Quarterly report pursuant to Section 13 or 15(d)

Impact of COVID-19

v3.20.2
Impact of COVID-19
6 Months Ended
Jun. 30, 2020
Extraordinary And Unusual Items [Abstract]  
Impact of COVID-19

2.

Impact of COVID-19

The outbreak of the COVID-19 pandemic has had an unprecedented impact on the world and the movie exhibition industry. The social and economic effects are widespread, and the situation continues to evolve.  As a movie exhibitor that operates spaces where patrons gather in close proximity, the Company’s business has been, and continues to be, significantly impacted by protective actions taken by governmental authorities to control the spread of the pandemic.  To comply with government mandates, the Company temporarily closed all of its theatres in the U.S. and Latin America effective March 17, 2020 and March 18, 2020, respectively.  

Because of the Company’s focus on maintaining a healthy balance sheet and low leverage, the Company believes it entered the global COVID-19 crisis in a strong financial position. Even if the Company’s theatres remained closed for the remainder of the year, the Company believes it has sufficient cash to sustain operations into 2021. Nonetheless, the COVID-19 pandemic has had and may continue to have adverse effects on our business, results of operations, cash flows, financial condition, access to credit markets and ability to service our existing and future indebtedness. In conjunction with the temporary closure of its theatres in March 2020, the Company implemented temporary personnel and salary reductions, halted non-essential operating and capital expenditures, suspended its quarterly dividend, negotiated modified timing and/or abatement of contractual payments with landlords and other major suppliers.  

The Company has elected to take advantage of certain tax-related benefits available under the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”) signed into U.S. federal law on March 27, 2020. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security payments, net operating loss (“NOL”) utilization and carryback periods, modifications to the net interest deduction limitations and a technical correction to the 2017 Tax Cuts and Jobs Act, which makes certain qualified improvement property eligible for bonus depreciation. The Company expects to receive approximately $20,000 in cash tax refunds related to qualified improvement property expenditures from 2018 and 2019, to defer payment of employer social security payroll taxes for 2020, to receive payroll tax credits for expenses related to paying wages and health benefits to employees who were not working as a result of closures and reduced receipts associated with COVID-19, and to apply tax losses incurred in 2020 to prior year income for refunds when its 2020 return is filed in 2021.  The Company continues to review and evaluate other available potential benefits under the CARES Act as well as any future legislation signed into law during 2020. If the Company receives certain government disaster relief assistance, it may be subject to certain requirements imposed by the government on the recipients of the aid including restrictions on executive officer compensation, share buybacks, dividends, prepayment of debt, incurrence of additional indebtedness and other similar restrictions until the aid is repaid or redeemed

in full. However, the Company cannot predict the manner in which such benefits will be allocated or administered and cannot predict whether it will be able to access such benefits in a timely manner or at all.

The Company continues to evaluate availability of new studio content, the status of the COVID-19 pandemic and local government regulations in assessing its reopening plans.  The Company reopened five of its domestic theatres in June 2020 as part of its test-and-learn strategy to define training, communication, implementation and execution of enhanced health and safety protocols.  These theatres opened to reduced operating hours with library content and “welcome back” pricing for tickets and concession products to encourage patrons to return to the movies.  The Company expanded its test-and-learn strategy to ten additional theatres on July 31, 2020 to further assess protocols and analyze results in other markets across the U.S.  The Company is evaluating the timing of its phased reopening of additional theatres, which is subject to the status of the COVID-19 pandemic, local government regulations and availability of new studio content.  The Company is still evaluating the timing of reopening of its theatres in Latin America.

The Company has implemented health and safety protocols in its theatres as a result of the pandemic for the safety of its employees and guests including, but not limited to, the following:

 

staggering showtimes to maximize physical distancing

 

employing seat buffering technology to ensure social distancing within the auditorium

 

implementing contactless transactions, such as limiting the use of cash to the box office and eliminating the paper ticket stub

 

requiring face masks for all guests within the theater, which may only be removed for eating and drinking in the auditoriums

 

substantially raising fresh-air rates of our building HVAC systems by adding purge cycles and constantly using supply fans to increase the total volume of fresh, outside air flowing into our theaters

 

using vacuums equipped with new HEPA filters that trap microscopic particles, including COVID-19

 

implementing stringent disinfecting and sanitizing protocols and supply of hand sanitizer and seat wipes for patrons

 

requiring that employees receive special training, participate in wellness check-ins and use personal protective wear, including face masks and gloves

With these comprehensive health and safety protocols in place, the Company believes it can more safely operate theaters while prioritizing the health of employees, guests and communities.  The Company will continue to evolve these protocols based on changes to recommendations by the Centers for Disease Control and Prevention and local government mandates, as well as the Company’s experiences as it reopens theatres.  

 

Restructuring Charges

 

In addition to the Company’s initial actions in response to the COVID-19 pandemic discussed above, during June 2020, Company management approved and announced a restructuring plan to realign its operations to create a more efficient cost structure (referred to herein as the “2020 Restructuring Plan”).  The 2020 Restructuring Plan primarily includes a permanent headcount reduction at its domestic corporate office and the permanent closure of thirteen domestic and seven international theatres.  The Company recorded $19,538 in restructuring costs on the condensed consolidated statement of income for the three and six months ended June 30, 2020.  The following table summarizes the costs of the 2020 Restructuring Plan and the remaining liability at June 30, 2020:

 

 

 

U.S. Operating Segment

 

 

International Operating Segment

 

 

Consolidated

 

 

 

Employee-related Costs

 

Facility Closure Costs

 

Total Charges

 

 

Employee-related Costs

 

Facility Closure Costs

 

Total Charges

 

 

Employee-related Costs

 

Facility Closure Costs

 

Total Charges

 

Restructuring charges during the three months ended June 30, 2020

 

$

8,955

 

$

7,589

 

$

16,544

 

 

$

163

 

$

2,831

 

$

2,994

 

 

$

9,118

 

$

10,420

 

$

19,538

 

Amounts paid

 

 

(90

)

 

(482

)

 

(572

)

 

 

 

 

(42

)

 

(42

)

 

 

(90

)

 

(524

)

 

(614

)

Noncash write-offs

 

 

 

 

88

 

 

88

 

 

 

 

 

(2,374

)

 

(2,374

)

 

 

 

 

(2,286

)

 

(2,286

)

Reserve balance at June 30, 2020

 

$

8,865

 

$

7,195

 

$

16,060

 

 

$

163

 

$

415

 

$

578

 

 

$

9,028

 

$

7,610

 

$

16,638

 

 

The unpaid and accrued restructuring costs of $16,638 are reflected in accounts payable and accrued expenses on the condensed consolidated balance sheet as of June 30, 2020.