AMC ENTERTAINMENT HOLDINGS, INC. quarterly report, Q1 FY2018

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AMC Entertainment Holdings, Inc. — Q1 2018 Form 10-Q

Reporting period: Three months ended March 31, 2018. AMC operates theatres in the U.S. and Europe; at quarter-end it operated 1,008 theatres and 11,071 screens. Wanda owned approximately 59.2% of common stock and 81.3% of combined voting power. Results are unaudited, and AMC cautions that seasonality makes the quarter an unreliable indicator of full-year results.

Financial performance

  • Revenue: $1.384 billion, up 8.0% from $1.281 billion. Admissions rose 7.0% to $875.0 million; food and beverage rose 2.1% to $405.8 million; other theatre revenue rose 55.1% to $102.8 million.
  • Operating income: $109.9 million versus $55.3 million; operating margin was approximately 7.9%, compared with 4.3%.
  • Net earnings: $17.7 million, or $0.14 per diluted share, versus $8.4 million, or $0.07 per share. Net margin was approximately 1.3%, versus 0.7%.
  • Adjusted EBITDA: $277.9 million, up 10.7% from $251.1 million. U.S. markets contributed $208.4 million and International markets $69.5 million. This is a non-GAAP measure and is not a substitute for cash flow or GAAP earnings.
  • Cash flow: Operating cash flow was $165.4 million, down from $172.5 million. Capital expenditures were $107.3 million, implying approximately $58.1 million of operating cash flow less capex before other investing and financing items. Investing used $114.8 million; financing used $62.4 million. Cash and restricted cash ended at $312.5 million.
  • Debt and liquidity: Corporate borrowings were $4.330 billion, including current maturities; capital and financing lease obligations were $659.7 million. The balance sheet also reported a $575.0 million exhibitor services agreement liability. Cash and cash equivalents were $300.9 million. Working capital excluding restricted cash was negative $495.7 million. Available borrowing was $210.8 million on the U.S. revolver and $118.0 million on Odeon’s facility; no revolver borrowings were outstanding. AMC reported compliance with financial debt covenants.
  • Dividend: $0.20 per share was paid during the quarter; the board declared another $0.20 per share, payable June 25, 2018.

Changes versus the prior comparable period

  • Revenue growth was largely driven by the Nordic acquisition, which contributed a full quarter in 2018 but only four days in Q1 2017, and by favorable foreign exchange. International revenue rose 38.8% to $401.5 million; U.S. revenue declined 1.0% to $982.1 million.
  • Attendance fell 2.6% overall to 90.9 million, while average ticket price increased 9.9%. U.S. attendance declined 7.4%; international attendance benefited from Nordic, though Odeon attendance weakened.
  • Operating income improved substantially, helped by lower merger and acquisition costs ($4.7 million versus $40.2 million) and a $24.2 million rent reduction from a lease modification. Higher interest expense, operating expenses, and equity-method losses partly offset these benefits.
  • Interest expense increased to $82.5 million from $62.0 million, including $10.5 million of noncash interest recognized under the new revenue standard. A $16.0 million impairment of NCM investments held for sale contributed to equity-method losses.
  • Q1 2018 adopted ASC 606; Q1 2017 was not restated. The new standard increased reported revenue and expense in certain areas, including gross presentation of online ticket fees and advertising revenue with an offsetting noncash financing expense. AMC reported Q1 2018 net earnings would have been $24.9 million without adoption, versus $17.7 million reported.

Outlook, commentary, and risks

  • Capital spending outlook: AMC expected 2018 gross capital expenditures of approximately $600–$640 million, before expected landlord contributions of approximately $140–$150 million. No full-year earnings or revenue guidance was provided in the filing.
  • Management said cash from operations, existing cash, revolver availability, and asset sales should fund operations, planned capex, dividends, and repurchases for at least 12 months and support covenant compliance. This is management’s assessment, not a guarantee.
  • AMC cited film slate and release timing, competition, alternative entertainment and shrinking theatrical windows, high indebtedness and refinancing needs, foreign currency movements, acquisition integration, and theatre renovation costs as risks. A 100-basis-point interest-rate change was estimated to change quarterly interest expense by $3.4 million; a 10% adverse currency move would reduce quarterly International segment net income by about $1.8 million.
  • Under the DOJ settlement, AMC must further reduce its NCM ownership. It classified 9.49 million NCM units and 1.0 million NCM, Inc. shares as held for sale, to be sold by December 20, 2018, and recorded a $16.0 million impairment at a quoted price of $5.19 per share. Remaining NCM units had carrying value above estimated fair value; additional impairment could result if the decline is deemed other than temporary.
  • Two securities class actions related to the February 2017 secondary offering were pending; AMC said losses were not then probable or reasonably estimable. Federal and state antitrust investigations concerning potentially anticompetitive conduct were ongoing; the company said it was cooperating and could not predict their outcome.
  • AMC expects lease-accounting adoption in 2019 to materially affect its balance sheet, principally through recognition of operating-lease right-of-use assets and liabilities; the impact had not been quantified.
  • A $35 million landlord incentive from a lease modification reduced Q1 rent expense by $24.2 million. AMC also noted possible future goodwill impairment if share prices, operating performance, or other valuation assumptions deteriorate.

Important facts for investors to verify

  • How much of revenue and EBITDA growth reflects Nordic ownership and currency effects versus underlying attendance and comparable-theatre performance?
  • Can AMC sustain operating cash generation while funding its $600–$640 million gross 2018 capital plan, dividends, and debt service?
  • What are the expected timing and proceeds, tax consequences, and possible further impairment effects of required NCM divestitures?
  • How should investors interpret earnings and revenue trends given ASC 606’s non-comparable presentation and the $24.2 million lease-related rent benefit?
  • What are the potential financial exposure and developments in the securities actions and antitrust investigations, and how could lease-accounting adoption alter reported liabilities and leverage?