AMC ENTERTAINMENT HOLDINGS, INC. quarterly report, Q2 FY2017

AMC Entertainment Holdings, Inc. — Q2 2017 Form 10-Q

Reporting period: Three and six months ended June 30, 2017. Unaudited consolidated results. AMC operates theatres in the U.S. and Europe; acquisitions of Carmike, Odeon and Nordic substantially expanded the reported business. Results are seasonal and year-to-date results are not necessarily indicative of full-year performance.

Financial performance

Metric	Q2 2017	Q2 2016	Six months 2017	Six months 2016
Revenue	$1,202.3 million	$764.0 million	$2,483.7 million	$1,530.0 million
Operating income (loss)	$(19.6) million	$55.6 million	$35.7 million	$114.9 million
Net income (loss)	$(176.5) million	$24.0 million	$(168.1) million	$52.3 million
Diluted loss per share	$(1.35)	$0.24 earnings	$(1.33)	$0.53 earnings
Adjusted EBITDA	$135.8 million	$129.6 million	$386.9 million	$276.1 million
Operating cash flow	Not separately provided for quarter	Not separately provided for quarter	$109.8 million	$134.0 million

Margins and revenue drivers: Q2 operating margin was approximately negative 1.6%, compared with 7.3% a year earlier. Revenue rose 57.4% in Q2 and 62.3% year to date, primarily reflecting the acquired theatre chains. Q2 attendance increased 63.3%, while average ticket price declined 3.1%; food and beverage revenue per patron declined 5.9%. AMC attributed these per-customer declines chiefly to the lower averages in its expanded international mix. Adjusted EBITDA rose 4.8% in Q2 and 40.1% for the first half; U.S. segment EBITDA fell 11.4% in Q2 to $115.0 million, while international segment EBITDA was $20.8 million.

Exceptional item: Q2 and first-half results include a $202.6 million and $204.5 million, respectively, other-than-temporary impairment of AMC’s National CineMedia investment, written down to a quoted price of $7.42 per share. The impairment was the principal driver of the reported net loss. Adjusted EBITDA is a non-GAAP measure and excludes this equity-method loss, among other adjustments.

Cash, debt and liquidity

• Cash and equivalents were $127.8 million at June 30, 2017, down from $207.1 million at year-end 2016; restricted cash was $6.5 million.
• Current assets were $622.3 million and current liabilities $1,146.6 million. The company reported a working capital deficit of $530.8 million, excluding restricted cash; deferred revenue accounted for $292.8 million of current liabilities.
• Corporate borrowings were $4,249.1 million; capital and financing lease obligations were $599.1 million long-term, plus current maturities. The debt schedule reported $4,934.4 million of borrowings and lease obligations before deferred financing charges and premiums. Total interest expense was $69.9 million in Q2 and $132.0 million for the first half.
• Net cash provided by operations was $109.8 million for the first half. Investing used $882.0 million, including $584.4 million net cash paid for Nordic and $318.0 million of capital expenditures. Financing provided $681.2 million, including equity and debt issuance.
• At June 30, AMC had $50.0 million drawn on its revolving facility and $162.1 million available for borrowing, net of letters of credit. Management said cash, operating cash generation and operating float should fund operations and planned capital spending and support covenant compliance for at least 12 months. AMC stated it was in compliance with debt covenants.

Material changes and transactions

• AMC completed the $654.9 million cash acquisition of Nordic on March 28, 2017. Carmike and Odeon had been acquired in December and November 2016, respectively. Acquisition-related revenue and screen growth make year-over-year comparisons less representative of underlying performance; acquisition purchase-price allocations remained preliminary.
• In February, AMC issued 20.3 million Class A shares for net proceeds of $616.8 million, using part of the proceeds to repay a $350 million bridge loan. In March, it issued $475 million of 6.125% notes due 2027 and an additional £250 million of 6.375% notes due 2024, primarily to fund Nordic and refinance assumed Nordic debt.
• At June 30, AMC had 1,009 theatres and 11,083 screens. First-half capital expenditures were $318.0 million, versus $140.3 million in the prior-year period.
• On August 3, the board declared a $0.20-per-share dividend and authorized a discretionary $100 million Class A share repurchase program over two years. On August 4, AMC and Regal completed the sale of Open Road Releasing; AMC received $14.4 million before transaction expenses for its 50% interest.

Outlook, management commentary and risks

• AMC forecast gross 2017 capital expenditure cash outflows of approximately $600–$670 million, before expected landlord contributions of $100–$120 million. No full-year revenue or earnings guidance is provided in the filing.
• Management cited acquisition attendance gains and anticipated procurement and cost synergies, while noting that integration, theatre renovations and strategic initiatives carry execution risk. AMC said recliner renovations had produced 47% higher attendance at locations in their first year after renovation; this is management’s reported experience, not a company-wide forecast.
• The company identified film availability and popularity, seasonality, competition and alternative entertainment, changing theatrical release windows, substantial indebtedness and refinancing needs, foreign exchange exposure, acquisition integration, impairment and closure risks, and limits on capital availability as risks.
• A DOJ settlement tied to the Carmike acquisition requires theatre divestitures, advertising-network transfers and a phased reduction of AMC’s NCM ownership to no more than 4.99% by June 2019. AMC classified $110.5 million of NCM interests as held for sale and was required to reach 15% ownership by December 20, 2017. Separately, federal and state authorities were investigating potential antitrust conduct; AMC said it was cooperating and could not predict the investigations’ outcome.
• The company noted that the new lease accounting standard, effective for AMC in 2019, is expected to materially affect its financial statements; its impact had not yet been quantified. AMC also expected revenue recognition changes in 2018, including a significant financing component in its NCM agreement that it said would increase advertising revenue with a similar offsetting increase in interest expense.

Important facts for investors to verify

• How much of revenue and EBITDA growth reflects acquired operations versus comparable-theatre performance, and whether expected acquisition synergies are being realized.
• The outlook for attendance, average ticket price and food-and-beverage spending per patron, particularly in the U.S. and international segments.
• The NCM impairment assumptions, required ownership reduction and timing and tax consequences of selling NCM interests.
• Debt maturities, interest costs, revolver availability, covenant headroom and the ability to fund capital spending, dividends and any repurchases alongside the working capital deficit.
• Actual capital spending and landlord contributions against the 2017 estimates, plus the financial impact of lease and revenue-recognition standard adoption.