Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-33892
AMC ENTERTAINMENT HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware(State or other jurisdiction ofincorporation or organization)
26-0303916(I.R.S. EmployerIdentification No.)
One AMC Way11500 Ash Street, Leawood, KS(Address of principal executive offices)
66211(Zip Code)
Registrant’s telephone number, including area code: (913) 213-2000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☒
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standard provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Class A common stock
AMC
New York Stock Exchange
Title of each class of common stock
Number of sharesoutstanding as of August 2, 2019
Class A common stockClass B common stock
52,080,077
51,769,784
INDEX
PageNumber
PART I—FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited)
3
Condensed Consolidated Statements of Operations
Condensed Consolidated Statements of Comprehensive Income (Loss)
4
Condensed Consolidated Balance Sheets
5
Condensed Consolidated Statements of Cash Flows
6
Notes to Condensed Consolidated Financial Statements
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
48
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
71
Item 4.
Controls and Procedures
72
PART II—OTHER INFORMATION
Legal Proceedings
73
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Item 5.
Other Information
Item 6.
Exhibits
74
Signatures
75
2
Item 1. Financial Statements. (Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
Six Months Ended
(in millions, except share and per share amounts)
June 30, 2019
June 30, 2018
(unaudited)
Revenues
Admissions
$
895.5
896.3
1,627.0
1,771.3
Food and beverage
492.5
445.8
861.3
851.6
Other theatre
118.1
100.4
218.2
203.2
Total revenues
1,506.1
1,442.5
2,706.5
2,826.1
Operating costs and expenses
Film exhibition costs
482.5
471.4
847.8
897.9
Food and beverage costs
76.4
72.2
137.9
138.4
Operating expense, excluding depreciation and amortization below
437.4
424.5
840.2
836.4
Rent
245.9
199.7
487.9
389.4
General and administrative:
Merger, acquisition and transaction costs
3.2
4.3
6.5
9.0
Other, excluding depreciation and amortization below
43.2
43.0
89.4
87.2
Depreciation and amortization
112.0
137.7
225.0
268.2
1,400.6
1,352.8
2,634.7
2,626.5
Operating income
105.5
89.7
71.8
199.6
Other expense (income):
Other expense (income)
(23.4)
2.2
6.4
3.4
Interest expense:
Corporate borrowings
74.2
62.2
145.5
123.9
Capital and financing lease obligations
2.1
9.8
4.2
20.1
Non-cash NCM exhibitor services agreement
10.1
10.4
20.3
20.9
Equity in earnings of non-consolidated entities
(10.2)
(13.0)
(16.7)
(4.0)
Investment income
(2.1)
(1.5)
(18.2)
(6.7)
Total other expense
50.7
70.1
141.5
157.6
Earnings (loss) before income taxes
54.8
19.6
(69.7)
42.0
Income tax provision (benefit)
5.4
(2.6)
11.1
Net earnings (loss)
49.4
22.2
(80.8)
39.9
Earnings (loss) per share:
Basic
0.48
0.17
(0.78)
0.31
Diluted
Average shares outstanding:
Basic (in thousands)
103,845
128,039
103,814
128,042
Diluted (in thousands)
135,528
128,105
See Notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
Other comprehensive income (loss)
Unrealized foreign currency translation adjustment
(9.3)
(107.6)
(34.7)
(95.9)
Realized loss on foreign currency transactions reclassified into other expense, net of tax
0.1
1.0
0.6
Pension and other benefit adjustments:
Net gain (loss) arising during the period, net of tax
(0.4)
Equity method investees' cash flow hedge:
Unrealized net holding gain (loss) arising during the period, net of tax
(0.1)
—
0.2
Realized net gain reclassified into equity in earnings of non-consolidated entities, net of tax
(0.2)
(0.3)
Other comprehensive loss
(9.2)
(107.2)
(34.1)
(96.5)
Total comprehensive income (loss)
40.2
(85.0)
(114.9)
(56.6)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions, except share data)
December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents
190.5
313.3
Restricted cash
10.7
Receivables, net
228.5
259.5
Other current assets
160.3
197.8
Total current assets
590.0
781.3
Property, net
2,613.9
3,039.6
Operating right-of-use assets, net
4,798.9
Intangible assets, net
197.6
352.1
Goodwill
4,763.0
4,788.7
Deferred tax asset, net
31.1
28.6
Other long-term assets
520.4
505.5
Total assets
13,514.9
9,495.8
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
423.2
452.6
Accrued expenses and other liabilities
317.8
378.5
Deferred revenues and income
369.8
414.8
Current maturities of corporate borrowings
21.4
15.2
Current maturities of finance lease liabilities
10.9
Current maturities of operating lease liabilities
570.8
Current maturities of capital and financing lease obligations
67.0
Total current liabilities
1,713.9
1,328.1
4,713.1
4,707.8
Finance lease liabilities
109.4
493.2
Operating lease liabilities
4,852.0
Exhibitor services agreement
557.7
564.0
Deferred tax liability, net
51.7
41.6
Other long-term liabilities
192.0
963.1
Total liabilities
12,189.8
8,097.8
Commitments and contingencies
Class A common stock (temporary equity) ($.01 par value, 0 shares issued; 0 shares outstanding as of June 30, 2019 and 75,712 shares issued; 38,943 shares outstanding as of December 31, 2018)
0.4
Stockholders’ equity:
Class A common stock ($.01 par value, 524,173,073 shares authorized; 55,809,037 shares issued and 52,076,412 outstanding as of June 30, 2019; 55,401,325 shares issued and 51,705,469 outstanding as of December 31, 2018)
0.5
Class B common stock ($.01 par value, 75,826,927 shares authorized; 51,769,784 shares issued and outstanding as of June 30, 2019 and December 31, 2018)
Additional paid-in capital
2,006.8
1,998.4
Treasury stock (3,732,625 shares as of June 30, 2019 and December 31, 2018, at cost)
(56.4)
Accumulated other comprehensive income (loss)
(28.6)
5.5
Accumulated deficit
(597.7)
(550.9)
Total stockholders’ equity
1,325.1
1,397.6
Total liabilities and stockholders’ equity
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Deferred income taxes
8.9
(2.0)
Amortization of net discount (premium) on corporate borrowings
5.0
(1.7)
Amortization of deferred charges to interest expense
7.8
7.5
Non-cash portion of stock-based compensation
9.4
6.8
Gain on dispositions
(16.0)
(2.8)
Gain on disposition of NCM
(1.1)
Gain on derivative asset and derivative liability
(12.6)
Loss on repayment of indebtedness
16.6
Equity in (earnings) loss from non-consolidated entities, net of distributions
(7.8)
NCM held-for-sale impairment loss
16.0
Landlord contributions
64.8
72.3
Non-cash rent - purchase accounting
13.4
Deferred rent
(29.4)
(64.7)
Net periodic benefit cost
Change in assets and liabilities, excluding acquisitions:
Receivables
32.0
82.3
Other assets
18.6
(35.7)
(42.0)
(64.0)
(79.0)
Other, net
(2.2)
(1.4)
Net cash provided by operating activities
153.6
297.1
Cash flows from investing activities:
Capital expenditures
(229.9)
(241.1)
Proceeds from sale leaseback transactions
50.1
Proceeds from disposition of NCM
7.1
Acquisition of theatre assets
(11.8)
Proceeds from disposition of long-term assets
21.3
13.5
Investments in non-consolidated entities, net
(10.7)
(0.8)
Net cash used in investing activities
(221.3)
(181.5)
Cash flows from financing activities:
Proceeds from issuance of Term Loan due 2026
1,990.0
Payment of principal Senior Secured Notes due 2023
(230.0)
Payment of principal Senior Subordinated Notes due 2022
(375.0)
Call premiums paid for Senior Secured Notes due 2023 and Senior Subordinated Notes due 2022
(15.9)
Principal payment of Term Loans due 2022 and 2023
(1,338.5)
Repayments under revolving credit facilities
(12.0)
Scheduled principal payments under Term Loans
(11.9)
(6.9)
Principal payments under capital and financing lease obligations
(6.1)
(35.9)
Cash used to pay for debt financing costs
(11.2)
Cash used to pay dividends
(42.6)
(51.4)
Taxes paid for restricted unit withholdings
(1.3)
Purchase of treasury stock
(19.8)
Net cash used in financing activities
(54.5)
(117.9)
Effect of exchange rate changes on cash and cash equivalents and restricted cash
(0.6)
11.4
Net increase (decrease) in cash and cash equivalents and restricted cash
(122.8)
9.1
Cash and cash equivalents and restricted cash at beginning of period
324.0
318.3
Cash and cash equivalents and restricted cash at end of period
201.2
327.4
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (including amounts capitalized of $0.4 million and $0.3 million)
146.2
138.3
Income taxes paid (received), net
8.4
Schedule of non-cash activities:
Investment in NCM (See Note 5—Investments)
1.3
(6.3)
Construction payables at period end
87.4
92.0
Accrued treasury stock payable at period end
1.9
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1—BASIS OF PRESENTATION
AMC Entertainment Holdings, Inc. (“Holdings”), through its direct and indirect subsidiaries, including American Multi-Cinema, Inc. and its subsidiaries, (collectively with Holdings, unless the context otherwise requires, the “Company” or “AMC”), is principally involved in the theatrical exhibition business and owns, operates or has interests in theatres located in the United States and Europe. Holdings is an indirect subsidiary of Dalian Wanda Group Co., Ltd. (“Wanda”), a Chinese private conglomerate.
As of June 30, 2019, Wanda owned approximately 49.85% of Holdings’ outstanding common stock and 74.89% of the combined voting power of Holdings’ outstanding common stock and has the power to control Holdings’ affairs and policies, including with respect to the election of directors (and, through the election of directors, the appointment of management), entering into mergers, sales of substantially all of the Company’s assets and other extraordinary transactions.
Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Principles of Consolidation: The accompanying unaudited condensed consolidated financial statements include the accounts of Holdings and all subsidiaries, as discussed above, and should be read in conjunction with the Company’s Annual Report on Form 10–K for the year ended December 31, 2018. The accompanying condensed consolidated balance sheet as of December 31, 2018, which was derived from audited financial statements, and the unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10–Q. Accordingly, they do not include all of the information and footnotes required by the accounting principles generally accepted in the United States of America for complete consolidated financial statements. In the opinion of management, these interim financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the Company’s financial position and results of operations. All significant intercompany balances and transactions have been eliminated in consolidation. There are no noncontrolling (minority) interests in the Company’s consolidated subsidiaries; consequently, all of its stockholders’ equity, net earnings (loss) and total comprehensive income (loss) for the periods presented are attributable to controlling interests. Due to the seasonal nature of the Company’s business, results for the six months ended June 30, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019. The Company manages its business under two reportable segments for its theatrical exhibition operations, U.S. markets and International markets.
Accumulated depreciation and amortization: Accumulated depreciation was $1,626.9 million and $1,697.1 million at June 30, 2019 and December 31, 2018, respectively, related to property. Accumulated amortization of intangible assets was $20.3 million and $72.9 million at June 30, 2019 and December 31, 2018, respectively.
Other expense (income): The following table sets forth the components of other expense (income):
(In thousands)
Derivative liability fair value adjustment for embedded conversion feature in the Convertible Notes due 2024
(33.9)
(20.6)
Derivative asset fair value adjustment for contingent call option related to the Class B common stock purchase and cancellation agreement
(7.1)
8.0
Loss on Pound sterling forward contract
0.7
0.8
Foreign currency transactions losses
Non-operating components of net periodic benefit cost
Other
0.3
Total other expense (income)
Accounting Pronouncements Recently Adopted
Leases.The Company adopted the guidance of ASU No. 2016-02, Leases (“ASC 842”) as of January 1, 2019 using the modified retrospective transition approach with the cumulative effect recognized at the date of initial application. The comparative information in the prior year has not been adjusted and continues to be reported under ASC 840, Leases, which was the accounting standard in effect for that period. ASC 842 requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model (“ROU”) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. See Note 2—Leases for the required disclosures of the nature, amount, timing, and uncertainty of cash flows arising from leases.
Accounting Pronouncements Issued Not Yet Adopted
Financial Instruments. In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which provides new guidance regarding the measurement and recognition of credit impairment for certain financial assets. Such guidance will impact how the Company determines its allowance for estimated uncollectible receivables and evaluates its available-for-sale investments for impairment. ASU 2016-13 is effective for the Company in the first quarter of 2020. The Company is currently evaluating the effect that ASU 2016-13 will have on its consolidated financial statements and related disclosures.
Fair Value Measurement. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework–Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which eliminates, adds, and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for the Company in the first quarter of 2020. Early adoption is permitted. The Company is currently evaluating the effect that ASU 2018-13 will have on its fair value measurement disclosures.
Cloud Computing Arrangement. In August 2018, the FASB issued ASU 2018-15, Intangibles–Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). ASU 2018-15 requires a customer in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation, setup, and other upfront costs to capitalize as assets or expense as incurred. ASU 2018-15 is effective for the Company in the first quarter of 2020. Early adoption is permitted. Entities have the option to apply the guidance prospectively to all implementation costs incurred after the date of adoption or
9
retrospectively in accordance with ASC 250-10-45. The Company is currently evaluating the effect that ASU 2018-15 will have on its consolidated financial statements.
NOTE 2—LEASES
The Company adopted ASC 842 on January 1, 2019 using the modified retrospective transition method; and therefore, the comparative information has not been adjusted for the three months and six months ended June 30, 2018 or as of December 31, 2018. Upon transition to the new standard, the Company elected the package of practical expedients, which permitted the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs.
The Company leases theatres and equipment under operating and finance leases. The majority of the Company’s operations are conducted in premises occupied under lease agreements with initial base terms ranging generally from 12 to 15 years, with certain leases containing options to extend the leases for up to an additional 20 years. The Company typically does not believe that exercise of the renewal options is reasonably assured at the inception of the lease agreements and, therefore, considers the initial base term as the lease term. Lease terms vary but generally the leases provide for fixed and escalating rentals, contingent escalating rentals based on the Consumer Price Index and other indexes not to exceed certain specified amounts and variable rentals based on a percentage of revenues. The Company often receives contributions from landlords for renovations at existing locations. The Company records the amounts received from landlords as an adjustment to the right-of-use asset and amortizes the balance as a reduction to rent expense over the base term of the lease agreement.
Operating lease right-of-use assets and lease liabilities were recognized at commencement date based on the present value of minimum lease payments over the remaining lease term. The minimum lease payments include base rent and other fixed payments, including fixed maintenance costs. The Company’s leases have remaining lease terms of approximately 1 year to 25 years, which may include the option to extend the lease when it is reasonably certain the Company will exercise that option. The present value of the lease payments is calculated using the incremental borrowing rate for operating leases, which was determined using a portfolio approach based on the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. Operating lease expense is recognized on a straight-line basis over the lease term.
The Company elected the practical expedient to not separate lease and non-lease components and also elected the short-term practical expedient for all leases that qualify. As a result, the Company will not recognize right-of-use assets or liabilities for short-term leases that qualify for the short-term practical expedient, but instead will recognize the lease payments as lease cost on a straight-line basis over the lease term. The Company’s lease agreements do not contain residual value guarantees. Short-term leases and sublease arrangements are immaterial. Equipment leases primarily consist of digital projectors and food and beverage equipment.
As a result of adopting ASC 842, the Company’s condensed consolidated balance sheet includes additional operating ROU assets and total operating lease liabilities of $4,798.9 million and $5,422.8 million, respectively, at June 30, 2019. The difference between the ROU assets and total lease liabilities upon initial measurement at January 1, 2019, was primarily due to the reclassification of (i) deferred rent, landlord allowances, unfavorable lease balances, and theatre closure liabilities previously recorded in other long-term liabilities, (ii) current portions of theatre closure liabilities previously recorded in accrued expenses and other liabilities; (iii) favorable lease balances previously recorded in intangible assets; and, (iv) prepaid rents recorded in other current assets within the condensed consolidated balance sheets as an offset or addition to the opening ROU asset balances, as required by ASC 842.
10
The following table provides the operating and finance ROU assets and lease liabilities:
(In millions)
Balance Sheet Classification
Assets
Operating lease right-of-use assets (1)
Operating lease right-of-use assets
Finance lease right-of-use assets (2)
92.8
Total leased assets
4,891.7
Liabilities
Current
Operating lease liabilities (1)
Finance lease liabilities (2)
Noncurrent
Total lease liabilities
5,543.1
The cumulative effect adjustment to accumulated deficit at January 1, 2019 is as follows:
Accumulated
Deficit
Balance as of December 31, 2018
Derecognition of existing assets for certain sale leaseback transactions previously recorded in property, net
(405.9)
Derecognition of existing liabilities for certain sale leaseback transactions previously recorded in current maturities of corporate borrowings and capital and financing lease obligations
427.5
Derecognition of deferred gains from the sale and leaseback transactions previously recorded in other long-term liabilities
102.4
Difference in fair value compared to the basis of the right-of-use assets for previously impaired asset groups
(49.0)
Deferred taxes
1.2
Cumulative effect adjustment to accumulated deficit
76.2
Balance as of January 1, 2019
(474.7)
11
The following is the impact of the adoption of ASC 842 on the Company’s condensed consolidated statement of operations for the three months ended June 30, 2019:
Three Months Ended June 30, 2019
Without Adoption of
U.S. Markets
International Markets
ASC 842
Adjustments
As Reported
Rent (1)(2)(4)
215.5
17.4
13.0
Depreciation and amortization (2)(3)
136.0
(13.4)
(10.6)
1,394.2
4.0
2.4
111.9
(2.4)
Capital and financing lease obligations (1)
(3.3)
(3.6)
Net earnings
48.9
(0.7)
The following is the impact of the adoption of ASC 842 on the Company’s condensed consolidated statement of operations for the six months ended June 30, 2019:
Six Months Ended June 30, 2019
427.1
34.8
26.0
273.0
(26.8)
(21.2)
2,621.9
4.8
84.6
(8.0)
(4.8)
18.0
(6.6)
(7.2)
Net loss
(81.8)
12
The following table reflects the lease costs for the three and six months ended June 30, 2019:
Condensed Consolidated
Statement of Operations
Operating lease cost
Theatre properties
220.7
439.6
Operating expense
2.9
Equipment
3.5
7.0
Office and other
General and administrative: other
1.4
2.7
Finance lease cost
Amortization of finance lease assets
2.5
5.2
Interest on lease liabilities
Variable lease cost
25.2
48.3
19.1
29.8
Total lease cost
275.7
539.7
The following table represents the weighted-average remaining lease term and discount rate as of June 30, 2019:
As of June 30, 2019
Weighted Average
Remaining
Discount
Lease Term and Discount Rate
Lease Term (years)
Rate
Operating leases
10.0
7.3%
Finance leases
13.1
6.4%
Cash flow and supplemental information is presented below:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used in finance leases
(4.2)
Operating cash flows used in operating lease cost
(468.2)
Financing cash flows used in finance leases
Landlord contributions:
Operating cashflows provided by operating leases
Supplemental disclosure of noncash leasing activities:
Right-of-use assets obtained in exchange for new operating lease liabilities (1)
115.5
13
Minimum annual payments required under existing operating and finance lease liabilities, (net present value thereof) as of June 30, 2019 are as follows:
Operating Lease
Financing Lease
Payments (1)(2)
Payments
Six months ended December 31, 2019
470.8
2020
922.8
18.3
2021
863.2
17.2
2022
803.5
16.8
2023
709.6
13.7
2024
633.8
12.5
Thereafter
3,321.2
92.1
Total lease payments
7,724.9
179.7
Less imputed interest
(2,302.1)
(59.4)
Total
5,422.8
120.3
As of June 30, 2019, the Company had signed additional operating lease agreements for 19 theatres that have not yet commenced of approximately $417.0 million, which are expected to commence between 2019 and 2021, and carry lease terms of approximately 5 to 25 years. The timing of lease commencement is dependent on the landlord providing the Company with control and access to the related facility.
Minimum annual payments required under operating lease liabilities and capital and failed sale-leaseback, finance lease obligations, (net present value thereof) that have initial or remaining non-cancelable terms in excess of one year as of December 31, 2018 were as follows:
Capital and Finance Lease Obligations
Minimum Operating
Minimum Lease
Lease Payments
Less Interest
Principal
2019
810.2
100.7
33.7
801.9
96.6
29.4
67.2
748.9
87.8
62.6
687.5
82.7
21.1
61.6
597.1
70.4
17.3
53.1
3,367.6
331.5
248.8
Total minimum payments required
7,013.2
769.7
209.4
560.3
During the six months ended June 30, 2018, the Company modified the terms of an existing operating lease to reduce the lease term. The Company received a $35.0 million incentive from the landlord to enter into the new lease agreement. The Company has recorded amortization of the lease incentive as a reduction to rent expense on a straight-line basis over the remaining lease term which reduced rent expense by $10.8 million and $35.0 million during the three and six months ended June 30, 2018, respectively.
14
NOTE 3—REVENUE RECOGNITION
Disaggregation of Revenue: Revenue is disaggregated in the following tables by major revenue types and by timing of revenue recognition:
Major revenue types
Other theatre:
Advertising
35.7
82.4
66.7
Timing of revenue recognition
Products and services transferred at a point in time
1,410.2
1,396.2
Products and services transferred over time (1)
95.9
46.3
70.2
71.3
148.0
131.9
2,520.2
2,729.4
186.3
96.7
The following tables provide the balances of receivables and deferred revenue income:
Receivables related to contracts with customers
123.3
183.2
Miscellaneous receivables
105.2
76.3
15
Deferred revenue related to contracts with customers
366.5
412.8
Miscellaneous deferred income
3.3
2.0
Deferred revenue and income
The significant changes in contract liabilities with customers included in deferred revenues and income are as follows:
Deferred Revenues
Related to Contracts
with Customers
Cash received in advance (1)
202.0
Customer loyalty rewards accumulated, net of expirations:
Admission revenues (2)
Food and beverage (2)
36.2
Other theatre (2)
1.8
Reclassification to revenue as the result of performance obligations satisfied:
Admission revenues (3)
(204.0)
Food and beverage (3)
(49.4)
Other theatre (4)
(47.9)
Disposition of Austria theatres
(1.2)
Foreign currency translation adjustment
Balance as of June 30, 2019
The significant changes to contract liabilities included in the exhibitor services agreement, classified as long-term liabilities in the condensed consolidated balance sheets, are as follows:
Exhibitor Services
Agreement
Common Unit Adjustment–additions of common units (1)
Reclassification of the beginning balance to other theatre revenue, as the result of performance obligations satisfied
(7.7)
16
Transaction Price Allocated to the Remaining Performance Obligations: The following table includes the amount of NCM ESA, included in deferred revenues and income in the Company’s condensed consolidated balance sheets, that is expected to be recognized as revenues in the future related to performance obligations that are unsatisfied as of June 30, 2019:
Six Months Ended December 31, 2019
Year Ended 2020
16.9
Year Ended 2021
18.1
Year Ended 2022
19.5
Year Ended 2023
Year Ended 2024
22.5
Years Ended 2025 through February 2037
451.8
The total amount of non-redeemed gifts cards and exchange tickets included in deferred revenues and income as of June 30, 2019 was $272.3 million. This will be recognized as revenues as the gift cards and exchange tickets are redeemed or as the non-redeemed gift card and exchange ticket revenues are recognized in proportion to the pattern of actual redemptions, which is estimated to occur over the next 24 months.
As of June 30, 2019, the amount of deferred revenue allocated to the AMC Stubs® loyalty programs included in deferred revenues and income was $58.8 million. The earned points will be recognized as revenue as the points are redeemed, which is estimated to occur over the next 24 months. The annual membership fee is recognized ratably over the one-year membership period.
The Company applies the practical expedient in ASC 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less.
NOTE 4—GOODWILL
The following table summarizes the changes in goodwill by reportable segment for the six months ended June 30, 2019:
3,072.6
1,716.1
Currency translation adjustment
(25.7)
1,690.4
The Company evaluates goodwill for impairment annually as of the beginning of the fourth fiscal quarter and any time an event occurs or circumstances change that would more likely than not reduce the fair value for a reporting unit below its carrying amount. A decline in our common stock price and the resulting impact on market capitalization is one of several factors we consider when making this evaluation. The Company’s market capitalization has been below carrying value since May 24, 2019. The recent declines in the trading price of the Company’s Class A common stock were not considered to be sustained declines and therefore were not an event that would require the Company to evaluate goodwill for impairment as of June 30, 2019.
17
NOTE 5—INVESTMENTS
Investments in non-consolidated affiliates and certain other investments accounted for under the equity method generally include all entities in which the Company or its subsidiaries have significant influence, but not more than 50% voting control, and are recorded in the condensed consolidated balance sheets in other long-term assets. Investments in non-consolidated affiliates as of June 30, 2019 include interests in Digital Cinema Implementation Partners, LLC (“DCIP”) of 29.0%, Digital Cinema Distribution Coalition, LLC (“DCDC”) of 14.6%, AC JV, LLC (“AC JV”) owner of Fathom Events, of 32.0%, SV Holdco LLC, owner of Screenvision, 18.4%, and Digital Cinema Media Ltd. (“DCM”) of 50.0%. The Company also has partnership interests in four U.S. motion picture theatres (“Theatre Partnerships”) and approximately 50.0% interest in 58 theatres in Europe (“Nordic theatre JVs”) acquired in the Odeon and UCI Cinemas Holdings Limited (“Odeon”) and Nordic Cinema Group Holding AB (“Nordic”) acquisitions. Indebtedness held by equity method investees is non-recourse to the Company.
NCM Transaction. In March 2019, the NCM CUA resulted in a positive adjustment of 197,118 common units for the Company. The Company received the units and recorded the common units as an addition to deferred revenues for the ESA at fair value of $1.3 million, based upon a price per share of National CineMedia, Inc. (“NCM, Inc.”) of $7.24 on March 14, 2019. The Company does not have significant influence over this entity and the investment is recorded at fair value each period.
Equity in Earnings (Loss) of Non-Consolidated Entities
Aggregated condensed financial information of the Company’s significant non-consolidated equity method investment (DCIP) is shown below:
48.0
42.5
85.7
83.6
38.7
28.5
47.0
43.7
The components of the Company’s recorded equity in earnings of non-consolidated entities are as follows:
NCM and NCM, Inc.
5.8
(11.6)
DCIP
14.6
The Company’s recorded equity in earnings
10.2
16.7
Digital Cinema Media. The Company acquired its equity investment in DCM on November 30, 2016 in connection with the acquisition of Odeon. The Company receives advertising services from DCM for its Odeon theatres in International markets through a joint venture in which it has a 50.0% ownership interest.
The Company recorded the following related party transactions with DCM:
As of
Due from DCM for on-screen advertising revenue
2.8
Loan receivable from DCM
DCM screen advertising revenues
5.3
4.6
9.2
DCIP Transactions. The Company pays equipment rent monthly and records the equipment rental expense on a straight-line basis over 12 years.
18
The Company recorded the following related party transactions with DCIP:
Due from DCIP for warranty expenditures
Deferred rent liability for digital projectors
Digital equipment rental expense
1.5
3.0
AC JV Transactions. The Company recorded the following related party transactions with AC JV:
Due to AC JV for Fathom Events programming
Film exhibition costs:
Gross exhibition cost on Fathom Events programming
2.3
Screenvision Transactions. The Company recorded the following related party transactions with Screenvision:
Due from Screenvision for on-screen advertising revenue
Screenvision screen advertising revenues
3.8
7.7
Nordic JVs. The Company recorded the following related party transactions with the Nordic theatre JVs :
Due from Nordic JVs
2.6
Due to Nordic JVs for management services
1.7
19
NOTE 6—CORPORATE BORROWINGS
A summary of the carrying value of corporate borrowings and capital and finance lease obligations is as follows:
Odeon Revolving Credit Facility Due 2022 (2.5% + Base Rate of 0.75% as of June 30, 2019)
11.9
Senior Secured Credit Facility-Term Loan due 2026 (5.23% as of June 30, 2019)
1,995.0
Senior Secured Credit Facility-Term Loan due 2022
854.2
Senior Secured Credit Facility-Term Loan due 2023
491.2
6.0% Senior Secured Notes due 2023
230.0
2.95% Senior Unsecured Convertible Notes due 2024
600.0
5.0% Promissory Note payable to NCM due 2019
5.875% Senior Subordinated Notes due 2022
375.0
6.375% Senior Subordinated Notes due 2024 (£500 million par value)
635.0
634.1
5.75% Senior Subordinated Notes due 2025
5.875% Senior Subordinated Notes due 2026
595.0
6.125% Senior Subordinated Notes due 2027
475.0
Finance lease obligations
Debt issuance costs
(94.5)
(104.4)
Net discounts
(75.7)
(64.4)
Derivative liability
24.0
4,854.8
5,283.2
Less:
Current maturities corporate borrowings
(21.4)
(15.2)
Current maturities finance lease obligations
(10.9)
Current maturities capital and financing lease obligations
(67.0)
4,822.5
5,201.0
Senior Secured Credit Facility – Term Loan due 2026
On April 22, 2019, the Company entered into the Sixth Amendment to Credit Agreement (the “Sixth Amendment”) amending the Credit Agreement dated April 30, 2013, by and among the Company, each lender party thereto and Citicorp North America, Inc. (“Citi”), as administrative agent. After giving effect to the Sixth Amendment, the Credit Agreement provides for senior secured financing of $2,225.0 million in aggregate, consisting of (1) $2,000.0 million in aggregate principal amount of senior secured tranche B loans maturing April 22, 2026 (the “Term Loan Facility”)and (2) a $225.0 million senior secured revolving credit facility (which includes borrowing capacity available for letters of credit) maturing April 22, 2024 (the “Revolving Credit Facility” and, together with the Term Loan Facility, the “Credit
Facilities”). The loans were used to repay all of the Company’s existing term loans in an aggregate principal amount of approximately $1,338.5 million and to fund the redemptions of the 5.875% Senior Subordinated Notes due 2022 and the 6.0% Senior Secured Notes due 2023. The Company recorded a loss of $16.6 million related to these transactions, comprised of $14.1 million of extinguishment losses and $2.5 million of third party costs related to the modification of the Term Loans under the Senior Secured Credit Facility.
All obligations under the Credit Agreement are guaranteed by, subject to certain exceptions, each of the Company’s current and future wholly-owned material domestic restricted subsidiaries. All obligations under the Credit Agreement, and the guarantees of those obligations, are secured by substantially all of the assets of the Company and each guarantor, subject to customary exceptions, including:
20
The Credit Facilities will require the Company to prepay outstanding term loans, subject to certain exceptions, with:
The foregoing mandatory prepayments will be used to reduce the installments of principal on the Term Loan Facility. The Company may voluntarily repay outstanding loans under the Credit Facilities at any time without premium or penalty, except (1) for customary “breakage” costs with respect to LIBOR loans under the Credit Facilities and (2) during the six months following the Amendment Closing Date, with respect to certain voluntary prepayments or refinancings of the Term Loan Facility that reduce the effective yield of the Term Loan Facility, which will be subject to a 1.00% prepayment premium.
Borrowings under the Term Loan Facility will bear interest at a rate per annum equal to, at the Company’s option, either (1) an applicable margin plus a base rate determined by reference to the highest of (a) 0.50% per annum plus the Federal Funds Effective Rate, (b) the prime rate of Citi and (c) the LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits for an interest period of one month adjusted for certain additional costs, plus 1.00% or (2) an applicable margin plus a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs. Borrowings under the Revolving Credit Facility will bear interest at a rate per annum equal to an applicable margin based upon a leverage-based pricing grid, plus, at the Company’s option, either (1) a base rate determined by reference to the highest of (a) 0.50% per annum plus the Federal Funds Effective Rate, (b) the prime rate of Citi and (c) the LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits for an interest period of one month adjusted for certain additional costs, plus 1.00% or (2) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs. As of the date hereof, the applicable margins for the LIBOR rate borrowings under the Term Loan Facility and the Revolving Credit Facility are 3.00% and 2.25%, respectively.
The Credit Agreement contains other customary terms, including (1) representations, warranties and affirmative covenants, (2) negative covenants, including limitations on indebtedness, liens, mergers and acquisitions, asset sales, investments, distributions, prepayments of subordinated debt and transactions with affiliates, in each case subject to baskets, thresholds and other exceptions, and (3) customary events of default.
The availability of certain baskets and the ability to enter into certain transactions will also be subject to compliance with certain financial ratios. In addition, the Revolving Credit Facility includes a maintenance covenant that requires, in certain circumstances, compliance with a certain secured leverage ratio.
Senior Unsecured Convertible Notes due 2024
Carrying value (in millions) as of June 30, 2019:
Carrying Value
as of
Increase to
Net Earnings (Loss)
Principal balance
(86.7)
6.3
(80.4)
0.9
(12.1)
524.3
510.9
21
On September 14, 2018, the Company issued $600.0 million aggregate principal amount of its 2.95% Senior Unsecured Convertible Notes due 2024 (the "Convertible Notes due 2024"). The Convertible Notes due 2024 mature on September 15, 2024, subject to earlier conversion by the holders thereof, repurchase by the Company at the option of the holders or redemption by the Company upon the occurrence of certain contingencies, as discussed below. Upon maturity, the $600.0 million principal amount of the Convertible Notes due 2024 will be payable in cash. The Company will pay interest in cash on the Convertible Notes due 2024 at 2.95% per annum, semi-annually in arrears on September 15th and March 15th, commencing on March 15, 2019. The Company used the net proceeds from the sale of the Convertible Notes due 2024 to repurchase and retire 24,057,143 shares of Class B common stock held by Wanda for $17.50 per share or approximately $421.0 million, associated legal fees of $2.6 million, and to pay a special dividend of $1.55 per share of Class A common stock and Class B common stock, or approximately $160.5 million on September 28, 2018 to shareholders of record on September 25, 2018.
The Company bifurcated the conversion feature from the principal balance of the Convertible Notes due 2024 as a derivative liability because (1) a conversion feature is not clearly and closely related to the debt instrument and the reset of the conversion price discussed in the following paragraph causes the conversion feature to not be considered indexed to the Company’s equity, (2) the conversion feature standing alone meets the definition of a derivative, and (3) the Convertible Notes due 2024 are not remeasured at fair value each reporting period with changes in fair value recorded in the condensed consolidated statement of operations. The initial derivative liability of $90.4 million is offset by a discount to the principal balance and is amortized to interest expense resulting in an effective rate of 5.98% over the term of the Convertible Notes due 2024. The Company also recorded debt issuance costs of approximately $13.6 million related to the issuance of the Convertible Notes due 2024 and will amortize those costs to interest expense under the effective interest method over the term of the Convertible Notes due 2024. The Company recorded interest expense for the three and six months ended June 30, 2019 of $8.0 million and $16.0 million, respectively. The derivative liability is remeasured at fair value each reporting period with changes in fair value recorded in the condensed consolidated statement of operations as other expense or income. See Note 9—Fair Value Measurements for a discussion of the valuation methodology. For the three and six months ended June 30, 2019, this resulted in a gain of $33.9 million and $20.6 million, respectively. The if-converted value of the Convertible Notes due 2024 is less than the principal balance by approximately $304.6 million as of June 30, 2019 based on the closing price per share of the Company’s common stock of $9.33 per share.
The Convertible Notes due 2024 are generally not convertible to equity in the first year after issuance. Upon conversion by a holder thereof, the Company shall deliver, at its election, either cash, shares of the Company’s Class A common stock or a combination of cash and shares of the Company’s Class A common stock at a conversion rate of 52.7704 per $1,000 principal amount of the Convertible Notes due 2024 (which represents an initial conversion price of $18.95), in each case subject to customary anti-dilution adjustments. As of June 30, 2019, the $600.0 million principal balance of the Convertible Notes due 2024 would be convertible into 31,662,269 shares of Class A common stock. In addition to typical anti-dilution adjustments, in the event that the then-applicable conversion price is greater than 120% of the average of the volume-weighted average price of the Company’s Class A common stock for the ten days prior to the second anniversary of issuance (the “Reset Conversion Price”), the conversion price for the Convertible Notes due 2024 is subject to a reset provision that would adjust the conversion price downward to such Reset Conversion Price. However, this conversion price reset provision is subject to a conversion price floor such that the shares of the Company’s Class A common stock issuable upon conversion would not exceed 30% of the Company’s then outstanding fully-diluted share capital after giving effect to the conversion. In addition, a trigger of the reset provision would result in up to 5,666,000 shares of the Company’s Class B common stock held by Wanda becoming subject to forfeiture and retirement by the Company at no additional cost pursuant to the stock repurchase agreement between the Company and Wanda discussed in Note 7—Stockholders’ Equity. This cancellation agreement is a contingent call option for the forfeiture shares, which is a freestanding derivative measured at fair value on a recurring basis. The feature is contingent on the same reset of the conversion price which is part of the conversion feature. The initial derivative asset of $10.7 million is offset by a credit to stockholders’ equity related to the Class B common stock purchase and cancellation. The forfeiture shares feature is not clearly and closely related to the Convertible Notes due 2024 host and it is bifurcated and accounted for as a derivative asset measured at fair value through earnings each reporting period with changes in fair value recorded in the condensed consolidated statement of operations as other expense or income. See Note 9 – Fair Value Measurements for a discussion of the valuation methodology. For the three and six months ended June 30, 2019, this resulted in other income (expense) of $7.1 million and $(8.0) million, respectively. Additionally, the conversion rate will be adjusted if any cash dividend or distribution is made to all or substantially all holders of the Company’s common stock (other than the special dividend referenced above and a regular, quarterly cash dividend that does not exceed $0.20 per share until the second anniversary of issuance and $0.10 per share thereafter). Any Convertible Notes due 2024 that
22
are converted in connection with a Make-Whole Fundamental Change (as defined in the Indenture (the “Indenture”) governing the Convertible Notes due 2024) are, under certain circumstances, entitled to an increase in the conversion rate.
The Company has the option to redeem the Convertible Notes due 2024 for cash on or after the fifth anniversary of issuance at par if the price for the Company’s Class A common stock is equal to or greater than 150% of the then applicable conversion price for 20 or more trading days out of a consecutive 30 day trading period (including the final three trading days), at which time the holders have the option to convert. The Company also has the option to redeem the Convertible Notes due 2024, between the second and third anniversary of issuance, if the reset provision described above is triggered at a redemption price in cash that would result in the noteholders realizing a 15% IRR from the date of issuance regardless of when any particular noteholder acquired its Convertible Notes due 2024. The Company also bifurcated this redemption feature from the principal balance of the Convertible Notes due 2024 and considered it as a part of the overall fair value of the derivative liability. During the three and six months ended June 30, 2019, the Company recorded a gain to other expense for $33.9 million and $20.6 million, respectively, as a decrease in fair value of its derivative liability for the Convertible Notes due 2024.
With certain exceptions, upon a change of control of the Company or if the Company’s Class A common stock is not listed for trading on The New York Stock Exchange, The NASDAQ Global Select Market or The NASDAQ Global Market, the holders of the Convertible Notes due 2024 may require that the Company repurchase in cash all or part of the principal amount of the Convertible Notes due 2024 at a purchase price equal to the principal amount plus accrued and unpaid interest up to, but excluding, the date of repurchase. The Indenture includes restrictive covenants that, subject to specified exceptions and parameters, limit the ability of the Company to incur additional debt and limit the ability of the Company to incur liens with respect to the Company’s senior subordinated notes or any debt incurred to refinance the Company’s senior subordinated notes. The Indenture also includes customary events of default, which may result in the acceleration of the maturity of the Convertible Notes due 2024 under the Indenture.
The Convertible Notes due 2024 are general unsecured senior obligations of the Company and are fully and unconditionally guaranteed on a joint and several senior unsecured basis by all the Company’s existing and future domestic restricted subsidiaries that guarantee its other indebtedness.
On September 14, 2018, in connection with the issuance of the Convertible Notes due 2024, the Company entered into an investment agreement (the “Investment Agreement”) providing for, among other things, registration rights with respect to the Convertible Notes due 2024 and the shares of Class A common stock underlying the Convertible Notes due 2024. Subject to the terms of the Investment Agreement, the Company was required to file a registration statement with the SEC not later than three months from the issuance date of the Convertible Notes in order to provide for resales of the Convertible Notes due 2024 and the shares of Class A common stock underlying the Convertible Notes to be made on a delayed or continuous basis pursuant to Rule 415 under the Securities Act. The Company filed a registration statement with the SEC on December 14, 2018 to fulfill this requirement.
23
NOTE 7—STOCKHOLDERS’ EQUITY
Dividends
The following is a summary of dividends and dividend equivalents paid to stockholders during the three and six months ended June 30, 2019:
Amount per
Total Amount
Share of
Declared
Declaration Date
Record Date
Date Paid
Common Stock
February 15, 2019
March 11, 2019
March 25, 2019
0.20
May 3, 2019
June 10, 2019
June 24, 2019
On August 2, 2019, the Holdings’ Board of Directors declared a cash dividend in the amount of $0.20 per share on its Class A and Class B common stock, payable on September 23, 2019 to stockholders of record on September 9, 2019.
Related Party Transactions
As of June 30, 2019 and December 31, 2018, the Company recorded a receivable due from Wanda of $0.5 million and $0.9 million, respectively, for reimbursement of general administrative and other expense incurred on behalf of Wanda. During the three and six months ended June 30, 2019, the Company recorded $0.1 million and $0.2 million, respectively, of cost reductions for general and administrative services provided on behalf of Wanda. Wanda owns Legendary Entertainment, a motion picture production company. The Company will occasionally play Legendary’s films in its theatres as a result of transactions with independent film distributors.
On September 14, 2018, the Company entered into the Investment Agreement with Silver Lake Alpine, L.P., an affiliate of Silver Lake Group, L.L.C. (“Silver Lake”), relating to the issuance to Silver Lake (or its designated affiliates) of $600.0 million principal amount of the Convertible Notes due 2024. See Note 6—Corporate Borrowings - Senior Unsecured Convertible Notes due 2024 for more information.
On September 14, 2018, the Company, Silver Lake and Wanda entered into a Right of First Refusal Agreement (the “ ROFR Agreement ”), which provides Silver Lake certain rights to purchase shares of the Company’s common stock that Wanda proposes to sell during a period of two years from the date of execution of the ROFR Agreement or, if earlier, until such time that Wanda and its affiliates cease to beneficially own at least 50.1% of the total voting power of the Company’s voting stock. The right of first refusal applies to both registered and unregistered transfers of shares. Under the ROFR Agreement, in the event that Wanda and its affiliates cease to beneficially own at least 50.1% of the total voting power of the Company’s voting stock, then the Company will have the same right of first refusal over sales of the Company’s common stock by Wanda as described above until the expiration of the two-year period beginning on the date of execution of the ROFR Agreement. In such event, the Company may exercise such right to purchase shares from Wanda from time to time pursuant to the ROFR Agreement in its sole discretion, subject to approval by the disinterested directors of the Board. If the Company determines to exercise its right to purchase shares from Wanda pursuant to the ROFR Agreement, it will have the obligation under the Investment Agreement to offer to sell to Silver Lake a like number of shares of the Company’s Class A Common Stock, at the same per share price at which it purchased the Wanda shares.
On September 14, 2018, the Company used the proceeds from the Convertible Notes due 2024, and pursuant to a stock repurchase agreement between the Company and Wanda, repurchased 24,057,143 shares of Class B common stock at a price of $17.50 per share or $421.0 million and associated legal fees of $2.6 million. As of June 30, 2019, Wanda owns 49.85% of AMC through its 51,769,784 shares of Class B common stock. With the three-to-one voting ratio between the Company’s Class B and Class A common stock, Wanda retains voting control of AMC with 74.89% of the voting power of the Company’s common stock. As discussed in Note 6—Corporate Borrowings up to 5,666,000 shares of Class B common stock are subject to forfeiture for no consideration in connection with the reset provision contained in the Indenture.
Temporary Equity
24
Certain members of management had the right to require Holdings to repurchase the Class A common stock held by them under certain limited circumstances pursuant to the terms of a stockholders’ agreement. Beginning on January 1, 2016 (or upon the termination of a management stockholder’s employment by the Company without cause, by the management stockholder for good reason, or due to the management stockholder’s death or disability) management stockholders had the right, in limited circumstances, to require Holdings to purchase shares that were not fully and freely tradeable at a price equal to the price per share paid by such management stockholder with appropriate adjustments for any subsequent events such as dividends, splits, or combinations. The shares of Class A common stock, subject to the stockholder agreement, were classified as temporary equity, apart from permanent equity, as a result of the contingent redemption feature contained in the stockholder agreement. The Company determined the amount reflected in temporary equity for the Class A common stock-based on the price paid per share by the management stockholders and Wanda on August 30, 2012, the date Wanda acquired Holdings.
As of January 1, 2019, the temporary equity program expired and management employees who held 75,712 shares relinquished their put rights, therefore the related share amount of $0.4 million was reclassified to additional paid in capital, a component of stockholders’ equity.
Stock-Based Compensation
Holdings adopted a stock-based compensation plan in December of 2013.
During the three and six months ended June 30, 2019, the Company recognized stock-based compensation expense of $5.4 million and $9.4 million, respectively, within general and administrative: other. During the three and six months ended June 30, 2018, the Company recognized stock-based compensation expense of $4.0 million and $6.8 million, respectively, within general and administrative: other.
The components of the Company’s recorded and unrecognized stock-based compensation expense are as follows:
Additional
Amount Recognized
Amount
Expected to
Unrecognized
Recognize
Grant Tranche
2019 Board of Directors
2019 RSU awards
1.1
9.6
3.7
2019 PSU awards
8.5
3.9
2018 RSU awards
4.9
1.6
2018 PSU awards
2017 RSU awards
2017 RSU NEO awards
2017 PSU awards (1)
27.1
Awards Granted in 2019
The Company’s Board of Directors approved awards of stock, restricted stock units (“RSUs”), and performance stock units (“PSUs”) to certain of the Company’s employees and directors under the Plan. The fair value of the stock at the grant date of March 6, 2019 was $15.13 per share and was based on the closing price of Holdings’ stock.
The award agreements generally had the following features:
25
The Company recognized approximately $0.4 million of expense in general and administrative: other expense during the six months ended June 30, 2019, in connection with these share grants.
The following table represents the nonvested RSU and PSU activity for the six months ended June 30, 2019:
Weighted
Average
Shares of RSU
Grant Date
and PSU
Fair Value
Beginning balance at January 1, 2019
1,934,447
21.50
Granted
1,460,334
15.13
Vested
(303,201)
21.76
Forfeited
(11,776)
18.65
Cancelled (1)
(100,840)
21.46
Nonvested at June 30, 2019
2,978,964
17.62
26
Condensed Consolidated Statements of Stockholders’ Equity
For the Six Months Ended June 30, 2019
Class A Voting
Class B Voting
Paid-in
Treasury Stock
Comprehensive
Earnings
Stockholders’
(In millions, except share and per share data)
Shares
Capital
Income (Loss)
(Deficit)
Equity
Balances December 31, 2018
55,401,325
3,732,625
Cumulative effect adjustments for the adoption of new accounting principles (ASU 842)
78.8
(130.2)
(24.9)
Dividends declared:
Class A common stock, $0.20/share, net of forfeitures
Class B common stock, $0.20/share
(10.4)
Reclassification from temporary equity
75,712
Stock-based compensation
328,904
Balances March 31, 2019
55,805,941
2,001.7
(19.4)
(623.4)
1,303.5
3,096
Balances June 30, 2019
55,809,037
27
For the Six Months Ended June 30, 2018
Balances December 31, 2017
55,010,160
75,826,927
2,241.6
3,232,625
(48.2)
125.6
(207.9)
2,112.4
Cumulative effect adjustments for the adoption of new accounting principles (ASU 606, ASU 2016-01 and ASU 2018-02)
4.4
(36.2)
(31.8)
17.7
Other comprehensive income
Class A common stock, $0.20/share
(10.8)
Reversed dividend accrual for nonvested PSU's
RSUs surrendered to pay for payroll taxes
(1.8)
27,195
354,060
Balances March 31, 2018
55,391,415
2,242.9
140.7
(251.7)
2,085.0
9,910
Class A common stock repurchases
500,000
(8.2)
Balances June 30, 2018
2,247.0
33.5
(255.5)
1,969.9
28
NOTE 8—INCOME TAXES
The Company’s worldwide effective income tax rate is based on expected income, statutory rates, valuation allowances against deferred tax assets and tax planning opportunities available in the various jurisdictions in which it operates. For interim financial reporting, the Company estimates the worldwide annual income tax rate based on projected taxable income for the full year and records a quarterly income tax provision or benefit in accordance with the anticipated annual rate, adjusted for discrete items, if any. The Company refines the estimates of the year’s taxable income as new information becomes available, including actual year-to-date financial results. This continual estimation process often results in a change to the expected worldwide effective income tax rate for the year. When this occurs, the Company adjusts the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected income tax rate. Significant judgment is required in determining the effective tax rate. The Company recognizes income tax-related interest expense and penalties as income tax expense and general and administrative expense, respectively.
At June 30, 2019 and December 31, 2018, the Company has net deferred tax liabilities of $20.6 million and $13.0 million, respectively. During the fourth quarter of 2017, the Company determined that it was appropriate to record a valuation allowance against U.S. deferred tax assets. In addition, several international jurisdictions carry valuation allowances against their deferred tax assets. As a result, the effective tax rate for the six months ended June 30, 2019 reflects the impact of these valuation allowances against U.S. and international deferred tax assets generated during the six month period. For the remainder of 2019, the Company anticipates income tax expense will relate to domestic state tax expense, changes in domestic indefinite-lived liabilities, and international tax expense incurred in certain profitable jurisdictions. The Company evaluates its deferred tax assets each period to determine if a valuation allowance is required based on whether it is “more likely than not” that some portion of the deferred tax assets would not be realized. The ultimate realization of these deferred tax assets is dependent upon the generation of sufficient taxable income during future periods on a federal, state and foreign jurisdiction basis. The Company conducts its evaluation by considering all available positive and negative evidence, including historical operating results, forecasts of future profitability, the duration of statutory carryforward periods, and the outlooks for the U.S. motion picture and broader economy, among others.
The projected worldwide effective tax rate based on annual projected earnings for the year ending December 31, 2019 is (4.5)%. The actual effective rate for the six months ended June 30, 2019 was (16.0)%. The Company’s consolidated tax rate for the six months ended June 30, 2019 differs from the U.S. statutory tax rate primarily due to the valuation allowances in U.S. and foreign jurisdictions, foreign tax rate differences, federal and state tax credits partially offset by state income taxes, permanent differences related to interest, compensation, and other discrete items.
Tax contingencies and other income tax liabilities were $25.6 million and $22.0 million as of June 30, 2019 and December 31, 2018, respectively, and are included in other long-term liabilities. The increase relates primarily to state income taxes and state income tax credits. The Company also continues to be subject to examination by the IRS and the fiscal year ended March 29, 2012 (tax year 2011) is currently under extended statute. The Company’s operations in certain jurisdictions outside of the U.S. remain subject to examination for tax years 2012 to 2018, some of which are currently under audit by local tax authorities. The resolutions of these audits are not expected to be material to the Company’s condensed consolidated financial statements. The Company believes its allowances for income tax contingencies are adequate. Based on the information currently available, the Company does not anticipate a material (or significant) increase or decrease to its tax contingencies within the next 12 months.
While the Tax Reform Act provides for a territorial tax system, beginning in 2018, it includes the global intangible low-taxed income (“GILTI”) provisions. The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. For 2019, the Company does not anticipate a GILTI inclusion.
29
NOTE 9—FAIR VALUE MEASUREMENTS
Fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the entity transacts business. The inputs used to develop these fair value measurements are established in a hierarchy, which ranks the quality and reliability of the information used to determine the fair values. The fair value classification is based on levels of inputs. Assets and liabilities that are carried at fair value are classified and disclosed in one of the following categories:
Level 1:
Quoted market prices in active markets for identical assets or liabilities.
Level 2:
Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3:
Unobservable inputs that are not corroborated by market data.
Recurring Fair Value Measurements. The following table summarizes the fair value hierarchy of the Company’s financial assets and liabilities carried at fair value on a recurring basis as of June 30, 2019:
Fair Value Measurements at June 30, 2019 Using
Significant
Total Carrying
Quoted prices in
Significant other
unobservable
Value at
active market
observable inputs
inputs
(Level 1)
(Level 2)
(Level 3)
Other long-term assets:
Money market mutual funds
Derivative asset
47.7
Investments measured at net asset value (1)
Equity securities, available-for-sale:
Investment in NCM
Total assets at fair value
60.9
Corporate Borrowings:
Total liabilities at fair value
Valuation Techniques. The Company’s money market mutual funds are invested in funds that seek to preserve principal, are highly liquid, and therefore are recorded on the balance sheet at the principal amounts deposited, which equals fair value. See Note 10—Accumulated Other Comprehensive Income for the unrealized gain on the equity securities recorded in accumulated other comprehensive income.
On September 14, 2018, the Company issued Convertible Notes due 2024 with a conversion feature that gave rise to an embedded derivative instrument and a stock purchase and cancellation agreement that gave rise to a derivative asset (See Note 6—Corporate Borrowings). The derivative features have been valued using a Monte Carlo simulation approach. The Monte Carlo simulation approach consists of simulated common stock prices from the valuation date to the maturity of the Convertible Notes and to September 14, 2020 for the contingent call option for forfeiture shares. Increases or decreases in the Company’s share price, the volatility of the share price, the passage of time, risk-free interest rate, discount yield, and dividend yield will all impact the value of the derivative instruments. The Company re-values the derivative instruments at the end of each reporting period and any changes are recorded in other expense (income) in the condensed consolidated statements of operations.
30
Other Fair Value Measurement Disclosures. The Company is required to disclose the fair value of financial instruments that are not recognized at fair value in the statement of financial position for which it is practicable to estimate that value:
observable
20.2
4,090.3
507.0
Valuation Technique. Quoted market prices and observable market based inputs were used to estimate fair value for Level 2 inputs. The Level 3 fair value measurement represents the transaction price of the corporate borrowings under market conditions. On September 14, 2018, the Company issued $600.0 million of Convertible Notes due 2024. These notes were issued by private placement, as such there is no observable market for these Convertible Notes. The Company valued these notes at principal value less a discount reflecting a market yield to maturity. See Note 6—Corporate Borrowings for further information.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate fair value because of the short maturity of these instruments.
NOTE 10—ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents the change in accumulated other comprehensive income (loss) by component:
Unrealized Net
Pension and
Gain from
Gain from Equity
Foreign
Marketable
Method Investees’
Currency
Benefits (1)
Securities
Cash Flow Hedge
Balance, December 31, 2018
7.2
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive income
Balance, June 30, 2019
(26.9)
The tax effects allocated to each component of other comprehensive income (loss) during the three months ended June 30, 2019 and June 30, 2018 are as follows:
Tax
Pre-Tax
(Expense)
Net-of-Tax
Benefit
Unrealized foreign currency translation adjustment (1)
(107.4)
Realized loss on foreign currency transactions
Net gain (loss) arising during the period
(0.5)
Unrealized net holding loss arising during the period
Realized net loss reclassified into equity in earnings of non-consolidated entities
(107.1)
31
The tax effects allocated to each component of other comprehensive income (loss) during the six months ended June 30, 2019 and June 30, 2018 are as follows:
(96.0)
(1.9)
Unrealized net holding gain (loss) arising during the period
Realized net (gain) loss reclassified into equity in earnings of non-consolidated entities
(97.0)
NOTE 11—OPERATING SEGMENTS
The Company reports information about operating segments in accordance with ASC 280-10, Segment Reporting, which requires financial information to be reported based on the way management organizes segments within a company for making operating decisions and evaluating performance. The Company has identified two reportable segments and reporting units for its theatrical exhibition operations, U.S. markets and International markets. The International markets reportable segment has operations in or partial interest in theatres in the United Kingdom, Germany, Spain, Italy, Ireland, Portugal, Sweden, Finland, Estonia, Latvia, Lithuania, Norway, and Denmark. Each segment’s revenue is derived from admissions, food and beverage sales and other ancillary revenues, primarily screen advertising, AMC Stubs® membership fees and other loyalty programs, ticket sales, gift card income and exchange ticket income. The measure of segment profit and loss the Company uses to evaluate performance and allocate its resources is Adjusted EBITDA, as defined in the reconciliation table below. The Company does not report asset information by segment because that information is not used to evaluate the performance of or allocate resources between segments.
Below is a breakdown of select financial information by reportable operating segment:
Revenues (In millions)
U.S. markets
1,161.2
1,129.3
2,028.4
2,111.4
International markets
344.9
313.2
678.1
714.7
Adjusted EBITDA (1) (In millions)
U.S. markets (2)
202.1
222.2
279.5
430.5
35.5
22.6
66.3
92.2
Total Adjusted EBITDA
237.6
244.8
345.8
522.7
32
Capital Expenditures (In millions)
84.1
101.0
159.6
172.0
31.0
32.8
70.3
69.1
Total capital expenditures
115.1
133.8
229.9
241.1
Financial Information About Geographic Area:
United States
United Kingdom
134.1
125.8
236.2
256.3
Spain
42.2
90.8
91.8
Sweden
36.1
33.3
81.8
93.9
Italy
45.2
98.4
94.6
Germany
29.0
24.5
60.6
57.3
Finland
22.4
22.1
48.1
Ireland
9.3
8.8
19.3
Other foreign countries
19.4
22.8
44.9
51.4
Long-term assets, net (In millions)
9,052.7
5,826.5
International
3,872.2
2,888.0
Total long-term assets (1)
12,924.9
8,714.5
33
The following table sets forth a reconciliation of net earnings (loss) to Adjusted EBITDA:
Plus:
Interest expense
86.4
170.0
164.9
Certain operating expenses (1)
5.7
Equity in earnings of non-consolidated entities (2)
Cash distributions from non-consolidated entities (3)
12.3
27.8
Attributable EBITDA (4)
Other expense (income) (5)
(23.8)
6.1
Non-cash rent - purchase accounting (6)
General and administrative — unallocated:
Merger, acquisition and transaction costs (7)
Stock-based compensation expense (8)
Adjusted EBITDA
34
Equity in earnings of non-consolidated entities excluding International theatre JV's
(9.8)
(13.9)
(15.8)
Equity in earnings (loss) of International theatre JV's
(0.9)
Income tax provision
Attributable EBITDA
NOTE 12—COMMITMENTS AND CONTINGENCIES
The Company, in the normal course of business, is a party to various ordinary course claims from vendors (including food and beverage suppliers and film distributors), landlords, competitors, and other legal proceedings. If management believes that a loss arising from these actions is probable and can reasonably be estimated, the Company records the amount of the loss, or the minimum estimated liability when the loss is estimated using a range and no point is more probable than another. As additional information becomes available, any potential liability related to these actions is assessed and the estimates are revised, if necessary. Management believes that the ultimate outcome of such matters discussed below, individually and in the aggregate, will not have a material adverse effect on the Company’s financial position or overall trends in results of operations. However, litigation and claims are subject to inherent uncertainties and unfavorable outcomes can occur. An unfavorable outcome might include monetary damages. If an unfavorable outcome were to occur, there exists the possibility of a material adverse impact on the results of operations in the period in which the outcome occurs or in future periods.
On January 12, 2018 and January 19, 2018, two putative federal securities class actions, captioned Hawaii Structural Ironworkers Pension Trust Fund v. AMC Entertainment Holdings, Inc., et al., Case No. 1:18-cv-00299-AJN (the “Hawaii Action”), and Nichols v. AMC Entertainment Holdings, Inc., et al., Case No. 1:18-cv-00510-AJN (the “Nichols Action,” and together with the Hawaii Action, the “Actions”), respectively, were filed against the Company in the U.S. District Court for the Southern District of New York. The Actions, which name certain of the Company’s officers and directors and, in the case of the Hawaii Action, the underwriters of the Company’s February 8, 2017 secondary public offering, as defendants, asserted claims under some or all of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 with respect to alleged material misstatements and omissions in the registration statement for the secondary public offering and in certain other public disclosures. On May 30, 2018, the court consolidated the Actions and appointed the International Union of Operating Engineers Pension Fund of Eastern Pennsylvania and Delaware as lead plaintiff. On August 13, 2018, lead plaintiff and additional named plaintiff Hawaii Structural Ironworkers Pension Trust Fund (“Plaintiffs”) filed an Amended Class Action Complaint. On November 21, 2018, Plaintiffs filed a Second Amended Class Action Complaint.
35
On January 22, 2019, the defendants moved to dismiss the Second Amended Class Action Complaint.
On May 21, 2018, a stockholder derivative complaint, captioned Gantulga v. Aron, et al., Case No. 2:18-cv-02262-JAR-TJJ (the “Gantulga Action”), was filed against certain of the Company’s officers and directors in the U.S. District Court for the District of Kansas. The Gantulga Action, which was filed on behalf of the Company, asserts claims under Section 14(a) of the Securities Exchange Act of 1934 and for breaches of fiduciary duty and unjust enrichment based on allegations substantially similar to the Actions. On August 27, 2018, defendants and the Company as nominal defendant filed a motion to dismiss or, in the alternative, to transfer the action to the U.S. District Court for the Southern District of New York. On September 17, 2018, plaintiff filed an amended complaint. On October 12, 2018, the parties filed a joint motion to transfer the action to the U.S. District Court for the Southern District of New York, which the court granted on October 15, 2018. When the action was transferred to the Southern District of New York, it was re-captioned Gantulga v. Aron, et al., Case No. 1:18-cv-10007-AJN. The parties filed a joint stipulation to stay the action, which the court granted on December 17, 2018.
On April 22, 2019, a putative stockholder class and derivative complaint, captioned Lao v. Dalian Wanda Group Co., Ltd., et al., C.A. No. 2019-0303-JRS (the “Lao Action”), was filed against certain of the Company’s directors, Dalian Wanda Group Co., Ltd. (“Wanda”), two of Wanda’s affiliates, Silver Lake Group, L.L.C. (“Silver Lake”), and one of Silver Lake’s affiliates in the Delaware Court of Chancery. The Lao Action asserts claims directly, on behalf of a putative class of Company stockholders, and derivatively, on behalf of the Company, for breaches of fiduciary duty and aiding and abetting breaches of fiduciary duty with respect to transactions that the Company entered into with affiliates of Wanda and Silver Lake on September 14, 2018, and the special cash dividend of $1.55 per share of common stock that was payable on September 28, 2018 to the Company’s stockholders of record as of September 25, 2018. On July 18, 2019, the Company’s Board of Directors formed a Special Litigation Committee to investigate and evaluate the claims and allegations asserted in the Lao Action and make a determination as to how the Company should proceed with respect to the Lao Action.
The Company remains contingently liable for lease payments under certain leases of theatres that it previously divested, in the event that such assignees are unable to fulfill their future lease payment obligations. Due to the variety of remedies available, the Company believes that if the current tenant defaulted on the leases it would not have a material effect on the Company’s financial condition, results of operations or cash flows.
36
NOTE 13—EARNINGS (LOSS) PER SHARE
Basic net earnings (loss) per share is computed by dividing net earnings (loss) by the weighted-average number of common shares outstanding. Diluted earnings per share includes the effects of unvested RSU’s with a service condition only and unvested contingently issuable RSUs that have service and performance conditions, if dilutive, as well as potential dilutive shares from the conversion feature of the Convertible Notes due 2024, if dilutive.
The following table sets forth the computation of basic and diluted earnings (loss) per common share:
Numerator:
Net earnings (loss) for basic earnings (loss) per share
Calculation of Net earnings for diluted earnings (loss) per share:
Marked-to-market gain on derivative liability
Interest expense for Convertible Notes due 2024
8.1
Net earnings (loss) for diluted earnings (loss) per share
23.6
Denominator (shares in thousands):
Weighted average shares for basic earnings (loss) per common share
Common equivalent shares for RSUs and PSUs
66
Common equivalent shares if converted: convertible notes 2024
31,662
Weighted average shares for diluted earnings (loss) per common share
Basic earnings (loss) per common share
Diluted earnings (loss) per common share
Vested RSUs and PSU’s have dividend rights identical to the Company’s Class A and Class B common stock and are treated as outstanding shares for purposes of computing basic and diluted earnings per share. Certain unvested RSUs and unvested PSUs are subject to performance conditions and are included in diluted earnings per share, if dilutive, based on the number of shares, if any, that would be issuable under the terms of the Company’s 2013 Equity Incentive Plan if the end of the reporting period were the end of the contingency period. During the six months ended June 30, 2019, unvested PSU’s of 502,858 at the minimum performance target were not included in the computation of diluted earnings (loss) per share because they would not be issuable if the end of the reporting period were the end of the contingency period.
During the six months ended June 30, 2018, unvested PSU’s of 411,657 at the minimum performance target were not included in the computation of diluted loss per share since the shares would not be issuable under the terms of the Plan, if the end of the reporting period were the end of the contingency period and they would also be anti-dilutive. During the six months ended June 30, 2018, unvested RSU’s of 902,004 were not included in the computation of diluted loss per share because they would be anti-dilutive.
The Company uses the if-converted method for calculating any potential dilutive effect of the Convertible Notes due 2024 that were issued on September 14, 2018. The Company has not adjusted net loss for the six months ended June 30, 2019 to eliminate the interest expense and the gain for the derivative liability related to the Convertible Notes due 2024 of $16.0 million and $20.6 million, respectively in the computation of diluted loss per share because the effects would be anti-dilutive. The Company has not included in diluted weighted average shares approximately 31.7 million shares issuable upon conversion for the six months ended June 30, 2019, as the effects would be anti-dilutive. Based on the current conversion price of $18.95 per share the Convertible Notes due 2024 are convertible into 31,662,269 Class A common shares.
37
NOTE 14—CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10, Financial statements of guarantors and issuers of guaranteed securities registered or being registered. Each of the subsidiary guarantors are 100% owned by Holdings. The subsidiary guarantees of the Company’s Sterling Notes due 2024, the Convertible Notes due 2024, the Notes due 2025, the Notes due 2026, and the Notes due 2027 are full and unconditional and joint and several and subject to customary release provisions. The Company and its subsidiary guarantors’ investments in its consolidated subsidiaries are presented under the equity method of accounting.
The condensed consolidating information for the guarantors/non-guarantors has been retrospectively revised based on the structure that exists as of June 30, 2019 and reflecting changes as a result of the Sixth Amendment.
Condensed Consolidating Statement of Operations
Three Months Ended June 30, 2019:
Subsidiary
Consolidating
Consolidated
Holdings
Guarantors
Non-Guarantors
680.7
214.8
401.1
91.4
79.4
390.2
92.3
56.1
Operating expense, excluding depreciation and amortization
320.9
116.5
179.6
Other, excluding depreciation and amortization
24.9
84.2
1,058.3
342.3
102.9
Equity in net loss of subsidiaries
18.2
(27.3)
(40.9)
73.6
74.4
(74.5)
Non-cash NCM exhibitor service agreement
Intercompany interest expense
(9.9)
(91.2)
(4.9)
106.2
21.2
(18.6)
27.3
(9.1)
38
Three Months Ended June 30, 2018:
694.3
369.2
76.6
65.9
34.5
1,129.4
313.1
391.4
80.0
54.3
17.9
300.5
124.0
145.4
26.6
16.4
97.3
40.4
1,017.7
335.1
Operating income (loss)
111.7
(22.0)
Equity in net (earnings) loss of subsidiaries
(26.5)
25.5
Other expense
61.4
63.0
(63.1)
Equity in (earnings) loss of non-consolidated entities
(58.1)
63.1
(22.2)
83.8
27.9
(29.5)
(1.0)
26.5
(25.5)
39
Six Months Ended June 30, 2019:
1,196.0
431.0
688.7
172.6
143.6
74.6
2,028.3
678.2
667.5
180.3
99.0
38.9
606.5
233.7
356.2
131.7
52.4
37.0
167.9
57.1
1,953.0
681.7
75.3
(3.5)
303.7
215.0
(518.7)
144.5
145.3
(145.7)
218.9
(218.9)
(355.4)
(14.5)
(12.9)
364.6
80.8
369.7
209.7
Loss before income taxes
(294.4)
(213.2)
518.7
(303.7)
(215.0)
40
Six Months Ended June 30, 2018:
1,298.9
472.4
170.9
71.5
2,111.3
714.8
707.6
190.3
98.6
39.8
582.5
253.9
278.7
110.7
6.2
52.9
34.3
191.3
76.9
1,917.8
708.7
193.5
(47.8)
7.3
40.5
122.1
125.7
(125.8)
(115.2)
(16.6)
(39.9)
143.2
13.8
50.3
(40.5)
47.8
(7.3)
41
Condensed Consolidating Statement of Comprehensive Income (Loss)
Other comprehensive income (loss):
Equity in other comprehensive loss of subsidiaries
(4.1)
13.3
Unrealized foreign currency translation adjustment, net of tax
(5.1)
Net gain arising during the period, net of tax
Equity method investees’ cash flow hedge:
Unrealized net holding loss arising during the period, net of tax
(18.3)
(22.3)
40.6
(86.0)
193.2
(85.6)
Net loss arising during period, net of tax
Realized net holding gain reclassified to equity in earnings of non-consolidated entities, net of tax
Total comprehensive loss
(80.7)
(111.5)
192.2
42
(19.3)
53.4
(15.4)
Realized loss on foreign currency transactions, net of tax
(337.8)
(234.3)
572.1
(70.0)
166.5
(27.4)
(68.5)
Net loss arising during the period, net of tax
Realized net loss reclassified to equity in earnings of non-consolidated entities, net of tax
(48.7)
(77.3)
126.0
43
Condensed Consolidating Balance Sheet
As of June 30, 2019:
99.2
91.0
156.2
77.9
(5.6)
44.8
370.9
224.4
Investment in equity of subsidiaries
668.4
1,201.7
(1,870.1)
1,972.9
641.0
3,482.0
1,316.9
132.3
65.3
Intercompany advances
5,354.7
(4,326.1)
(1,028.6)
3,074.7
58.2
334.7
127.5
6,079.5
6,243.1
3,068.0
(1,875.7)
Liabilities and Stockholders’ Equity
318.2
110.5
(5.5)
168.7
127.9
292.4
77.4
20.0
5.6
439.3
131.5
41.3
1,225.6
86.9
3,607.1
1,244.9
26.2
135.6
56.4
4,754.4
5,574.7
1,866.3
Stockholders’ equity
44
As of December 31, 2018:
177.8
135.2
163.0
100.9
(4.4)
481.5
303.9
719.0
1,430.1
(2,149.1)
2,152.3
887.3
225.6
126.5
5,362.3
(4,512.3)
(850.0)
59.8
316.2
129.5
6,139.3
3,168.1
2,341.9
(2,153.5)
327.2
129.9
(4.5)
31.5
197.5
149.4
314.0
100.8
38.6
28.4
45.3
878.7
408.5
4,696.0
11.8
194.3
298.9
23.9
794.4
4,741.3
2,449.1
911.8
Temporary equity
45
Condensed Consolidating Statement of Cash Flows
Net cash provided by (used in) operating activities
238.9
(135.9)
50.6
(159.6)
(70.3)
6.0
15.3
(166.3)
(55.0)
Principal payments under Term Loans due 2022 and 2023
Repayments under Revolving Credit Facility
(2.5)
Cash used to pay debt financing costs
Change in intercompany advances
(203.3)
227.7
(24.4)
Net cash provided by (used in) financing activities
(239.7)
224.1
(38.9)
(0.0)
(78.5)
(44.3)
177.7
146.0
101.7
46
279.3
(172.0)
(69.1)
Proceeds from disposition of NCM, Inc. shares
7.9
(118.7)
(62.8)
Principal payments under Term Loan
(20.1)
Cash used to pay deferred financing costs
(120.1)
(25.3)
63.4
(140.2)
(41.1)
(14.7)
25.9
59.4
(96.6)
221.3
60.5
142.2
124.7
47
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
In addition to historical information, this Quarterly Report on Form 10–Q contains “forward-looking statements” within the meaning of the “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of words such as “may,” “will,” “forecast,” “estimate,” “project,” “intend,” “plan,” “expect,” “should,” “believe” and other similar expressions that predict or indicate future events or trends or that are not statements of historical matters. These forward-looking statements are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. These forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors, including those discussed in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, the following:
This list of factors that may affect future performance and the accuracy of forward-looking statements is illustrative but not exhaustive. In addition, new risks and uncertainties may arise from time to time. Accordingly, all forward-looking statements should be evaluated with an understanding of their inherent uncertainty.
Readers are urged to consider these factors carefully in evaluating the forward-looking statements. For further information about these and other risks and uncertainties as well as strategic initiatives, see Item 1A. “Risk Factors” and Item 1. “Business” in our Annual Report on Form 10–K for the year ended December 31, 2018 and our other public filings.
All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included herein are made only as of the date of this Quarterly Report on Form 10–Q, and we do not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Overview
AMC is the world’s largest theatrical exhibition company and an industry leader in innovation and operational excellence. We operate theatres in 15 countries and are the market leader in nine of those.
Our theatrical exhibition revenues are generated primarily from box office admissions and theatre food and beverage sales. The balance of our revenues are generated from ancillary sources, including on-screen advertising, fees earned from our AMC Stubs® customer frequency membership program, rental of theatre auditoriums, income from gift card and exchange ticket sales, on-line ticketing fees and arcade games located in theatre lobbies. As of June 30, 2019, we owned, operated or had interests in 1,004 theatres and 11,036 screens.
Film Content
Box office admissions are our largest source of revenue. We predominantly license “first-run” films from distributors owned by major film production companies and from independent distributors on a film-by-film and theatre-by-theatre basis. Film exhibition costs are accrued based on the applicable admissions revenues and estimates of the final settlement pursuant to our film licenses. Licenses that we enter into typically state that rental fees are based on aggregate terms established prior to the opening of the picture. In certain circumstances and less frequently, our rental fees are based on a mutually agreed settlement upon the conclusion of the picture. Under an aggregate terms formula, we pay the distributor a specified percentage of box office gross or pay based on a scale of percentages tied to different amounts of
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box office gross. The settlement process allows for negotiation based upon how a film actually performs.
Our revenues attributable to individual distributors may vary significantly from year to year depending upon the commercial success of each distributor’s films in any given year. Our results of operations may vary significantly from quarter to quarter and from year to year based on the timing and popularity of film releases.
AMC Movie Screens
During the six months ended June 30, 2019, we opened four new theatres with a total of 37 screens, permanently closed 104 screens, temporarily closed 236 screens and reopened 184 screens to install consumer experience upgrades.
As of June 30, 2019, we had 5,344 3D enabled screens, including 218 IMAX®, and 113 Premium Large Format (“PLF”) screens; approximately 49% of our screens were 3D enabled screens, including IMAX® 3D enabled screens, and approximately 2% of our screens were IMAX® 3D enabled screens. The following table identifies the upgrades to our theatre circuit during the periods indicated:
Number of
Screens As of
Format
Digital
11,036
11,091
3D enabled
5,344
5,411
IMAX® (3D enabled)
218
216
Dolby CinemaTM at AMC
138
127
Other PLF (3D enabled)
113
112
Dine-in theatres
413
437
Premium seating
3,476
3,279
Guest Amenities
We continually upgrade the quality of our theatre circuit through substantial renovations featuring our seating concepts, acquisitions, new builds (including expansions), expansion of food and beverage offerings (including dine-in theatres), and by disposing of older screens through closures and sales.
Recliner seating is the key feature of theatre renovations, which drive a 36% increase in attendance at these locations in their first year post renovation. These renovations, in conjunction with capital contributions from our landlords, involve stripping theatres to their basic structure in order to replace finishes throughout, upgrade the sight and sound experience, install modernized points of sale and replace traditional theatre seats with plush, electric recliners.
As of June 30, 2019, we now feature recliner seating in approximately 369 theatres, including Dine-in-Theatres, totaling approximately 3,476 screens. By the end of 2019, we expect to convert an additional 406 screens to recliner seating.
Open-source internet ticketing makes our AMC seats (over 1.1 million) in all our U.S. theatres and auditoriums, for all our showtimes as available as possible, on as many websites as possible. Our tickets are currently on sale over the internet, directly or through mobile apps, at our own website and app, Fandango, Movietickets.com, and Atom Tickets.
Food and beverage sales are our second largest source of revenue after box office admissions. Food and beverage items traditionally include popcorn, soft drinks, candy and hot dogs. Different varieties of food and beverage items are offered at our theatres based on preferences in the particular geographic region. Our traditional food and beverage strategy emphasizes prominent and appealing food and beverage offerings designed for rapid service and efficiency, including a customer friendly self-serve experience.
Our expanded menu includes enhanced food and beverage products to include made-to-order drinks and meals, customized coffee, healthy snacks, premium beers, wine and mixed drinks, flatbread pizzas, more varieties of hot dogs, four flavors of popcorn and other menu items. We currently operate 28 Dine-In Theatres that deliver chef-inspired menus with seat-side or delivery service to luxury recliners with tables.
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AMC Stubs®
AMC Stubs® is a customer loyalty program for our U.S. markets which allows members to earn rewards, receive discounts and participate in exclusive members-only offerings and services. It features both a traditional paid tier called AMC Stubs PremiereTM and a non-paid tier called AMC Stubs InsiderTM. Both programs reward loyal guests for their patronage of AMC Theatres.
On June 26, 2018, we launched AMC Stubs® A-List, a new tier of our AMC Stubs® loyalty program. This program offers guests admission to the movies at AMC up to three times per week including multiple movies per day and repeat visits to already seen movies for $19.95 to $23.95 per month depending upon geographic market. AMC Stubs® A-List also includes premium offerings including IMAX®, Dolby Cinema™ at AMC, RealD Holdings Inc., Prime and BigD. AMC Stubs® A-List members can book tickets on-line in advance and select specific seats at AMC Theatres with reserved seating.
As of June 30, 2019, we had 20,875,000 member households in the AMC Stubs® program. AMC Stubs® members represented approximately 46% of AMC U.S. markets attendance during the three months ended June 30, 2019, driving an average 2.0x higher total gross revenue versus non-members. Our much larger database of identified movie-goers also provides us with additional insight into our customers’ movie preferences, and this enables us to have both a larger and a more targeted marketing effort to support our Hollywood studio partners.
The portion of the admissions and food and beverage revenues attributed to the rewards is deferred as a reduction of admissions and food and beverage revenues and is allocated between admissions and food and beverage revenues based on expected member redemptions.
Upon redemption, deferred rewards are recognized as revenues along with associated cost of goods. We estimate point breakage in assigning value to the points at the time of sale based on historical trends. The program’s annual membership fee is allocated to the material rights for discounted or free products and services and is initially deferred, net of estimated refunds, and recognized as the rights are redeemed based on estimated utilization, over the one-year membership period in admissions, food and beverage, and other revenues. A portion of the revenues related to a material right are deferred as a virtual rewards performance obligation using the relative standalone selling price method and are recognized as the rights are redeemed or expire.
Critical Accounting Policies and Estimates
Goodwill. We evaluate the goodwill recorded at our two reporting units (Domestic Theatres and International Theatres) for impairment annually as of the beginning of the fourth fiscal quarter or more frequently as specific events or circumstances dictate. Prior to calendar 2019 we evaluated our recorded goodwill for impairment at three reporting units (Domestic Theatres, Odeon Theatres and Nordic Theatres). Our market capitalization has been below carrying value since May 24, 2019.
A decline in our common stock price and the resulting impact on market capitalization is one of several events and circumstances we consider when determining if goodwill should be evaluated for impairment at an interim period.
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The following table sets forth the historical closing prices per share of our Class A common stock for the calendar periods indicated:
Closing
Date
Price Per Share
July 31, 2017
20.40
August 31, 2017
13.40
September 30, 2017
14.70
October 31, 2017
13.90
November 30, 2017
14.25
December 31, 2017
15.10
January 31, 2018
12.80
February 28, 2018
15.00
March 31, 2018
14.05
April 30, 2018
17.45
May 31, 2018
14.80
15.90
July 31, 2018
16.30
August 31, 2018
19.05
September 30, 2018
20.50
October 31, 2018
19.26
November 30, 2018
13.65
12.28
January 31, 2019
14.65
February 28, 2019
14.03
March 31, 2019
14.85
April 30, 2019
15.16
May 31, 2019
11.98
9.33
July 31, 2019
11.83
August 7, 2019
11.35
The recent decline in the trading price of our Class A common stock was not considered to be a sustained decline and therefore is not an event that would require us to evaluate goodwill for impairment as of June 30, 2019.
We have previously performed a quantitative analysis of the goodwill recorded in our 3 reporting units (Domestic Theatres, Odeon Theatres and Nordic Theatres) for impairment as of September 30, 2017 based on declines in the trading price of our Class A common stock and poor box office performance during 2017 and, most recently for our Odeon Theatres and Nordic Theatres reporting units as of October 1, 2018, based on declines in their operating results compared to the prior year and in advance of combining Odeon Theatres and Nordic Theatres reporting units into a single reporting unit International Theatres. We have not recorded any goodwill impairment to date as a result of these evaluations.
If the current market price of our common stock does not increase from current levels in the near future, or if other events or circumstances change that would more likely than not reduce the fair value of our reporting units below their respective carrying values, all or a portion of our goodwill may be impaired in future periods. Examples of such adverse events or circumstances that could change include (i) an adverse change in macroeconomic conditions; (ii) increased cost factors that have a negative effect on our earnings and cash flows; (iii) negative or overall declining financial performance compared with our actual and projected results of relevant prior periods; and (iv) a sustained decrease in our share price. Any impairment charges that we may take in the future could be material to our results of operations and financial condition.
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Leases. We adopted ASC Topic 842 effective January 1, 2019 and as a result our lease accounting policy has been modified as discussed in Note 2—Leases in the Notes to the Condensed Consolidated Financial Statements under Item 1. Lessees are required to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). The liability is equal to the present value of lease payments. The asset is based on the liability, subject to certain adjustments, such as for lease incentives. For financial presentation purposes, a dual model was retained, requiring leases to be classified as either operating or finance leases. Operating leases result in straight-line expense (similar to operating leases under the prior accounting standard) while finance leases result in a front-loaded expense pattern (similar to capital leases under the prior accounting standard). We used our incremental borrowing rate to calculate the present value of our future operating lease payments, which was determined using a portfolio approach based on the rate of interest that we would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term.
Dividends. The following is a summary of dividends and dividend equivalents declared to stockholders:
November 1, 2018
December 10, 2018
December 26, 2018
September 14, 2018
September 25, 2018
September 28, 2018
1.55
162.9
July 24, 2018
September 10, 2018
September 24, 2018
25.8
May 3, 2018
June 11, 2018
June 25, 2018
March 12, 2018
March 26, 2018
During the six months ended June 30, 2019 and June 30, 2018, we paid dividends and dividend equivalents of $42.6 million and $51.4 million, respectively. As of June 30, 2019, we accrued $3.8 million for the remaining unpaid dividends.
On August 2, 2019, we declared a cash dividend in the amount of $0.20 per share on our Class A and Class B common stock, payable on September 23, 2019 to stockholders of record on September 9, 2019.
Stock Repurchases. On August 3, 2017, we announced that our Board of Directors had approved a $100.0 million share repurchase program to repurchase our Class A common stock over a two-year period.
Repurchases may be made at management's discretion from time to time through open-market transactions including block purchases, through privately negotiated transactions, or otherwise over the next two years in accordance with all applicable securities laws and regulations. The extent to which AMC repurchases its shares, and the timing of such repurchases, will depend upon a variety of factors, including liquidity, capital needs of the business, market conditions, regulatory requirements, and other corporate considerations, as determined by AMC’s management team. Repurchases may be made under a Rule 10b5-1 plan, which would permit common stock to be repurchased when our management might otherwise be precluded from doing so under insider trading laws. The repurchase program does not obligate us to repurchase any minimum dollar amount or number of shares and may be suspended for periods or discontinued at any time. As of June 30, 2019, we had $44.3 million remaining available for repurchases under this plan. This program expired on August 2, 2019, we repurchased 3,695,856 shares for approximately $55.7 million and an average price of $14.87 per share.
AMC Shares Repurchased from Wanda. On September 14, 2018, we issued $600.0 million of Convertible Notes due 2024. Using proceeds from the Convertible Notes, we repurchased 24,057,143 shares at a price of $17.50 per share or $421.0 million and associated legal fees of $2.6 million. As of June 30, 2019, Wanda owns 49.85% of AMC through its 51,769,784 shares of Class B common stock. With the 3 to 1 voting rights of Class B common shares, Wanda retains voting control of AMC.
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Operating Results
The following table sets forth our consolidated revenues, operating costs and expenses.
% Change
%
(8.1)
10.5
17.6
7.4
Operating Costs and Expenses
23.1
25.3
(25.6)
(27.8)
(18.7)
(16.1)
*
88.2
(78.6)
(79.1)
(2.9)
Equity in earnings of non-consolidated entities (1)
(21.5)
40.0
(27.7)
* Percentage change in excess of 100%
Operating Data:
Screen additions
Screen acquisitions
64
Screen dispositions
104
134
Construction openings (closures), net
(3)
(65)
(52)
(118)
Average screens (1)
10,675
10,684
10,679
10,737
Number of screens operated
10,988
Number of theatres operated
1,004
1,005
Screens per theatre
11.0
Attendance (in thousands) (1)
96,955
91,245
176,780
182,177
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Segment Operating Results
The following table sets forth our revenues, operating costs and expenses by reportable segment.
June 30,
2018
694.2
369.3
76.5
65.8
34.6
300.6
54.2
General and administrative expense:
16.5
97.2
111.6
(21.9)
(23.2)
73.5
61.3
Investment (income) expense
(1.6)
50.9
62.3
52.0
49.3
(29.7)
46.2
47.9
Segment Operating Data:
(6)
(38)
(27)
8,006
8,010
2,669
2,674
8,107
8,080
2,929
2,908
639
365
366
12.7
12.6
71,900
69,751
25,055
21,494
55
1,196.1
430.9
680.8
170.8
52.5
36.9
1,953.1
681.6
193.6
144.1
122.0
(5.3)
150.6
143.1
14.5
(75.3)
50.5
(8.5)
(84.6)
125
(41)
(68)
(11)
(50)
8,003
8,053
2,676
2,684
126,879
131,607
49,901
50,570
We present Adjusted EBITDA as a supplemental measure of our performance. We define Adjusted EBITDA as net earnings (loss) plus (i) income tax provision (benefit), (ii) interest expense and (iii) depreciation and amortization, as further adjusted to eliminate the impact of certain items that we do not consider indicative of our ongoing operating performance and to include attributable EBITDA from equity investments in theatre operations in international markets and any cash distributions of earnings from other equity method investees. These further adjustments are itemized below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the
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same as or similar to some of the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.
Adjusted EBITDA decreased by $7.2 million during the three months ended June 30, 2019 compared to the three months ended June 30, 2018. Adjusted EBITDA in U.S. markets decreased by $20.1 million primarily due to the modification of a lease in the prior year that reduced rent expense in 2018 by $10.8 million and increased rent due to the new lease standard ASC 842 that reduced Adjusted EBITDA by approximately $12.8 million. Adjusted EBITDA in international markets increased $12.9 million primarily due to increases in attendance, partially offset by increased rent due to the new lease standard ASC 842 that reduced Adjusted EBITDA by approximately $9.9 million, and a decrease in foreign currency translation rates. See Note 2—Leases in the Notes to the Condensed Consolidated Financial Statements under Item 1 for the impact of ASC 842.
Adjusted EBITDA decreased by $176.9 million during the six months ended June 30, 2019 compared to the six months ended June 30, 2018. Adjusted EBITDA in U.S. markets decreased by $151.0 million primarily due to decreases in attendance, the modification of a lease in the prior year that reduced rent expense in 2018 by $35.0 million and increased rent due to the new lease standard ASC 842 that reduced Adjusted EBITDA by approximately $25.6 million. Adjusted EBITDA in international markets decreased $25.9 million primarily due to increased rent due to the new lease standard ASC 842 that reduced Adjusted EBITDA by approximately $19.8 million, decreases in attendance and a decrease in foreign currency translation rates. See Note 2—Leases in the Notes to the Condensed Consolidated Financial Statements under Item 1 for the impact of ASC 842.
The following tables set forth our Adjusted EBITDA by reportable operating segment and our reconciliation of Adjusted EBITDA:
Adjusted EBITDA (In millions)
U.S. markets (1)
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Adjusted EBITDA is a non-GAAP financial measure commonly used in our industry and should not be construed as an alternative to net earnings (loss) as an indicator of operating performance (as determined in accordance with U.S. GAAP). Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.
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We have included Adjusted EBITDA because we believe it provides management and investors with additional information to measure our performance and estimate our value.
Adjusted EBITDA has important limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. For example, Adjusted EBITDA:
Results of Operations— For the Three Months Ended June 30, 2019 and June 30, 2018
Condensed Consolidated Results of Operations
Revenues. Total revenues increased 4.4%, or $63.6 million, during the three months ended June 30, 2019 compared to the three months ended June 30, 2018. Admissions revenues decreased 0.1%, or $0.8 million during the three months ended June 30, 2019 compared to the three months ended June 30, 2018, primarily due a 5.9% decrease in average ticket price offset by a 6.2% increase in attendance. The decrease in average ticket price was primarily due to strategic pricing initiatives put in place over the last year; decreases in the popularity of IMAX premium content, and declines in foreign currency translation rates. The increase in attendance was primarily due to strategic pricing initiatives in the U.S. markets and the popularity of films in International markets.
Food and beverage revenues increased 10.5%, or $46.7 million, during the three months ended June 30, 2019 compared to the three months ended June 30, 2018, primarily due to increase in attendance and a 4.0% increase in food and beverage revenues per patron. Food and beverage revenues per patron increased as a result of strategic price increases, our food and beverage initiatives including theatre renovations, and our Feature Fare menu, partially offset by declines in foreign currency translation rates.
Total other theatre revenues increased 17.6%, or $17.7 million, during the three months ended June 30, 2019 compared to the three months ended June 30, 2018, primarily due to the increase in ticket fees, partially offset by declines in foreign currency translation rates.
Operating costs and expenses. Operating costs and expenses increased 3.5%, or $47.8 million, during the three months ended June 30, 2019 compared to the three months ended June 30, 2018. Film exhibition costs increased 2.4%, or $11.1 million, during the three months ended June 30, 2019 compared to the three months ended June 30, 2018, primarily due to the increase in attendance. As a percentage of admissions revenues, film exhibition costs were 53.9% for the three months ended June 30, 2019 and 52.6% for the three months ended June 30, 2018.
Food and beverage costs increased 5.8%, or $4.2 million, during the three months ended June 30, 2019 compared to the three months ended June 30, 2018. The increase in food and beverage costs was primarily due to the increase in food and beverage revenues. As a percentage of food and beverage revenues, food and beverage costs were 15.5% for the three months ended June 30, 2019 and 16.2% for the three months ended June 30, 2018. Food and beverage gross profit per patron increased 4.8% and is calculated as food and beverage revenues less food and beverage costs divided by attendance.
As a percentage of revenues, operating expense was 29.0% for the three months ended June 30, 2019 and
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29.4% for the three months ended June 30, 2018. Rent expense increased 23.1%, or $46.2 million, during the three months ended June 30, 2019 compared to the three months ended June 30, 2018, primarily due to a prior year modification of a theatre lease which reduced rent by $10.8 million in 2018 and the adoption of ASC 842 for lease accounting where approximately $20.9 million of principal and interest payments were reclassified as rent expense during the three months ended June 30, 2019 related to build-to-suit financing lease obligations, $1.8 million of deferred gain amortization for sale leaseback transactions that previously reduced rent expense was eliminated and $7.7 million of non-cash expense from purchase accounting was recorded as rent expense, which was previously classified as depreciation and amortization expense. See Note 2—Leases in the Notes to the Condensed Consolidated Financial Statements under Item 1 for the impact of ASC 842.
Merger, acquisition and transaction costs. Merger, acquisition and transaction costs were $3.2 million during the three months ended June 30, 2019 compared to $4.3 million during the three months ended June 30, 2018, primarily due to expenses incurred in connection with the Nordic acquisition in the prior year.
Other. Other general and administrative expense increased $0.2 million during the three months ended June 30, 2019 compared to the three months ended June 30, 2018.
Depreciation and amortization. Depreciation and amortization decreased $25.7 million during the three months ended June 30, 2019 compared to the three months ended June 30, 2018, primarily due to the adoption of ASC 842 where the financing lease building and related depreciation were eliminated. See Note 2—Leases in the Notes to the Condensed Consolidated Financial Statements under Item 1 for the impact of ASC 842.
Other Expense (Income):
Other expense (income). Other income of $23.4 million during the three months ended June 30, 2019 is primarily due to an increase in fair value of our derivative asset for the contingent call option related to the Class B common stock purchase and cancellation agreement of $7.1 million and a decrease of $33.9 million in fair value of our derivative liability for the embedded conversion feature in our Convertible Notes due 2024 which resulted in a gain of $41.0 million, partially offset by $16.6 million of expense related to the repayment of indebtedness (See Note 6 – Corporate Borrowings for additional information). During the three months ended June 30, 2018, other expense included $0.1 million financing related foreign currency transaction losses, $0.7 million loss on forward foreign currency contracts, and $0.4 million net periodic benefit cost.
Interest expense. Interest expense increased $4.0 million to $86.4 million for the three months ended June 30, 2019 compared to $82.4 million during the three months ended June 30, 2018. The increase is primarily due to the issuance of our 2.95% $600.0 million Convertible Notes due 2024 on September 14, 2018 and our Senior Secured Credit Facility-Term Loan due 2026, partially offset by the reclassification to rent expense of $6.9 million of financing lease obligation interest as a result of the adoption of ASC 842. See Note 2—Leases in the Notes to the Condensed Consolidated Financial Statements under Item 1 for the impact of ASC 842.
Equity in earnings of non-consolidated entities. Equity in earnings of non-consolidated entities were $10.2 million for the three months ended June 30, 2019 compared to $13.0 million for the three months ended June 30, 2018.
Investment income. Investment income was $2.1 million for the three months ended June 30, 2019 compared to $1.5 million for the three months ended June 30, 2018. Investment income includes a gain on the sale of our Austria theatres of $1.9 million for the three months ended June 30, 2019. Investment income for the three months ended June 30, 2018 includes a $1.5 million gain on the sale of a joint venture managed theatre.
Income tax provision (benefit). The income tax provision was $5.4 million for the three months ended June 30, 2019 and the income tax benefit was $2.6 million for the three months ended June 30, 2018. See Note 8—Income Taxes of the Notes to the Condensed Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q for further information.
Net earnings. Net earnings were $49.4 million and $22.2 million during the three months ended June 30, 2019 and June 30, 2018, respectively. Net earnings during the three months ended June 30, 2019 compared to the three months ended June 30, 2018 were positively impacted by higher food and beverage revenue and higher other theatre revenue, increased other income; gains related to our derivative asset and liability, decreases in depreciation and
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amortization expense, offset by higher income tax provision, lower average ticket prices which negatively impacted admissions revenue, higher rent expense, and a decline in foreign currency translation rates.
Theatrical Exhibition–U.S. Markets
Revenues. Total revenues increased 2.8%, or $31.9 million, during the three months ended June 30, 2019 compared to the three months ended June 30, 2018. Admissions revenues decreased 1.9%, or $13.5 million, during the three months ended June 30, 2019 compared to the three months ended June 30, 2018, primarily due to a 4.9% decrease in average ticket price partially offset by a 3.1% increase in attendance. The decrease in average ticket price was primarily due to strategic pricing initiatives and decreases in premium format attendance for IMAX. Attendance increased primarily due to the popularity of films released in the quarter as compared to the same period a year ago.
Food and beverage revenues increased 8.6%, or $31.8 million, during the three months ended June 30, 2019 compared to the three months ended June 30, 2018, primarily due to the increase in attendance, and an increase in food and beverage revenues per patron of 5.4%. Food and beverage revenues per patron increased as a result of strategic price increases and our food and beverage initiatives including our Feature Fare menu and theatre renovations.
Total other theatre revenues increased 20.7%, or $13.6 million, during the three months ended June 30, 2019 compared to the three months ended June 30, 2018, primarily due to an increase in ticket fees of $10.3 million primarily due to the increase in attendance.
Operating costs and expenses. Operating costs and expenses increased 4.0%, or $40.6 million, during the three months ended June 30, 2019 compared to the three months ended June 30, 2018. Film exhibition costs decreased 0.3%, or $1.2 million, during the three months ended June 30, 2019 compared to the three months ended June 30, 2018, primarily due to the decrease in admissions revenues. As a percentage of admissions revenues, film exhibition costs were 57.3% and 56.4% for the three months ended June 30, 2019 and June 30, 2018, respectively.
Food and beverage costs increased 3.3%, or $1.8 million, during the three months ended June 30, 2019 compared to the three months ended June 30, 2018. As a percentage of food and beverage revenues, food and beverage costs were 14.0% for the three months ended June 30, 2019 and 14.7% for the three months ended June 30, 2018. Food and beverage gross profit per patron increased 6.3% and is calculated as food and beverage revenues less food and beverage costs divided by attendance.
As a percentage of revenues, operating expense was 27.6% for the three months ended June 30, 2019 and 26.6% during the three months ended June 30, 2018. Rent expense increased 23.4%, or $34.1 million, during the three months ended June 30, 2019 compared to the three months ended June 30, 2018. Rent expense increased due to a prior year modification of a theatre lease which reduced rent expense by $10.8 million and the adoption of ASC 842 for lease accounting that caused increases in cash rent expense for build-to-suit financing lease obligations of $11.0 million, non-cash rent expense – purchase accounting included in rent expense of $4.6 million and the elimination of $1.8 million of deferred gain amortization. See Note 2—Leases in the Notes to the Condensed Consolidated Financial Statements under Item 1 for the impact of ASC 842.
General and Administrative Expense:
Merger, acquisition and transaction costs. Merger, acquisition and transaction costs were $2.4 million during the three months ended June 30, 2019 compared to $2.2 million during the three months ended June 30, 2018, primarily due to increases in expenses incurred in connection with the acquisition of other theatre assets in the current year.
Other. Other general and administrative expense decreased $1.6 million during the three months ended June 30, 2019 compared to the three months ended June 30, 2018.
Depreciation and amortization. Depreciation and amortization decreased $13.0 million during the three months ended June 30, 2019 compared to the three months ended June 30, 2018 primarily due to the adoption of ASC 842 where the financing lease buildings and related depreciation were eliminated. See Note 2—Leases in the Notes to the Condensed Consolidated Financial Statements under Item 1 for the impact of ASC 842.
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Other expense (income). Other income of $23.2 million during the three months ended June 30, 2019 is primarily due to an increase in fair value of our derivative asset for the contingent call option related to the Class B common stock purchase and cancellation agreement of $7.1 million and decrease of $33.9 million in fair value of our derivative liability for the embedded conversion feature in our Convertible Notes due 2024 which resulted in income of $41.0 million, partially offset by $16.6 million expense related to the repayment of indebtedness (See Note 6 – Corporate Borrowings for additional information). Other expense of $1.7 million during the three months ended June 30, 2018 is primarily due to loss on foreign currency transactions of $1.8 million, and net periodic benefit cost of $0.2 million, partially offset by $0.3 million in business interruption recoveries.
Interest expense. Interest expense increased $8.1 million to $84.2 million for the three months ended June 30, 2019 compared to $76.1 million for the three months ended June 30, 2018 primarily due to the interest expense related to our 2.95% $600.0 million Convertible Notes due 2024 issued on September 14, 2018 and our Senior Secured Credit Facility-Term Loan due 2026 issued on April 22, 2019 (See Note 6 – Corporate Borrowings), partially offset by the reclassification to rent expense of $3.3 million of financing lease obligation interest as a result of the adoption of ASC 842. See Note 2—Leases in the Notes to the Condensed Consolidated Financial Statements under Item 1 for the impact of ASC 842.
Equity in earnings of non-consolidated entities. Equity in earnings of non-consolidated entities were $9.9 million for the three months ended June 30, 2019 compared to $13.9 million for the three months ended June 30, 2018. Equity in earnings for the three months ended June 30, 2018 included a $2.3 million gain on the sale of NCM, Inc. common shares.
Investment income. Investment income was $0.2 million for the three months ended June 30, 2019 compared to $1.6 million for the three months ended June 30, 2018. Investment income for the three months ended June 30, 2018 includes a $1.5 million gain on the sale of a joint venture managed theatre.
Income tax provision. The income tax provision was $5.8 million and $1.4 million for the three months ended June 30, 2019 and June 30, 2018, respectively. See Note 8—Income Taxes of the Notes to the Condensed Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q for further information.
Net earnings. Net earnings were $46.2 million and $47.9 million during the three months ended June 30, 2019 and June 30, 2018, respectively. Net earnings during the three months ended June 30, 2019 compared to the three months ended June 30, 2018 were decreased due to lower admissions revenue, higher rent expense, lower equity in earnings from non-consolidated entities and an increase in income tax provision, and partially offset by higher food and beverage revenues, increased other theatre revenues, decreases in depreciation and amortization expense, an increase in other income related to our derivative asset and liability.
Theatrical Exhibition - International Markets
Revenues. Total revenues increased 10.1%, or $31.7 million, during the three months ended June 30, 2019 compared to the three months ended June 30, 2018. Admissions revenues increased 6.3%, or $12.7 million, during the three months ended June 30, 2019 compared to the three months ended June 30, 2018, primarily due to an overall increase in attendance of 16.6%, partially offset by an 8.8% decline in average ticket price including declines in foreign currency translation rates. The increase in attendance was primarily due to the popularity of films released in the quarter as compared to the same period a year ago.
Food and beverage revenues increased 19.5%, or $14.9 million, during the three months ended June 30, 2019 compared to the three months ended June 30, 2018, primarily due to the overall increase in attendance and a 2.5% increase in food and beverage revenues per patron, partially offset by a decline in foreign currency translation rates.
Total other theatre revenues increased $4.1 million during the three months ended June 30, 2019 compared to the three months ended June 30, 2018, primarily due to increased screen advertising revenue, partially offset by a decline in foreign currency translation rates.
Operating costs and expenses. Operating costs and expenses increased $7.2 million during the three months ended June 30, 2019 compared to the three months ended June 30, 2018. Film exhibition costs increased $12.3 million
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during the three months ended June 30, 2019 compared to the three months ended June 30, 2018, primarily due to the increase in admissions revenues. As a percentage of admissions revenues, film exhibition costs were 43.0% for the three months ended June 30, 2019 and 39.6% for the three months ended June 30, 2018 primarily due to the popularity of films released during the current period which typically results in higher film rent terms.
Food and beverage costs increased $2.4 million during the three months ended June 30, 2019 compared to the three months ended June 30, 2018. The increase in food and beverage costs was primarily due to the increase in food and beverage revenues. As a percentage of food and beverage revenues, food and beverage costs were 22.2% for the three months ended June 30, 2019 and 23.4% for the three months ended June 30, 2018.
As a percentage of revenues, operating expense was 33.8% for the three months ended June 30, 2019 and 39.6% during the three months ended June 30, 2018. Rent expense increased $12.1 million during the three months ended June 30, 2019 compared to the three months ended June 30, 2018 primarily due to the adoption of ASC 842 for lease accounting where approximately $9.9 million of prior year principal and interest payments were reclassified as rent expense during the three months ended June 30, 2019 related to build-to-suit financing lease obligations and $3.1 million of non-cash rent expense - purchase accounting was recorded as rent expense, offset by a decline in foreign currency translation rates. See Note 2—Leases in the Notes to the Condensed Consolidated Financial Statements under Item 1 for the impact of ASC 842.
Merger, acquisition and transaction costs. Merger, acquisition and transaction costs decreased $1.3 million during the three months ended June 30, 2019 compared to the three months ended June 30, 2018.
Other. Other general and administrative expense increased $1.6 million, during the three months ended June 30, 2019 compared to the three months ended June 30, 2018.
Depreciation and amortization. Depreciation and amortization decreased $12.7 million during the three months ended June 30, 2019 compared to the three months ended June 30, 2018 primarily due to the adoption of ASC 842 where the financing lease buildings and depreciation were eliminated and a decline in foreign currency translation rates. See Note 2—Leases in the Notes to the Condensed Consolidated Financial Statements under Item 1 for the impact of ASC 842.
Interest expense. Interest expense decreased $4.1 million for the three months ended June 30, 2019 compared to the three months ended June 30, 2018, primarily due to the adoption of ASC 842 which reclassified build-to-suit finance lease obligation interest expense to rent and a decline in foreign currency translation rates. See Note 2—Leases in the Notes to the Condensed Consolidated Financial Statements under Item 1 for the impact of ASC 842.
Income tax benefit. The income tax benefit was $0.4 million and $4.0 million for the three months ended June 30, 2019 and June 30, 2018, respectively. See Note 8—Income Taxes of the Notes to the Condensed Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q for further information.
Net earnings (loss). Net earnings increased $28.9 million during the three months ended June 30, 2019 as a result of higher attendance and the related increase in revenues, lower operating expenses, depreciation and amortization and interest expense, partially offset by a decline in foreign currency translation rates.
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Results of Operations— For the Six Months Ended June 30, 2019 and June 30, 2018
Revenues. Total revenues decreased 4.2%, or $119.6 million, during the six months ended June 30, 2019 compared to the six months ended June 30, 2018. Admissions revenues decreased 8.1%, or $144.3 million, during the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due a 5.3% decrease in average ticket price and a 3.0% decrease in attendance. The decrease in average ticket price was primarily due to strategic pricing initiatives put in place over the last year; decreases in the popularity of 3D and IMAX premium content, and declines in foreign currency translation rates. The decrease in attendance was primarily due to the popularity of films (for U.S. markets and International markets) released in the first quarter as compared to the same period a year ago as well as temporary screen closures for theatre refurbishments.
Food and beverage revenues increased 1.1%, or $9.7 million, during the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to a 4.2% increase in food and beverage revenues per patron, partially offset by the decrease in attendance. Food and beverage revenues per patron increased as a result of strategic price increases, our food and beverage initiatives including theatre renovations, and our Feature Fare menu, partially offset by declines in foreign currency translation rates.
Total other theatre revenues increased 7.4%, or $15.0 million, during the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to increases in ticket fees, partially offset by declines in foreign currency translation rates.
Operating costs and expenses. Operating costs and expenses increased 0.3%, or $8.2 million, during the six months ended June 30, 2019 compared to the six months ended June 30, 2018. Film exhibition costs decreased 5.6%, or $50.1 million, during the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to the decrease in admissions revenues. As a percentage of admissions revenues, film exhibition costs were 52.1% for the six months ended June 30, 2019 and 50.7% for the six months ended June 30, 2018.
Food and beverage costs decreased 0.4%, or $0.5 million, during the six months ended June 30, 2019 compared to the six months ended June 30, 2018. The decrease in food and beverage costs was primarily due to declines in foreign currency translation rates. As a percentage of food and beverage revenues, food and beverage costs were 16.0% for the six months ended June 30, 2019 and 16.3% for the six months ended June 30, 2018. Food and beverage gross profit per patron increased 4.5% and is calculated as food and beverage revenues less food and beverage costs divided by attendance.
As a percentage of revenues, operating expense was 31.0% for the six months ended June 30, 2019 and 29.6% for the six months ended June 30, 2018. Rent expense increased 25.3%, or $98.5 million, during the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to a prior year modification of a theatre lease which reduced rent by $35.0 million in 2018 and the adoption of ASC 842 for lease accounting where approximately $41.8 million of principal and interest payments were reclassified as rent expense during the six months ended June 30, 2019 related to build-to-suit financing lease obligations, $3.6 million of deferred gain amortization for sale leaseback transactions that previously reduced rent expense was eliminated and $15.4 million of non-cash expense from purchase accounting was recorded as rent expense, which was previously classified as depreciation and amortization expense. See Note 2—Leases in the Notes to the Condensed Consolidated Financial Statements under Item 1 for the impact of ASC 842.
Merger, acquisition and transaction costs. Merger, acquisition and transaction costs were $6.5 million during the six months ended June 30, 2019 compared to $9.0 million during the six months ended June 30, 2018, primarily due to expenses incurred in connection with the Nordic acquisition in the prior year.
Other. Other general and administrative expense increased $2.2 million during the six months ended June 30, 2019 compared to the six months ended June 30, 2018.
Depreciation and amortization. Depreciation and amortization decreased $43.2 million during the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to the adoption of ASC 842 for lease accounting where the financing lease building and related depreciation were eliminated. See Note 2—Leases in the Notes to the Condensed Consolidated Financial Statements under Item 1 for the impact of ASC 842.
Other expense. Other expense of $6.4 million during the six months ended June 30, 2019 is primarily due to a $16.6 million expense related to the repayment of indebtedness (See Note 6 – Corporate Borrowings for additional information), the decrease in fair value of our derivative asset for the contingent call option related to the Class B common stock purchase and cancellation agreement of $8.0 million, $1.0 million loss on forward currency contracts, offset by a decrease in fair value of our derivative liability for the embedded conversion feature in our Convertible Notes due 2024 of $20.6 million. During the six months ended June 30, 2018, other expense of $3.4 million included $1.0 million financing related foreign currency transaction losses, and $0.4 million forward foreign currency contract losses.
Interest expense. Interest expense increased $5.1 million to $170.0 million for the six months ended June 30, 2019 compared to $164.9 million during the six months ended June 30, 2018. The increase is primarily due to the issuance of our 2.95% $600.0 million Convertible Notes due 2024 on September 14, 2018 and our Senior Secured Credit Facility-Term Loan due 2026 (See Note 6 – Corporate Borrowings for additional information), partially offset by the reclassification to rent expense of $13.8 million of financing lease obligation interest as a result of the adoption of ASC 842. See Note 2—Leases in the Notes to the Condensed Consolidated Financial Statements under Item 1 for the impact of ASC 842.
Equity in earnings of non-consolidated entities. Equity in earnings of non-consolidated entities were $16.7 million for the six months ended June 30, 2019 compared to $4.0 million for the six months ended June 30, 2018. The earnings for the six months ended June 30, 2018 includes a $2.3 million gain on the sale of NCM, Inc. common shares, partially offset by a $16.0 million lower of carrying value or fair value impairment loss on 9,492,820 NCM units and 1,000,000 NCM, Inc. common shares held-for-sale and a $1.1 million loss on the return of 915,150 NCM units as a part of the annual common unit adjustment under the NCM ESA.
Investment income. Investment income was $18.2 million for the six months ended June 30, 2019 compared to $6.7 million for the six months ended June 30, 2018. Investment income includes a gain on the sale of our Austria theatres of $12.9 million for the six months ended June 30, 2019 and includes payments received related to the NCM tax receivable agreement of $4.0 million and $5.4 million for the six months ended June 30, 2019 and June 30, 2018, respectively. Investment income for the six months ended June 30, 2018 includes a $1.5 million gain on the sale of a joint venture managed theatre.
Income tax provision. The income tax provision was $11.1 million and $2.1 million for the six months ended June 30, 2019 and June 30, 2018, respectively. See Note 8—Income Taxes of the Notes to the Condensed Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q for further information.
Net earnings (loss). Net loss was $80.8 million and net earnings were $39.9 million during the six months ended June 30, 2019 and June 30, 2018, respectively. Net loss during the six months ended June 30, 2019 compared to the six months ended June 30, 2018 was impacted by lower attendance which negatively impacted admissions revenue, higher rent expense, increased other expense related to our repayment of indebtedness, increased income tax provision, and a decline in foreign currency translation rates, offset by decreases in depreciation and amortization expense and increased equity in earnings from non-consolidated entities and increased investment income.
Revenues. Total revenues decreased 3.9%, or $83.0 million, during the six months ended June 30, 2019 compared to the six months ended June 30, 2018. Admissions revenues decreased 7.9%, or $102.8 million, during the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to a 4.5% decrease in average ticket price and a 3.6% decrease in attendance. The decrease in average ticket price was primarily due to strategic pricing initiatives and decreases in premium format attendance for 3D and IMAX. The decrease in attendance was primarily due to the popularity of films released in the first quarter as compared to the same period a year ago as well as temporary screen closures for theatre refurbishments.
Food and beverage revenues increased 1.2%, or $7.9 million, during the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to the increase in food and beverage revenues per patron
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of 4.9%, partially offset by the decrease in attendance. Food and beverage revenues per patron increased as a result of strategic price increases and our food and beverage initiatives including our Feature Fare menu and theatre renovations.
Total other theatre revenues increased 9.0%, or $11.9 million, during the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to increased ticket fees of $8.4 million or 15.5%.
Operating costs and expenses. Operating costs and expenses increased 1.8%, or $35.3 million, during the six months ended June 30, 2019 compared to the six months ended June 30, 2018. Film exhibition costs decreased 5.7%, or $40.1 million, during the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to the decrease in admissions revenues. As a percentage of admissions revenues, film exhibition costs were 55.8% and 54.5% for the six months ended June 30, 2019 and June 30, 2018, respectively.
Food and beverage costs increased 0.4%, or $0.4 million, during the six months ended June 30, 2019 compared to the six months ended June 30, 2018. As a percentage of food and beverage revenues, food and beverage costs were 14.4% for the six months ended June 30, 2019 and 14.5% for the six months ended June 30, 2018. Food and beverage gross profit per patron increased 5.0% and is calculated as food and beverage revenues less food and beverage costs divided by attendance.
As a percentage of revenues, operating expense was 29.9% for the six months ended June 30, 2019 and 27.6% during the six months ended June 30, 2018. Rent expense increased 27.8%, or $77.5 million, during the six months ended June 30, 2019 compared to the six months ended June 30, 2018. Rent expense increased due to a prior year modification of a theatre lease which reduced rent expense by $35.0 million and the adoption of ASC 842 for lease accounting that caused increases in cash rent expense for build-to-suit financing lease obligations of $22.0 million, non-cash rent expense – purchase accounting included in rent expense of $9.2 million and eliminated $3.6 million of deferred gain amortization. See Note 2—Leases in the Notes to the Condensed Consolidated Financial Statements under Item 1 for the impact of ASC 842.
Merger, acquisition and transaction costs. Merger, acquisition and transaction costs were $3.5 million during the six months ended June 30, 2019 compared to $6.2 million during the six months ended June 30, 2018, primarily due to expenses incurred in connection with the Nordic acquisition in the prior year.
Other. Other general and administrative expense decreased $0.4 million, during the six months ended June 30, 2019 compared to the six months ended June 30, 2018.
Depreciation and amortization. Depreciation and amortization decreased $23.4 million during the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to the adoption of ASC 842 for lease accounting where the financing lease buildings and related depreciation were eliminated. See Note 2—Leases in the Notes to the Condensed Consolidated Financial Statements under Item 1 for the impact of ASC 842.
Other Expense:
Other expense. Other expense of $6.1 million during the six months ended June 30, 2019 is primarily due to a $16.6 million expense related to the repayment of indebtedness (See Note 6 – Corporate Borrowings for additional information), a decrease in fair value of our derivative asset for the contingent call option related to the Class B common stock purchase and cancellation agreement of $8.0 million, $1.0 million loss on forward currency contracts, and partially offset by a decrease in fair value of our derivative liability for the embedded conversion feature in our Convertible Notes due 2024 which resulted in income of $20.6 million. Other expense in the prior year was primarily due to foreign currency transaction losses.
Interest expense. Interest expense increased $13.9 million to $165.8 million for the six months ended June 30, 2019 compared to $151.9 million the six months ended June 30, 2018 primarily due to the interest expense related to our 2.95% $600.0 million Convertible Notes due 2024 issued on September 14, 2018 and our Senior Secured Credit Facility-Term Loan due 2026 (See Note 6 – Corporate Borrowings for additional information), partially offset by the reclassification to rent expense of $6.6 million of financing lease obligation interest as a result of the adoption of ASC 842. See Note 2—Leases in the Notes to the Condensed Consolidated Financial Statements under Item 1 for the impact of ASC 842.
Equity in earnings of non-consolidated entities. Equity in earnings of non-consolidated entities were $16.0 million for the six months ended June 30, 2019 compared to $3.6 million for the six months ended June 30, 2018. Equity in earnings for the six months ended June 30, 2018 includes a $2.3 million gain on the sale of NCM, Inc. common shares, partially offset by a $16.0 million lower of carrying value or fair value impairment loss on 9,492,820 NCM units and 1,000,000 NCM, Inc. common shares held-for-sale and a $1.1 million loss on the return of 915,150 NCM units as a part of the annual common unit adjustment under the NCM ESA.
Investment income. Investment income was $5.3 million for the six months ended June 30, 2019 compared to $6.7 million for the six months ended June 30, 2018. Investment income includes payments received related to the NCM tax receivable agreement of $4.0 million and $5.4 million for the six months ended June 30, 2019 and June 30, 2018, respectively. Investment income for the six months ended June 30, 2018 includes a $1.5 million gain on the sale of a joint venture managed theatre.
Income tax provision. The income tax provision was $9.3 million and $2.5 million for the six months ended June 30, 2019 and June 30, 2018, respectively. See Note 8—Income Taxes of the Notes to the Condensed Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q for further information.
Net earnings (loss). Net loss was $84.6 million and net earnings were $48.0 million during the six months ended June 30, 2019 and June 30, 2018, respectively. Net loss during the six months ended June 30, 2019 compared to the six months ended June 30, 2018 was impacted by lower attendance which negatively impacted admissions revenue, higher rent expense, increased other expense related to repayment of indebtedness, increased income tax provision, offset by decreases in depreciation and amortization expense and increased equity in earnings from non-consolidated entities.
Revenues. Total revenues decreased 5.1%, or $36.6 million, during the six months ended June 30, 2019 compared to the six months ended June 30, 2018. Admissions revenues decreased 8.8%, or $41.5 million, during the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to an overall decrease in attendance of 1.3% and decline in average ticket price of 7.5%. The decrease in average ticket price was primarily due to decreases in foreign currency translation rates. The decrease in attendance was primarily due to the popularity of films released in the period as compared to the same period a year ago as well as temporary screen closures for theatre refurbishments.
Food and beverage revenues increased 1.1%, or $1.8 million, during the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to the overall increase of food and beverage per patron of 2.4%, partially offset by the decrease in attendance and decline in foreign currency translation rates.
Total other theatre revenues increased $3.1 million during the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to increased ticket fees, partially offset by a decline in foreign currency translation rates.
Operating costs and expenses. Operating costs and expenses decreased 3.8%, or $27.1 million, during the six months ended June 30, 2019 compared to the six months ended June 30, 2018. Film exhibition costs decreased $10.0 million during the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to the decrease in admissions revenues. As a percentage of admissions revenues, film exhibition costs were 41.8% for the six months ended June 30, 2019 and 40.3% for the six months ended June 30, 2018.
Food and beverage costs decreased $0.9 million during the six months ended June 30, 2019 compared to the six months ended June 30, 2018. The decrease in food and beverage costs was primarily due to the decrease in foreign currency translation rates. As a percentage of food and beverage revenues, food and beverage costs were 22.5% for the six months ended June 30, 2019 and 23.3% for the six months ended June 30, 2018.
As a percentage of revenues, operating expense was 34.5% for the six months ended June 30, 2019 and 35.5% during the six months ended June 30, 2018. Rent expense increased $21.0 million during the six months ended June 30, 2019 compared to the six months ended June 30, 2018 primarily due to the adoption of ASC 842 for lease accounting where approximately $19.8 million of prior year principal and interest payments were reclassified as rent expense during
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the six months ended June 30, 2019 related to build-to-suit financing lease obligations and $6.2 million of non-cash rent expense - purchase accounting was recorded as rent expense, offset by a decline in foreign currency translation rates. See Note 2—Leases in the Notes to the Condensed Consolidated Financial Statements under Item 1 for the impact of ASC 842.
Merger, acquisition and transaction costs. Merger, acquisition and transaction costs increased $0.2 million during the six months ended June 30, 2019 compared to the six months ended June 30, 2018.
Other. Other general and administrative expense increased $2.6 million, during the six months ended June 30, 2019 compared to the six months ended June 30, 2018.
Depreciation and amortization. Depreciation and amortization decreased $19.8 million during the six months ended June 30, 2019 compared to the six months ended June 30, 2018 primarily due to the adoption of ASC 842 for lease accounting where the financing lease buildings and depreciation were eliminated and a decline in foreign currency translation rates. See Note 2—Leases in the Notes to the Condensed Consolidated Financial Statements under Item 1 for the impact of ASC 842.
Interest expense. Interest expense decreased $8.8 million for the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to the adoption of ASC 842 for lease accounting which reclassified build-to-suit finance lease obligation interest expense to rent and a decline in foreign currency translation rates. See Note 2—Leases in the Notes to the Condensed Consolidated Financial Statements under Item 1 for the impact of ASC 842.
Investment income. Investment income increased $12.9 million due to the gain on the sale of our Austria theatres.
Income tax provision (benefit). The income tax provision was $1.8 million for the six months ended June 30, 2019 and the income tax benefit was $0.4 million for the six months ended June 30, 2018. See Note 8—Income Taxes of the Notes to the Condensed Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q for further information.
Net earnings. Net earnings increased $11.9 million during the six months ended June 30, 2019 as a result of lower depreciation and amortization, reduced operating expenses and lower interest expense, offset by lower attendance and the related decrease in revenues, a decline in foreign currency translation rates, higher rent expense and higher income tax provisions.
LIQUIDITY AND CAPITAL RESOURCES
Our consolidated revenues are primarily collected in cash, principally through box office admissions and food and beverage sales. We have an operating “float” which partially finances our operations, and which generally permits us to maintain a smaller amount of working capital capacity. This float exists because admissions revenues are received in cash, while exhibition costs (primarily film rentals) are ordinarily paid to distributors from 20 to 45 days following receipt of box office admissions revenues. Film distributors generally release the films which they anticipate will be the most successful during the summer and year-end holiday seasons. Consequently, we typically generate higher revenues during such periods.
We had working capital deficits (excluding restricted cash) as of June 30, 2019 and December 31, 2018 of $(1,134.6 million) and $(557.5 million), respectively. Working capital included $570.8 million and $0 of operating lease liabilities as of June 30, 2019 and December 31, 2018, respectively. Working capital included $369.8 million and $414.8 million of deferred revenues as of June 30, 2019 and December 31, 2018, respectively. We have the ability to borrow under our Revolving Credit Facility to meet obligations as they come due (subject to limitations on the incurrence of indebtedness in our various debt instruments). As of June 30, 2019, we had $211.6 million available for borrowing, net of letters of credit, under our Revolving Credit Facility. We also maintain a £100.0 million ($127.0 million based on the foreign currency translation rate of 1.2699 on June 30, 2019) revolving credit facility at our Odeon subsidiary. As of June 30, 2019, we had $0 drawn down on the revolving credit facility and had issued £17.0 million ($21.6 million) standby letters of credit in the ordinary course of business, leaving £83.0 million ($105.4 million) available for borrowing.
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We believe that cash generated from operations, existing cash and cash equivalents, availability under our Revolving Credit Facility and Odeon’s revolving credit facility will be sufficient to fund operations, planned capital expenditures and dividends currently and for at least the next 12 months and enable us to maintain compliance with all financial debt covenants.
As of June 30, 2019, we were in compliance with all financial debt covenants.
Cash Flows from Operating Activities
Cash flows provided by operating activities, as reflected in the condensed consolidated statements of cash flows, were $153.6 million and $297.1 million during the six months ended June 30, 2019 and June 30, 2018, respectively. The decrease in cash flows provided by operating activities was primarily due to decreased attendance levels which drove lower operating results and the adoption of ASC 842 which reclassified approximately $28.0 million of principal payments under build-to-suit finance lease obligations from net cash used in financing activities to net cash used in operating activities during calendar 2019.
Cash Flows from Investing Activities
Cash flows used in investing activities, as reflected in the condensed consolidated statements of cash flows, were $221.3 million and $181.5 million during the six months ended June 30, 2019 and June 30, 2018, respectively. Cash outflows from investing activities include capital expenditures of $229.9 million and $241.1 million during the six months ended June 30, 2019 and June 30, 2018, respectively. Our capital expenditures primarily consisted of strategic growth initiatives and remodels, capital improvements to existing locations in our theatre circuit, and technology upgrades. During the six months ended June 30, 2019, cash flows used in investing activities included the cash outflows of $11.8 million for the acquisition of assets related to 4 theatres in the U.S. markets, offset by the disposition of long-term assets of $21.3 million. During the six months ended June 30, 2018, net cash used in investing activities included proceeds from sale leaseback transactions of $50.1 million and proceeds from the disposition of long-term assets of $13.5 million, offset by the investment in Dreamscape Immersive, Inc. and Central Service Studios, Inc. of $10.0 million. We expect that our cash outflows for capital expenditures, net of landlord contributions, will be approximately $415.0 million for calendar 2019.
We fund the costs of constructing, maintaining and remodeling our theatres through existing cash balances, cash generated from operations, landlord contributions, or borrowed funds, as necessary. We generally lease our theatres pursuant to long-term non-cancelable operating leases which may require the developer, who owns the property, to reimburse us for the construction costs. We may decide to own the real estate assets of new or acquired theatres and, following construction or acquisition, sell and leaseback the real estate assets pursuant to long-term non-cancelable operating leases. See Commitments and Contingencies below for additional discussion of the potential cash outflows.
Cash Flows from Financing Activities
Cash flows used in financing activities, as reflected in the condensed consolidated statements of cash flows, were $54.5 million and $117.9 million during the six months ended June 30, 2019 and June 30, 2018, respectively.
During the six months ended June 30, 2019, cash inflows from financing activities included the proceeds from the issuance of $1,990.0 million of Term Loans due 2026, offset by cash outflows for the repayment of the Term Loan due 2022 of $849.8 million, repayment of the Term Loan due 2023 of $488.7 million, repayments of the 6.0% Senior Secured Notes due 2023 of $230.0 million and payment of the 5.875% Senior Subordinated Notes due 2022 of $375.0 million. Call premiums paid related to the repayment of the 6.0% Senior Secured Notes due 2023 and the 5.875% Senior Subordinated Notes due 2022 were $15.9 million and debt financing costs paid were $11.2 million. See Note 6 – Corporate Borrowings for additional information.
Principal payments under finance lease obligations declined to $6.1 million due primarily to the adoption of ASC 842 where principal payments of $28.0 million for build-to-suit finance lease obligations were reclassified as operating leases and the cash flows were also classified as operating activities. See Note 2 – Leases in the Notes to the Condensed Consolidated Financial Statements under Item 1. for the impact of ASC 842.
On February 15, 2019, our Board of Directors declared a cash dividend in the amount of $0.20 per share of
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Class A and Class B common stock, paid on March 25, 2019 to stockholders of record on March 11, 2019. On May 3, 2019, our Board of Directors declared a cash dividend in the amount of $0.20 per share of Class A and Class B common stock, paid on June 24, 2019 to stockholders of record on June 10, 2019. We paid dividends and dividend equivalents of $42.6 million and $51.4 million during the six months ended June 30, 2019 and June 30, 2018, respectively.
We made tax payments for restricted stock units withholdings of $1.3 million and $1.7 million during the six months ended June 30, 2019 and June 30, 2018, respectively.
During the six months ended June 30, 2018, we paid a total of $19.8 million for treasury stock, including $13.5 million for treasury stock purchased at the end of 2017 and paid for at the beginning of 2018, and $6.3 million for treasury stock purchased and paid for during the six months ended June 30, 2018.
Contractual Obligations, Commitments and Contingencies
We have commitments and contingencies for financing leases, corporate borrowings, operating leases, capital related betterments and pension funding that were summarized in a table in our Annual Report on Form 10–K for the year ended December 31, 2018. Since December 31, 2018, there have been no material changes to the commitments and contingencies outside of the ordinary course of business, except entering into the amended and restated Senior Secured Credit Agreement.
70
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In the ordinary course of business, our financial results are exposed to fluctuations in interest rates and foreign currency exchange rates. In accordance with applicable guidance, we presented a sensitivity analysis showing the potential impact to net income of changes in interest rates and foreign currency exchange rates. For the six months ended June 30, 2019, our analysis utilized a hypothetical 100 basis-point increase or decrease to the average interest rate on our variable rate debt instruments to illustrate the potential impact to interest expense of changes in interest rates. For the six months ended June 30, 2019, our analysis utilized a hypothetical 100 basis-point increase or decrease to market interest rates on our fixed rate debt instruments to illustrate the potential impact to fair value of changes in interest rates.
Similarly, for the same period, our analysis used a uniform and hypothetical 10% strengthening of the U.S. dollar versus the average exchange rates of applicable currencies to depict the potential impact to net income of changes in foreign exchange rates. These market risk instruments and the potential impacts to the condensed consolidated statements of operations for the current year, have not materially fluctuated, individually or in the aggregate from the preceding year; thus, only current year information is presented below.
Market risk on variable-rate financial instruments. At June 30, 2019, we maintained a Senior Secured Credit Facility comprised of a $225.0 million revolving credit facility and $2,000.0 million of Term Loan due 2026. The Senior Secured Credit Facility provides for borrowings at a rate per annum equal to, at our option, either (i) an applicable margin plus a base rate determined by reference to the highest of (a) 0.50% per annum plus the Federal Funds Effective Rate, or (b) the prime rate of Citi or (ii) the LIBOR + 3.0%. The rate in effect at June 30, 2019 for the outstanding Term Loan due 2026 was 5.23% per annum. Increases in market interest rates would cause interest expense to increase and earnings before income taxes to decrease. The change in interest expense and earnings before income taxes would be dependent upon the weighted average outstanding borrowings during the reporting period following an increase in market interest rates. At June 30, 2019, we had no variable-rate borrowings outstanding under our revolving credit facility and had an aggregate principal balance of $1,995.0 million outstanding under the Term Loan due 2026. A 100-basis point change in market interest rates would have increased or decreased interest expense on the Senior Secured Credit Facility by $9.8 million during the six months ended June 30, 2019.
Market risk on fixed-rate financial instruments. Included in long-term corporate borrowings at June 30 2019 were principal amounts of $600.0 million of our Convertible Notes due 2024, $600.0 million of our Notes due 2025, $595.0 million of our Notes due 2026, $475.0 million of our Notes due 2027, and £500.0 million ($635.0 million) of our Sterling Notes due 2024. A 100-basis point change in market interest rates would have caused an increase or (decrease) in the fair value of our fixed rate financial instruments of approximately $138.6 million and ($130.2) million, respectively.
Foreign currency exchange rate risk. We are also exposed to market risk arising from changes in foreign currency exchange rates as a result of our ownership of Odeon and Nordic. Odeon’s revenues and operating expenses are transacted in British Pounds and Euros, and Nordic’s revenues and operating expenses are transacted primarily in Swedish Krona and Euros. U.S. GAAP requires that our subsidiaries use the currency of the primary economic environment in which they operate as their functional currency. If Odeon and Nordic operate in a highly inflationary economy, U.S. GAAP requires that the U.S. dollar be used as the functional currency for Odeon and Nordic. Currency fluctuations in the countries in which we operate result in us reporting exchange gains (losses) or foreign currency translation adjustments. Based upon our ownership in Odeon and Nordic as of June 30, 2019, holding everything else constant, a hypothetical 10% strengthening of the U.S. dollar versus the average exchange rates of applicable currencies to depict the potential impact to net income of changes in foreign exchange rates, would increase the aggregate net earnings of our International markets reportable segment for the six months ended June 30, 2019 by approximately $0.4 million.
Our foreign currency translation rates decreased by approximately 7.0% for the six months ended June 30, 2019 compared to the six months ended June 30, 2018, which did not significantly impact our consolidated net loss for the six months ended June 30, 2019.
Item 4. Controls and Procedures.
(a)
Evaluation of disclosure controls and procedures.
The Company maintains a set of disclosure controls and procedures designed to ensure that material information required to be disclosed in its filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that material information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s Chief Executive Officer and Chief Financial Officer have evaluated these disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10–Q and have determined that such disclosure controls and procedures were effective.
(b)
Changes in internal control.
As part of the adoption of ASC Topic 842, the Company implemented new internal controls to ensure we adequately evaluated our contracts and properly assessed the new lease accounting standard’s impact on our consolidated financial statements. There were no other significant changes in the Company’s internal control over financial reporting due to the adoption of the new standard, and no other changes in its internal control over financial reporting as defined in Exchange Act Rule 13a-15(f) during the quarter ended June 30, 2019, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 1. Legal Proceedings
Reference is made to Note 12—Commitments and Contingencies of the Notes to the Company’s Condensed Consolidated Financial Statements contained in Part I of this quarterly report on Form 10–Q for information on certain litigation to which we are a party.
Item 1A. Risk Factors
Reference is made to Part I Item 1A. Risk Factors in our Annual Report on Form 10–K for the year ended December 31, 2018, which sets forth information relating to important risks and uncertainties that could materially adversely affect our business, financial condition or operating results. There have been no material changes to the risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2018.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities
Approximate Dollar
Total Number of
Value of Shares that
Shares Purchased as
May Yet Be
Part of Publicly
Purchased Under the
Average Price Paid
Announced Plans or
Plans or Program (a)
Period
Shares Purchased
Per Share
Programs (a)
April 1, 2019 through April 30, 2019
44.3
May 1, 2019 through May 31, 2019
June 1, 2019 through June 30, 2019
Item 3. Defaults Upon Senior Securities
None.
Item 5. Other Information
Item 6. Exhibits.
EXHIBIT INDEX
EXHIBITNUMBER
DESCRIPTION
Sixth Amendment to Credit Agreement, dated as of April 22, 2019, by and among AMC Entertainment Holdings, Inc., as borrower, the lenders party thereto and Citicorp North America, Inc., as administrative agent (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 1-33892) filed on April 25, 2019).
*31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Acts of 2002.
*31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Acts of 2002.
*32.1
Section 906 Certifications of Adam M. Aron (Chief Executive Officer) and Craig R. Ramsey (Chief Financial Officer) furnished in accordance with Securities Act Release 33-8212.
**101.INS
XBRL Instance Document
**101.SCH
XBRL Taxonomy Extension Schema Document
**101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
**101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
**101.LAB
XBRL Taxonomy Extension Label Linkbase Document
**101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
* Filed herewith
** Submitted electronically with this Report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 8, 2019
/s/ ADAM M. ARON
Adam M. Aron
Chief Executive Officer, Director and President
/s/ CRAIG R. RAMSEY
Craig R. Ramsey
Executive Vice President and Chief Financial Officer