General - Basis of Presentation

9 Months Ended

Oct. 03, 2021

General - Basis of Presentation

General - Basis of Presentation

1.  General — Basis of Presentation

We own and operate regional theme parks and waterparks. We are the largest regional theme park operator in the world, and we are the largest operator of waterparks in North America based on the number of parks we operate. Of the 27 parks we owned or operated as of October 3, 2021, 24 parks are located in the United States, two are located in Mexico, and one is located in Montreal, Canada. Our waterpark at Six Flags Great America, in Gurnee, Illinois, opened as a separate gate in 2021 as Hurricane Harbor Chicago, creating our 27^th park.

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States ("U.S. GAAP"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed, or omitted, pursuant to the rules and regulations of the SEC.

The Board of Directors of Six Flags Entertainment Corporation (“Holdings”) determined that it is in our best interest to change the method of determining our fiscal quarters and fiscal years, such that each fiscal quarter will consist of thirteen weeks ending on a Sunday and each fiscal year will consist of 52 or 53 weeks, as applicable, and will end on the Sunday closest to December 31, effective as of the commencement of our fiscal year on January 1, 2021. This change was made to align our fiscal reporting calendar with how we operate our business and improve comparability across periods. Our current fiscal year will end on January 2, 2022. This Quarterly Report covers the nine month period January 1, 2021 through October 3, 2021 (“the nine months ended October 3, 2021”) and the three month period July 5, 2021 through October 3, 2021 (“the three months ended October 3, 2021”). The comparison period in the prior year covers January 1, 2020 through September 30, 2020 (“the nine months ended September 30, 2020”) and July 1, 2020 through September 30, 2020 (“the three months ended September 30, 2020”).

The 2020 Annual Report includes additional information about us, our operations and our financial position, and should be referred to in conjunction with this Quarterly Report. The information furnished in this Quarterly Report reflects all normal and recurring adjustments that are, in the opinion of management, necessary to present a fair statement of the results for the periods presented.

Results of operations for the nine months ended October 3, 2021, are not indicative of the results expected for the full year. In particular, our park operations contribute more than half of their annual revenue during the period from Memorial Day to Labor Day each year, while expenses are incurred year-round.

COVID-19 Considerations

In response to the COVID-19 pandemic, federal, state and local governments implemented significant restrictions on travel, social conduct and business operations, including mass quarantine and social distancing mandates and orders. In March 2020, we quickly implemented plans to mitigate the impact of the COVID-19 pandemic on our business to ensure the health and safety of our employees and guests.

We resumed partial operations at many of our parks on a staggered basis near the end of the second quarter of 2020 using a cautious and phased approach, including limiting attendance, in accordance with local conditions and government guidelines. Attendance trends continued to improve throughout 2020 and the first nine months of 2021. As of May 29, 2021, we had opened all of our parks, and, as of June 15, 2021, none of our parks were subject to mandated capacity constraints, with the exception of our theme park in Montreal and our two parks in Mexico. As of October 18, 2021, all capacity constraints were lifted on the two Mexico parks. The COVID-19 pandemic has had, and may continue to have, an unfavorable impact on certain parts of our business. The broader implications of the COVID-19 pandemic on our business, financial condition and results of operations remain uncertain and will depend on certain developments, including the duration and severity of the COVID-19 pandemic, the impact of virus variants, the rate of vaccinations, and the COVID-19 pandemic’s impact on our guests and suppliers. 

We have taken measures to ensure sufficient liquidity to meet our cash flow needs and covenant compliance obligations for at least the next twelve months from the issuance of these financial statements. Additionally, we believe we have sufficient liquidity to meet our cash obligations through the end of 2022, even if we are required to suspend

operations due to the COVID-19 pandemic. In addition to reducing expenses and capital expenditures, in April 2020, we increased the revolving credit commitments under the Second Amended and Restated Revolving Loan by $131.0 million, increasing the facility from $350.0 million to $481.0 million. Also, in April 2020, we completed the private sale of $725.0 million in aggregate principal amount of 7.00% senior secured notes due 2025. In August 2020, we extended the increased revolving credit commitments under the Second Amended and Restated Revolving Loan through December 31, 2022, and extended the suspension of the senior secured leverage ratio financial maintenance covenant through the end of 2021. See Note 3, Long-Term Indebtedness, for more information on these transactions. In connection with the Second Amended and Restated Credit Agreement, we suspended dividend payments and stock repurchases until the earlier of December 31, 2022, or such time as Six Flags Theme Parks Inc. (“SFTP”), Holdings’ indirect, wholly owned subsidiary, reduces the incremental revolving credit commitments by $131 million and begins using actual results to test compliance with the senior secured leverage ratio financial maintenance covenant.

The COVID-19 pandemic continues to present material uncertainty and risk with respect to our performance and financial results, including our ability to keep all of our parks open to our guests. We will continue to consider near-term exigencies and the long-term financial health of the business as we take steps to mitigate the consequences of the COVID-19 pandemic on our business. The extent to which the COVID-19 pandemic adversely impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including any additional actions we have taken, or will take, to minimize the spread of COVID-19 or manage its impact.

Transformation Plan

We commenced a transformation plan in March 2020 to reinvigorate long-term profit growth. The transformation plan is focused on modernizing the guest experience through technology, continuously improving operational efficiency, and driving financial excellence.

During the three and nine months ended October 3, 2021, we incurred the below expenses related to our transformation plan.

Transformation Costs
	Three Months Ended		Nine Months Ended
	October 3, 2021		October 3, 2021
Amounts included in "Other expense, net"
Consultant costs	$	—	$	6,854
Technology modernization costs		546		3,616
Employee termination costs		182		1,290
Total transformation costs	$	728	$	11,760

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We incurred expenses of $23.1 million and $29.2 million related to our transformation plan during the three and nine months ended September 30, 2020.

a.  Consolidated U.S. GAAP Presentation

Our accounting policies reflect industry practices and conform to U.S. GAAP.

The unaudited condensed consolidated financial statements include our accounts and the accounts of our wholly owned subsidiaries. We also consolidate the partnerships that own Six Flags Over Texas ("SFOT") and Six Flags Over Georgia (including Six Flags White Water Atlanta) ("SFOG", and together with SFOT, the "Partnership Parks") as subsidiaries in our unaudited condensed consolidated financial statements, as we have determined that we have the power to direct the activities of the Partnership Parks that most significantly impact their economic performance and we have the obligation to absorb losses and receive benefits from the Partnership Parks that can be potentially significant to these entities. The equity interests owned by non-affiliated parties in the Partnership Parks are reflected in the accompanying unaudited condensed consolidated balance sheets as redeemable noncontrolling interests.

b.  Income Taxes

We recorded a valuation allowance of $129.3 million, $128.2 million and $134.7 million as of October 3, 2021, December 31, 2020, and September 30, 2020, respectively, due to uncertainties related to our ability to use some of our deferred tax assets, primarily consisting of certain state net operating loss and other tax carryforwards, before they expire. The valuation allowance was based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets were recoverable. Our projected taxable income over the foreseeable future indicates we will be able to use all of our federal net operating loss carryforwards before they expire.

We classify interest and penalties attributable to income taxes as part of income tax expense. As of October 3, 2021, December 31, 2020, and September 30, 2020, we had no recorded amounts for accrued interest or penalties.

c. Goodwill and Intangibles

Goodwill and intangible assets with indefinite lives are tested for impairment annually, or more frequently if events or circumstances indicate that the assets might be impaired. We identify our reporting unit and determine the carrying value of the reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to the reporting unit. We then determine the fair value of the reporting unit and compare it to the carrying amount of the reporting unit. All of our parks are operated in a similar manner and have comparable characteristics in that they produce and distribute similar services and products using similar processes, have similar types of customers, are subject to similar regulations and exhibit similar economic characteristics. As such, we are a single reporting unit.

As of October 3, 2021, the fair value of the single reporting unit exceeded our carrying amount. We have one reporting unit at the same level for which Holdings common stock is traded and we believe our market capitalization is the best indicator of our reporting unit’s fair value. At October 3, 2021, we did not identify any triggering events that would require a full qualitative analysis to be performed.

d.  Long-Lived Assets

We review long-lived assets, including finite-lived intangible assets subject to amortization, for impairment upon the occurrence of events or changes in circumstances that would indicate that the carrying value of the asset or group of assets may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of the asset or group of assets to the future net cash flows expected to be generated by the asset or group of assets. If such assets are not considered to be fully recoverable, any impairment to be recognized is measured by the amount by which the carrying amount of the asset or group of assets exceeds its respective fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. At October 3, 2021, we did not identify any triggering events that would require a full qualitative analysis to be performed.

e.  Earnings (loss) Per Common Share

Earnings (loss) per common share for the three and nine months ended October 3, 2021, and September 30, 2020, was calculated as follows:

	Three Months Ended				Nine Months Ended
(Amounts in thousands, except per share data)	October 3, 2021		September 30, 2020		October 3, 2021		September 30, 2020
Net income (loss) attributable to Six Flags Entertainment Corporation	$	157,241	$	(116,172)	$	131,922	$	(337,612)
Weighted-average common shares outstanding - basic:		85,919		84,829		85,596		84,730
Effect of dilutive stock options and restricted stock units		1,340		—		1,482		—
Weighted-average common shares outstanding - diluted:		87,259		84,829		87,078		84,730
Earnings (loss) per share - basic:	$	1.83	$	(1.37)	$	1.54	$	(3.98)
Earnings (loss) per share - diluted:	$	1.80	$	(1.37)	$	1.51	$	(3.98)

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The computation of diluted earnings (loss) per share excluded the effect of 3,580,000 and 5,811,000 antidilutive stock options and restricted stock units for the three months ended October 3, 2021, and September 30, 2020, respectively, and excluded the effect of 3,528,000 and 5,811,000 antidilutive stock options and restricted stock units for the nine months ended October 3, 2021, and September 30, 2020, respectively.

f.  Stock Benefit Plans

Pursuant to the Six Flags Entertainment Corporation Long-Term Incentive Plan (the "Long-Term Incentive Plan"), Holdings may grant stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, deferred stock units, performance and cash-settled awards and dividend equivalent rights ("DERs") to select employees, officers, directors and consultants of Holdings and its affiliates.

During the nine months ended October 3, 2021, performance stock units were granted to key employees that will vest upon the achievement of specified EBITDA and revenue performance targets by 2023. The aggregate payout under these awards if the targets are achieved in 2023 would be 186,000 shares of Holdings’ common stock, but could be more or less depending on the level of achievement and timing thereof. There has been no stock-based compensation expense recorded for the performance stock units because, as of October 3, 2021, it is not deemed probable that we will achieve the specified performance targets in 2023. Based on the grant date fair value of these performance stock units as determined by the closing market price of Holdings’ common stock on the date of grant, the total unrecognized compensation cost related to these performance stock units at target achievement in 2023 is $9.3 million, which will be expensed over the service period if achievement of the performance conditions becomes probable. We will continue to evaluate the probability of achieving the performance conditions going forward, and will record the appropriate expense as necessary.

During the three and nine months ended October 3, 2021, and September 30, 2020, stock-based compensation expense consisted of the following:

	Three Months Ended				Nine Months Ended
(Amounts in thousands)	October 3, 2021		September 30, 2020		October 3, 2021		September 30, 2020
Long-Term Incentive Plan	$	7,801	$	7,869	$	17,148	$	18,089
Employee Stock Purchase Plan		75		38		366		118
Total Stock-Based Compensation	$	7,876	$	7,907	$	17,514	$	18,207

During the three and nine months ended October 3, 2021, we paid $0.6 million and $0.8 million, respectively, to employees with dividend equivalent rights for previously declared dividends due upon the vesting of the related shares of Holdings’ common stock. These dividends were declared prior to the suspension of dividend payments in connection with the increase in the Second Amended and Restated Revolving Loan in April 2020.

g.  Accounts Receivable, Net

Accounts receivable are reported at net realizable value and consist primarily of amounts due from guests for the sale of group outings and multi-use admission products, such as season passes and memberships. We are not exposed to a significant concentration of credit risk; however, based on the age of the receivables, our historical experience and other factors and assumptions we believe to be customary and reasonable, we record an allowance for doubtful accounts. As of October 3, 2021, December 31, 2020, and September 30, 2020, we have recorded an allowance for doubtful accounts of $22.0 million, $3.1 million, and $7.7 million, respectively, which is primarily comprised of estimated payment defaults under our membership program. To the extent that payments under our membership program have not been recognized in revenue, the allowance for doubtful accounts recorded against our membership program is offset with a corresponding reduction in deferred revenue.

h.  Recently Adopted Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“Update 2019-12”), which removes certain exceptions for investments, intraperiod allocations and interim tax calculations and adds guidance to reduce complexity in accounting for income taxes. Update 2019-12 was adopted as of January 1, 2021. The various amendments in Update 2019-12 are applied on a retrospective basis, modified retrospective basis and prospective basis, depending on the amendment. Our adoption of Update 2019-12 did not have a material impact on our condensed consolidated financial statements and related disclosures.

i.  Recent Accounting Pronouncements

In August 2018, FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans: (“Update 2018-14”), which modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. Update 2018-14 is effective for annual periods beginning after January 1, 2021, with early adoption permitted. Adoption is required to be applied on a retrospective basis to all periods presented. We are in the process of evaluating the impact of this amendment on our condensed consolidated financial statements; however, we do not expect a material impact.

In March 2020, FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“Update 2020-04”), which provides optional expedients and exceptions for applying U.S. GAAP principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in Update 2020-04 apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected optional expedients for and that are retained through the end of the hedging relationship. The provisions in Update 2020-04 are effective upon issuance and can be applied prospectively through December 31, 2022. Interest on the Second Amended and Restated Credit Facility accrues at an annual rate of LIBOR. We do not expect Update 2020-04 to have a material effect on our condensed consolidated financial statements.