Six Flags earnings off on weather, impairment charge; sees rebound, touts strong liquidity

By Paul Deckelman

New York, Nov. 9 - Six Flags Inc. reported sharply lower third-quarter earnings versus year-ago levels Tuesday, citing the effects of unseasonably cool weather and even hurricanes on attendance in some of its markets, as well as sizable impairment charges the theme park operator took. On the upside, company executives said they look forward to a rebound next year, in part because of the ambitious capital spending plan that they outlined on a conference call with analysts and investors after the release of the earnings data.

One area which the company believes won't be a roller coaster ride for investors is its debt and liquidity situation, which chief financial officer Jim Dannhauser described as "very comfortable," following the company's retirement of $260 million of debt earlier this year, and its having gotten from its lenders revised leverage ratio and fixed-charge coverage covenants.

With the relaxed covenant requirements, he said that Six Flags anticipates remaining in compliance through 2005, so long as adjusted EBITDA remains at or above $250 million, and through 2006 so long as it stays at or above the $275 million to $280 million area - both well within company projections.

Covenant compliance expected

The CFO said that Six Flags was already in full compliance with its covenants when it negotiated the easier terms but sees them as "an additional insurance policy" should management's expectations for the coming year prove to be too optimistic - "a significant cushion as we implement our plans for the intermediate future."

With Six Flags betting its fortunes next year on its plans to spend between $130 million and $135 million for new rides and attractions - the lack of such capex spending was seen as a key factor in holding down attendance over the past year - "we felt it was prudent in implementing the capital expenditure program to seek an amendment now, which is a relatively low-cost amendment, where we ended up with 95% support from our bank group," Dannhauser said in answer to an analyst's query as to why Six Flags chose this particular time to amend its covenants.

The company wants "to make certain that we have a meaningful cushion, so if the operating results next year are not at the level that we expect, we don't have any issues with respect to our financial covenants," he said.

Looking at the balance sheet, Dannhauser noted that as of the end of the third quarter on Sept. 30, Six Flags' gross debt stood at $2.1 billion, while net debt (gross debt less available cash) was $1.9 billion.

No debt maturities before 2009

The cash balance at the end of the quarter was about $177 million. The company now has no public debt maturities before 2009, and its bank loan does not begin any material amortization until the third quarter of 2008. That term loan, with $655 million drawn as of June 30, is "very well secured," he said, backed by a first lien on all of the company's assets other than its interest in its Six Flags Over Georgia and Six Flags Over Texas parks. Six Flags currently has no outstanding borrowings on its committed $300 million working capital revolving credit facility and also has the full availability of its $100 million back-up facility.

Dannhauser said that while the company had to tap the revolver earlier in the year, "we've been out of [it] since the first week in August. I don't expect to be back into that revolver in any material way until near the end of December."

How much it might have to access would depend on factors such as the pace of the capex program and its off-season operating expenses, but he estimated that at the most, the company might have a $10 million to $15 million balance by year's end and would also show a cash balance of $75 million to $80 million at the end of the year as well.

$260 million debt retired

Earlier in the year, Six Flags retired about $260 million of permanent debt using the proceeds from the sales of its European operations and its underperforming Cleveland-area theme park. The debt was retired between March 31 and Aug. 9 and consisted of $75 million of the term loan debt and an additional $184.9 million of other debt.

The debt retirement should give the company pro forma full-year interest savings of about $20 million. Cash interest expense is expected to be $175 million next year - a lower-than-otherwise figure which the CFO attributes to the previous paydown of debt.

Comfortable liquidity position

He said the blended interest rate on the company's debt was about 8.17%. He said there had been no additional debt retirements outside of the $261 million. All and all, he said, Six Flags was in "a very comfortable position in terms of liquidity, with a substantial cash balance," due to the fact that the company "has always tried to be very conservative in the structure of the liability side of our balance sheet."

Looking at the overall company finances, Six Flags had net earnings for the quarter of $56.4 million (53 cents per share), well down from $140.2 million ($1.32 per share) a year earlier. Six Flags cited the affects of unpredictable weather - including the four hurricanes that roared across the southeastern U.S. in late August and early September and which also brought heavy rainstorms and other meteorological phenomena even hundreds of miles away from the hurricanes' actual paths.

Other factors, said Six Flags chairman and chief executive officer Kieran E. Burke, included the inconsistent economic recovery, which was weaker in some markets than in others, and the decision the company had made over the previous year or two to largely throttle back on capex spending for glitzy new rides in order to instead allocate most of the money to improving the "guest experience" at the company's parks with non-ride infrastructure improvements such as parking areas, lighting, restrooms, walkways and eating areas.

Spending to draw repeat customers

He said that such a decision had been the right thing to do in the long run, was already producing measurably higher levels of customer satisfaction, and would yield greater repeat visitations going forward. Still, he acknowledged, the decision on reallocating company spending had "put some pressure on revenues" this year.

Revenue for the quarter fell 3.4% to $527.4 million from $545.2 million a year ago, reflecting a 4.8% drop in attendance - although that was at least partially offset by a 1.6% increase in per-capita revenue - customers actually coming through the gates spending more at the parks than they had in the past.

Also hurting the bottom line were several charges - a non-cash impairment loss of $14.4 million associated with the company's investment in the Madrid park it manages and related assets, although the company divested its other European holdings, as well as a valuation allowance of $39.2 million connected with the company's domestic deferred tax asset, which had the net effect of increasing its book tax expense for the period.

Excluding the impairment and other charges, Six Flags earned $110.28 million ($1.13 per share) from continuing operations, down just slightly from the comparable year-ago figure of $117 million ($1.20 per share) and actually better than the 97 cents per share Wall Street had projected.

Rebound expected

Burke sees a "solid rebound" ahead, as the company builds on the greater customer satisfaction it says has come from its increased spending on the "guest experience" side of the park's operation, and better promotion - including its unexpectedly popular TV commercials featuring the fun-loving octogenarian "Mr. Six" wildly boogieing to the funky Vengaboys' hit "We Like To Party," and its sponsorship links with Coca-Cola.

Key to the company's fortunes going forward will be its plans to make up for lost time and spend $130 million on new rides and attractions at parks in 13 of its 18 markets, including a big new Chicago-area water park and many improvements to its theme park, water park and safari park operations in central New Jersey, which attract customers from both New York and Philadelphia, both about an hour's drive away.

Burke projects adjusted EBITDA of about $300 million in 2005 and $325 million in 2006.

Will the increased spending on rides, the energetic promotions and the hope for better days ahead as the national amusement park industry tries to get its footing, led by such "destination" parks as Disney's California and Florida parks and their competitors, be enough to hold off Six Flags critics who contend the company made poor choices and has underperformed?

In August, after the release of disappointing second-quarter results, wealthy Six Flags investors such as Microsoft chairman Bill Gates and Washington Redskins team owner Daniel Snyder indicated in separate filings with the Securities and Exchange Commission that they felt the company was underperforming, and they might exercise the right to nominate new directors or propose financial transactions - up to and including the possible sale of part or all of the company - to enhance shareholder returns.

Gates' name did not surface during the conference call - but Burke, in response to an analyst's question, said that "our top management met with Mr. Snyder in early September. We also facilitated a separate meeting for Mr. Snyder with five non-management members of our board, which took place in late September. Mr. Snyder made some suggestions which, while appreciated, neither the non-management directors or the company's management believe are likely to enhance shareholder value.

"So that's kind of where that sits," Burke concluded - "and I really couldn't speculate further on his intentions."

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