AMC Entertainment Holdings, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; this is an annual report, not a standalone fourth-quarter filing. Amounts are U.S. dollars unless stated otherwise.
Business context
AMC operates movie theatres and earns most revenue from admissions and food and beverage sales. Following the Odeon, Carmike and Nordic acquisitions, it operated 1,014 theatres and 11,169 screens in 15 countries at year-end. International markets contributed 26.7% of 2017 revenue. Dalian Wanda owned approximately 59.37% of common shares and 81.43% of voting power.
Financial and operating performance
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $5,079.2 million | $3,235.9 million |
| Operating income | $101.8 million | $212.9 million |
| Operating margin | 2.0% | 6.6% |
| Net earnings (loss) | $(487.2) million | $111.7 million |
| Diluted earnings (loss) per share | $(3.80) | $1.13 |
| Adjusted EBITDA | $822.5 million | $602.0 million |
| Cash provided by operating activities | $558.7 million | $431.7 million |
| Capital expenditures | $626.8 million | $421.7 million |
Revenue grew 57.0%, largely because the acquired businesses were included for more of the year; attendance increased 61.2%, while average ticket price declined 2.2%. Food and beverage revenue per patron fell 5.7%, primarily reflecting the lower-spending international mix. Operating costs rose faster than revenue, and operating income fell 52.2%. Adjusted EBITDA is a company-defined non-GAAP measure and should not be treated as a substitute for net income or cash flow.
Cash and equivalents were $310.0 million at year-end. Working capital was negative $545.3 million, including $401.0 million of deferred revenue. Available borrowing capacity was $212.8 million under the U.S. revolver and $113.0 million under Odeon’s facility; AMC reported compliance with financial debt covenants. Carrying-value indebtedness, including capital and financing leases, was $4.89 billion; face amount was approximately $4.96 billion. The company also disclosed approximately $7.0 billion of future operating lease payments. Operating cash flow less capital expenditures was approximately negative $68 million, before acquisitions, financing and other investing activity.
Material changes versus the prior year
- Revenue rose substantially with the acquisitions of Odeon, Carmike and Nordic; reported growth is not directly comparable to same-store or organic growth.
- Operating margin contracted and the company moved from $111.7 million of net income to a $487.2 million net loss. Interest expense increased to $274.0 million from $121.5 million, reflecting acquisition-related borrowing and lease obligations.
- Equity in losses of non-consolidated entities was $185.2 million, versus equity earnings of $47.7 million in 2016, principally due to NCM impairment and share-sale losses.
- Capital expenditures increased by $205.1 million. Cash from operations increased, but was below capital expenditures.
Outlook, commentary, risks and unusual items
- Tax charge: AMC recorded an approximately $310 million fourth-quarter 2017 tax provision charge related to the U.S. federal rate reduction and a full valuation allowance on U.S. deferred tax assets, following cumulative losses. Management gave no earnings guidance in the supplied filing text.
- NCM and DOJ settlement: AMC must reduce its National CineMedia ownership to 7.5% by December 20, 2018 and no more than 4.99% by June 20, 2019. NCM impairment and disposition losses were significant in 2017. The DOJ settlement also required theatre divestitures, advertising-network transfers, governance changes and information firewalls.
- Investment and operating plans: Management expected 2018 gross capital expenditures of $600–$640 million, before expected landlord contributions of $140–$150 million. It targeted 3,296 screens with recliner seating by year-end 2018 and approximately 42% of screens by the end of 2021. These are plans, not guaranteed outcomes.
- Other unusual items: AMC recognized $43.6 million of long-lived-asset impairment charges and a $17.2 million gain on the sale of Open Road. A $78.2 million gain on a theatre sale-leaseback was deferred and is to be amortized over the lease term.
- Key risks: significant debt and lease commitments, film availability and performance, competition from streaming and other entertainment, shrinking theatrical release windows, integration and execution risks, foreign exchange and international exposure, and potential future impairments. The company was cooperating with antitrust investigations concerning film clearances and joint ventures. Two securities class actions filed in 2018 related to the 2017 public offering and disclosures; AMC said a loss was not then probable or estimable.
- Governance and controls: Wanda controls voting power. Management and KPMG reported effective internal control over financial reporting, but Nordic’s controls—covering $1.3 billion of assets and $266.6 million of revenue—were excluded from the assessment. The independent auditor issued an unqualified opinion on the consolidated financial statements.
Investor verification priorities
- Separate acquisition-driven growth from comparable-theatre performance; verify attendance, ticket-price and per-patron trends by segment.
- Assess recurring cash generation against capital spending, dividends, debt service and lease obligations; confirm revolver availability and covenant headroom.
- Review the assumptions behind deferred-tax-asset valuation allowances and the potential for future tax charges or benefits.
- Track required NCM divestitures, proceeds, tax consequences and the effect on advertising-related earnings and distributions.
- Monitor integration and returns from the acquisitions, planned theatre upgrades, ongoing antitrust matters and the securities litigation.