Item 7. Managements Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and analysis should be read in conjunction with the financial
statements and accompanying notes included in this report. This discussion contains forward-looking statements. See Cautionary Statement Regarding Forward-Looking Statements and Risk Factors for a discussion of the
uncertainties and risk associated with these statements.
We are a leader in the motion picture exhibition industry, with theatres in the U.S., Brazil, Argentina, Chile, Colombia, Ecuador, Peru,
Honduras, El Salvador, Nicaragua, Costa Rica, Panama and Guatemala. We operated theatres in Mexico until November 15, 2013. As of December 31, 2013, we managed our business under two reportable operating segments U.S. markets and
international markets. See Note 22 to the consolidated financial statements.
Revenues and Expenses
We 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 contracts with NCM have assisted us in expanding our offerings to domestic advertisers and broadening
ancillary revenue sources such as digital video monitor advertising and third party branding. Historically, we have also offered alternative entertainment, such as live and pre-recorded sports programs, concert events, the MET opera and other
special presentations in our theatres through our relationship with NCM. We will continue to offer this entertainment through our recently formed joint venture, AC JV, LLC. Our Flix Media initiative has allowed us to expand our screen advertising
within our international circuit and to other international exhibitors. Films leading the box office during the year ended December 31, 2013 included Iron Man 3, Despicable Me 2, The Hunger Games: Catching Fire, Monsters University, Frozen,
Man of Steel, Fast & Furious 6, Oz: The Great and Powerful, Gravity, World War Z, Thor: the Dark World, Star Trek Into Darkness, The Croods, Hobbit: The Desolation of Smaug, The Heat, The Conjuring, Were the Millers, Identity Thief
and The Great Gatsby, among other films. Our revenues are affected by changes in attendance and concession revenues per patron. Attendance is primarily affected by the quality and quantity of films released by motion picture studios. The
film slate for 2014 currently includes sequels such as Hunger Games: Mockingjay Part I, Hobbit: There and Back Again, Transformers 4, Amazing Spider-Man 2, How to Train Your Dragon 2, and Captain America: The Winter Soldier and new
films such as The Lego Movie, Maleficent, and Interstellar, 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. Film rental costs can also vary based on the length of a
films run. Film rental rates are generally negotiated on a film-by-film and theatre-by-theatre basis. 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.