CEC Entertainment, Inc. Reports Financial Results for the 2016 Third quarter

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Nov 07, 2016, 09:00 ET

IRVING, Texas, Nov. 7, 2016 /PRNewswire/ -- CEC Entertainment, Inc. (the "Company") today announced financial results for its third quarter ended October 2, 2016.

Third quarter same store sales for our Chuck E. Cheese's and Peter Piper Pizza stores increased 3.5% on a same calendar week basis ⁽¹⁾, compared to the comparable prior year period
On a fiscal period basis third quarter same store sales for our Chuck E. Cheese's and Peter Piper Pizza stores increased 3.7% over the 2015 fiscal third quarter
Total revenues increased 2.8% over the prior year fiscal third quarter to $228.1 million
PlayPass deployed in 72 stores during the quarter

"During the third quarter, we continued to execute the many initiatives we have introduced, leading to the sixth consecutive quarter of same store sales growth at our Chuck E. Cheese's stores," said Tom Leverton, Chief Executive Officer. Additionally, Peter Piper Pizza recorded its 25th consecutive quarter of same store sales growth, and we are pleased to report that we successfully opened the first two new Company-owned Peter Piper Pizza locations since we acquired the brand two years ago. We plan to open three more Peter Piper locations before the end of the year. "Finally, our national roll-out of our PlayPass system is in full swing as we completed installation in 72 stores during the quarter. PlayPass is now installed in nearly 200 stores across our network."

Third quarter Results

Total revenues for the third fiscal quarter of 2016 increased 2.8%, or $6.2 million, over the prior year to $228.1 million. The increase is attributable to increased same store sales at both our Chuck E. Cheese's and Peter Piper Pizza brands. On a calendar week basis same store sales for our Company-owned stores increased 3.5% over the comparable weeks in 2015. Company store sales for the third quarter of 2016 were impacted by approximately $0.6 million of incremental deferred revenue as a result of the implementation of our proprietary PlayPass card system, compared to the third quarter of 2015.

The Company reported a net loss of $2.4 million for the third quarter of 2016, compared to a net loss of $3.2 million for the third quarter of 2015. The decrease in the net loss was driven by an increase in store revenues offset by an increase in store related operating costs, marketing costs, and corporate overhead costs primarily related to IT initiatives.

Adjusted EBITDA ⁽²⁾ for the third quarter of 2016 was $49.5 million compared to $53.4 million for the third quarter of fiscal 2015. In addition to the $0.6 million incremental impact of deferred revenue, Adjusted EBITDA for the third quarter of 2016 was impacted by a planned shift in the timing of some of its advertising expenditures in 2016, resulting in approximately $1.2 million in higher advertising costs for the quarter relative to 2015. Furthermore, third quarter 2015 Adjusted EBITDA benefited from a few unusual items including last year's receipt of approximately $2.1 million in cash landlord incentives primarily relating to our corporate office move and approximately $1.2 million of favorable self-insurance and other reserve adjustments. Before the impact of these items, Adjusted EBITDA for the third quarter of 2016 would have been approximately $1.2 million higher than the third quarter of 2015.

________________

⁽¹⁾

Our fiscal year ending January 1, 2017 will consist of 52 weeks and our fiscal year ended January 3, 2016 (fiscal 2015) consisted of 53 weeks. As a result of the 53-week fiscal year in 2015, our 2016 fiscal year began one calendar week later than our 2015 fiscal year. In order to provide useful information and to better analyze our business, we have provided same store sales presented on both a fiscal week basis and calendar week basis. Same store sales growth on a calendar week basis compares the results for the period from July 3, 2016 through October 2, 2016 (weeks 27 through 39 of our 2016 fiscal year) to the results for the period from July 5, 2015 through October 4, 2015 (weeks 28 through 40 of our 2015 fiscal year). We believe same store sales growth calculated on a same calendar week basis is more indicative of the operating trends in our business. However, we also recognize that same store sales growth calculated on a fiscal week basis is a useful measure when analyzing year-over-year changes in our financial results.

⁽²⁾

Adjusted EBITDA represents net income (loss) adjusted to exclude interest expense, income taxes, depreciation and amortization, asset impairments, the effects of acquisition accounting adjustments, transaction and severance costs and certain other items.

Balance Sheet and Liquidity

As of October 2, 2016, cash and cash equivalents were $79.9 million, and the principal outstanding on our debt was $1.0 billion, with net availability of $140.1 million on our undrawn revolving credit facility. During the third quarter of 2016, we had capital expenditures of $26.7 million, of which $7.8 million related to our PlayPass initiative and another $6.8 million related to other growth initiatives. In addition, we had $1.8 million in capital expenditures related to IT initiatives.

As of October 2, 2016, the Company's system-wide portfolio consisted of:

	Chuck E. Cheese's	Peter Piper Pizza	Total
Company operated	523	34	557
Domestic franchised	29	63	92
International franchised	46	47	93
Total	598	144	742

Conference Call Information:

The Company will host a conference call beginning at 9:00 a.m. Central Time on Monday, November 8, 2016. The call can be accessed by dialing (855) 743-8451 or (330) 968-0151 for international participants and conference code 79481814.

A replay of the call will be available from 12:00 p.m. Central Time on November 8, 2016 through 11:00 p.m. Central Time on November 15, 2016. The replay of the call can be accessed by dialing (800) 585-8367 or (404) 537-3406 for international participants and conference code 79481814.

About CEC Entertainment, Inc.
For nearly 40 years, CEC Entertainment has served as the nationally recognized leader in family dining and entertainment and the place Where A Kid Can Be A Kid^®. Chuck E. Cheese's goal is to create positive, lifelong memories for families through fun, food, and play. It is also the place where more than a million happy birthdays are celebrated every year. Each Chuck E. Cheese's features musical entertainment, games, rides, and play areas for kids of all ages, as well as a variety of freshly prepared dining options. Committed to providing a fun, safe environment, Chuck E. Cheese's helps protect families through industry-leading programs such as Kid Check^®. As a strong advocate for its local communities and childhood education, Chuck E. Cheese's has donated more than $14 million to schools through its fundraising programs. Additionally, Chuck E. Cheese's supports its national charity partner, Big Brothers Big Sisters, through nationwide fundraisers and donation drives. As of October 2, 2016 the Company and its franchisees operated a system of 598 Chuck E. Cheese's stores and 144 Peter Piper Pizza stores, with locations in 47 states and 12 foreign countries and territories. For more information, visit chuckecheese.com and peterpiperpizza.com.

Investor Inquiries:	Media Inquiries:
Dale R. Black	Christelle Dupont
EVP & CFO	Public Relations Manager
CEC Entertainment, Inc.	CEC Entertainment, Inc.
(972) 258-4525	(972) 258-4223
[email protected]	[email protected]

Cautionary Statement Regarding Forward-Looking Statements

Certain statements in this press release, other than historical information, may be considered "forward-looking statements" within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, and are subject to various risks, uncertainties and assumptions. Statements that are not historical in nature and which may be identified by the use of words such as "may," "should," "could," "believe," "predict," "potential," "continue," "plan," "intend," "expect," "anticipate," "future," "project," "estimate," and similar expressions (or the negative of such expressions) are forward-looking statements. Forward-looking statements are made based on management's current expectations and beliefs concerning future events and, therefore, involve a number of assumptions, risks and uncertainties, including the risk factors described in Part I, Item 1A. "Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended January 3, 2016, filed with the Securities and Exchange Commission on March 2, 2016. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ from those anticipated, estimated or expected. There are a number of important factors that could cause actual results or events to differ materially from those indicated by such forward-looking statements, including but not limited to:

Negative publicity concerning food quality, health, general safety and other issues, and changes in consumer preferences;
The success of our capital initiatives, including new store development and existing store evolution;
Our ability to successfully implement our marketing strategy;
Competition in both the restaurant and entertainment industries;
Economic uncertainty and changes in consumer discretionary spending in the United States and Canada;
Expansion in international markets;
Our ability to generate sufficient cash flow to meet our debt service payments;
Increases in food, labor and other operating costs;
Disruptions of our information technology systems and technologies, including, but not limited to, data security breaches;
Any disruption of our commodity distribution system;
Our dependence on a limited number of suppliers for our games, rides, entertainment-related equipment, redemption prizes and merchandise;
Product liability claims and product recalls;
Government regulations;
Litigation risks;
Adverse effects of local conditions, natural disasters and other events;
Fluctuations in our quarterly results of operations due to seasonality;
Inadequate insurance coverage;
Loss of certain key personnel;
Our ability to adequately protect our trademarks or other proprietary rights;
Risks in connection with owning and leasing real estate; and
Our ability to successfully integrate the operations of companies we acquire.

The forward-looking statements made in this report relate only to events as of the date on which the statements were made. Except as may be required by law, we undertake no obligation to update our forward-looking statements to reflect events and circumstances after the date on which the statements were made or to reflect the occurrence of unanticipated events.

- financial tables follow -

CEC ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands)

	Three Months Ended						Nine Months Ended
	October 2, 2016			September 27, 2015			October 2, 2016			September 27, 2015
REVENUES:
Food and beverage sales	$	101,984	44.7%	$	98,243	44.3%	$	321,591	44.7%	$	308,924	44.2%
Entertainment and merchandise sales	121,764		53.4%	118,753		53.5%	383,978		53.4%	377,358		53.9%
Total Company store sales	223,748		98.1%	216,996		97.8%	705,569		98.1%	686,282		98.1%
Franchise fees and royalties	4,322		1.9%	4,941		2.2%	13,440		1.9%	13,241		1.9%
Total revenues	228,070		100.0%	221,937		100.0%	719,009		100.0%	699,523		100.0%
OPERATING COSTS AND EXPENSES:
Company store operating costs:
Cost of food and beverage (exclusive of items shown separately below) ⁽¹⁾	25,507		25.0%	25,032		25.5%	80,702		25.1%	78,209		25.3%
Cost of entertainment and merchandise (exclusive of items shown separately below) ⁽²⁾	8,014		6.6%	7,863		6.6%	25,004		6.5%	23,399		6.2%
Total cost of food, beverage, entertainment and merchandise ⁽³⁾	33,521		15.0%	32,895		15.2%	105,706		15.0%	101,608		14.8%
Labor expenses ⁽³⁾	61,721		27.6%	59,998		27.6%	191,170		27.1%	186,405		27.2%
Depreciation and amortization ⁽³⁾	27,667		12.4%	28,394		13.1%	85,029		12.1%	86,606		12.6%
Rent expense ⁽³⁾	24,120		10.8%	23,979		11.1%	72,318		10.2%	72,698		10.6%
Other store operating expenses ⁽³⁾	38,757		17.3%	36,587		16.9%	112,143		15.9%	105,435		15.4%
Total Company store operating costs ⁽³⁾	185,786		83.0%	181,853		83.8%	566,366		80.3%	552,752		80.5%
Other costs and expenses:
Advertising expense	11,515		5.0%	10,292		4.6%	36,777		5.1%	36,339		5.2%
General and administrative expenses	17,284		7.6%	14,592		6.6%	51,222		7.1%	48,620		7.0%
Transaction, severance and related litigation costs	166		0.1%	1,826		0.8%	1,349		0.2%	3,939		0.6%
Asset impairments	772		0.3%	875		0.4%	772		0.1%	875		0.1%
Total operating costs and expenses	215,523		94.5%	209,438		94.4%	656,486		91.3%	642,525		91.9%
Operating income	12,547		5.5%	12,499		5.6%	62,523		8.7%	56,998		8.1%
Interest expense	17,237		7.6%	17,209		7.8%	51,419		7.2%	52,031		7.4%
Income (loss) before income taxes	(4,690)		(2.1)%	(4,710)		(2.1)%	11,104		1.5%	4,967		0.7%
Income tax expense (benefit)	(2,286)		(1.0)%	(1,508)		(0.7)%	4,645		0.6%	3,319		0.5%
Net income (loss)	$	(2,404)	(1.1)%	$	(3,202)	(1.4)%	$	6,459	0.9%	$	1,648	0.2%

________________

Percentages are expressed as a percent of total revenues (except as otherwise noted).
⁽¹⁾	Percentage amount expressed as a percentage of food and beverage sales.
⁽²⁾	Percentage amount expressed as a percentage of entertainment and merchandise sales.
⁽³⁾	Percentage amount expressed as a percentage of total Company store sales.
Due to rounding, percentages presented in the table above may not sum to total. The percentage amounts for the components of cost of food and beverage and the cost of entertainment and merchandise may not sum to total due to the fact that cost of food and beverage and cost of entertainment and merchandise are expressed as a percentage of related food and beverage sales and entertainment and merchandise sales, as opposed to total Company store sales.

CEC ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)

	October 2, 2016		January 3, 2016
ASSETS
Current assets:
Cash and cash equivalents	$	79,857	$	50,654
Other current assets	59,771		67,434
Total current assets	139,628		118,088
Property and equipment, net	599,653		629,047
Goodwill	483,876		483,876
Intangible assets, net	485,057		488,095
Other noncurrent assets	22,861		13,929
Total assets	$	1,731,075	$	1,733,035
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Bank indebtedness and other long-term debt	$	7,626	$	7,650
Other current liabilities	105,781		106,463
Total current liabilities	113,407		114,113
Capital lease obligations, less current portion	14,681		15,044
Bank indebtedness and other long term debt, net of deferred financing costs, less current portion	969,030		971,333
Deferred tax liability	191,532		201,734
Other noncurrent liabilities	226,181		222,265
Total liabilities	1,514,831		1,524,489
Stockholder's equity:
Common stock, $0.01 par value; authorized 1,000 shares; 200 shares issued as of October 2, 2016 and January 3, 2016	—		—
Capital in excess of par value	356,996		356,460
Accumulated deficit	(138,139)		(144,598)
Accumulated other comprehensive loss	(2,613)		(3,316)
Total stockholder's equity	216,244		208,546
Total liabilities and stockholder's equity	$	1,731,075	$	1,733,035

CEC ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)

	Nine Months Ended
	October 2, 2016		September 27, 2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	6,459	$	1,648
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	90,167		89,597
Deferred income taxes	(10,329)		(19,101)
Stock-based compensation expense	522		733
Amortization of lease related liabilities	(17)		(2)
Amortization of original issue discount and deferred debt financing costs	3,410		3,410
Loss on asset disposals, net	6,298		4,867
Asset impairments	772		875
Non-cash rent expense	5,261		6,190
Other adjustments	237		(908)
Changes in operating assets and liabilities:
Operating assets	3,554		(2,011)
Operating liabilities	4,920		3,000
Net cash provided by operating activities	111,254		88,298
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Peter Piper Pizza	—		(663)
Purchases of property and equipment	(66,535)		(56,994)
Development of internal use software	(8,788)		(2,784)
Proceeds from sale of property and equipment	426		261
Net cash used in investing activities	(74,897)		(60,180)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on senior term loan	(5,700)		(5,700)
Other financing activities	(1,810)		(71,538)
Net cash used in financing activities	(7,510)		(77,238)
Effect of foreign exchange rate changes on cash	356		(977)
Change in cash and cash equivalents	29,203		(50,097)
Cash and cash equivalents at beginning of period	50,654		110,994
Cash and cash equivalents at end of period	$	79,857	$	60,897

CEC ENTERTAINMENT, INC.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(Unaudited)
(in thousands)

Non-GAAP Financial Measures

The Company reports and discusses its operating results using financial measures consistent with accounting principles generally accepted in the United States ("GAAP"). From time to time in the course of financial presentations, earnings conference calls or otherwise, the Company may disclose certain non-GAAP financial measures such as Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA"). The Company believes Adjusted EBITDA is a measure that provides investors with additional information to measure our performance. We believe that the presentation of Adjusted EBITDA is appropriate to provide additional information to investors about certain material non-cash items and about unusual items that we do not expect to continue at the same level in the future, as well as other items. Further, we believe Adjusted EBITDA provides a meaningful measure of operating profitability because we use it for evaluating our business performance and understanding certain significant items. The non-GAAP financial measures presented in this earnings release should not be viewed as alternatives or substitutes for the Company's reported GAAP results.

The following table sets forth a reconciliation of net income to Adjusted EBITDA and Adjusted EBITDA expressed as a percentage of total revenues for the periods shown:

	Three Months Ended				Nine Months Ended
	October 2, 2016		September 27, 2015		October 2, 2016			September 27, 2015

Total revenues	$	228,070	$	221,937		$	719,009		$	699,523
Net income (loss) as reported	$	(2,404)	$	(3,202)		$	6,459		$	1,648
Interest expense	17,237		17,209			51,419			52,031
Income tax expense (benefit)	(2,286)		(1,508)			4,645			3,319
Depreciation and amortization	29,886		29,350			90,167			89,597
Non-cash impairments, gain or loss on disposal	2,997		2,700			7,070			5,742
Non-cash stock-based compensation	185		164			522			733
Rent expense book to cash	1,603		2,468			6,267			6,649
Franchise revenue, net cash received	(35)		386			127			321
Impact of purchase accounting	171		249			725			597
Store pre-opening costs	572		178			888			539
One-time items	1,615		4,941			4,670			12,546
Cost savings initiatives	—		505			62			1,505
Adjusted EBITDA	$	49,541	$	53,440		$	173,021		$	175,227
Adjusted EBITDA as a percent of total revenues	21.7%		24.1%			24.1%			25.0%

Adjusted EBITDA, a measure used by management to assess operating performance, is defined as Net income (loss) plus interest expense, income taxes and depreciation and amortization, adjusted to exclude asset impairments, the effects of acquisition accounting adjustments, transaction and severance costs, and certain other items.

CEC ENTERTAINMENT, INC.
STORE COUNT INFORMATION
(Unaudited)

	Three Months Ended			Nine Months Ended
	October 2, 2016		September 27, 2015	October 2, 2016	September 27, 2015
Number of Company-owned stores:
Beginning of period	556		557	556	559
New ⁽¹⁾	3		1	4	3
Closed ⁽¹⁾	(2)		(2)	(3)	(6)
End of period	557		556	557	556
Number of franchised stores:
Beginning of period	183		173	176	172
New ⁽²⁾	2		4	11	8
Closed ⁽²⁾	—		(4)	(2)	(7)
End of period	185		173	185	173
Total number of stores:
Beginning of period		739	730	732	731
New ⁽³⁾		5	5	15	11
Closed ⁽³⁾		(2)	(6)	(5)	(13)
End of period		742	729	742	729

________________

⁽¹⁾	The number of new and closed Company-owned stores during the nine months ended September 27, 2015 included one store that was relocated.
⁽²⁾	The number of new and closed franchise stores during the three and nine months ended September 27, 2015 included one and two stores, respectively, that were relocated.
⁽³⁾	The number of new and closed stores during the three and nine months ended September 27, 2015 included one and three stores, respectively, that were relocated.