AMC Entertainment Holdings, Inc. — FY 2016 Form 10-K
Reporting period: Year ended December 31, 2016. AMC operates movie theatres and related food, beverage, advertising and ticketing businesses. It completed the Odeon acquisition on November 30 and Carmike acquisition on December 21, ending the year with 906 theatres and 10,558 screens across the United States and seven European countries. Because both acquisitions closed late in the year, reported results include only partial-period acquired operations and are not directly comparable with the prior year. Wanda controlled approximately 86.9% of voting power at year-end.
Financial results and liquidity
| Metric | FY 2016 | FY 2015 | Change / context |
|---|---|---|---|
| Total revenue | $3.236 billion | $2.947 billion | Up 9.8% |
| Admissions revenue | $2.049 billion | $1.892 billion | Up 8.3%; attendance rose 9.3%, while average ticket price declined 0.8% |
| Food and beverage revenue | $1.019 billion | $910.1 million | Up 12.0%; revenue per patron rose 2.6% |
| Operating income | $212.9 million | $237.1 million | Down 10.2%; operating margin was approximately 6.6%, versus 8.0% |
| Net earnings | $111.7 million | $103.9 million | Up 7.5%; diluted EPS was $1.13 versus $1.06 |
| Adjusted EBITDA | $602.0 million | $536.5 million | Up 12.2%; non-GAAP measure, with company-defined adjustments |
| Operating cash flow | $431.7 million | $467.6 million | Down $35.9 million |
| Capital expenditures | $421.7 million | $333.4 million | Up $88.3 million |
Film exhibition costs were 53.2% of admissions revenue, compared with 54.0% in 2015; food and beverage costs were 14.0% of food and beverage revenue, compared with 14.1%. Interest expense rose 14.6% to $121.5 million, reflecting acquisition-related borrowings and assumed lease obligations. The 2016 tax provision was $38.0 million, including a $19.2 million benefit from favorable resolution of uncertain tax positions.
Cash and equivalents were $207.1 million at year-end. Working capital was a deficit of $505.5 million, including $277.2 million of deferred revenue. The revolving credit facility had $137.4 million available, and AMC reported compliance with debt covenants. Debt was substantial: approximately $3.834 billion face amount of corporate borrowings, plus $675.4 million of capital and financing lease obligations. The filing also reports approximately $6.208 billion of undiscounted future operating lease payments.
Fourth-quarter 2016 revenue was $926.1 million, operating income $32.5 million and net earnings $29.0 million. The filing attributes a difficult year-over-year fourth-quarter comparison partly to the prior-year release of Star Wars: The Force Awakens.
Material changes versus the prior period
- Revenue and attendance increased, substantially influenced by the acquisitions of Starplex in December 2015 and Odeon and Carmike in 2016. Attendance growth outpaced revenue per ticket, which declined slightly.
- AMC more than doubled its screen count from 5,426 to 10,558 and established an International markets reporting segment following the Odeon acquisition.
- Operating income declined despite higher revenue. Acquisition-related costs rose to $47.9 million from $3.4 million; depreciation and amortization, rent and other general and administrative costs also increased.
- Operating cash flow decreased while capital spending increased. Investing cash outflow rose to $1.355 billion, including net acquisition payments of $438.7 million for Odeon and $497.8 million for Carmike.
- Corporate borrowings and capital and financing lease obligations increased materially to fund the acquisitions. Year-end cash was nearly unchanged from 2015.
Outlook, management commentary and risks
- Management expected 2017 gross capital expenditures of approximately $700 million to $750 million, partly offset by expected landlord contributions of $150 million to $170 million. AMC cited recliner renovations, premium formats, food and beverage enhancements, loyalty and digital ticketing as growth initiatives.
- Management expected approximately $35 million of annual cost synergies from Carmike and approximately $10 million from Odeon. These are expectations, not achieved results; integration, customer acceptance and realizing synergies remain risks.
- AMC expected expanded deployment of recliner seating, Dolby Cinema, IMAX, Coca-Cola Freestyle and other upgrades. The filing provides targets for these initiatives but no consolidated earnings or revenue guidance.
- After year-end, AMC agreed to acquire Nordic Cinema Group for an announced transaction value of approximately $929 million, including refinancing Nordic debt. Closing remained subject to European Commission antitrust clearance. AMC disclosed committed financing, but cautioned that completion and financing terms were not assured.
- The Carmike settlement with the U.S. Department of Justice requires divestiture of 17 theatres, transfers of 24 theatres to Screenvision’s advertising network, and a staged reduction of AMC’s NCM ownership to no more than 4.99% by June 2019. The NCM divestiture could reduce distributions and could generate tax costs; AMC also expects related payments under its NCM arrangements.
- AMC faces film slate and distributor concentration risk: seven distributors represented approximately 90% of U.S. admissions revenue. Results are seasonal and can vary with film popularity. Other significant risks include competition from home and alternative entertainment, shrinking theatrical release windows, high debt and lease commitments, variable interest rates, foreign currency exposure, acquisition integration, and pending antitrust investigations concerning potentially anticompetitive conduct.
- AMC reported an ongoing antitrust inquiry involving film clearances and joint ventures. It stated that it was cooperating and did not believe it had violated antitrust laws, but could not predict the investigations’ scope or outcome.
- The board declared a quarterly dividend of $0.20 per share in February 2017. Payment remains subject to board discretion, cash generation and debt covenant restrictions. In February 2017, AMC raised approximately $618 million net through additional Class A share offerings and used $350 million to repay the Carmike bridge loan, reducing debt but diluting existing shareholders.
- Management and KPMG reported effective internal control over financial reporting, but the year-end assessment excluded the newly acquired Odeon and Carmike operations because of acquisition timing. KPMG’s financial statement audit opinion was unqualified.
Important facts for investors to verify
- Separate acquisition-driven growth from comparable-theatre trends; verify the full-year and same-store contributions of Carmike and Odeon, including the impact on attendance, ticket prices and margins.
- Track integration progress and whether the expected $45 million of combined annual acquisition synergies are realized, net of integration and transaction costs.
- Reconcile debt, capital and financing leases, operating lease commitments, interest costs and covenant capacity after the February 2017 equity offering and any Nordic transaction financing.
- Monitor liquidity and cash conversion: operating cash flow fell to $431.7 million while 2017 planned gross capital expenditures were $700 million to $750 million.
- Confirm completion and financial effects of DOJ-required theatre divestitures, Screenvision transfers and NCM ownership reductions, including any cash payments, foregone distributions and tax consequences.
- Assess whether dividends remain supported by operating cash flow and permitted under debt agreements, and account for the dilution from the February 2017 share issuances.
- Review the pending Nordic acquisition’s regulatory status, final purchase and refinancing amounts, financing terms, and integration risks; the filing’s Nordic financial information was unaudited and prepared under IFRS.