Business context and reporting period
AMC Entertainment Holdings, Inc. filed its annual report for the fiscal year ended December 31, 2018. AMC operates movie theatres in the United States and Europe; at year-end it owned, operated, or held interests in 1,006 theatres with 11,091 screens across 15 countries. Its principal revenue sources are admissions and food and beverage sales. The filing also presents fourth-quarter results, but this is an annual 10-K rather than a quarterly filing.
Key financial metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $5.461 billion | $5.079 billion |
| Operating income | $265.0 million | $102.0 million |
| Operating margin | 4.9% | 2.0% |
| Net earnings (loss) | $110.1 million | $(487.2) million |
| Net margin | 2.0% | (9.6)% |
| Adjusted EBITDA | $929.2 million | $822.5 million |
| Cash from operating activities | $523.2 million | $537.4 million |
| Capital expenditures | $576.3 million | $626.8 million |
| Cash and cash equivalents | $313.3 million | $310.0 million |
Revenue rose 7.5%; admissions increased 4.8%, food and beverage revenue 8.0%, and other theatre revenue 34.2%. Attendance increased 3.5% overall. Adjusted EBITDA margin was approximately 17.0%, versus 16.2% in 2017. Operating cash flow less capital expenditures was negative $53.1 million in 2018, compared with negative $89.4 million in 2017; this simple difference is not a company-reported free-cash-flow measure.
At December 31, 2018, corporate borrowings and capital and financing lease obligations totaled approximately $5.283 billion on a carrying-value basis ($5.428 billion face amount). Cash was $313.3 million; the company reported a working-capital deficit of $557.5 million. Available borrowing capacity was $211.2 million under the U.S. revolving facility and $93.7 million under Odeon’s facility. AMC reported compliance with its financial debt covenants and stated it expected cash, operating cash flow, and facility availability to fund operations and planned spending for at least the next 12 months. The filing lists $7.013 billion of future minimum operating-lease payments.
Material changes versus the prior comparable period
- Net income returned to positive territory from a $487.2 million loss in 2017. The improvement reflected higher revenue, lower acquisition costs, fewer investment impairment losses, a lower tax provision, and favorable derivative fair-value changes. The comparison is affected by a roughly $310 million 2017 tax charge and $208 million of 2017 NCM impairment losses.
- Operating income increased to $265.0 million from $102.0 million. Adjusted EBITDA rose 13.0%, with U.S. Markets up 14.8% and International Markets up 7.6%.
- Operating cash flow edged down despite improved operating results, which AMC attributed primarily to higher cash interest and taxes. Capital spending remained substantial.
- Corporate borrowings increased from $4.235 billion to $4.723 billion, while reported capital and financing lease obligations declined from $651.4 million to $560.3 million.
- AMC issued $600 million of 2.95% senior unsecured convertible notes due 2024. Proceeds funded a $421 million repurchase and retirement of Wanda-held Class B shares and a special dividend of $1.55 per share. The notes carry conversion and reset provisions and are payable in cash at maturity.
Outlook, commentary, risks and unusual items
- Management expected 2019 net capital-expenditure cash outflows of approximately $450 million, expected about 3,875 screens with recliner seating by year-end 2019, and targeted approximately 43% of screens with recliners by year-end 2021. These are forward-looking targets, not guarantees.
- AMC’s strategy emphasizes theatre upgrades, premium formats, food and beverage, loyalty and online ticketing. Management cited attendance gains at renovated theatres, while acknowledging substantial investment needs.
- 2018 earnings included $111.4 million of favorable derivative fair-value changes, plus gains connected with the NCM sale and Screenvision merger. The fourth quarter included $165.5 million of derivative-related other income; Q4 net earnings were $170.6 million. These items make reported earnings less indicative of recurring operations. The filing also adopted ASC 606, which increased reported revenue and non-cash interest expense without increasing operating cash flow.
- Key risks include substantial debt and lease commitments, interest-rate exposure, film availability and popularity, intense competition and shorter theatrical release windows, international currency and Brexit uncertainty, integration of acquisitions, theatre impairment, and limits on dividends and other restricted payments. AMC’s U.S. deferred-tax-asset valuation allowance and future goodwill impairment sensitivity are also relevant.
- Two putative securities class actions and a related derivative action were pending. Management said ordinary-course claims were not expected to materially affect the company overall, while noting litigation outcomes remain uncertain.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Reconcile reported 2018 net income and Q4 earnings to the derivative gains, investment gains, and other non-recurring items; assess earnings excluding these effects.
- Review debt maturities, cash interest, variable-rate exposure, covenant headroom, and the ability to refinance alongside operating-lease commitments.
- Test whether planned capital spending and theatre upgrades can generate sufficient operating cash flow, particularly given negative operating cash flow less capital expenditures.
- Assess the sustainability of attendance, ticket pricing, food and beverage spending, and international performance, including Odeon trends and currency effects.
- Confirm dividend capacity and policy under debt covenants and cash needs; the 2018 per-share dividend total included a special $1.55 payment.
- Review dilution and control implications of the convertible notes, their reset terms, and Wanda’s continuing majority voting control.