AMC Entertainment Holdings, Inc. — 2014 Q3 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Unaudited results; amounts below are in U.S. dollars. AMC operates movie theatres and reported 344 theatres and 4,959 screens at quarter-end.
Financial results and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $633.9 million | $696.0 million | $1,983.2 million | $2,036.5 million |
| Operating income | $28.5 million | $57.8 million | $114.5 million | $155.2 million |
| Net earnings | $7.4 million | $33.5 million | $34.3 million | $84.8 million |
| Adjusted EBITDA | $90.1 million | $118.3 million | $323.9 million | $335.2 million |
- Q3 operating margin was approximately 4.5%, versus 8.3% a year earlier; nine-month margin was approximately 5.8%, versus 7.6%.
- Q3 diluted EPS was $0.08, compared with $0.44; nine-month diluted EPS was $0.35, compared with $1.12. AMC declared dividends of $0.20 per share in each of Q2 and Q3.
- Operating cash flow for the first nine months was $118.6 million, down from $204.7 million. Capital expenditures were $183.0 million, implying cash flow after capital expenditures of negative $64.4 million, compared with positive $29.3 million in the prior period.
- Cash and equivalents were $155.5 million at September 30, down from $546.5 million at year-end 2013. Working capital was a deficit of $134.0 million, including $150.1 million of deferred revenue and income. The company reported $136.8 million available under its revolving credit facility, net of letters of credit.
- Corporate borrowings were $1.780 billion, with capital and financing lease obligations of $103.5 million; current maturities of borrowings and leases were $23.1 million. AMC said it was in compliance with applicable debt covenants.
Changes and operating drivers
- Q3 revenue fell 8.9%; nine-month revenue fell 2.6%. Admissions revenue declined 10.6% in Q3 and 4.4% year to date, primarily as attendance fell 15.1% and 6.6%, respectively. Higher average ticket prices partly offset the declines.
- Food and beverage revenue decreased 6.2% in Q3 and 1.1% year to date, while spending per patron increased. Other theatre revenue rose 16.3% for the nine-month period, aided by packaged-ticket income, membership fees, and online ticketing fees.
- Operating income declined more sharply than revenue. Film rental costs rose as a share of admissions revenue, food and beverage costs increased as a share of related sales, and operating expenses included higher renovation-related preopening costs. Depreciation and amortization also increased.
- Equity earnings from unconsolidated affiliates declined to $17.3 million for the nine months from $38.1 million. AMC cited weaker National CineMedia advertising revenue and losses at Open Road Films, partly offset by stronger DCIP earnings.
Outlook, risks, and unusual items
- Management expected 2014 gross capital expenditures of $255–$275 million, before approximately $60 million of expected landlord contributions. The board had authorized an additional $38.8 million of 2014 capital expenditures to accelerate customer-experience initiatives.
- Management believed operating cash generation and existing cash would fund operations, planned capital spending, and acquisitions for at least 12 months while maintaining covenant compliance. AMC noted that results are seasonal and depend on film release timing and popularity; nine-month results were not necessarily indicative of full-year results.
- AMC issued $375 million of 5.875% subordinated notes due 2022 and repurchased or redeemed $600 million principal amount of 8.75% notes due 2019. The refinancing contributed a $8.5 million debt-extinguishment gain to nine-month results; this is a nonrecurring item. Interest expense declined year over year.
- After quarter-end, the Department of Justice filed an antitrust lawsuit seeking to block National CineMedia’s proposed $375 million acquisition of Screenvision. AMC owns 14.96% of NCM; the filing described potential investment impairment and a possible termination-fee exposure if the transaction does not close.
- Key risks include film supply and performance, high debt and interest-rate exposure, competition from alternative entertainment and distribution, execution and costs of theatre renovations, information-system and cybersecurity risks, and legal or regulatory outcomes. Management reported effective disclosure controls and no material quarterly change in internal controls.
Investor verification priorities
- Assess whether attendance and theatre revenue recover, and whether ticket-price and per-patron spending gains can offset weak admissions volume.
- Review cash conversion, the working-capital deficit, the elevated capital-spending plan, and the continuing dividend against cash availability and debt service needs.
- Check the debt maturity, interest-rate, and covenant profile, including the impact of the 2014 refinancing and remaining 2020 and 2022 notes.
- Monitor NCM’s advertising performance, the DOJ case and Screenvision transaction, and the valuation and impairment risk for AMC’s NCM investment.
- Separate underlying operating performance from the debt-extinguishment gain and other accounting or timing effects, including packaged-ticket revenue recognition and stock-based compensation adjustments.