AMC Entertainment Holdings, Inc. — Q2 2018 Form 10-Q
Business context and period. AMC operates movie theatres in the U.S. and Europe. This unaudited report covers the quarter and six months ended June 30, 2018; comparisons are with 2017. Results are seasonal and depend on film releases. Wanda owned approximately 59.44% of common shares and 81.47% of combined voting power as of quarter-end.
Financial performance
| Metric | Three months ended June 30, 2018 | Six months ended June 30, 2018 |
|---|---|---|
| Revenue | $1,442.5 million, up 20.0% | $2,826.1 million, up 13.8% |
| Operating income | $89.7 million, versus a $19.5 million loss | $199.6 million, versus $35.9 million |
| Net earnings | $22.2 million, versus a $176.5 million loss; diluted EPS $0.17 | $39.9 million, versus a $168.1 million loss; diluted EPS $0.31 |
| Adjusted EBITDA | $244.8 million, versus $135.8 million | $522.7 million, versus $386.9 million |
| Operating cash flow | Not separately reported for the quarter | $297.1 million, versus $118.4 million |
Q2 operating margin was approximately 6.2% and net margin approximately 1.5%. For the six-month period, they were approximately 7.1% and 1.4%, respectively. Adjusted EBITDA is a non-GAAP measure and has limitations; it is not a substitute for GAAP earnings or cash flow.
- Revenue drivers: Q2 admissions revenue rose 17.7%, food and beverage 19.2%, and other theatre revenue 50.3%. Attendance increased 11.8% overall and average ticket price increased 5.3%. U.S. attendance rose 20.4%; international attendance fell 9.3%.
- Costs and interest: Q2 film exhibition costs rose 24.1%, faster than admissions revenue; those costs were 52.6% of admissions revenue, up from 49.9%. Six-month interest expense was $164.9 million, up from $132.0 million.
- Cash and liquidity: Cash and cash equivalents were $316.4 million, with restricted cash of $11.0 million. Working capital, excluding restricted cash, was negative $413.5 million. Revolver availability was $210.8 million at AMC and $112.6 million at Odeon, net of letters of credit. Management reported compliance with financial debt covenants and expected available resources to fund operations, planned capital expenditures, dividends and repurchases for at least 12 months.
- Debt and leases: Corporate borrowings were $4,202.6 million, excluding current maturities included with lease obligations in the balance sheet. Capital and financing lease obligations were $536.8 million, excluding their current portion. The company also had $1,352.4 million outstanding under variable-rate term loans.
- Investing and distributions: Six-month capital expenditures were $241.1 million. The company paid $51.4 million in dividends and declared $0.20 per share for the following quarter. It repurchased 500,000 shares in June for approximately $8.2 million.
Material changes versus prior period
- Q2 and first-half earnings improved substantially from 2017 losses, partly because 2017 included NCM impairment charges of $202.6 million for Q2 and $204.5 million for the first half. AMC recorded a $16.0 million NCM impairment in the first half of 2018.
- Revenue gains reflected stronger U.S. film attendance, pricing and food-and-beverage initiatives. International Q2 attendance declined amid a weaker film slate, competition and refurbishment-related closures.
- Comparability is affected by AMC’s acquisition of Nordic in March 2017: 2018 includes a full six months of Nordic results, whereas the 2017 first-half comparison includes only the post-acquisition period.
- ASC 606 adoption increased reported other theatre revenue and added non-cash NCM agreement interest expense: $10.4 million in Q2 and $20.9 million in the first half. It also changed the timing and presentation of certain revenues; prior-year figures were not restated. The filing states these accounting changes did not affect operating cash flow.
Outlook, commentary, risks and unusual items
- Management forecast 2018 gross capital expenditures of approximately $600–$640 million, before expected landlord contributions of approximately $140–$150 million. No full-year revenue or earnings guidance is provided in the supplied filing text.
- Management attributed higher Adjusted EBITDA primarily to attendance gains and lower rent expense following a lease modification. That modification reduced rent expense by $35.0 million in the first half; the benefit is reflected in the period’s results.
- AMC completed a theatre real-estate sale-leaseback for $50.1 million net proceeds; the approximately $27.3 million gain was deferred and will be amortized over the lease term.
- After quarter-end, AMC sold its remaining NCM units on July 5 for approximately $156.8 million and expected to record an approximately $30 million gain in Q3. Screenvision distributed $45.9 million on July 2; AMC expected an approximately $30 million excess distribution to be recorded in Q3 earnings.
- Key risks include film-release performance and distributor terms, competition and alternative entertainment, substantial indebtedness and refinancing needs, debt covenants, theatre investment and integration, impairment exposure, currency movements, and the ability to sustain dividends. The filing also describes securities class actions and ongoing federal and state antitrust investigations; AMC said it believes the securities claims lack merit and intends to defend them.
- ASC 842 lease accounting, planned for adoption January 1, 2019, was expected to materially affect the balance sheet; AMC had not quantified the effect. The company also reported U.S. and certain foreign deferred-tax-asset valuation allowances.
Most important facts for investors to verify
- How much of the earnings improvement reflects stronger underlying theatre operations versus the unusually large prior-year NCM impairment and other comparability effects.
- Whether attendance, film-cost percentages and international performance remain favorable as film releases and refurbishment closures change.
- Cash generation, debt service, revolver availability, covenant headroom and funding for the stated capital-spending plan and dividends.
- Whether expected NCM and Screenvision proceeds and gains were realized and recorded as described after quarter-end.
- The eventual balance-sheet effect of lease-accounting adoption and developments in litigation, antitrust inquiries and impairment assessments.