AMC Entertainment Holdings, Inc. — Q2 2016 Form 10-Q
Business context and reporting period
AMC operates movie theatres in the United States, with one reportable segment, Theatrical Exhibition. This unaudited filing covers the three and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods. At quarter-end AMC operated 386 theatres and 5,334 screens. Results are seasonal and depend on the timing and popularity of film releases.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $764.0m | $821.1m | $1,530.0m | $1,474.2m |
| Operating income | $55.6m | $94.2m | $114.9m | $126.2m |
| Net earnings | $24.0m | $43.9m | $52.3m | $50.1m |
| Diluted EPS | $0.24 | $0.45 | $0.53 | $0.51 |
| Adjusted EBITDA (non-GAAP) | $129.6m | $157.8m | $276.0m | $273.5m |
| Cash from operations | Not separately presented for quarter | $133.9m | $192.9m |
- Q2 revenue fell 7.0%, operating income fell 41.0%, and net earnings fell 45.4%. Approximate operating margin was 7.3%, versus 11.5%; approximate net margin was 3.1%, versus 5.3%.
- First-half revenue rose 3.8%, but operating income declined 9.0%; net earnings increased 4.4%. Approximate operating margin was 7.5%, versus 8.6%, and net margin was 3.4% in both periods. Margins are calculated from reported figures.
- Q2 admissions revenue decreased 9.8%, reflecting attendance down 7.1% and average ticket price down 2.8%. First-half admissions rose 1.2%, with attendance up 2.7% and average ticket price down 1.4%.
- Food and beverage revenue declined 2.8% in Q2 but increased 8.1% for the first half. Food and beverage revenue per patron rose 4.7% and 5.2%, respectively. Film exhibition costs were 54.6% of admissions revenue in Q2, compared with 55.4%; first-half ratio was 54.5% in both years.
- Q2 Adjusted EBITDA declined 17.9%; first-half Adjusted EBITDA increased 0.9%. Adjusted EBITDA is a non-GAAP measure and is not a substitute for GAAP earnings or operating cash flow.
Balance sheet, debt and liquidity
- At June 30, cash and equivalents were $93.3m, down from $211.3m at December 31, 2015. Current assets were $255.5m and current liabilities $620.4m, producing a working capital deficit of $364.9m.
- Corporate borrowings totaled approximately $1.844bn, including current maturities; capital and financing lease obligations totaled $107.9m. The company also reported a $368.4m Exhibitor Services Agreement liability. Long-term corporate borrowings were $1.825bn.
- AMC had $137.4m available under its revolving credit facility, net of letters of credit, and reported compliance with debt covenants. Management said existing cash, operating cash generation and operating float should fund operations, dividends and planned capital spending for at least 12 months.
- First-half operating cash flow was $133.9m, versus $192.9m. Capital expenditures were $140.3m, versus $143.8m; operating cash flow less reported capital expenditures was a cash shortfall of about $6.4m before other investing and financing flows. Investing cash outflow was $128.0m and financing cash outflow $123.8m.
- AMC paid $39.4m in dividends in the first half and declared a further $0.20 per share dividend payable September 19, 2016.
Material changes, outlook and risks
- Management attributed the Q2 attendance decline primarily to weaker film performance. Lower admissions and ticket prices weighed on results; higher food and beverage spend per patron and lower film costs as a percentage of admissions partly offset the impact. Starplex, acquired in December 2015, contributed to first-half attendance and revenue growth.
- First-half merger, acquisition and transaction costs were $10.2m, compared with $1.8m. Q2 costs were $5.5m, compared with $0.3m, primarily reflecting proposed Carmike and Odeon transactions. The prior-year comparison also included an $18.1m postretirement medical plan benefit credit, affecting first-half general and administrative expense comparisons.
- AMC projected 2016 gross capital expenditures of $400m–$420m, with expected landlord contributions of $120m–$130m and net cash outlay of $280m–$290m. The filing does not provide a clear full-year revenue or earnings forecast.
- After quarter-end, AMC agreed to acquire Odeon for £500m for equity consideration, 75% cash and 25% stock, plus approximately £14m in employee incentive costs; closing was subject to European Commission approval. It also amended its Carmike merger agreement, with consideration structured for an aggregate mix of 70% cash and 30% stock, subject to customary conditions and regulatory and shareholder approvals.
- Committed acquisition financing included up to $525m in incremental term loans and an $800m bridge loan for Odeon, and up to $225m in incremental term loans and a $300m bridge loan for Carmike. AMC cautioned that financing on favorable terms was not assured. The acquisitions could increase leverage and carry integration, regulatory, execution, and foreign-market risks.
- The company disclosed federal and state antitrust investigations concerning potentially anticompetitive conduct, including film clearances and joint ventures. AMC said it believed it had not violated antitrust laws and was cooperating, but could not predict the investigations’ scope, duration or outcome.
- Other stated risks include film availability and performance, competition and alternative entertainment, substantial indebtedness and refinancing, interest-rate exposure, theatre renovation costs, litigation, and ability to sustain dividends. A 100-basis-point interest-rate change would have changed first-half interest expense on the variable-rate credit facility by approximately $4.5m.
Important facts for investors to verify
- Whether attendance, ticket-price trends and film performance improve after the weak Q2 comparison.
- Liquidity and cash generation against the working capital deficit, capital spending plan, dividend payments and acquisition funding needs.
- Final terms, financing, regulatory approvals, shareholder approvals and closing status of the Carmike and Odeon transactions, including resulting leverage.
- Developments in the antitrust investigations and any potential financial or operational consequences.
- Adjusted EBITDA reconciliation and the effect of acquisition costs, prior-year benefit credits and other adjustments on comparisons with GAAP results.