a refinancing or amendment of the New Term Loans on or prior

12


to the sixth-month anniversary of the closing of the December 2016 Refinancing Agreement that, in either case, has the effect of reducing the interest rate on the New Term Loans. In connection with the execution of the December 2016 Refinancing Agreement, the Company recorded a loss on debt extinguishment of approximately $1.4 million during the quarter ended December 31, 2016.

No amounts have been drawn on the Revolving Facility. As of March 31, 2017, we had approximately $2.7 million outstanding in letters of credit, leaving approximately $82.3 million available for drawing under the Revolving Facility. The Amended Senior Credit Facility also permits Regal Cinemas to borrow additional term loans thereunder in an amount of up to $200.0 million, plus additional amounts as would not cause the consolidated total leverage ratio of Regal Cinemas to exceed 3.00:1.00, in each case, subject to lenders providing additional commitments for such amounts and the satisfaction of certain other customary conditions. The obligations of Regal Cinemas are secured by, among other things, a lien on substantially all of its tangible and intangible personal property (including but not limited to accounts receivable, inventory, equipment, general intangibles, investment property, deposit and securities accounts, and intellectual property) and certain owned real property. The obligations under the Amended Senior Credit Facility are also guaranteed by certain subsidiaries of Regal Cinemas and secured by a lien on all or substantially all of such subsidiaries’ personal property and certain owned real property pursuant to that certain second amended and restated guaranty and collateral agreement, dated as of May 19, 2010, among Regal Cinemas, certain subsidiaries of Regal Cinemas party thereto and Credit Suisse AG (the “Amended Guaranty Agreement”). The obligations are further guaranteed by Regal Entertainment Holdings, Inc., on a limited recourse basis, with such guaranty being secured by a lien on the capital stock of Regal Cinemas.

Borrowings under the Amended Senior Credit Facility bear interest, at Regal Cinemas’ option, at either a base rate or an adjusted LIBOR rate (as defined in the Amended Senior Credit Facility) plus, in each case, an applicable margin of 1.50% in the case of base rate loans or 2.50% in the case of LIBOR rate loans. Interest is payable (a) in the case of base rate loans, quarterly in arrears, and (b) in the case of LIBOR rate loans, at the end of each interest period, but in no event less often than every 3 months. If, at any time, with respect to the New Term Loans, the adjusted LIBOR rate as defined in the Amended Senior Credit Facility would otherwise be lower than 0.75% per annum, the adjusted LIBOR rate with respect to the New Term Loans shall be deemed to be 0.75% per annum at such time.

As of March 31, 2017 and December 31, 2016, borrowings of $952.3 million (net of debt discount) and $954.7 million (net of debt discount), respectively, were outstanding under the New Term Loans at an effective interest rate of 3.73% (as of March 31, 2017) and 3.56% (as of December 31, 2016), after the impact of the interest rate swaps described in Note 10—"Derivative Instruments" is taken into account.

For further discussion of the Amended Senior Credit Facility, please refer to Note 5 to the 2016 Audited Consolidated Financial Statements and incorporated by reference herein.

Regal 53/4% Senior Notes Due 2022—On March 11, 2014, Regal issued $775.0 million in aggregate principal amount of its 53/4% senior notes due 2022 (the “53/4% Senior Notes Due 2022”) in a registered public offering. The 53/4% Senior Notes Due 2022 bear interest at a rate of 5.75% per year, payable semiannually in arrears on March 15 and September 15 of each year, beginning September 15, 2014. The 53/4% Senior Notes Due 2022 will mature on March 15, 2022.

The 53/4% Senior Notes Due 2022 are the Company’s senior unsecured obligations and rank equal in right of payment with all of the Company’s existing and future senior unsecured indebtedness and prior to all of the Company’s future subordinated indebtedness. The 53/4% Senior Notes Due 2022 are effectively subordinated to all of the Company’s future secured indebtedness to the extent of the value of the collateral securing that indebtedness and structurally subordinated to all existing and future indebtedness and other liabilities of the Company’s subsidiaries. None of the Company’s subsidiaries guaranty any of the Company’s obligations with respect to the 53/4% Senior Notes Due 2022.

For further discussion of the 53/4% Senior Notes Due 2022, please refer to Note 5 to the 2016 Audited Consolidated Financial Statements and incorporated by reference herein.

Regal 53/4% Senior Notes Due 2025—On January 17, 2013, Regal issued $250.0 million in aggregate principal amount of its 53/4% senior notes due 2025 (the "53/4% Senior Notes Due 2025") in a registered public offering. The 53/4% Senior Notes Due 2025 bear interest at a rate of 5.75% per year, payable semiannually in arrears on February 1 and August 1 of each year, beginning August 1, 2013. The 53/4% Senior Notes Due 2025 will mature on February 1, 2025.

The 53/4% Senior Notes Due 2025 are the Company's senior unsecured obligations. They rank equal in right of payment with all of the Company's existing and future senior unsecured indebtedness and prior to all of the Company's future subordinated

13


indebtedness. The 53/4% Senior Notes Due 2025 are effectively subordinated to all of the Company's future secured indebtedness to the extent of the value of the collateral securing that indebtedness and structurally subordinated to all existing and future indebtedness and other liabilities of the Company's subsidiaries. None of the Company's subsidiaries guaranty any of the Company's obligations with respect to the 53/4% Senior Notes Due 2025.

For further discussion of the 53/4% Senior Notes Due 2025, please refer to Note 5 to the 2016 Audited Consolidated Financial Statements and incorporated by reference herein.    

Regal 53/4% Senior Notes Due 2023—On June 13, 2013, Regal issued $250.0 million in aggregate principal amount of its 53/4% senior notes due 2023 (the "53/4% Senior Notes Due 2023") in a registered public offering. The 53/4% Senior Notes Due 2023 bear interest at a rate of 5.75% per year, payable semiannually in arrears on June 15 and December 15 of each year, beginning December 15, 2013. The 53/4% Senior Notes Due 2023 will mature on June 15, 2023.

The 53/4% Senior Notes Due 2023 are the Company’s senior unsecured obligations. They rank equal in right of payment with all of the Company’s existing and future senior unsecured indebtedness and prior to all of the Company’s future subordinated indebtedness. The 53/4% Senior Notes Due 2023 are effectively subordinated to all of the Company’s future secured indebtedness to the extent of the value of the collateral securing that indebtedness and structurally subordinated to all existing and future indebtedness and other liabilities of the Company’s subsidiaries. None of the Company’s subsidiaries guaranty any of the Company’s obligations with respect to the 53/4% Senior Notes Due 2023.

For further discussion of the 53/4% Senior Notes Due 2023, please refer to Note 5 to the 2016 Audited Consolidated Financial Statements and incorporated by reference herein.

Lease Financing Arrangements—These obligations primarily represent lease financing obligations resulting from the requirements of ASC Subtopic 840-40.
 
Other Long-Term Obligations—Other long-term obligations, including capital lease obligations, not explicitly discussed herein are described in Note 5 to the 2016 Audited Consolidated Financial Statements and incorporated by reference herein.

Covenant Compliance—As of March 31, 2017, we are in full compliance with all agreements, including all related covenants, governing our outstanding debt obligations.
 
4. INCOME TAXES
 
The provision for income taxes of $30.7 million and $29.7 million for the quarters ended March 31, 2017 and March 31, 2016, respectively, reflect effective tax rates of approximately 38.8% and 42.2%, respectively. The decrease in the effective tax rate for the quarter ended March 31, 2017 is primarily attributable to to the Company’s adoption of ASU 2016-09 during the quarter ended March 31, 2017 (described further in Note 9—"Recent Accounting Pronouncements"), an increase in uncertain state tax positions during the quarter ended March 31, 2016, and to a lesser extent, the settlement of state tax positions during the quarter ended March 31, 2016. The effective tax rates for all periods presented also reflect the impact of certain non-deductible expenses and income tax credits.
 
In assessing the realizable value of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which these temporary differences become deductible. The Company has recorded a valuation allowance against deferred tax assets at March 31, 2017 and December 31, 2016 of $34.5 million, as management believes it is more likely than not that certain deferred tax assets will not be realized in future tax periods. Future reductions in the valuation allowance associated with a change in management's determination of the Company's ability to realize these deferred tax assets will result in a decrease in the provision for income taxes.
    
Total unrecognized tax benefits at March 31, 2017 and December 31, 2016 were $8.6 million and $10.9 million, respectively. The total net unrecognized tax benefits that would affect the effective tax rate if recognized at March 31, 2017 and December 31, 2016 were $3.9 million and $5.4 million, respectively.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits as a component of income tax expense. As of March 31, 2017 and December 31, 2016, the Company has accrued gross interest and penalties of approximately $1.9 million and $1.8 million, respectively.

14



The Company and its subsidiaries collectively file income tax returns in the U.S. federal jurisdiction and various state and U.S. territory jurisdictions. The Company is not subject to U.S. federal examinations before 2013, U.S. Territory examinations for years before 2012, and with limited exceptions, state examinations before 2012. However, the taxing authorities still have the ability to review the propriety of tax attributes created in closed tax years if such tax attributes are utilized in an open tax year. In April 2016, the Company was notified that the the Internal Revenue Service ("IRS") would examine its 2014 federal income tax return. The Company is in the process of providing information requested by the IRS with respect to such tax year. Management believes that it has provided adequate provision for income taxes relative to the tax year under examination.
   
5. CAPITAL STOCK AND SHARE-BASED COMPENSATION
 
Capital Stock
 
As of March 31, 2017, the Company’s authorized capital stock consisted of:
 
500,000,000 shares of Class A common stock, par value $0.001 per share;
200,000,000 shares of Class B common stock, par value $0.001 per share; and
50,000,000 shares of preferred stock, par value $0.001 per share.
 
Of the authorized shares of Class A common stock, 18.0 million shares were sold in connection with the Company’s initial public offering in May 2002. The Company’s Class A common stock is listed on the New York Stock Exchange under the trading symbol "RGC." As of March 31, 2017, 133,324,481 shares of Class A common stock were outstanding. Of the authorized shares of Class B common stock, 23,708,639 shares were outstanding as of March 31, 2017, all of which are beneficially owned by The Anschutz Corporation and its affiliates (collectively, "Anschutz"). Each share of Class B common stock converts into a single share of Class A common stock at the option of the holder or upon certain transfers of a holder’s Class B common stock. Each holder of Class B common stock is entitled to ten votes for each outstanding share of Class B common stock owned by that stockholder on every matter properly submitted to the stockholders for their vote. Of the authorized shares of the preferred stock, no shares were issued and outstanding as of March 31, 2017. The Class A common stock is entitled to a single vote for each outstanding share of Class A common stock on every matter properly submitted to the stockholders for a vote. Except as required by law, the Class A and Class B common stock vote together as a single class on all matters submitted to the stockholders. The material terms and provisions of the Company's certificate of incorporation affecting the relative rights of the Class A common stock and the Class B common stock are described in Note 9 to the 2016 Audited Consolidated Financial Statements, incorporated by reference herein.

As of March 31, 2017, Anschutz owned 18,440,000 shares of our issued and outstanding Class A Common Stock, representing approximately 13.8% of our Class A common stock issued and outstanding, which together with the 23,708,639 shares of our Class B common stock owned by Anschutz, represents approximately 69.0% of the combined voting power of the outstanding shares of Class A common stock and Class B common stock as of March 31, 2017.

Warrants
 
No warrants to acquire the Company’s Class A or Class B common stock were outstanding as of March 31, 2017.
 
Share-Based Compensation
 
In 2002, the Company established the Regal Entertainment Group Stock Incentive Plan (as amended, the "Incentive Plan"), which provides for the granting of incentive stock options and non-qualified stock options to officers, employees and consultants of the Company. As described below under "Restricted Stock" and "Performance Share Units," the Incentive Plan also provides for grants of restricted stock and performance shares that are subject to restrictions and risks of forfeiture.  Readers should refer to Note 9 to the 2016 Audited Consolidated Financial Statements for additional information related to these awards and the Incentive Plan.
 
On May 9, 2012, the stockholders of Regal approved amendments to the Incentive Plan increasing the number of Class A common stock authorized for issuance under the Incentive Plan by a total of 5,000,000 shares and extending the term of

15


the Incentive Plan to May 9, 2022.  As of March 31, 2017, 3,759,579 shares remain available for future issuance under the Incentive Plan.
 
Restricted Stock
 
As described further in Note 9 to the 2016 Audited Consolidated Financial Statements, the Incentive Plan also provides for restricted stock awards to officers, directors and key employees. Under the Incentive Plan, shares of Class A common stock of the Company may be granted at nominal cost to officers, directors and key employees, subject to a continued employment/service restriction.  On January 11, 2017, 217,366 restricted shares were granted under the Incentive Plan at nominal cost to officers, directors and key employees.  These awards vest 25% at the end of each year for 4 years (in the case of officers and key employees) and vest 100% at the end of one year (in the case of directors). The closing price of the Company’s Class A common stock on the date of the grant was $22.10 per share. The Company assumed a forfeiture rate of 6% for such restricted stock awards.
 
During the quarter ended March 31, 2017, the Company withheld approximately 166,081 shares of restricted stock at an aggregate cost of approximately $3.6 million, as permitted by the applicable equity award agreements, to satisfy employee tax withholding requirements related to the vesting of 491,084 restricted stock awards.  In addition, during the quarter ended March 31, 2017, 205,677 performance shares (originally granted on January 8, 2014) were effectively converted to shares of restricted common stock, as threshold performance goals for these awards were satisfied on January 8, 2017, the calculation date. These awards are scheduled to fully vest on January 8, 2018, the one year anniversary of the calculation date.
 
During the quarters ended March 31, 2017 and March 31, 2016, the Company recognized approximately $1.1 million and $0.8 million, respectively, of share-based compensation expense related to restricted share grants.  Such expense is presented as a component of "General and administrative expenses."  The compensation expense for these awards was determined based on the market price of the Company's stock at the date of grant applied to the total numbers of shares that were anticipated to fully vest.  As of March 31, 2017, we have unrecognized compensation expense of $7.9 million associated with restricted stock awards, which is expected to be recognized through January 11, 2021.
 
The following table represents the restricted stock activity for the quarter ended March 31, 2017:
Unvested at beginning of period
765,952

Granted during the period
217,366

Vested during the period
(491,084
)
Forfeited during the period
(12,760
)
Conversion of performance shares during the period
205,677

Unvested at end of period
685,151

 
During the quarter ended March 31, 2017, the Company paid one cash dividend of $0.22 on each share of outstanding restricted stock totaling approximately $0.2 million. During the quarter ended March 31, 2016, the Company paid one cash dividend of $0.22 on each share of outstanding restricted stock totaling approximately $0.2 million.
    
Performance Share Units
 
The Incentive Plan also provides for grants in the form of performance share units to officers, directors and key employees. Performance share agreements are entered into between the Company and each grantee of performance share units. 

In 2009, the Company adopted an amended and restated form of performance share agreement (each, a "Performance Agreement" and collectively, the "Performance Agreements").  Pursuant to the terms and conditions of the Performance Agreements, grantees will be issued shares of restricted common stock of the Company in an amount determined by the attainment of Company performance criteria set forth in each Performance Agreement. The shares of restricted common stock received upon attainment of the performance criteria will be subject to further vesting over a period of time, provided the grantee remains a service provider to the Company during such period. On January 11, 2017, 235,356 performance shares were granted under the Incentive Plan at nominal cost to officers and key employees. Under the Performance Agreement, which is described further in the section entitled "Compensation Discussion and Analysis — Elements of Compensation — Performance Shares," of our 2017 proxy statement filed with the Commission on April 10, 2017, each performance share represents the right to receive from 0% to 150% of the target numbers of shares of restricted Class A common stock. The number of shares of restricted common stock earned will be determined based on the attainment of specified performance goals by January 11, 2020

16


(the third anniversary of the grant date for the January 11, 2017 grant) set forth in the applicable Performance Agreement.  Such performance shares vest on January 11, 2021 (the fourth anniversary of the grant date for the January 11, 2017 grant).  The shares are subject to the terms and conditions of the Incentive Plan. The closing price of the Company’s Class A common stock on the date of the grant was $22.10 per share, which approximates the grant date fair value of the awards.  The Company assumed a forfeiture rate of 9% for such performance share awards.
 
During the quarters ended March 31, 2017 and March 31, 2016, the Company recognized approximately $1.1 million and $1.0 million, respectively, of share-based compensation expense related to performance share grants. Such expense is presented as a component of "General and administrative expenses."  As of March 31, 2017, we have unrecognized compensation expense of $10.4 million associated with performance share units, which is expected to be recognized through January 11, 2021. During the quarter ended March 31, 2017, 205,677 performance share awards (originally granted on January 8, 2014) were converted to shares of restricted common stock, as threshold performance goals for these awards were satisfied on January 8, 2017, the calculation date.
 
The following table summarizes information about the Company’s number of performance shares for the quarter ended March 31, 2017:
Unvested at beginning of period
698,709

Granted (based on target) during the period
235,356

Cancelled/forfeited during the period
(8,457
)
Conversion to restricted shares during the period
(205,677
)
Unvested at end of period
719,931

 
In connection with the conversion of the above 205,677 performance shares, during the quarter ended March 31, 2017, the Company paid cumulative cash dividends of $3.64 (representing the sum of all cash dividends paid from January 8, 2014 through January 8, 2017) on each performance share converted, totaling approximately $0.7 million.  The above table does not reflect the maximum or minimum number of shares of restricted stock contingently issuable. An additional 0.4 million shares of restricted stock could be issued if the performance criteria maximums are met.
 
6. COMMITMENTS AND CONTINGENCIES
 
The Company is presently involved in various judicial, administrative, regulatory and arbitration proceedings concerning matters arising in the ordinary course of business operations, including but not limited to, personal injury claims, landlord-tenant, antitrust, vendor and other third party disputes, tax disputes, employment and other contractual matters, some of which are described below. Many of these proceedings are at preliminary stages, and many of these cases seek an indeterminate amount of damages. The Company's theatre operations are also subject to federal, state and local laws governing such matters as wages, working conditions, citizenship and health and sanitation and environmental protection requirements.

On October 9, 2012, staff at the San Francisco Regional Water Quality Board (the "Regional Board") notified United Artists Theatre Circuit, Inc. (“UATC”), an indirect, wholly owned subsidiary of the Company, that the Regional Board was contemplating issuing a cleanup and abatement order to UATC with respect to a property in Santa Clara, California that UATC owned and then leased during the 1960s and 1970s. On June 25, 2013, the Regional Board issued a tentative order to UATC setting out proposed site clean-up requirements for UATC with respect to the property. According to the Regional Board, the property in question has been contaminated by dry-cleaning facilities that operated at the property in question from approximately 1961 until 1996. The Regional Board also issued a tentative order to the current property owner, who has been conducting site investigation and remediation activities at the site for several years. UATC submitted comments to the Regional Board on July 28, 2013, objecting to the tentative order. The Regional Board considered the matter at its regular meeting on September 11, 2013 and adopted the tentative order with only minor changes. On October 11, 2013, UATC filed a petition with the State Water Resources Control Board (“the State Board”) for review of the Regional Board’s order. The State Board failed to act on the petition and hence by operation of law it was deemed denied, and UATC filed a petition for writ of mandamus with the California Superior Court seeking review and modification of the order. The Superior Court dismissed UATC's claims against the State Board and the City of Santa Clara. Briefing on UATC's claims against the Regional Board is scheduled to be completed during the first half of 2017. UATC is cooperating with the Regional Board while its petition remains pending before the State Board. To that end, UATC and the current property owner jointly submitted, and on October 27, 2015, the Regional Board approved, a Remedial Action Plan (“RAP”) to remediate the dry-cleaner contamination. UATC intends to vigorously defend this matter. We believe that we are, and were during the period in question described in this paragraph, in compliance with such applicable laws and regulations.


17


On January 28, 2016, Regional Board staff contacted UATC’s counsel in the Santa Clara matter to ascertain whether he would be representing UATC in connection with the cleanup of a drycleaner-impacted property located in Millbrae, California that the Regional Board believes UATC or related entities formerly owned during the dry-cleaning operations. Counsel subsequently responded in the affirmative. The Company has received no further communications from the Regional Board on this matter.

On May 5, 2014, NCM, Inc. announced that it had entered into a merger agreement to acquire Screenvision, LLC ("Screenvision"). On November 3, 2014, the United States Department of Justice (the "DOJ") filed an antitrust lawsuit seeking to enjoin the proposed merger between NCM, Inc. and Screenvision. On March 16, 2015, NCM, Inc. announced that it had agreed with Screenvision to terminate the merger agreement. On March 17, 2015, the Company was notified by the DOJ that it had opened an investigation into potential anticompetitive conduct by and coordination among NCM, Inc., National CineMedia, Regal, AMC and Cinemark (the “DOJ Notice”). In addition, the DOJ Notice requested that the Company preserve all documents and information since January 1, 2011 relating to movie clearances or communications or cooperation between and among AMC, Regal and Cinemark or their participation in NCM. On May 28, 2015, the Company received a civil investigative demand (the “CID”) from the DOJ as part of an investigation into potentially anticompetitive conduct under Sections 1 and 2 of the Sherman Act, 15 U.S.C. § 1 and § 2. The Company has also received investigative demands from the antitrust sections of various state attorneys general regarding movie clearances and Regal's various joint venture investments, including National CineMedia. The CID and various state investigative demands require the Company to produce documents and answer interrogatories. The Company may receive additional investigative demands from the DOJ and state attorneys general regarding these or related matters. The Company continues to cooperate with these investigations and any other related Federal or state investigations to the extent any are undertaken. The DOJ and various state investigations may also give rise to additional lawsuits filed against the Company related to clearances and the Company’s investments in its various joint ventures. While we do not believe that the Company has engaged in any violation of Federal or state antitrust or competition laws during its participation in NCM and other joint ventures, we can provide no assurances as to the scope, timing or outcome of the DOJ’s or any other state or Federal governmental reviews of the Company’s conduct.

In situations where management believes that a loss arising from judicial, administrative, regulatory and arbitration proceedings is probable and can reasonably be estimated, the Company records the amount of the loss, or the minimum estimated liability when the loss is estimated using a range and no amount within the range is more probable than another. As additional information becomes available, any potential liability related to these proceedings is assessed and the estimates are revised, if necessary. The amounts reserved for such proceedings totaled approximately $3.4 million and $3.5 million as of March 31, 2017 and December 31, 2016, respectively. Management believes any additional liability with respect to these claims and disputes will not be material in the aggregate to the Company’s consolidated financial position, results of operations or cash flows. Under ASC Topic 450, Contingencies—Loss Contingencies, an event is "reasonably possible" if "the chance of the future event or events occurring is more than remote but less than likely" and an event is "remote" if "the chance of the future event or events occurring is slight." Thus, references to the upper end of the range of reasonably possible loss for cases in which the Company is able to estimate a range of reasonably possible loss mean the upper end of the range of loss for cases for which the Company believes the risk of loss is more than slight. Management is unable to estimate a range of reasonably possible loss for cases described herein in which damages have not been specified and (i) the proceedings are in early stages, (ii) there is uncertainty as to the likelihood of a class being certified or the ultimate size of the class, (iii) there is uncertainty as to the outcome of pending appeals or motions, (iv) there are significant factual issues to be resolved, and/or (v) there are novel legal issues presented. However, for these cases, management does not believe, based on currently available information, that the outcomes of these proceedings will have a material adverse effect on the Company’s financial condition, though the outcomes could be material to the Company’s operating results for any particular period, depending, in part, upon the operating results for such period.

Our theatres must comply with Title III of the Americans with Disabilities Act of 1990 (the "ADA") to the extent that such properties are "public accommodations" and/or "commercial facilities" as defined by the ADA. Compliance with the ADA requires that public accommodations "reasonably accommodate" individuals with disabilities and that new construction or alterations made to "commercial facilities" conform to accessibility guidelines unless "structurally impracticable" for new construction or technically infeasible for alterations. Non-compliance with the ADA could result in the imposition of injunctive relief, fines, awards of damages to private litigants and additional capital expenditures to remedy such non-compliance. The Company believes that it is in substantial compliance with all current applicable regulations relating to accommodations for the disabled. The Company intends to comply with future regulations in this regard and except as set forth above, does not currently anticipate that compliance will require the Company to expend substantial funds.
 



18


7. RELATED PARTY TRANSACTIONS

During each of the quarters ended March 31, 2017 and March 31, 2016, Regal Cinemas received approximately $0.1 million from an Anschutz affiliate for rent and other expenses related to a theatre facility.
 
During each of the quarters ended March 31, 2017 and March 31, 2016, the Company received approximately $0.2 million from an Anschutz affiliate for management fees related to a theatre site in Los Angeles, California.

Please also refer to Note 2—"Investments" for a discussion of other related party transactions associated with our various investments in non-consolidated entities.
 
8. EARNINGS PER SHARE
 
We compute earnings per share of Class A and Class B common stock using the two-class method.  Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares and, if dilutive, common stock equivalents outstanding during the period. Potential common stock equivalents consist of the incremental common shares issuable upon the vesting of restricted stock and performance share units. The dilutive effect of outstanding restricted stock and performance share units is reflected in diluted earnings per share by application of the treasury-stock method. In addition, the computation of the diluted earnings per share of Class A common stock assumes the conversion of Class B common stock, while the diluted earnings per share of Class B common stock does not assume the conversion of those shares.
    
The rights, including the liquidation and dividend rights, of the holders of our Class A and Class B common stock are identical, except with respect to voting. The earnings for the periods presented are allocated based on the contractual participation rights of the Class A and Class B common shares. As the liquidation and dividend rights are identical, the earnings are allocated on a proportionate basis. Further, as we assume the conversion of Class B common stock in the computation of the diluted earnings per share of Class A common stock, the earnings are equal to net income attributable to controlling interest for that computation.
    
The following table sets forth the computation of basic and diluted earnings per share of Class A and Class B common stock (in millions, except share and per share data):
 
Quarter Ended
March 31, 2017
 
Quarter Ended
March 31, 2016
 
Class A
 
Class B
 
Class A
 
Class B
Basic earnings per share:
 

 
 

 
 
 
 

Numerator:
 

 
 

 
 
 
 
Allocation of earnings
$
41.1

 
$
7.3

 
$
34.5

 
$
6.2

Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding (in thousands)
132,585

 
23,709

 
132,308

 
23,709

Basic earnings per share
$
0.31

 
$
0.31

 
$
0.26

 
$
0.26

Diluted earnings per share:
 
 
 
 
 
 
 
Numerator:
 

 
 

 
 

 
 

Allocation of earnings for basic computation
$
41.1

 
$
7.3

 
$
34.5

 
$
6.2

Reallocation of earnings as a result of conversion of Class B to Class A shares
7.3

 

 
6.2

 

Allocation of earnings
$
48.4

 
$
7.3

 
$
40.7

 
$
6.2

Denominator:
 
 
 
 
 
 
 
Number of shares used in basic computation (in thousands)
132,585

 
23,709

 
132,308

 
23,709

Weighted average effect of dilutive securities (in thousands)
 

 
 

 
 

 
 

Add:
 

 
 

 
 

 
 

Conversion of Class B to Class A common shares outstanding
23,709

 

 
23,709

 

Restricted stock and performance shares
745

 

 
756

 

Number of shares used in per share computations (in thousands)
157,039

 
23,709

 
156,773

 
23,709

Diluted earnings per share
$
0.31

 
$
0.31

 
$
0.26

 
$
0.26




19


9. RECENT ACCOUNTING PRONOUNCEMENTS
 
Adoption of New Accounting Pronouncements

In March 2016, the FASB issued ASU 2016-07, Investments – Equity Method and Joint Ventures (Topic 323). The purpose of ASU 2016-07 is to eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment was held. ASU 2016-07 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years and early adoption is permitted. The Company's adoption of ASU 2016-07 during the quarter ended March 31, 2017 had no impact on the Company's consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which relates to the accounting for employee share-based payments. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years and early adoption is permitted. The Company's adoption of ASU 2016-09 during the quarter ended March 31, 2017 had the impact of reducing income tax expense by approximately $1.2 million pertaining to excess tax benefits related to vesting of 491,084 restricted stock awards and to a lesser extent, dividends paid on restricted stock during the quarter. Historically, such excess tax benefits would have been recorded as a component of additional paid-in capital.

In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control, which requires when assessing which party is the primary beneficiary in a VIE, the decision maker considers interests held by entities under common control on a proportionate basis instead of treating those interests as if they were that of the decision maker itself, as current U.S. GAAP requires.  ASU 2016-17 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years and early adoption is permitted. The Company's adoption of ASU 2016-17 during the quarter ended March 31, 2017 had no impact on the Company's consolidated financial statements and related disclosures.

Recently Issued FASB Accounting Standard Codification Updates

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The standard permits the use of either the retrospective or modified retrospective transition method. ASU 2014-09 was originally effective for annual and interim reporting periods beginning after December 15, 2016. However, the standard was deferred by ASU 2015-14, issued by the FASB in August 2015, and is now effective for fiscal years beginning on or after December 15, 2017, including interim reporting periods within that reporting period, with early adoption permitted as of the original effective date. The Company believes that the adoption of ASU 2014-09 will primarily impact its accounting for its (i) loyalty program, (ii) gift cards and bulk tickets, (iii) customer incentives and (iv) amounts recorded as deferred revenue and the method of amortization for advanced payments received in connection with the 2007 National CineMedia ESA modification and subsequent receipts of common units of National CineMedia pursuant to the provisions of the Common Unit Adjustment Agreement, each as described in Note 2—"Investments." The Company has selected the modified retrospective method for adoption of ASU 2014-09. Under this method, we will recognize the cumulative effect of the changes in retained earnings at the date of adoption, but will not restate prior periods. The Company is continuing to further evaluate the full impact that ASU 2014-09 will have on its consolidated financial statements and related disclosures. To that end, the Company has conducted initial analyses, developed project management relative to the process of adopting ASU 2014-09, and is currently completing detailed contract reviews to determine necessary adjustments to existing accounting policies and to support an evaluation of the standard’s impact on the Company’s consolidated results of operations and financial condition.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the

20


financial statements, with certain practical expedients available. The Company is evaluating the impact that ASU 2016-02 will have on its consolidated financial statements and related disclosures and believes that the significance of its future minimum rental payments will result in a material increase in ROU assets and lease liabilities.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenues Gross versus Net). The purpose of ASU 2016-08 is to clarify the implementation of revenue recognition guidance related to principal versus agent considerations. ASU 2016-08 is effective for fiscal years beginning after December 15, 2017, including interim periods within that year, concurrent with ASU 2014-09. Early adoption is permitted. The Company is evaluating the impact that ASU 2016-08 will have on its consolidated financial statements and related disclosures.

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The purpose of ASU 2016-10 is to provide more detailed guidance in the following key areas: identifying performance obligations and licenses of intellectual property. ASU 2016-10 is effective for fiscal years beginning after December 15, 2017, including interim periods within that year, concurrent with ASU 2014-09. Early adoption is permitted. The Company is evaluating the impact that ASU 2016-10 will have on its consolidated financial statements and related disclosures.

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The purpose of ASU 2016-12 is to address certain narrow aspects of ASC Topic 606 including assessing collectability, presentation of sales and other similar taxes, noncash considerations, contract modifications and completed contracts at transition. ASU 2016-12 is effective for fiscal years beginning after December 15, 2017, including interim periods within that year, concurrent with ASU 2014-09. Early adoption is permitted. The Company is evaluating the impact that ASU 2016-12 will have on its consolidated financial statements and related disclosures.
    
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The purpose of ASU 2016-15 is to reduce the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within that year. The Company is evaluating the impact that ASU 2016-15 will have on its consolidated financial statements and related disclosures.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which requires that an entity recognize the income tax consequences of intra-entity transfers of assets other than inventory at the time of the transfer instead of deferring the tax consequences until the asset has been sold to an outside party, as current U.S. GAAP requires. ASU 2016-16 is effective for annual periods, and interim periods therein, beginning after December 15, 2017. Early application is permitted in any interim or annual period. The Company is evaluating the impact that ASU 2016-16 will have on its consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The purpose of ASU 2017-01 is to clarify the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within that year. The amendments in ASU 2017-01 should be applied prospectively on or after the effective date. Early adoption is permitted. The Company is evaluating the impact that ASU 2017-01 will have on its consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The purpose of ASU 2017-04 is to simplify the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment should be applied on a prospective basis. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, including interim periods within that year. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is evaluating the impact that ASU 2017-04 will have on its consolidated financial statements and related disclosures.  

10. DERIVATIVE INSTRUMENTS
    
Regal Cinemas has entered into hedging relationships via interest rate swap agreements to hedge against interest rate exposure of its variable rate debt obligations under Regal Cinemas' Amended Senior Credit Facility. Certain of these interest rate swaps qualify for cash flow hedge accounting treatment, and as such, the change in the fair values of the interest rate swaps

21


is recorded on the Company's consolidated balance sheet as an asset or liability with the effective portion of the interest rate swaps' gains or losses reported as a component of other comprehensive income and the ineffective portion reported in earnings. As interest expense is accrued on the debt obligation, amounts in accumulated other comprehensive income/loss related to the interest rate swaps will be reclassified into earnings. In the event that an interest rate swap is terminated or de-designated prior to maturity, gains or losses accumulated in other comprehensive income or loss remain deferred and are reclassified into earnings in the periods during which the hedged forecasted transaction affects earnings. See Note 11—"Fair Value of Financial Instruments" for discussion of the Company’s interest rate swaps’ fair value estimation methods and assumptions.
        
Below is a summary of Regal Cinemas' current interest rate swap agreement as of March 31, 2017:
Nominal Amount
 
Effective Date
 
Fixed Rate
 
Receive Rate
 
Expiration Date
Designated as Cash Flow Hedge
Gross Fair Value at March 31, 2017
Balance Sheet Location
$200.0 million
 
June 30, 2015
 
2.165%
 
1-month LIBOR*
 
June 30, 2018
Yes
$(2.1) million
See Note 11
________________________________
* Subject to a 0.75% LIBOR floor.

On April 2, 2015, Regal Cinemas amended two of its existing interest rate swap agreements originally designated as cash flow hedges on $350.0 million of variable rate debt obligations. Since the terms of the interest rate swaps designated in the original cash flow hedge relationships changed with these amendments, we de-designated the original hedge relationships and re-designated the amended interest rate swaps in new cash flow hedge relationships as of the amendment date of April 2, 2015. On December 31, 2016, one of these interest rate swap agreements designated to hedge $150.0 million of variable rate debt obligations expired.
  
The following tables show the effective portion of gains and losses on derivative instruments designated and qualifying in cash flow hedges recognized in other comprehensive income (loss), and amounts reclassified from accumulated other comprehensive loss to interest expense for the periods indicated (in millions):

 
 
After-tax Gain (Loss) Recognized in Other Comprehensive Income (Loss) (Effective Portion)
 
 
Quarter Ended
March 31, 2017
Quarter Ended
March 31, 2016
Derivatives designated as cash flow hedges:
 
 
 
Interest rate swaps
 
$
(0.2
)
$
(1.3
)

 
 
Pre-tax Amounts Reclassified from Accumulated Other Comprehensive Loss into Interest Expense, net
 
 
Quarter Ended
March 31, 2017
Quarter Ended
March 31, 2016
Derivatives designated as cash flow hedges:
 
 
 
Interest rate swaps(1)
 
$
1.0

$
1.7

________________________________

(1)
We estimate that $0.6 million of deferred pre-tax losses attributable to these interest rate swaps will be reclassified into earnings as interest expense during the next 12 months as the underlying hedged transactions occur.
    
The changes in accumulated other comprehensive loss, net associated with the Company’s interest rate swap arrangements for the quarters ended March 31, 2017 and March 31, 2016 were as follows (in millions):

22


 
 
Interest Rate Swaps
 
 
Quarter Ended
March 31, 2017
 
Quarter Ended
March 31, 2016
Accumulated other comprehensive loss, net, beginning of period
 
$
(1.4
)
 
$
(2.7
)
Change in fair value of interest rate swap transactions (effective portion), net of taxes of $0.1 and $0.9, respectively
 
(0.2
)
 
(1.3
)
Amounts reclassified from accumulated other comprehensive loss to interest expense, net of taxes of $0.4 and $0.7, respectively
 
0.6

 
1.0

Accumulated other comprehensive loss, net, end of period
 
$
(1.0
)
 
$
(3.0
)
    
The following table sets forth the effect of our interest rate swap arrangements on our unaudited condensed statements of income for the quarters ended March 31, 2017 and March 31, 2016 (in millions):
 
 
Pre-tax Gain (Loss) Recognized in Interest Expense, net
 
 
Quarter Ended
March 31, 2017
Quarter Ended
March 31, 2016
Derivatives designated as cash flow hedges (ineffective portion):
 
 
 
Interest rate swaps(1)
 
$
0.4

$
0.8

 ________________________________

(1)
Amounts represent the ineffective portion of the change in fair value of the hedging derivatives and are recorded as a reduction of interest expense in the consolidated financial statements. On December 31, 2016, one of these interest rate swap agreements designated to hedge $150.0 million of variable rate debt obligations expired.

11. FAIR VALUE OF FINANCIAL INSTRUMENTS
 
Fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the entity transacts. The inputs used to develop these fair value measurements are established in a hierarchy, which ranks the quality and reliability of the information used to determine fair value. The fair value classification is based on levels of inputs. Assets and liabilities that are carried at fair value are classified and disclosed in one of the following categories described in ASC Topic 820, Fair Value Measurements and Disclosures:
 
Level 1 Inputs:                               Quoted market prices in active markets for identical assets or liabilities.
 
Level 2 Inputs:                               Observable market based inputs or unobservable inputs that are corroborated by market data.
 
Level 3 Inputs:                               Unobservable inputs that are not corroborated by market data.


The following tables summarize the fair value hierarchy of the Company’s financial assets and liabilities carried at fair value on a recurring basis as of March 31, 2017 and December 31, 2016:
 
 
 
 
Fair Value Measurements at March 31, 2017 
 
Balance Sheet Location
Total Carrying
Value at
March 31, 2017
 
Quoted prices in
active market
(Level 1)
 
Significant other
observable inputs
(Level 2)
 
Significant
unobservable inputs
(Level 3)
 
 
(in millions)
Liabilities:
 
 

 
 

 
 

 
 

Interest rate swap designated as cash flow hedge(1)
Accrued Expenses
$
1.8

 
$

 
$
1.8

 
$

Interest rate swap designated as cash flow hedge(1)
Other Non-Current Liabilities
$
0.3

 
$

 
$
0.3

 
$

Total liabilities at fair value
 
$
2.1

 
$

 
$
2.1

 
$



23



 
 
Total Carrying
Value at
December 31, 2016
 
Fair Value Measurements at December 31, 2016
 
Balance Sheet Location
Quoted prices in
active market
(Level 1)
 
Significant other
observable inputs
(Level 2)
 
Significant
unobservable inputs
(Level 3)
 
 
 
 
(in millions)
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Interest rate swap designated as cash flow hedge(1)
Accrued Expenses
$
2.3

 
$

 
$
2.3

 
$

Interest rate swap designated as cash flow hedge(1)
Other Non-Current Liabilities
$
0.7

 
$

 
$
0.7

 
$

Total liabilities at fair value
 
$
3.0

 
$

 
$
3.0

 
$

 ________________________________
(1)
The fair value of the Company’s interest rate swaps described in Note 10—"Derivative Instruments" is based on Level 2 inputs, which include observable inputs such as dealer quoted prices for similar assets or liabilities, and represents the estimated amount Regal Cinemas would receive or pay to terminate the agreements taking into consideration various factors, including current interest rates, credit risk and counterparty credit risk. The counterparties to the Company’s interest rate swaps are major financial institutions. The Company evaluates the bond ratings of the financial institutions and believes that credit risk is at an acceptably low level.
 

There were no changes in valuation techniques during the period.  There were no transfers in or out of Level 3 during the quarters ended March 31, 2017 and March 31, 2016, respectively.
 
In addition, the Company is required to disclose the fair value of financial instruments that are not recognized in the statement of financial position for which it is practicable to estimate that value. The methods and assumptions used to estimate the fair value of each class of financial instrument are as follows:
 
Cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities:
 
The carrying amounts approximate fair value because of the short maturity of these instruments.
 
Long-Lived Assets, Intangible Assets and Other Investments
 
As further described in Note 2 to the 2016 Audited Consolidated Financial Statements and incorporated by reference herein, the Company regularly reviews long-lived assets (primarily property and equipment), intangible assets and investments in non-consolidated entities, for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. When the estimated fair value is determined to be lower than the carrying value of the asset, an impairment charge is recorded to write the asset down to its estimated fair value.
 
The Company’s analysis relative to long-lived assets resulted in the recording of impairment charges of $2.1 million and $2.2 million, respectively, for the quarters ended March 31, 2017 and March 31, 2016.  The long-lived asset impairment charges recorded were specific to theatres that were directly and individually impacted by increased competition, adverse changes in market demographics or adverse changes in the development or the conditions of the areas surrounding the theatres we deemed other than temporary.
 
The Company did not record an impairment of any intangible assets or investments in non-consolidated subsidiaries accounted for under the equity method for the quarters ended March 31, 2017 and March 31, 2016.
 
Long term obligations, excluding capital lease obligations, lease financing arrangements and other:
 
The fair value of the Amended Senior Credit Facility described in Note 3—"Debt Obligations," which consists of the New Term Loans and the Revolving Facility, is estimated based on quoted prices (Level 2 inputs as described in ASC Topic 820) as of March 31, 2017 and December 31, 2016. The associated interest rates are based on floating rates identified by reference to market rates and are assumed to approximate fair value. The fair values of the 53/4% Senior Notes Due 2022, the 53/4% Senior Notes Due 2025 and the 53/4% Senior Notes Due 2023 were estimated based on quoted prices (Level 1 inputs as described in ASC Topic 820) for these issuances as of March 31, 2017 and December 31, 2016. The aggregate carrying values and fair values of long-term debt at March 31, 2017 and December 31, 2016 consist of the following:

24


        
 
March 31, 2017
 
December 31, 2016
 
(in millions)
Carrying value
$
2,227.3

 
$
2,229.7

Fair value
$
2,291.8

 
$
2,287.1


12. ACCUMULATED OTHER COMPREHENSIVE LOSS, NET
 
The following tables present for the quarters ended March 31, 2017 and March 31, 2016, respectively, the change in accumulated other comprehensive loss, net of tax, by component (in millions):
 
Interest rate swaps
 
Equity method investee interest rate swaps
 
Total
Balance as of December 31, 2016
$
(1.4
)
 
$
0.1

 
$
(1.3
)
Other comprehensive income (loss), net of tax
 
 
 
 
 
Change in fair value of interest rate swap transactions
(0.2
)
 

 
(0.2
)
Amounts reclassified to net income from interest rate swaps
0.6

 

 
0.6

Change in fair value of equity method investee interest rate swaps

 
0.1

 
0.1

Total other comprehensive income (loss), net of tax
0.4

 
0.1

 
0.5

Balance as of March 31, 2017
$
(1.0
)
 
$
0.2

 
$
(0.8
)

 
Interest rate swaps
 
Available for sale securities
 
Equity method investee interest rate swaps
 
Total
Balance as of December 31, 2015
$
(2.7
)
 
$
0.5

 
$
0.1

 
$
(2.1
)
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Change in fair value of interest rate swap transactions
(1.3
)
 

 

 
(1.3
)
Amounts reclassified to net income from interest rate swaps
1.0

 

 

 
1.0

Reclassification adjustment for gain on sale of available for sale securities recognized in net income

 
(0.5
)
 

 
(0.5
)
Change in fair value of equity method investee interest rate swaps

 

 
(0.6
)
 
(0.6
)
Total other comprehensive income (loss), net of tax
(0.3
)
 
(0.5
)
 
(0.6
)
 
(1.4
)
Balance as of March 31, 2016
$
(3.0
)
 
$

 
$
(0.5
)
 
$
(3.5
)

13. SUBSEQUENT EVENTS

Acquisition of Two Theatres and a Parcel of Land

On April 13, 2017, the Company completed the acquisition of two theatres with 41 screens located in Houston, Texas from Santikos Theaters, Inc. for an aggregate net cash purchase price, before post-closing adjustments, of $30.0 million. In addition, on April 18, 2017, the Company purchased a parcel of land located in Montgomery County, Texas from an entity affiliated with Santikos Theaters, Inc. for a net cash purchase price, before post-closing adjustments, of approximately $7.3 million. The results of operations of the acquired theatres will be included in the Company’s consolidated financial statements for periods subsequent to the acquisition date.

Declaration of Quarterly Dividend

On April 26, 2017, the Company declared a cash dividend of $0.22 per share on each share of the Company’s Class A and Class B common stock (including outstanding restricted stock), payable on June 15, 2017, to stockholders of record on June 5, 2017.

25



Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Some of the information in this quarterly report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts included in this Form 10-Q, including, without limitation, certain statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, may constitute forward-looking statements. In some cases you can identify these “forward-looking statements” by words like “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of those words and other comparable words. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those indicated in these statements as a result of certain factors as more fully discussed under the heading “Risk Factors” contained in our annual report on Form 10-K filed on February 27, 2017 with the Commission (File No. 001-31315) for the Company’s fiscal year ended December 31, 2016 (our "Form 10-K"). The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included herein.

Overview and Basis of Presentation
 
We conduct our operations through our wholly owned subsidiaries. We operate one of the largest and most geographically diverse theatre circuits in the United States, consisting of 7,262 screens in 559 theatres in 43 states along with Guam, Saipan, American Samoa and the District of Columbia as of March 31, 2017. We believe the size, reach and quality of our theatre circuit provide an exceptional platform to realize economies of scale from our theatre operations. The Company manages its business under one reportable segment: theatre exhibition operations.

We generate revenues primarily from admissions and concession sales. Additional revenues are generated by our vendor marketing programs, our gift card and bulk ticket programs, various other activities in our theatres and through our relationship with National CineMedia, which focuses on in-theatre advertising. Film rental costs depend primarily on the popularity and box office revenues of a film, and such film rental costs generally increase as the admissions revenues generated by a film increase. Because we purchase certain concession items, such as fountain drinks and popcorn, in bulk and not pre-packaged for individual servings, we are able to maximize our margins by negotiating volume discounts. Other operating expenses consist primarily of theatre labor and occupancy costs.

The timing of movie releases can have a significant effect on our results of operations, and the results of one fiscal quarter are not necessarily indicative of results for the next fiscal quarter or any other fiscal quarter. The unexpected emergence of a hit film during other periods can alter the traditional trend. The seasonality of motion picture exhibition, however, has become less pronounced as motion picture studios are releasing motion pictures somewhat more evenly throughout the year. The Company does not believe that inflation has had a material impact on its financial position or results of operations.
 
For a summary of industry trends as well as other risks and uncertainties relevant to the Company, see "Business—Industry Overview and Trends" and "Risk Factors" contained in our Form 10-K and incorporated herein by reference and "Results of Operations" below.

Critical Accounting Estimates
 
For a discussion of accounting policies that we consider critical to our business operations and the understanding of our results of operations and affect the more significant judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements, please refer to Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates" contained in our Form 10-K and incorporated by reference herein.  As of March 31, 2017, there were no significant changes in our critical accounting policies or estimation procedures.


26


Significant Events
 
For a discussion of other significant operating, financing and investing transactions which have occurred through December 31, 2016, please refer to "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources" included in Part II, Item 7 of our Form 10-K and incorporated herein by reference.
 
Our business strategy is predicated on our ability to allocate capital effectively to enhance value for our stockholders. This strategy focuses on enhancing our position in the motion picture exhibition industry by capitalizing on prudent industry consolidation and partnership opportunities, managing, expanding and upgrading our existing asset base with new technologies and customer amenities and realizing selective growth opportunities through new theatre construction. Our business strategy should enable us to continue to produce the free cash flow necessary to maintain a prudent allocation of our capital among dividend payments, debt service and repayment and investment in our theatre assets, all to provide meaningful value to our stockholders. During the quarter ended March 31, 2017 (the "Q1 2017 Period"), we continued to make progress with respect to our business strategy as follows:
 
We demonstrated our commitment to providing incremental value to our stockholders.  Total cash dividends paid to our stockholders during the Q1 2017 Period totaled approximately $35.3 million.

We continued to embrace innovative concepts that generate incremental revenue and cash flows for the Company and deliver a premium movie-going experience for our customers on several complementary fronts:

First, we continued to improve customer amenities, primarily through the installation of luxury reclining seats. With respect to our luxury reclining seating initiative, as of March 31, 2017, we offered luxury reclining seating in 1,500 auditoriums at 123 theatre locations. We expect to install luxury reclining seating in approximately 40-45 locations during 2017 and expect to outfit approximately 45% of the total screens in our circuit by the end of 2019. The costs of these conversions in some cases are partially covered by investments from our theatre landlords.

Second, to address consumer trends and customer preferences, we have continued to expand our menu of food and alcoholic beverage products to an increasing number of attendees. The enhancement of our food and alcoholic beverage offerings has had a positive effect on our operating results, and we expect to continue to invest in such offerings in our theatres. As of March 31, 2017, we offered an expanded menu of food in 231 locations (reaching 55% of our Q1 2017 Period attendees) and alcoholic beverages in 156 locations (reaching 31% of our Q1 2017 Period attendees), and we expect to offer an expanded menu of food in approximately 270 locations and alcoholic beverages in approximately 215 locations by the end of 2017.

Third, we continued to implement various customer engagement initiatives aimed at delivering a premium movie-going experience for our customers in order to better compete for patrons and build brand loyalty. For example, we maintain a frequent moviegoer loyalty program, named the Regal Crown Club®, to actively engage our core customers. Regal Crown Club® members are eligible for specified awards, such as concession items, based on purchases made at our theatres. During 2016, we completed the national rollout of the new Regal Crown Club®. Members of the enhanced program can earn unlimited credits and can redeem such credits for movie tickets, concession items and movie memorabilia at the theatre or in an online reward center where members can select the rewards of their choice. We believe these changes allow us to offer more relevant offers to our members and increase customer engagement in the program. As of March 31, 2017, we had approximately 12 million active members in the Regal Crown Club®, making it the largest loyalty program in our industry.

In addition, we continued to develop and enhance other customer engagement initiatives such as mobile ticketing applications, internet ticketing, social media and other marketing initiatives. For example, we have improved the customer experience by expanding our ability to sell tickets remotely via our mobile ticketing application, which was officially launched in the Q1 2017 Period, and through our internet ticketing partners such as Fandango.com and Atom Tickets. Customers can choose their preferred ticketing option, which in many cases means they can pre-purchase tickets, scan their mobile device and proceed directly to their reserved seat without waiting in line. In addition to providing customers the ability to pre-purchase tickets, our mobile ticketing application provides customers the ability to find films, movie information, showtimes, track Regal Crown Club® credits and receive special offers from Regal. Finally, our newest ticketing partner, Atom Tickets, provides our patrons the ability to bypass

27


concession stand lines by pre-purchasing concession items via their mobile device. We believe these technologies provide a platform for delivering a quality customer experience and will drive incremental revenues and cash flows in a cost-effective manner.

We continued to actively manage our asset base during the Q1 2017 Period by opening two new theatres with 26 screens and closing four underperforming theatres with 31 screens, ending the Q1 2017 Period with 559 theatres and 7,262 screens.

We believe the continued rollout of premium amenities such as luxury reclining seating, a wider array of food and alcoholic beverage offerings allows us to deliver a premium movie-going experience for a majority of our customers. We believe this strategy will enable us to better compete for patrons and build brand loyalty, which will provide us the opportunity for incremental revenue and cash flows.

Recent Developments

On April 13, 2017, the Company completed the acquisition of two theatres with 41 screens located in Houston, Texas from Santikos Theaters, Inc. for an aggregate net cash purchase price, before post-closing adjustments, of $30.0 million. In addition, on April 18, 2017, the Company purchased a parcel of land located in Montgomery County, Texas from an entity affiliated with Santikos Theaters, Inc. for a net cash purchase price, before post-closing adjustments, of approximately $7.3 million. The results of operations of the acquired theatres will be included in the Company’s consolidated financial statements for periods subsequent to the acquisition date.

On April 26, 2017, the Company declared a cash dividend of $0.22 per share on each share of the Company’s Class A and Class B common stock (including outstanding restricted stock), payable on June 15, 2017, to stockholders of record on June 5, 2017.
    
Results of Operations

Based on our review of industry sources, North American box office revenues for the time period that corresponds to Regal’s first quarter of 2017 were estimated to have increased by approximately 3 to 4 percent per screen in comparison to the first quarter of 2016. The industry’s box office results for the first quarter of 2017 were positively impacted by strong attendance from the breadth and commercial success of the overall film slate during the quarter.
  
The following table sets forth the percentage of total revenues represented by certain items included in our unaudited condensed consolidated statements of income for the Q1 2017 Period and the quarter ended March 31, 2016 (the "Q1 2016 Period") (dollars in millions, except average ticket prices and average concessions per patron): 

28


 
Q1 2017 Period
 
Q1 2016 Period
 
$
 
% of
Revenue
 
$
 
% of
Revenue
Revenues:
 

 
 

 
 

 
 

Admissions
$
533.2

 
64.9
%
 
$
515.7

 
65.5
%
Concessions
239.5

 
29.2

 
230.1

 
29.2

Other operating revenues
48.5

 
5.9

 
41.3

 
5.3

Total revenues
821.2

 
100.0

 
787.1

 
100.0

Operating expenses:
 

 
 

 
 

 
 

Film rental and advertising costs(1)
283.1

 
53.1

 
277.5

 
53.8

Cost of concessions(2)
30.8

 
12.9

 
28.8

 
12.5

Rent expense(3)
106.2

 
12.9

 
107.5

 
13.7

Other operating expenses(3)
215.7

 
26.3

 
211.5

 
26.9

General and administrative expenses (including share-based compensation expense of $2.2 and $1.8 for the Q1 2017 Period and the Q1 2016 Period, respectively)(3)
22.3

 
2.7

 
21.2

 
2.7

Depreciation and amortization(3)
60.9

 
7.4

 
55.7

 
7.1

Net loss on disposal and impairment of operating assets(3)
2.7

 
0.3

 
4.3

 
0.5

Total operating expenses(3)
721.7

 
87.9

 
706.5

 
89.8

Income from operations(3)
99.5

 
12.1

 
80.6

 
10.2

Interest expense, net(3)
30.7

 
3.7

 
32.5

 
4.1

Earnings recognized from NCM(3)
(2.0
)
 
0.2

 
(12.3
)
 
1.6

Equity in income of non-consolidated entities and other, net(3)
(8.3
)
 
1.0

 
(10.0
)
 
1.3

Provision for income taxes(3)
30.7

 
3.7

 
29.7

 
3.8

Net income attributable to controlling interest(3)
$
48.4

 
5.9

 
$
40.7

 
5.2

Attendance (in thousands)
53,355

 
*

 
53,297

 
*

Average ticket price(4)
$
9.99

 
*

 
$
9.68

 
*

Average concessions per patron(5)
$
4.49

 
*

 
$
4.32

 
*

_______________________________________________________________________
*            Not meaningful
 
(1)
Percentage of revenues calculated as a percentage of admissions revenues.
(2)
Percentage of revenues calculated as a percentage of concessions revenues.
(3)
Percentage of revenues calculated as a percentage of total revenues.
(4)
Calculated as admissions revenues/attendance.
(5)
Calculated as concessions revenues/attendance.
 
Admissions

Total admissions revenues increased $17.5 million, or 3.4%, during the Q1 2017 Period to $533.2 million, from $515.7 million in the Q1 2016 Period. A 3.2% increase in average ticket prices (approximately $16.5 million of total admissions revenues), and a 0.1% increase in attendance (approximately $1.0 million of total admissions revenues) led to the increase in the Q1 2017 Period admissions revenues. The 3.2% average ticket price increase was due to selective price increases identified during our ongoing periodic pricing reviews (particularly at locations featuring luxury reclining seats). The increase in attendance during the Q1 2017 Period was primarily a result of strong attendance from the breadth and commercial success of the overall film slate during the period. Based on our review of certain industry sources, the increase in our admissions revenues on a per screen basis was higher than the industry’s per screen results for the Q1 2017 Period as compared to the Q1 2016 Period. We are optimistic that the industry's investment in new theatres and customer amenities and other recent industry initiatives and trends will drive continued growth and strength for the domestic motion picture industry. To that end, our market share may be positively or negatively impacted by such initiatives and trends during any given quarter.


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Concessions

Total concessions revenues increased $9.4 million, or 4.1%, to $239.5 million in the Q1 2017 Period, from $230.1 million in the Q1 2016 Period. Average concessions revenues per patron during the Q1 2017 Period increased 3.9%, to $4.49, from $4.32 in the Q1 2016 Period. The 3.9% increase in average concessions revenues per patron (approximately $9.1 million of total concessions revenues), coupled with the aforementioned 0.1% increase in attendance (approximately $0.3 million of total concessions revenues) led to the overall increase in the Q1 2017 Period concessions revenues. The increase in average concessions revenues per patron for the Q1 2017 Period was primarily attributable to selective price increases and the continued rollout of our expanded food and alcohol menu.

Other Operating Revenues
 
Other operating revenues increased $7.2 million, or 17.4%, to $48.5 million during the Q1 2017 Period, from $41.3 million in the Q1 2016 Period. Included in other operating revenues are revenues from our vendor marketing programs, other theatre revenues (consisting primarily of internet ticketing surcharges, theatre rentals and arcade games), theatre access fees paid by National CineMedia (net of payments for on-screen advertising time provided to our beverage concessionaire) and revenues related to our gift card and bulk ticket programs. The increase in other operating revenues during the Q1 2017 Period was due to an increase in revenues from our vendor marketing programs (approximately $3.8 million), an increase in internet ticketing surcharges (approximately $2.1 million), and an increase in revenues related to our gift card and bulk ticket programs (approximately $0.6 million).

Film Rental and Advertising Costs
 
Film rental and advertising costs as a percentage of admissions revenues for the Q1 2017 Period decreased to 53.1% from 53.8% in the Q1 2016 Period. The decrease in film rental and advertising costs as a percentage of box office revenues during the Q1 2017 Period was primarily attributable to the breadth of the overall film slate during the period and higher film costs associated with the success of the top tier films exhibited during the Q1 2016 Period.

Cost of Concessions
 
Cost of concessions increased $2.0 million, or 6.9%, to $30.8 million during the Q1 2017 Period, from $28.8 million in the Q1 2016 Period. Cost of concessions as a percentage of concessions revenues for the Q1 2017 Period was approximately 12.9% compared to 12.5% in the Q1 2016 Period. The increase in cost of concessions as a percentage of concessions revenues during the Q1 2017 Period was primarily related to increases in packaged good and raw material costs during the period, coupled with the amount of vendor marketing revenues recorded as a reduction of cost of concessions.

Rent Expense
 
During the Q1 2017 Period, rent expense totaled $106.2 million, a decrease of $1.3 million, or 1.2%, from $107.5 million in the Q1 2016 Period. Rent expense during the Q1 2017 Period was primarily impacted by the closure of 12 theatres with 112 screens subsequent to the end of the Q1 2016 Period, partially offset by an increase in contingent rent associated with the increase in total revenues and incremental rent from the opening of four new theatres with 45 screens subsequent to the end of the Q1 2016 Period.
 
Other Operating Expenses
 
During the Q1 2017 Period, other operating expenses increased $4.2 million, or 2.0%, to $215.7 million, from $211.5 million in the Q1 2016 Period. The increase in other operating expenses during the Q1 2017 Period was primarily due to an increase in theatre-level payroll and benefit costs during such periods (approximately $2.8 million), incremental expenses associated with higher alternative content revenues (approximately $2.4 million) and increases in banking and security costs (approximately $1.0 million), partially offset by decreased costs (approximately $1.9 million) associated with lower premium format film revenues during the Q1 2017 Period.

General and Administrative Expenses

General and administrative expenses increased $1.1 million, or 5.2%, to $22.3 million during the Q1 2017 Period, from $21.2 million in the Q1 2016 Period. During the Q1 2017 Period, the increase in general and administrative expenses was primarily attributable to slightly higher corporate payroll costs and share-based compensation expense during the period.


30


Depreciation and Amortization
 
During the Q1 2017 Period, depreciation and amortization expense increased $5.2 million, or 9.3%, to $60.9 million, from $55.7 million in the Q1 2016 Period. The increase in depreciation and amortization expense during the Q1 2017 Period was primarily related to incremental depreciation and amortization expense associated with increased capital expenditures related to the installation of luxury reclining seats, the opening of four new theatres with 45 screens subsequent to the end of the Q1 2016 Period and accelerated depreciation on certain identified assets, partially offset by the closure of 12 theatres with 112 screens subsequent to the end of the Q1 2016 Period.
 
Interest Expense, net
 
During the Q1 2017 Period, net interest expense decreased $1.8 million, or 5.5%, to $30.7 million, from $32.5 million in the Q1 2016 Period. The decrease in net interest expense during the Q1 2017 Period was primarily due to the impact of a lower effective interest rate under the Amended Senior Credit Facility during the Q1 2017 Period.

Earnings Recognized from NCM
 
Earnings recognized from NCM decreased $10.3 million, or 83.7%, to $2.0 million in the Q1 2017 Period, from $12.3 million in the Q1 2016 Period. The decrease in earnings recognized from National CineMedia during the Q1 2017 Period was primarily attributable to lower equity income (including a $5.6 million change in interest loss as described further in Note 2—"Investments") from National CineMedia and the timing of cash distributions from National CineMedia during the Q1 2017 Period as compared to that of the Q1 2016 Period.

Income Taxes
 
The provision for income taxes of $30.7 million and $29.7 million for the Q1 2017 Period and the Q1 2016 Period, respectively, reflect effective tax rates of approximately 38.8% and 42.2%, respectively. The decrease in the effective tax rate for the Q1 2017 Period is primarily attributable to the Company’s adoption of ASU 2016-09 during the Q1 2017 Period (described further in Note 9—"Recent Accounting Pronouncements"), an increase in uncertain state tax positions during the Q1 2016 Period, and to a lesser extent, the settlement of state tax positions during the Q1 2016 Period. The effective tax rates for all periods presented also reflect the impact of certain non-deductible expenses and income tax credits.
 

Liquidity and Capital Resources
 
On a consolidated basis, we expect our primary uses of cash to be for operating expenses, capital expenditures, investments, acquisitions, general corporate purposes related to corporate operations, debt service and the Company's dividend payments. The principal sources of liquidity are cash generated from operations, cash on hand and borrowings under the Amended Senior Credit Facility described below. Under the terms of the Amended Senior Credit Facility, Regal Cinemas is restricted as to how much it can advance or distribute to Regal, its indirect parent. Since Regal is a holding company with no significant assets other than the stock of its subsidiaries, this restriction could impact Regal's ability to effect future debt or dividend payments, pay corporate expenses, repurchase or retire for cash its 53/4% Senior Notes Due 2022, its 53/4% Senior Notes Due 2023 and its 53/4% Senior Notes Due 2025. In addition, as described further below, the indentures under which the 53/4% Senior Notes Due 2022, the 53/4% Senior Notes Due 2023, and the 53/4% Senior Notes Due 2025 are issued limit the Company's (and its restricted subsidiaries') ability to, among other things, incur additional indebtedness, pay dividends on or make other distributions in respect of its capital stock, purchase or redeem capital stock, make loans or advances to its subsidiaries, or purchase, redeem or otherwise acquire or retire certain subordinated obligations.

Operating Activities
 
Our revenues are generated principally through admissions and concessions sales with proceeds received in cash or via credit cards. Our operating expenses are primarily related to film and advertising costs, rent and occupancy and payroll. Film costs are ordinarily paid to distributors within 30 days following receipt of admissions revenues and the cost of the Company’s concessions are generally paid to vendors approximately 30 to 35 days from purchase. Our current liabilities include items that will become due within 12 months. In addition, from time to time, we use cash from operations to fund dividends in excess of net income attributable to controlling interest and to fund dividends in excess of cash flows from operating activities less capital expenditures (net of proceeds from asset sales). As a result, at any given time, our balance sheet may reflect a working capital deficit.
 

31


Net cash flows provided by operating activities totaled approximately $249.6 million and $180.8 million for the Q1 2017 Period and the Q1 2016 Period, respectively. The increase in net cash flows generated by operating activities for the Q1 2017 Period as compared to the Q1 2016 Period was caused by a positive fluctuation in working capital activity (primarily related to the timing of vendor payments, including film payables, as a result of increased attendance and admissions revenues at our theatres during the latter part of the Q1 2017 Period), an increase in net income excluding non-cash items and an increase in landlord contributions related to our luxury reclining seating initiative.

Investing Activities
 
Our capital requirements have historically arisen principally in connection with acquisitions of theatres, new theatre construction, strategic partnerships, the addition of luxury amenities in select theatres, other upgrades to the Company’s theatre facilities and equipment replacement. We fund the cost of capital expenditures through internally generated cash flows, cash on hand, landlord contributions, proceeds from the disposition of assets and financing activities.

We intend to continue to grow our theatre circuit through selective expansion and acquisition opportunities. The Company has a formal and intensive review procedure for the authorization of capital projects, with the most important financial measure of acceptability for a discretionary non-maintenance capital project being whether its projected discounted cash flow return on investment meets or exceeds the Company’s internal rate of return targets. We currently expect capital expenditures (net of proceeds from asset sales and landlord contributions) for theatre development, expansion, upgrading and replacements to be in the range of approximately $130.0 million to $145.0 million in 2017, exclusive of acquisitions.

During the Q1 2017 Period, we received approximately 0.5 million newly issued common units of National CineMedia in accordance with the annual adjustment provisions of the Common Unit Adjustment Agreement. This transaction increased our ownership share in National CineMedia to approximately 27.6 million common units. On a fully diluted basis, we own a 17.9% interest in NCM, Inc. as of March 31, 2017.

Net cash flows used in investing activities totaled approximately $44.9 million and $26.9 million for the Q1 2017 Period and the Q1 2016 Period, respectively. The $18.0 million increase in cash flows used in investing activities during the Q1 2017 Period as compared to the Q1 2016 Period was primarily attributable a $13.4 million increase in capital expenditures (net of proceeds from disposals), the impact of $3.6 million in proceeds received related to the sale of RealD, Inc. common stock during the Q1 2016 Period and higher capital investments in certain non-consolidated entities during the Q1 2017 Period.

Financing Activities
 
As described further in Note 3—"Debt Obligations," on June 1, 2016, Regal Cinemas entered into a permitted secured refinancing agreement with REH, the guarantors party thereto, Credit Suisse AG and the lenders party thereto (the "June 2016 Refinancing Agreement"). Pursuant to the June 2016 Refinancing Agreement, Regal Cinemas consummated a permitted secured refinancing of the Term Facility under the Amended Senior Credit Facility, which had an aggregate principal balance of approximately $958.5 million, and in accordance therewith, received term loans in an aggregate principal amount of approximately $958.5 million with a final maturity date in April 2022. Together with other amounts provided by Regal Cinemas, proceeds of the term loans were applied to repay all of the outstanding principal and accrued and unpaid interest on the Term Facility under the Amended Senior Credit Facility. In connection with the execution of the June 2016 Refinancing Agreement, the Company recorded a loss on debt extinguishment of approximately $1.5 million during the quarter ended June 30, 2016.

On December 2, 2016, Regal Cinemas entered into a permitted secured refinancing agreement (the “December 2016 Refinancing Agreement”) with REH, the guarantors party thereto, Credit Suisse AG and the lenders party thereto. The December 2016 Refinancing Agreement further amends the Amended Senior Credit Facility, which was amended by the June 2016 Refinancing Agreement. Pursuant to the December 2016 Refinancing Agreement, Regal Cinemas consummated a permitted secured refinancing of the Term Facility, which had an aggregate principal balance of approximately $956.1 million, and in accordance therewith, the Lenders advanced term loans in an aggregate principal amount of approximately $956.1 million with a final maturity date in April 2022 (the “New Term Loans”). Together with other amounts provided by Regal Cinemas, proceeds of the New Term Loans were applied to repay all of the outstanding principal and accrued and unpaid interest on the existing term facility under the Amended Senior Credit Facility in effect immediately prior to the making of the New Term Loans. The New Term Loans amortize in equal quarterly installments in an aggregate annual amount equal to 1.0% of the original principal amount of the New Term Loans, with the balance payable on the maturity date of the New Term Loans. The December 2016 Refinancing Agreement also amends the Amended Senior Credit Facility by reducing the interest rate on the New Term Loans, by providing, at Regal Cinemas’ option, either a base rate or an adjusted LIBOR rate plus, in each case, an applicable margin. Such applicable margin will be either 1.50% in the case of base rate loans or 2.50% in the case of LIBOR

32


rate loans. The December 2016 Refinancing Agreement also provides for a 1% prepayment premium applicable in the event that Regal Cinemas enters into a refinancing or amendment of the New Term Loans on or prior to the sixth-month anniversary of the closing of the December 2016 Refinancing Agreement that, in either case, has the effect of reducing the interest rate on the New Term Loans. In connection with the execution of the December 2016 Refinancing Agreement, the Company recorded a loss on debt extinguishment of approximately $1.4 million during the quarter ended December 31, 2016.

As of March 31, 2017, we had approximately $952.3 million aggregate principal amount outstanding (net of debt discount) under the New Term Loans, $775.0 million aggregate principal amount outstanding under the 53/4% Senior Notes Due 2022, $250.0 million aggregate principal amount outstanding under the 53/4% Senior Notes Due 2023, and $250.0 million aggregate principal amount outstanding under the 53/4% Senior Notes Due 2025. As of March 31, 2017, we had approximately $2.7 million outstanding in letters of credit, leaving approximately $82.3 million available for drawing under the Revolving Facility. As of March 31, 2017, we are in full compliance with all agreements, including all related covenants, governing our outstanding debt obligations.
 
During the Q1 2017 Period, Regal paid one quarterly cash dividend of $0.22 per share on each outstanding share of the Company's Class A and Class B common stock, or approximately $34.6 million in the aggregate. In addition, in connection with the conversion of 205,677 performance shares during the quarter ended March 31, 2017, the Company paid cumulative cash dividends of $3.64 (representing the sum of all cash dividends paid from January 8, 2014 through January 8, 2017) on each performance share converted, totaling approximately $0.7 million. Finally, on April 26, 2017, the Company declared a cash dividend of $0.22 per share on each share of the Company’s Class A and Class B common stock (including outstanding restricted stock), payable on June 15, 2017, to stockholders of record on June 5, 2017. Declared dividends have been or will be funded through cash flow from operations and available cash on hand. We, at the discretion of our Board of Directors and subject to applicable law, anticipate paying regular quarterly dividends on our Class A and Class B common stock for the foreseeable future. The amount, if any, of the dividends to be paid in the future will depend upon our then available cash, anticipated cash needs, overall financial condition, loan agreement restrictions, future prospects for earnings and cash flows, as well as other relevant factors.

Net cash flows used in financing activities were approximately $42.4 million and $45.5 million for the Q1 2017 Period and the Q1 2016 Period, respectively. The $3.1 million net decrease in cash flows used in financing activities during the Q1 2017 Period as compared to the Q1 2016 Period was primarily attributable to the impact of $2.5 million of landlord contributions received in connection with lease financing arrangements.
 
EBITDA
 
Net income attributable to controlling interest adjusted for interest expense, net, provision for income taxes and depreciation and amortization ("EBITDA") was approximately $170.7 million and $158.6 million for the Q1 2017 Period and the Q1 2016 Period, respectively.

The Company uses EBITDA as a supplemental liquidity and performance measure because we find it useful to understand and evaluate our capacity, excluding the impact of interest, taxes, and non-cash depreciation and amortization charges, for servicing our debt, paying dividends and otherwise meeting our cash needs, prior to our consideration of the impacts of other potential sources and uses of cash, such as working capital items. We believe that EBITDA is useful to investors for these purposes as well. EBITDA should not be considered an alternative to, or more meaningful than, net cash provided by or used in operating activities, as determined in accordance with U.S. GAAP, since it omits the impact of interest, taxes and changes in working capital that use or provide cash (such as receivables, payables and inventories) as well as the sources or uses of cash associated with changes in other balance sheet items (such as long-term loss accruals and deferred items). Because EBITDA excludes depreciation and amortization, EBITDA does not reflect any cash requirements for the replacement of the assets being depreciated and amortized, which assets will often have to be replaced in the future. Further, EBITDA, because it also does not reflect the impact of debt service, income taxes, cash dividends, capital expenditures and other cash commitments from time to time as described in more detail elsewhere in this Form 10-Q, does not represent how much discretionary cash we have available for other purposes. Nonetheless, EBITDA is a key measure expected by and useful to our fixed income investors, rating agencies and the banking community, all of whom believe, and we concur, that these measures are critical to the capital markets’ analysis of our ability to service debt, fund capital expenditures, pay dividends and otherwise meet cash needs, respectively. We also evaluate EBITDA because it is clear that movements in this non-GAAP measure impact our ability to attract financing and pay dividends. EBITDA, as calculated, may not be comparable to similarly titled measures reported by other companies. A reconciliation of net income attributable to controlling interest to EBITDA to net cash provided by operating activities is calculated as follows (in millions):


33


 
Q1 2017 Period
 
Q1 2016 Period
Net income attributable to controlling interest
$
48.4

 
$
40.7

Interest expense, net
30.7

 
32.5

Provision for income taxes
30.7

 
29.7

Depreciation and amortization
60.9

 
55.7

EBITDA
170.7

 
158.6

Interest expense, net
(30.7
)
 
(32.5
)
Provision for income taxes
(30.7
)
 
(29.7
)
Deferred income taxes
(4.5
)
 
(4.2
)
Changes in operating assets and liabilities
101.3

 
61.1

Landlord contributions
26.3

 
22.2

Other items, net
17.2

 
5.3

Net cash provided by operating activities
$
249.6

 
$
180.8


Contractual Cash Obligations and Commitments
 
For a summary of our contractual cash obligations and commitments and off-balance sheet arrangements as of December 31, 2016, please refer to Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations—Contractual Cash Obligations and Commitments” contained in our Form 10-K and incorporated by reference herein. For a discussion of material changes outside the ordinary course of our business in our contractual cash obligations and commitments during the quarter ended March 31, 2017, please refer to “Liquidity and Capital Resources” above. We believe that the amount of cash and cash equivalents on hand, cash flow expected from operations and availability under our Revolving Facility will be adequate for the Company to execute its business strategy and meet anticipated requirements for lease obligations, capital expenditures, working capital and debt service for the next 12 months.

Recent Accounting Pronouncements
 
For a discussion of the recent accounting pronouncements relevant to our operations, please refer to the information provided under Note 9—"Recent Accounting Pronouncements" of our notes to the accompanying unaudited condensed consolidated financial statements included in Part I, Item 1 (Financial Statements) of this Form 10-Q, which information is incorporated herein by reference.


Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
The Company’s interest rate risk is confined to interest rate exposure of its and its wholly owned subsidiaries’ debt obligations that bear interest based on floating rates. The Amended Senior Credit Facility provides variable rate interest that could be adversely affected by an increase in interest rates. Borrowings under the New Term Loans bear interest, at Regal Cinemas’ option, at either a base rate or an adjusted LIBOR rate plus, in each case, an applicable margin as described in Note 3 —"Debt Obligations."
 
Under the terms of the Company’s effective interest rate swap agreement (which hedges an aggregate of $200.0 million of variable rate debt obligations as of March 31, 2017) described in Note 10 —"Derivative Instruments," Regal Cinemas pays interest at a fixed rate of 2.165% and receives interest at a variable rate.

As of March 31, 2017 and December 31, 2016, borrowings of $952.3 million (net of debt discount) and $954.7 million (net of debt discount), respectively, were outstanding under the New Term Loans at an effective interest rate of 3.73% (as of March 31, 2017) and 3.56% (as of December 31, 2016), after the impact of the interest rate swaps described in Note 10—"Derivative Instruments" is taken into account. A hypothetical change of 10% in the Company’s effective interest rate under the New Term Loans as of March 31, 2017, would increase or decrease interest expense by approximately $0.9 million for the quarter ended March 31, 2017.
    

 Item 4. CONTROLS AND PROCEDURES
 
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit to the Commission under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the Commission’s rules and forms, and that information is accumulated and communicated to our management, including our principal executive, principal financial and principal accounting officers

34


(whom we refer to in this periodic report as our Certifying Officers), as appropriate to allow timely decisions regarding required disclosure. Our management evaluated, with the participation of our Certifying Officers, the effectiveness of our disclosure controls and procedures as of March 31, 2017, pursuant to Rule 13a-15(b) under the Exchange Act. Based upon that evaluation, our Certifying Officers concluded that, as of March 31, 2017, our disclosure controls and procedures were effective.
 
There were no changes in our internal control over financial reporting that occurred during our most recently completed quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
  

PART II—OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS
 
Information required to be furnished by us under this Part II, Item 1 (Legal Proceedings) is incorporated by reference to Note 6—"Commitments and Contingencies" of our notes to the accompanying unaudited condensed consolidated financial statements included in Part I, Item 1 (Financial Statements) of this Form 10-Q.

Item 1A. RISK FACTORS