Business context and reporting period
AMC Entertainment Holdings, Inc. operates movie theatres in the United States and internationally. This unaudited Form 10-Q covers the three and nine months ended September 30, 2017. Following acquisitions of Carmike, Odeon and Nordic, AMC reported 1,006 theatres and 11,046 screens in 15 countries. Comparisons with 2016 are materially affected by those acquisitions.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $1,178.7m | $779.8m | $3,662.4m | $2,309.8m |
| Operating income (loss) | $(4.3)m | $65.5m | $31.4m | $180.4m |
| Net earnings (loss) | $(42.7)m | $30.4m | $(210.8)m | $82.7m |
| Diluted EPS | $(0.33) | $0.31 | $(1.65) | $0.84 |
| Adjusted EBITDA | $147.4m | $144.4m | $534.3m | $420.4m |
| Cash from operating activities | — | — | $229.1m | $211.3m |
- Revenue increased 51.2% in Q3 and 58.6% year to date, largely from acquisitions. Q3 attendance rose 53.1%, while average ticket price declined 0.9% and food-and-beverage revenue per patron fell 5.2%. For the first nine months, attendance increased 66.2%, while average ticket price fell 3.9% and food-and-beverage revenue per patron fell 7.5%.
- Operating margin was approximately negative 0.4% in Q3 versus 8.4% a year earlier; for the nine months it was approximately 0.9% versus 7.8%. Net margin was approximately negative 3.6% in Q3 and negative 5.8% year to date.
- Q3 Adjusted EBITDA was nearly flat overall, but U.S. Markets EBITDA declined 25.5% to $107.6m, primarily on lower attendance per average screen and higher rent. International Markets contributed $39.8m, versus a loss of $0.1m, mainly reflecting acquired operations. Year-to-date EBITDA growth was primarily international and acquisition-related. Adjusted EBITDA is a non-GAAP measure and excludes items including interest, taxes and capital expenditures.
- Nine-month operating cash flow was $229.1m; capital expenditures were $467.7m, implying approximately $238.6m of negative operating cash flow after capex, before acquisitions and other investing activity. Investing cash outflow totaled $815.3m.
- At September 30, cash and cash equivalents were $260.0m; current assets were $622.0m and current liabilities $1,180.2m. The company reported a $565.0m working-capital deficit, excluding restricted cash. Revolver availability, net of letters of credit, was $152.1m.
- Corporate borrowings were $4,277.4m, with $594.4m of long-term capital and financing lease obligations and $89.1m of current maturities of borrowings and lease obligations. Total borrowings and lease obligations before deferred financing charges and premiums were $4,960.9m. Interest expense was $71.4m in Q3 and $203.4m year to date. AMC said it was in compliance with financial debt covenants.
Material changes versus prior comparable period
- Acquisitions expanded reported revenue and costs substantially; acquisition effects limit direct year-over-year comparability. On a pro forma basis assuming the acquisitions occurred at the start of 2016, Q3 revenue was $1,178.7m versus $1,307.3m, and nine-month revenue was $3,739.2m versus $3,908.7m. Pro forma net losses were $42.7m and $209.0m in 2017, versus losses of $25.1m and $91.0m in 2016, respectively.
- Operating costs rose faster than revenue in reported results, including higher operating expense, rent, depreciation and amortization. Interest expense increased substantially following acquisition-related debt issuance and assumed obligations.
- The company recorded a $204.5m other-than-temporary impairment of its NCM investment and losses on NCM share sales of $22.2m year to date. These items contributed materially to the year-to-date net loss.
- AMC completed a $616.8m net equity offering, issued $475.0m of 6.125% notes due 2027 and £250.0m of additional 6.375% notes due 2024, and repaid Nordic term loans and a $350.0m bridge loan. Corporate borrowings increased from $3,745.8m at year-end 2016 to $4,277.4m.
Outlook, commentary, risks and unusual items
- No full-year revenue or earnings guidance is provided. AMC estimated 2017 gross capital expenditures of $600m–$670m, before expected landlord contributions of approximately $100m–$120m. Management said cash from operations, existing cash, revolver availability and asset sales should fund operations, planned capex, dividends and repurchases and support covenant compliance for at least 12 months.
- A $78.2m gain on the September sale-leaseback of seven theatres was deferred and will be amortized over the lease term; proceeds net of closing costs were $128.4m. The company also recognized a $17.2m gain on the sale of its Open Road investment.
- Goodwill was $4,889.5m. An interim impairment test, prompted by falling share prices and weak box office performance, found no impairment; estimated fair value exceeded carrying value by only 7.2% for Domestic Theatres, 4.2% for Odeon and 1.2% for Nordic. AMC cautioned that further share-price declines or weaker performance could cause material future impairment.
- The DOJ settlement related to Carmike requires theatre divestitures, advertising-network transfers and staged reductions in AMC’s NCM ownership to no more than 4.99% by June 2019. AMC reported meeting the NCM divestiture requirement for 2017. It retained a 15.2% NCM LLC interest at quarter-end; further declines in its value could prompt additional impairment.
- Other risks include film slate and box-office volatility, competition and alternative entertainment, substantial debt and interest-rate exposure, international currency movements, acquisition integration and synergy execution, deferred-tax-asset realizability, and unresolved federal and state antitrust investigations concerning potentially anticompetitive conduct. The company said ordinary-course claims were not expected to have a material adverse effect, while noting litigation outcomes remain uncertain.
- AMC continued quarterly dividends of $0.20 per share and declared another $0.20 dividend after quarter-end. It also authorized a $100m two-year share repurchase program; $16.5m had been spent by September 30, with $83.5m remaining. Repurchases and dividends are discretionary and compete with liquidity and capital needs.
Important facts for investors to verify
- Whether U.S. attendance, ticket pricing and per-patron concession trends improve, and how much reported growth reflects acquisitions rather than comparable-theatre performance.
- Whether acquisition integration, expected synergies and international operations deliver sustainable profitability and cash generation.
- Liquidity and leverage capacity after capex, lease obligations, interest, dividends and repurchases; confirm revolver availability and covenant headroom.
- Goodwill and NCM valuation assumptions, including the narrow impairment cushions and the value of AMC’s remaining NCM LLC units.
- Execution of DOJ divestiture and NCM ownership requirements, and developments in antitrust investigations and other contingencies.
- Potential balance-sheet effects of lease accounting adoption in 2019 and revenue classification changes expected with ASC 606 adoption in 2018.