AMC Entertainment Holdings, Inc. — Q3 2016 Form 10-Q
Business context and period: AMC operates movie theatres and reports one segment, Theatrical Exhibition. This unaudited filing covers the quarter and nine months ended September 30, 2016. At quarter-end, AMC operated or held interests in 388 theatres and 5,295 screens. The business is seasonal, with attendance and revenue generally higher in summer and holiday periods. Wanda owned approximately 77.8% of common shares and controlled approximately 91.3% of voting power.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $779.8 million | $688.8 million | $2,309.8 million | $2,163.0 million |
| Operating income | $65.5 million | $35.5 million | $180.4 million | $161.8 million |
| Net earnings | $30.4 million | $12.2 million | $82.7 million | $62.2 million |
| Diluted EPS | $0.31 | $0.12 | $0.84 | $0.63 |
| Adjusted EBITDA (non-GAAP) | $144.4 million | $109.0 million | $420.4 million | $382.4 million |
- Q3 revenue rose 13.2%, operating income 84.4%, net earnings 149.9%, and Adjusted EBITDA 32.5%. Approximate operating margin was 8.4%, versus 5.2% a year earlier; approximate net margin was 3.9%, versus 1.8%.
- For the first nine months, revenue increased 6.8%, operating income 11.5%, net earnings 32.9%, and Adjusted EBITDA 9.9%. Approximate operating margin was 7.8%, versus 7.5% in 2015.
- Q3 admissions revenue grew 12.6%, supported by 9.7% higher attendance and a 2.6% increase in average ticket price. Nine-month attendance rose 5.0%, while average ticket price declined 0.1%.
- Food and beverage revenue increased 14.8% in Q3 and 10.3% year to date. Food and beverage revenue per patron rose 4.8% and 5.0%, respectively. Management attributed gains to attendance, pricing, and food-and-beverage initiatives.
- Management cited stronger film performance, Starplex acquisition contribution, premium-format attendance, and theatre renovations as growth drivers. Q3 results also benefited from lower film-rental costs as a share of admissions and lower food-and-beverage costs as a share of sales.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $211.3 million, compared with $209.2 million. Capital expenditures were $256.6 million, up from $215.6 million; operating cash flow less capital expenditures was therefore approximately negative $45.3 million, before other investing activity.
- Cash and equivalents were $46.3 million at September 30, down from $211.3 million at December 31, 2015. The filing reports a working-capital deficit of $399.5 million, including $162.7 million of deferred revenue and income. Revolver availability, net of letters of credit, was $117.4 million.
- Corporate borrowings totaled $1.863 billion on the balance sheet, including $19.4 million of current maturities; capital and financing lease obligations totaled $105.7 million. The company also reported a $363.8 million Exhibitor Services Agreement liability, which is not presented as corporate borrowing.
- AMC paid $59.1 million in dividends in the first nine months, declaring $0.20 per share in each of the first three quarters. Management said available cash, operating cash flow, financing and operating “float” were expected to fund operations, dividends, planned capital spending and acquisitions for at least the next 12 months, subject to transaction and financing risks. AMC reported compliance with applicable financial covenants at quarter-end.
Material changes, outlook and risks
- Acquisitions: AMC had agreed to acquire Carmike for consideration structured to deliver an aggregate mix of 70% cash and 30% AMC shares, subject to regulatory and Carmike shareholder approvals. It had also agreed to acquire Odeon for cash, AMC shares and repayment of Odeon debt, subject to European Commission and UK competition clearances. Both deals were pending at the filing date.
- Subsequent financing: On November 8, 2016, after quarter-end, AMC issued $595 million of 5.875% notes due 2026 and £250 million of 6.375% notes due 2024, amended its credit agreement and borrowed $500 million of new term loans. Proceeds and other sources were intended to finance the acquisitions, repay certain Odeon debt and pay related costs. The LIBOR margin on the amended facility was reduced from 3.25% to 2.75%, and its 0.75% LIBOR floor was removed.
- Capital spending outlook: AMC expected 2016 gross capital expenditures of $400–$420 million, before estimated landlord contributions of $120–$130 million, implying net cash outlay of approximately $280–$300 million.
- Operating initiatives: AMC expected to have 50 Dolby Cinema auditoriums operational by year-end 2016 and 100 by year-end 2017. It planned further recliner conversions and a full Coca-Cola Freestyle rollout by year-end 2016. These are management plans, not guaranteed outcomes.
- Unusual and comparative items: Nine-month 2015 results included a $9.3 million loss on redemption of 2020 notes and an $18.1 million postretirement medical plan benefit credit; these make year-over-year comparisons less straightforward. 2016 nine-month investment income included a $3.0 million gain on sale of RealD shares and NCM tax-receivable payments.
- Risks and contingencies: AMC and other exhibitors were subject to federal and state antitrust investigations concerning film clearances and joint ventures; AMC said it was cooperating and could not predict the outcome. Key risks include acquisition approvals, financing and integration, substantial indebtedness and interest-rate exposure, film availability and performance, competition from alternative entertainment, possible share dilution, and the ability to sustain dividends. AMC disclosed no material change to previously reported risk factors beyond specified updates.
- Reporting and accounting: Management assessed disclosure controls as effective and reported no material change in internal control over financial reporting. AMC expected the new lease accounting standard to materially increase reported assets and liabilities; its impact from the new revenue standard was still being evaluated.
Important facts for investors to verify
- Whether Carmike and Odeon received required approvals, closed on expected terms, and produced the anticipated benefits and integration results.
- The final acquisition funding mix, resulting debt and interest costs, covenant headroom, and effects of foreign-exchange movements on Odeon financing.
- Whether operating cash flow and landlord contributions support the capital-spending plan while maintaining liquidity and the dividend.
- Whether attendance, ticket pricing, food-and-beverage spending and margins remain sustainable given film-release seasonality and acquisition effects.
- Developments in antitrust investigations and other litigation, and any implications for theatre dispositions or operations.