Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction with our condensed consolidated financial
statements and related notes and schedules included elsewhere in this report.
We are a leader in the motion picture exhibition industry,
with theatres in the U.S., Brazil, Argentina, Chile, Colombia, Peru, Ecuador, Honduras, El Salvador, Nicaragua, Costa Rica, Panama, Guatemala, Bolivia, Curacao and Paraguay. As of June 30, 2016, we managed our business under two reportable
operating segments U.S. markets and international markets. See Note 14 to our condensed consolidated financial statements.
generate revenues primarily from box office receipts and concession sales with additional revenues from screen advertising sales and other revenue streams, such as vendor marketing promotions, meeting rentals and electronic video games located in
some of our theatres. Our relationship with NCM has assisted us in expanding our offerings to domestic advertisers and broadening ancillary revenue sources such as digital video monitor advertising. We also offer alternative entertainment, such as
live and pre-recorded sports programs, concert events, the Metropolitan Opera, in-theatre gaming and other special events in our theatres through our joint venture, AC JV, LLC. Our Flix Media initiative has allowed us to expand our screen
advertising and alternative content within our international circuit and to other international exhibitors.
Films leading the box office
during the six months ended June 30, 2016 included the carryover of Star Wars: The Force Awakens and The Revenant; and new releases such as Deadpool, Batman V Superman: Dawn Of Justice, Zootopia, Kung Fu Panda 3,
The Jungle Book, Captain America: Civil War, Finding Dory and other films. Films scheduled for release during the remainder of 2016 include Star Trek Beyond, Jason Bourne, The Secret Life Of Pets, Suicide Squad, Moana, Passengers,
Sing, and spin-off films Rogue One: A Star Wars Story and Fantastic Beasts And Where To Find Them, among other films.
Film rental costs are variable in nature and fluctuate with our admissions revenues. Film rental costs as a percentage of revenues are
generally higher for periods in which more blockbuster films are released. Advertising costs, which are expensed as incurred, are primarily fixed at the theatre level as daily movie directories placed in newspapers represent the largest component of
advertising costs. The monthly cost of these advertisements is based on, among other things, the size of the directory and the frequency and size of the newspapers circulation.
Concession supplies expense is variable in nature and fluctuates with our concession revenues. We purchase concession supplies to replace
units sold. We negotiate prices for concession supplies directly with concession vendors and manufacturers to obtain volume rates.
Although salaries and wages include a fixed cost component (i.e. the minimum staffing costs to operate a theatre facility during non-peak
periods), salaries and wages move in relation to revenues as theatre staffing is adjusted to respond to changes in attendance. In some international locations, staffing levels are also subject to local regulations.
Facility lease expense is primarily a fixed cost at the theatre level as most of our facility leases require a fixed monthly minimum rent
payment. Certain of our leases are subject to percentage rent only while others are subject to percentage rent in addition to their fixed monthly rent if a target annual revenue level is achieved. Facility lease expense as a percentage of revenues
is also affected by the number of theatres under operating leases, the number of theatres under capital leases and the number of fee-owned theatres.
Utilities and other costs include both fixed and variable costs and primarily includes utilities, expenses for projection and sound equipment
maintenance and monitoring, property taxes, janitorial costs, repairs and maintenance and security services.