AMC Entertainment Holdings, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. AMC operates theatres in the U.S. and internationally. At quarter-end it operated or held interests in 1,004 theatres and 11,036 screens. Results are seasonal. AMC adopted ASC 842 lease accounting on January 1, 2019; prior-year comparative amounts were not restated, limiting comparability of rent, depreciation, cash flows and balance-sheet liabilities.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $1,506.1 million | $1,442.5 million | $2,706.5 million | $2,826.1 million |
| Operating income | $105.5 million | $89.7 million | $71.8 million | $199.6 million |
| Net earnings (loss) | $49.4 million | $22.2 million | $(80.8) million | $39.9 million |
| Adjusted EBITDA | $237.6 million | $244.8 million | $345.8 million | $522.7 million |
| Cash from operating activities | Not provided for the quarter | $153.6 million | $297.1 million |
- Q2 operating margin was approximately 7.0%, versus 6.2% a year earlier; first-half operating margin was approximately 2.7%, versus 7.1%. First-half Adjusted EBITDA margin was approximately 12.8%, versus 18.5%.
- Q2 basic EPS was $0.48 and diluted EPS was $0.17; both basic and diluted first-half EPS were $(0.78). The convertible notes affected Q2 diluted EPS calculation.
- Q2 admissions revenue was nearly flat, as attendance rose 6.2% while average ticket price fell 5.9%. Food and beverage revenue rose 10.5%; other theatre revenue rose 17.6%.
- First-half attendance declined 3.0%, admissions revenue fell 8.1%, and total revenue fell 4.2%. Food and beverage revenue increased 1.1% and other theatre revenue increased 7.4%.
- Cash and cash equivalents were $190.5 million at June 30, down from $313.3 million at year-end 2018; including restricted cash, period-end cash was $201.2 million. First-half operating cash flow fell from $297.1 million to $153.6 million. Capital expenditures were $229.9 million.
- Corporate borrowings were $4.713 billion, excluding finance and operating lease liabilities. Reported finance and operating lease liabilities totaled $5.543 billion. The balance sheet showed a $1.135 billion working-capital deficit, including $570.8 million of current operating lease liabilities.
Material changes and unusual items
- Q2 revenue growth and higher operating income did not translate into higher Adjusted EBITDA, which declined $7.2 million. U.S. Adjusted EBITDA fell $20.1 million to $202.1 million; International Adjusted EBITDA rose $12.9 million to $35.5 million.
- First-half Adjusted EBITDA declined $176.9 million. Management attributed the decrease mainly to lower U.S. attendance, prior-year lease-related rent benefits, ASC 842 effects and, internationally, lower attendance and foreign-exchange translation.
- Q2 other income included a $33.9 million fair-value gain on the embedded conversion derivative and a $7.1 million gain on a related derivative asset, partly offset by a $16.6 million debt-repayment/modification expense. These items materially influenced reported earnings and are not a measure of recurring theatre performance.
- In April, AMC refinanced existing term loans and redeemed $605 million of notes using a new $2.0 billion term loan due 2026. The refinancing generated a $16.6 million loss, including extinguishment and third-party costs. The new term loan carried a 5.23% rate at June 30.
- ASC 842 brought substantial lease balances onto the balance sheet: $4.799 billion of operating right-of-use assets and $5.423 billion of operating lease liabilities, in addition to finance lease liabilities. Management reported $487.9 million of rent expense for the first half, up 25.3%; the filing attributes much of the increase to lease-accounting changes and prior-year items.
Liquidity, outlook and risks
- AMC said cash from operations, existing cash and borrowing availability were expected to fund operations, planned capital expenditures and dividends and maintain covenant compliance for at least the next 12 months. It reported compliance with financial debt covenants at June 30.
- Available borrowing capacity was $211.6 million under the U.S. revolving facility and $105.4 million under Odeon’s facility, net of its standby letters of credit. Expected 2019 capital expenditures, net of landlord contributions, were approximately $415 million. This is the stated capex outlook; the filing provides no clear full-year revenue or earnings guidance.
- The board declared a $0.20-per-share dividend on August 2, payable September 23, 2019. Dividend payments remain subject to cash generation, debt restrictions and available restricted-payment capacity.
- Key disclosed risks include film slate and distributor dependence, competition and alternative entertainment, shrinking theatrical windows, the performance of AMC Stubs A-List, significant debt and refinancing/covenant constraints, access to capital, theatre renovation costs, foreign exchange, goodwill impairment and legal claims.
- AMC’s market capitalization had been below carrying value since May 24. Management did not consider the share-price decline sustained enough to require a goodwill impairment test at June 30, but warned that a continued decline or other adverse developments could lead to material impairment charges.
- Pending matters include securities class actions and a stockholder derivative action; a special litigation committee was formed in July 2019 to evaluate the Delaware action. Management said outcomes were not expected to materially affect the financial statements, while acknowledging litigation uncertainty.
Most important facts for investors to verify
- Whether attendance, ticket pricing and film performance support sustained revenue and Adjusted EBITDA improvement, especially after the first-half decline.
- How ASC 842 and the non-restated prior-year figures affect operating-cost, margin and cash-flow comparisons; distinguish lease liabilities from funded corporate debt.
- Debt service capacity, interest-rate exposure, refinancing options and ongoing covenant and dividend capacity, given the working-capital deficit and significant lease commitments.
- The recurring operating performance apart from derivative fair-value gains, debt-refinancing costs and the gain on the Austria theatre disposition.
- Whether the stock-price and operating outlook trigger a goodwill impairment review, and the eventual outcomes of the disclosed litigation.