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. Similarly, statements made herein and elsewhere regarding our pending acquisitions of Carmike and Odeon are also forward
‑looking statements, including statements regarding the anticipated closing date of the acquisitions, the ability to obtain regulatory approvals or to satisfy closing conditions, the costs of the acquisitions or the source or structure of the financings, the expected benefits of the acquisition on our future business, operations and financial performance and our ability to successfully integrate the recently acquired businesses. 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:
|
·
|
|
decreased supply of motion pictures or delayed access to motion pictures;
|
|
·
|
|
quality of motion picture production, spending levels on motion picture marketing, and performance of motion pictures in our markets;
|
|
·
|
|
risks and uncertainties relating to our significant indebtedness;
|
|
·
|
|
limitations on the availability of capital may prevent us from deploying strategic initiatives;
|
|
·
|
|
risks of poor financial results may prevent us from meeting our payment obligations;
|
|
·
|
|
our ability to utilize net operating loss carryforwards to reduce our future tax liability;
|
|
·
|
|
increased competition in the geographic areas in which we operate;
|
|
·
|
|
increased use of alternative film delivery methods or other forms of entertainment;
|
|
·
|
|
shrinking exclusive theatrical release windows;
|
|
·
|
|
certain covenants in the agreements that govern our indebtedness may limit our ability to take advantage of certain business opportunities;
|
|
·
|
|
general political, social and economic conditions;
|
|
·
|
|
review by antitrust authorities in connection with acquisition opportunities;
|
|
·
|
|
dependence on key personnel for current and future performance and our ability to attract and retain senior executives and other key personnel;
|
|
·
|
|
optimizing our theatre circuit through construction and the transformation of our existing theatres may be subject to delay and unanticipated costs;
|
|
·
|
|
our ability to achieve expected synergies and benefits and performance from our strategic theatre acquisitions and strategic initiatives, execution risks related to our pending and completed acquisitions and other strategic initiatives;
|
|
·
|
|
with respect to our pending Carmike acquisition, our ability to satisfy closing conditions in the anticipated time frame or at all, obtaining regulatory approval, including the risk that any approval may be on terms or subject to conditions that are not anticipated, obtaining Carmike stockholders approval; the possibility that the acquisition does not close, including in circumstances in which we would be obligated to pay Carmike a termination fee or other damage or expenses;
|
|
·
|
|
with respect to our pending Odeon acquisition, our ability to operate a business in markets
where
we
have limited experience
, the United Kingdom’s exit from the European Union, obtaining regulatory approval, including the risk that any approval may be on terms or subject to conditions that are not anticipated and other business effects including the effects of industry, market, economic, political or regulatory conditions and future exchange or interest rates;
|
|
·
|
|
our ability to finance the Carmike and Odeon acquisitions on favorable terms;
|
|
·
|
|
our ability to refinance our indebtedness on terms favorable to us;
|
|
·
|
|
failures, unavailability or security breaches of our information systems;
|
|
·
|
|
our investment and equity in earnings from National CineMedia, LLC (“NCM”) may be negatively impacted by the competitive environment in which NCM operates and by the risks associated with its strategic initiatives;
|
|
·
|
|
risks relating to impairment losses and theatre and other closure charges;
|
|
·
|
|
risks relating to the incurrence of legal liability;
|
|
·
|
|
increased costs in order to comply with governmental regulation and the impact of governmental investigations concerning potentially anticompetitive conduct including film clearances and partnering with other major exhibitors in joint ventures; and
|
|
·
|
|
we may not generate sufficient cash flows or have sufficient restricted payment capacity under our Senior Secured Credit Facility or the indentures governing our debt securities to pay our intended dividends on our Class A and Class B common stock.
|
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, 2015 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 guest experience leader in the movie exhibition industry. We operate productive theatres in the country’s top markets, including No. 1 market share in the top three markets, New York, Los Angeles and Chicago.
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, 2016, we owned, operated or had interests in 386 theatres and 5,334 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 box office gross. The settlement process allows for negotiation based upon how a film actually performs.
During the 2015 calendar year, films licensed from our seven largest distributors based on revenues accounted for approximately 89% of our U.S. admissions revenues. 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 revenues are dependent upon the timing and popularity of film releases by distributors. The most marketable films are usually released during the summer and the calendar year-end holiday seasons. Therefore, our business is highly seasonal, with higher attendance and revenues generally occurring during the summer months and holiday seasons. Our results of operations may vary significantly from quarter to quarter and from year to year.
AMC Movie Screens
During the six months ended June 30, 2016, we opened 12 new screens, acquired 11 screens, permanently closed 38 screens, temporarily closed 237 screens and reopened 160 screens to implement our strategy and install consumer experience upgrades.
As of June 30, 2016, we had 2,598 3D enabled screens, including 153 IMAX, 20 Dolby Cinema
TM
at AMC and 8 Premium Large Format (“PLF”); approximately 49% of our screens were 3D enabled screens, including IMAX 3D enabled screens, and approximately 3% of our screens were IMAX 3D enabled screens.
|
|
|
|
|
|
|
|
Number of
|
|
Number of
|
|
|
|
Screens As of
|
|
Screens As of
|
|
Format
|
|
June 30, 2016
|
|
December 31, 2015
|
|
Digital
|
|
5,334
|
|
5,426
|
|
3D enabled
|
|
2,598
|
|
2,643
|
|
IMAX (3D enabled)
|
|
153
|
|
152
|
|
Dolby Cinema at AMC Prime
|
|
20
|
|
12
|
|
Other PLF (3D enabled)
|
|
8
|
|
13
|
|
Dine-in theatres
|
|
312
|
|
312
|
|
Premium seating
|
|
1,251
|
|
1,119
|
|
IMAX
®
.
IMAX is one of the world’s leading entertainment technology companies, specializing in motion picture technologies and presentations. IMAX offers a unique end-to-end cinematic solution combining proprietary software, theater architecture and equipment to create the highest -quality, most immersive motion picture experience for which the IMAX brand has become known globally. Top filmmakers and studios utilize IMAX theaters to connect with audiences in innovative ways, and as such, IMAX’s theater network is among the most important and successful theatrical distribution platforms for major event films around the world.
As of June 30, 2016, AMC is the largest IMAX exhibitor in the U.S. with a 44% market share, and each of our IMAX local installations is protected by geographic exclusivity. As of June 30, 2016, our IMAX screen count is 72% greater than our closest competitor. AMC believes that we have had considerable success with our IMAX partnership, and recently we have agreed to add another 25 IMAX locations by 2019.
Dolby Cinema™ at AMC.
On April 9, 2015, we, along with Dolby Laboratories, Inc., announced Dolby Cinema at AMC, a premium cinema offering for moviegoers that combines state-of-the-art image and sound technologies with inspired theatre design and comfort. Dolby Cinema at AMC includes Dolby Vision™ laser projection and object oriented Dolby Atmos
®
audio technology, as well as AMC’s plush power reclining seats with seat transducers that vibrate with the action on screen.
As of June 30, 2016, we have 20 fully operational Dolby Cinema
TM
at AMC screens and we expect to open substantially more Dolby screens by the end of 2016.
Other PLF.
AMC believes there is considerable opportunity to add a private label PLF format in many of our locations, with superior sight and sound technology and enhanced seating as contrasted with our traditional auditoriums. This PLF format will give AMC the capability to add a screen in theatres already outfitted with IMAX and/or Dolby Cinema at AMC. Also, this PLF should offer an enhanced theatrical experience for movie goers beyond AMC’s current core theatres, but may not carry the same price premium as IMAX or Dolby Cinema at AMC. Therefore, it may be especially relevant in smaller or more price sensitive markets.
Guest Amenities
We continually upgrade the quality of our theatre circuit by adding new screens through new builds (including expansions) and acquisitions, substantial upgrades to seating concepts, expansion of food and beverage offerings (including dine-in theatres), and by disposing of older screens through closures and sales. We are an industry leader in the development and operation of theatres. Typically, our theatres have 12 or more screens and offer amenities to enhance the movie-going experience, such as stadium seating providing unobstructed viewing, digital sound and premium seat design.
Recliner seating
is the key feature of theatre renovations. These renovations 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, most importantly, replace traditional theatre seats with plush, electric recliners that allow customers to deploy a leg rest and fully recline at the push of a button. The renovation process typically involves losing up to two-thirds of a given auditorium’s seating capacity. For an industry historically focused on quantity, this reduction in seating capacity could be viewed as counter-intuitive and harmful to revenues. However, the quality improvement in the customer experience is driving a 55% increase in attendance at these locations. Our customers have responded favorably to the significant personal space gains from ample row depths, ability to recline or stretch their legs, extra-wide pillowed chaise and oversized armrests. The reseated theatres attract more midweek audiences than normal theatres and tend to draw more adults who pay higher ticket prices than teens or young children. We typically do not change ticket prices in the first year after construction, however, in subsequent years we typically increase our ticket prices at our reseated theatres.
Rebalancing of the new supply-demand relationship created by recliner seating presents us two further opportunities to improve customer convenience and maximize operating results: open-source internet ticketing and reserved seating.
Open-source internet ticketing
makes all our seats (over 863,000) in all our theatres and auditoriums for all our showtimes as available as possible, on as many websites as possible. We believe increased online access is important because it captures customers’ purchase intent more immediately and directly than if we had to wait until they showed up at the theatre box office to make a purchase. Once our customers buy a ticket, they are less likely to change their mind. Carefully monitoring internet pre-sales also lets us adjust capacity in real time, moving movies that are poised to over perform to larger capacity or more auditoriums, thereby maximizing yield.
Reserved seating,
at some of our busiest theatres, allows our customers to choose a specific seat in advance of the movie. We believe that knowing there is a specifically chosen seat waiting for a show that promises to be a sellout is comforting to our customers, and removes anxiety around the experience. We believe reserved seating will become increasingly prevalent to the point of being a pre-requisite in the medium-term future.
We believe the comfort and personal space gains from recliner seating, coupled with the immediacy of demand captured from open-source internet ticketing and the certainty offered by reserved seating distinguish us from our competitors.
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. We design our theatres to have more food and beverage capacity to make it easier to serve larger numbers of customers. Strategic placement of large food and beverage operations within theatres increases their visibility, aids in reducing the length of lines, allows flexibility to introduce new concepts and improves traffic flow around the food and beverage stands.
To address recent consumer trends, we are expanding our menu of enhanced food and beverage products to include made-to-order drinks and meals, customized coffee, healthy snacks, premium beers, wine and mixed drinks and other gourmet products. We plan to invest across a spectrum of enhanced food and beverage formats, ranging from simple, less capital-intensive food and beverage design improvements to the development of new dine-in theatre options to rejuvenate theatres approaching the end of their useful lives as traditional movie theatres and, in some of our larger theatres, to more efficiently monetize attendance. The costs of these conversions in some cases are partially covered by investments from the theatre landlord. We currently operate 19 Dine-In Theatres that deliver chef-inspired menus with seat-side or delivery service to luxury recliners with tables. Our recent Dine-In Theatre concepts are designed to capitalize on the latest food service trend, the fast casual eating experience.
AMC Stubs
AMC Stubs
is a customer frequency program which allows members to earn rewards, some of which are redeemable on future purchases at AMC locations. 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. Points are forfeited upon expiration and recognized as admissions or food and beverage revenues. For the paid tier of the program (AMC Stubs Premiere), the program’s annual membership fee is deferred, net of estimated refunds, and is recognized ratably over the one-year membership period.
As of June 30, 2016, we had 2,672,000 AMC Stubs members. Our AMC Stubs members represented approximately 21% of our attendance during 2016 with an average ticket price 3% lower than our non-members and food and beverage expenditures per patron 2% higher than non-members.
In April of 2016, AMC launched a test of a revised AMC Stubs program featuring both a traditional paid membership program, called AMC Stubs Premiere, and a new non-paid tier called AMC Stubs Insider. Both programs reward loyal guests for their patronage of AMC Theatres, but the Premiere tier provides greater rewards for dollars spent than the free tier, and offers other guest amenities. AMC launched this revised AMC Stubs program nationally in July of 2016.
The following tables reflect AMC Stubs activity during the three month period and six month period ended June 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMC Stubs Revenue for
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2016
|
|
|
|
Deferred
|
|
|
|
|
Other Theatre
|
|
|
|
|
Food and
|
|
|
|
Membership
|
|
Deferred
|
|
Revenues
|
|
Admissions
|
|
Beverage
|
|
(In thousands)
|
|
Fees
|
|
Rewards
|
|
(Membership Fees)
|
|
Revenues
|
|
Revenues
|
|
Balance, March 31, 2016
|
|
$
|
11,187
|
|
$
|
15,527
|
|
|
|
|
|
|
|
|
|
|
Membership fees received
|
|
|
7,726
|
|
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Rewards accumulated, net of expirations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Admissions
|
|
|
—
|
|
|
5,791
|
|
|
—
|
|
|
(5,791)
|
|
|
—
|
|
Food and beverage
|
|
|
—
|
|
|
7,677
|
|
|
—
|
|
|
—
|
|
|
(7,677)
|
|
Rewards redeemed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Admissions
|
|
|
—
|
|
|
(5,528)
|
|
|
—
|
|
|
5,528
|
|
|
—
|
|
Food and beverage
|
|
|
—
|
|
|
(7,186)
|
|
|
—
|
|
|
—
|
|
|
7,186
|
|
Amortization of deferred revenue
|
|
|
(6,117)
|
|
|
—
|
|
|
6,117
|
|
|
—
|
|
|
—
|
|
For the period ended or balance as of June 30, 2016
|
|
$
|
12,796
|
|
$
|
16,281
|
|
$
|
6,117
|
|
$
|
(263)
|
|
$
|
(491)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMC Stubs Revenue for
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2016
|
|
|
|
Deferred
|
|
|
|
|
Other Theatre
|
|
|
|
|
Food and
|
|
|
|
Membership
|
|
Deferred
|
|
Revenues
|
|
Admissions
|
|
Beverage
|
|
(In thousands)
|
|
Fees
|
|
Rewards
|
|
(Membership Fees)
|
|
Revenues
|
|
Revenues
|
|
Balance, December 31, 2015
|
|
$
|
12,142
|
|
$
|
17,013
|
|
|
|
|
|
|
|
|
|
|
Membership fees received
|
|
|
12,908
|
|
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Rewards accumulated, net of expirations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Admissions
|
|
|
—
|
|
|
9,639
|
|
|
—
|
|
|
(9,639)
|
|
|
—
|
|
Food and beverage
|
|
|
—
|
|
|
13,051
|
|
|
—
|
|
|
—
|
|
|
(13,051)
|
|
Rewards redeemed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Admissions
|
|
|
—
|
|
|
(9,997)
|
|
|
—
|
|
|
9,997
|
|
|
—
|
|
Food and beverage
|
|
|
—
|
|
|
(13,425)
|
|
|
—
|
|
|
—
|
|
|
13,425
|
|
Amortization of deferred revenue
|
|
|
(12,254)
|
|
|
—
|
|
|
12,254
|
|
|
—
|
|
|
—
|
|
For the period ended or balance as of June 30, 2016
|
|
$
|
12,796
|
|
$
|
16,281
|
|
$
|
12,254
|
|
$
|
358
|
|
$
|
374
|
|
The following tables reflect AMC Stubs activity during the three month period and six month period ended June 30, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMC Stubs Revenue for
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2015
|
|
|
|
Deferred
|
|
|
|
|
Other Theatre
|
|
|
|
|
Food and
|
|
|
|
Membership
|
|
Deferred
|
|
Revenues
|
|
Admissions
|
|
Beverage
|
|
(In thousands)
|
|
Fees
|
|
Rewards
|
|
(Membership Fees)
|
|
Revenues
|
|
Revenues
|
|
Balance, March 31, 2015
|
|
$
|
11,239
|
|
$
|
15,708
|
|
|
|
|
|
|
|
|
|
|
Membership fees received
|
|
|
7,815
|
|
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Rewards accumulated, net of expirations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Admissions
|
|
|
—
|
|
|
5,886
|
|
|
—
|
|
|
(5,886)
|
|
|
—
|
|
Food and beverage
|
|
|
—
|
|
|
8,622
|
|
|
—
|
|
|
—
|
|
|
(8,622)
|
|
Rewards redeemed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Admissions
|
|
|
—
|
|
|
(4,838)
|
|
|
—
|
|
|
4,838
|
|
|
—
|
|
Food and beverage
|
|
|
—
|
|
|
(7,406)
|
|
|
—
|
|
|
—
|
|
|
7,406
|
|
Amortization of deferred revenue
|
|
|
(6,138)
|
|
|
—
|
|
|
6,138
|
|
|
—
|
|
|
—
|
|
For the period ended or balance as of June 30, 2015
|
|
$
|
12,916
|
|
$
|
17,972
|
|
$
|
6,138
|
|
$
|
(1,048)
|
|
$
|
(1,216)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMC Stubs Revenue for
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2015
|
|
|
Deferred
|
|
|
|
|
Other Theatre
|
|
|
|
|
Food and
|
|
|
Membership
|
|
Deferred
|
|
Revenues
|
|
Admissions
|
|
Beverage
|
(In thousands)
|
|
Fees
|
|
Rewards
|
|
(Membership Fees)
|
|
Revenues
|
|
Revenues
|
Balance, December 31, 2014
|
|
$
|
11,408
|
|
$
|
16,129
|
|
|
|
|
|
|
|
|
|
Membership fees received
|
|
|
13,757
|
|
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
Rewards accumulated, net of expirations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Admissions
|
|
|
—
|
|
|
10,126
|
|
|
—
|
|
|
(10,126)
|
|
|
—
|
Food and beverage
|
|
|
—
|
|
|
14,466
|
|
|
—
|
|
|
—
|
|
|
(14,466)
|
Rewards redeemed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Admissions
|
|
|
—
|
|
|
(9,286)
|
|
|
—
|
|
|
9,286
|
|
|
—
|
Food and beverage
|
|
|
—
|
|
|
(13,463)
|
|
|
—
|
|
|
—
|
|
|
13,463
|
Amortization of deferred revenue
|
|
|
(12,249)
|
|
|
—
|
|
|
12,249
|
|
|
—
|
|
|
—
|
For the period ended or balance as of June 30, 2015
|
|
$
|
12,916
|
|
$
|
17,972
|
|
$
|
12,249
|
|
$
|
(840)
|
|
$
|
(1,003)
|
Significant and Subsequent Events
Odeon and UCI Cinemas Holdings Limited.
On July 12, 2016, we entered into a definitive agreement to acquire the equity of Odeon and UCI Cinemas Holdings Limited (“Odeon”) from private equity firm Terra Firma
comprised of £500,000,000 ($661,850,000) for the equity, 75% in cash and 25% in stock consideration, subject to lock-ups, and the payment of approximately £14,000,000 ($18,452,000) in employee incentive costs based on the GBP/USD exchange rate of 1.32 on July 12, 2016. We have entered into a debt financing commitment letter in connection with this
definitive
agreement which provides senior secured incremental term loans in an aggregate amount of up to $525,000,000 and a senior subordinated bridge loan in an aggregate amount of up to $800,000,000 to fund the acquisition. There can be no assurance that we will be successful in completing the debt financing on favorable terms as it involves matters outside of our control. The acquisition is subject to European Commission approval.
Odeon operates 242 theatres and 2,236 screens in 7 countries (UK, Ireland, Italy, Spain, Austria, Portugal, and Germany).
RealD Inc.
We sold all of our 1,222,780 shares of common stock in RealD Inc. during the six months ended June 30, 2016 and recognized a gain on sale of $3,008,000.
Carmike Cinemas.
On July 24, 2016, we, Congress Merger Subsidiary, Inc., our indirect wholly owned subsidiary, and Carmike entered into an amended and restated merger agreement, which amends and restates that certain Agreement and Plan of Merger, dated March 3, 2016, and pursuant to which we will acquire all of the outstanding shares of Carmike for either $33.06 in cash or 1.0819 shares of Class A common stock, at the election of the Carmike stockholders, and subject to a customary proration mechanism to achieve an aggregate consideration mix of 70% cash and 30% in shares of our Class A common stock. We entered into a debt financing commitment letter in connection with the amended and restated merger agreement which provides senior secured incremental term loans in an aggregate amount of up to $225,000,000 and a senior subordinated bridge loan in an aggregate amount of up to $300,000,000 to fund the acquisition. There can be no assurance that we will be successful in completing the debt financing on favorable terms as it involves matters outside of our control. The merger is subject to customary closing conditions, including regulatory approval and approval by Carmike’s shareholders. Carmike is a U.S. leader in digital cinema, 3D cinema deployments and alternative programming and is one of the nation’s largest motion picture exhibitors. Carmike operates 276 theatres and 2,954 screens in 41 states focused primarily in mid-sized communities.
Starplex Cinemas.
In December 2015, we completed the acquisition of Starplex Cinemas
for cash. The purchase price for Starplex Cinemas was $172,172,000, net of cash acquired, and is subject to working capital and other purchase price adjustments as described in the stock purchase agreement. Starplex Cinemas operates 33 theatres with 346 screens in small and mid-size markets in 12 states, which further complements our large market portfolio. We expect to realize synergies and cost savings related to this acquisition as a result of purchasing and procurement economies of scale and general and administrative expense savings, particularly with respect to the consolidation of corporate related functions and elimination of redundancies. In January 2016, we divested of two Starplex Cinemas theatres with 22 screens, as required by the Antitrust Division of the United States Department of Justice. We received proceeds from the
divestiture of approximately $5,390,000. For additional information about the Starplex Cinemas acquisition, see Note 2—Acquisition to our Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q.
Corporate Borrowings.
On December 11, 2015, AMCE entered into a first amendment to its Senior Secured Credit Agreement dated April 30, 2013 (“First Amendment”). The First Amendment provides for the incurrence of $125,000,000 incremental term loans (“Incremental Term Loan”). In addition, the First Amendment, among other things, (a) extends the maturity date with respect to (i) the existing Term Loan due 2020 and the Incremental Term Loan (together “Term Loan due 2022”) to December 15, 2022 and (ii) the Revolving Credit Facility from April 30, 2018 to December 15, 2020 and (b) increases the applicable margin for the Term Loan due 2022 from 1.75% with respect to base rate borrowings to 2.25% and 2.75% with respect to LIBOR borrowings to 3.25%. The proceeds of the Incremental Term Loan were used by Holdings to pay expenses related to the First Amendment transactions and the Starplex Cinemas acquisition. At June 30, 2016, the aggregate principal balance of the Term Loan due 2022 was $876,222,000 and borrowings under the Revolving Credit Facility were $0. As of June 30, 2016, Holdings had approximately $137,384,000 available for borrowing, net of letters of credit, under its Revolving Credit Facility.
Notes due 2025
. On June 5, 2015, AMCE issued $600,000,000 aggregate principal amount of its Notes due 2025 in a private offering. Holdings capitalized deferred financing costs of approximately $11,378,000, related to the issuance of the Notes due 2025. The Notes due 2025 mature on June 15, 2025. Holdings will pay interest on the Notes due 2025 at 5.75% per annum, semi-annually in arrears on June 15th and December 15th, commencing on December 15, 2015. Holdings may redeem some or all of the Notes due 2025 at any time on or after June 15, 2020 at 102.875% of the principal amount thereof, declining ratably to 100% of the principal amount thereof on or after June 15, 2023, plus accrued and unpaid interest to the redemption date. Prior to June 15, 2020, Holdings may redeem the Notes due 2025 at par plus a make-whole premium. Holdings used the net proceeds from the Notes due 2025 private offering and cash on hand, to pay the consideration for the tender offer for the 9.75% Senior Subordinated Notes due 2020 (“Notes due 2020”), plus any accrued and unpaid interest and related transaction fees and expenses.
On June 5, 2015, in connection with the issuance of the Notes due 2025,
Holdings
entered into a registration rights agreement. Subject to the terms of the registration rights agreement,
Holdings
filed a registration statement on June 19, 2015 pursuant to the Securities Act of 1933, as amended, relating to an offer to exchange the original Notes due 2025 for exchange Notes due 2025 registered pursuant to an effective registration statement; the registration statement was declared effective on June 29, 2015, and
Holdings
commenced the exchange offer. The exchange notes have terms substantially identical to the original notes except that the exchange notes do not contain terms with respect to transfer restrictions and registration rights and additional interest payable for the failure to consummate the exchange offer within 210 days after the issue date. After the exchange offer expired on July 27, 2015, all of the original Notes due 2025 were exchanged.
Notes due 2020
. On May 26, 2015, Holdings launched a cash tender offer for any and all of its outstanding Notes due 2020 at a purchase price of $1,093 for each $1,000 principal amount of Notes due 2020 validly tendered and accepted by Holdings on or before June 2, 2015 (the “Expiration Date”). Holders of $581,324,000, or approximately 96.9%, of the Notes due 2020 validly tendered and did not withdraw their Notes due 2020 on or prior to the Expiration Date. On October 30, 2015, AMCE gave notice of its intention to redeem any and all of the remaining $18,676,000 principal amount of the Notes due 2020 on December 1, 2015 at 104.875% of the principal amount, plus accrued and unpaid interest to the redemption date. AMCE completed the redemption of all of its outstanding Notes due 2020 on December 1, 2015.
On March 31, 2016, AMCE merged with and into Holdings, its direct parent company. In connection with the merger, Holdings assumed all of the obligations of AMCE pursuant to the indentures to the Notes due 2022, the Notes due 2025 and the Credit Agreement, dated as of April 30, 2013 (as subsequently amended).
Postretirement Medical Plan Termination.
On January 12, 2015, the Compensation Committee and the Board of Directors of Holdings, adopted resolutions to terminate the AMC Postretirement Medical Plan with an effective date of
March 31, 2015
. During the three months ended March 31, 2015, we notified eligible associates that their retiree medical coverage under the plan will terminate after March 31, 2015. Payments to eligible associates were approximately $4,300,000 during the twelve months ended December 31, 2015. We recorded net periodic benefit credits of $18,118,000, including curtailment gains, settlement gains, amortization of unrecognized prior service credits and amortization of actuarial gains recorded in accumulated other comprehensive income related to the termination and settlement of the plan during the six months ended June 30, 2015.
Dividends.
The following is a summary of dividends and dividend equivalents declared to stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount per
|
|
Total Amount
|
|
|
|
|
|
|
|
Share of
|
|
Declared
|
|
Declaration Date
|
|
Record Date
|
|
Date Paid
|
|
Common Stock
|
|
(In thousands)
|
|
February 25, 2016
|
|
March 7, 2016
|
|
March 21, 2016
|
|
$
|
0.20
|
|
$
|
19,762
|
|
April 27, 2016
|
|
June 6, 2016
|
|
June 20, 2016
|
|
|
0.20
|
|
|
19,762
|
|
February 3, 2015
|
|
March 9, 2015
|
|
March 23, 2015
|
|
|
0.20
|
|
|
19,637
|
|
April 27, 2015
|
|
June 8, 2015
|
|
June 22, 2015
|
|
|
0.20
|
|
|
19,635
|
|
July 28, 2015
|
|
September 8, 2015
|
|
September 21, 2015
|
|
|
0.20
|
|
|
19,622
|
|
October 29, 2015
|
|
December 7, 2015
|
|
December 21, 2015
|
|
|
0.20
|
|
|
19,654
|
|
April 25, 2014
|
|
June 6, 2014
|
|
June 16, 2014
|
|
|
0.20
|
|
|
19,576
|
|
July 29, 2014
|
|
September 5, 2014
|
|
September 15, 2014
|
|
|
0.20
|
|
|
19,576
|
|
October 27, 2014
|
|
December 5, 2014
|
|
December 15, 2014
|
|
|
0.20
|
|
|
19,577
|
|
During the six months ended June 30, 2016 and the six months ended June 30, 2015, we paid dividends and dividend equivalents of $39,442,000 and $39,301,000, respectively. At June 30, 2016 and June 30, 2015, we accrued $247,000 and $196,000, respectively, for the remaining unpaid dividends.
On July 25, 2016, Holdings’ Board of Directors declared a cash dividend in the amount of $0.20 per share of Class A and Class B common stock, payable on September 19, 2016 to stockholders of record on September 6, 2016.
Operating Results
The following table sets forth our revenues, operating costs and expenses attributable to our theatrical exhibition operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
(In thousands)
|
|
June 30, 2016
|
|
June 30, 2015
|
|
% Change
|
|
June 30, 2016
|
|
June 30, 201
5
|
|
% Change
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theatrical exhibition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Admissions
|
|
$
|
481,234
|
|
$
|
533,382
|
|
(9.8)
|
%
|
$
|
963,808
|
|
$
|
952,076
|
|
1.2
|
%
|
Food and beverage
|
|
|
243,546
|
|
|
250,516
|
|
(2.8)
|
%
|
|
487,698
|
|
|
451,040
|
|
8.1
|
%
|
Other theatre
|
|
|
39,182
|
|
|
37,181
|
|
5.4
|
%
|
|
78,473
|
|
|
71,087
|
|
10.4
|
%
|
Total revenues
|
|
$
|
763,962
|
|
$
|
821,079
|
|
(7.0)
|
%
|
$
|
1,529,979
|
|
$
|
1,474,203
|
|
3.8
|
%
|
Operating Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theatrical exhibition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Film exhibition costs
|
|
$
|
262,940
|
|
$
|
295,416
|
|
(11.0)
|
%
|
$
|
525,294
|
|
$
|
518,504
|
|
1.3
|
%
|
Food and beverage costs
|
|
|
34,100
|
|
|
35,807
|
|
(4.8)
|
%
|
|
68,065
|
|
|
64,315
|
|
5.8
|
%
|
Operating expense
|
|
|
200,026
|
|
|
205,414
|
|
(2.6)
|
%
|
|
402,339
|
|
|
392,672
|
|
2.5
|
%
|
Rent
|
|
|
122,819
|
|
|
115,022
|
|
6.8
|
%
|
|
247,403
|
|
|
232,943
|
|
6.2
|
%
|
General and administrative expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger, acquisition and transaction costs
|
|
|
5,548
|
|
|
261
|
|
*
|
%
|
|
10,152
|
|
|
1,839
|
|
*
|
%
|
Other
|
|
|
20,634
|
|
|
17,737
|
|
16.3
|
%
|
|
39,150
|
|
|
22,678
|
|
72.6
|
%
|
Depreciation and amortization
|
|
|
62,291
|
|
|
57,249
|
|
8.8
|
%
|
|
122,721
|
|
|
115,026
|
|
6.7
|
%
|
Operating costs and expenses
|
|
|
708,358
|
|
|
726,906
|
|
(2.6)
|
%
|
|
1,415,124
|
|
|
1,347,977
|
|
5.0
|
%
|
Operating income
|
|
|
55,604
|
|
|
94,173
|
|
(41.0)
|
%
|
|
114,855
|
|
|
126,226
|
|
(9.0)
|
%
|
Other expense (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
(110)
|
|
|
9,273
|
|
*
|
%
|
|
(84)
|
|
|
9,273
|
|
*
|
%
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate borrowings
|
|
|
24,888
|
|
|
24,717
|
|
0.7
|
%
|
|
49,755
|
|
|
50,796
|
|
(2.0)
|
%
|
Capital and financing lease obligations
|
|
|
2,147
|
|
|
2,331
|
|
(7.9)
|
%
|
|
4,342
|
|
|
4,704
|
|
(7.7)
|
%
|
Equity in earnings losses of non-consolidated entities
|
|
|
(11,849)
|
|
|
(9,362)
|
|
26.6
|
%
|
|
(16,113)
|
|
|
(10,686)
|
|
50.8
|
%
|
Investment income
|
|
|
176
|
|
|
(59)
|
|
*
|
%
|
|
(9,778)
|
|
|
(5,202)
|
|
88.0
|
%
|
Total other expense
|
|
|
15,252
|
|
|
26,900
|
|
(43.3)
|
%
|
|
28,122
|
|
|
48,885
|
|
(42.5)
|
%
|
Earnings before income taxes
|
|
|
40,352
|
|
|
67,273
|
|
(40.0)
|
%
|
|
86,733
|
|
|
77,341
|
|
12.1
|
%
|
Income tax provision
|
|
|
16,385
|
|
|
23,350
|
|
(29.8)
|
%
|
|
34,475
|
|
|
27,280
|
|
26.4
|
%
|
Net earnings
|
|
$
|
23,967
|
|
$
|
43,923
|
|
(45.4)
|
%
|
$
|
52,258
|
|
$
|
50,061
|
|
4.4
|
%
|
* Percentage change in excess of 100%
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30, 2016
|
|
June 30, 2015
|
|
June 30, 2016
|
|
June 30, 2015
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
Screen additions
|
|
—
|
|
12
|
|
12
|
|
12
|
|
Screen acquisitions
|
|
11
|
|
32
|
|
11
|
|
40
|
|
Screen dispositions
|
|
—
|
|
—
|
|
38
|
|
—
|
|
Construction openings (closures), net
|
|
(57)
|
|
28
|
|
(77)
|
|
32
|
|
Average screens(1)
|
|
5,282
|
|
4,943
|
|
5,298
|
|
4,914
|
|
Number of screens operated
|
|
5,334
|
|
5,031
|
|
5,334
|
|
5,031
|
|
Number of theatres operated
|
|
386
|
|
350
|
|
386
|
|
350
|
|
Screens per theatre
|
|
13.8
|
|
14.4
|
|
13.8
|
|
14.4
|
|
Attendance (in thousands)(1)
|
|
49,996
|
|
53,818
|
|
101,241
|
|
98,576
|
|
|
(1)
|
|
Includes consolidated theatres only and excludes screens offline due to construction.
|
Adjusted EBITDA
We present Adjusted EBITDA as a supplemental measure of our performance. We define Adjusted EBITDA as net earnings 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 any cash distributions of earnings from our 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 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 $28,169,000 or 17.9% during the three months ended June 30, 2016 compared to the three months ended June 30, 2015. The decrease in Adjusted EBITDA was due primarily to decreases in attendance and average ticket prices and increases in General and Administrative: Other costs partially offset by increases in other revenues, the benefit of the Starplex acquisition, increases in food and beverage revenues per patron and declines in operating expenses.
Adjusted EBITDA increased by $2,589,000 or 0.9% during the six months ended June 30, 2016 compared to the six months ended June 30, 2015. The increase in Adjusted EBITDA was due primarily to increases in attendance, food and beverage revenues per patron, the benefit of the Starplex acquisition, increases in cash distributions from equity method investees offset by increases in G&A other expense due to the prior year postretirement curtailment gain of $18,118,000 and declines in average ticket prices.
The following table sets forth our reconciliation of Adjusted EBITDA:
Reconciliation of Adjusted EBITDA
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In thousands)
|
|
June 30, 2016
|
|
June 30, 2015
|
|
June 30, 2016
|
|
June 30, 2015
|
Net earnings
|
|
$
|
23,967
|
|
$
|
43,923
|
|
$
|
52,258
|
|
$
|
50,061
|
Plus:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
16,385
|
|
|
23,350
|
|
|
34,475
|
|
|
27,280
|
Interest expense
|
|
|
27,035
|
|
|
27,048
|
|
|
54,097
|
|
|
55,500
|
Depreciation and amortization
|
|
|
62,291
|
|
|
57,249
|
|
|
122,721
|
|
|
115,026
|
Certain operating expenses(1)
|
|
|
3,838
|
|
|
3,350
|
|
|
7,240
|
|
|
7,414
|
Equity in earnings of non-consolidated entities
|
|
|
(11,849)
|
|
|
(9,362)
|
|
|
(16,113)
|
|
|
(10,686)
|
Cash distributions from non-consolidated entities
|
|
|
590
|
|
|
1,285
|
|
|
18,271
|
|
|
15,771
|
Investment expense (income)
|
|
|
176
|
|
|
(59)
|
|
|
(9,778)
|
|
|
(5,202)
|
Other expense (income)(2)
|
|
|
(110)
|
|
|
9,273
|
|
|
(84)
|
|
|
9,273
|
General and administrative expense—unallocated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger, acquisition and transaction costs
|
|
|
5,548
|
|
|
261
|
|
|
10,152
|
|
|
1,839
|
Stock-based compensation expense(3)
|
|
|
1,717
|
|
|
1,439
|
|
|
2,804
|
|
|
7,178
|
Adjusted EBITDA
|
|
$
|
129,588
|
|
$
|
157,757
|
|
$
|
276,043
|
|
$
|
273,454
|
|
(1)
|
|
Amounts represent preopening expense related to temporarily closed screens under renovation, theatre and other closure expense for the permanent closure of screens including the related accretion of interest, non-cash deferred digital equipment rent expense, and disposition of assets and other non-operating gains or losses included in operating expenses. We have excluded these items as they are non-cash in nature, include components of interest cost for the time value of money or are non-operating in nature.
|
|
(2)
|
|
Other expense for the prior year periods related to the cash tender offer and redemption of the 9.75% Senior Subordinated Notes due 2020. We exclude other expense and income related to financing activities as the amounts are similar to interest expense or income and are non-operating in nature.
|
|
(3)
|
|
Non
‑cash expense included in general and administrative: other.
|
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 or as an alternative to cash flow provided by operating activities as a measure of liquidity (as determined in accordance with U.S. GAAP). Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies. We have included Adjusted EBITDA because we believe it provides management and investors with additional information to measure our performance, estimate our value and evaluate our ability to service debt.
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:
|
·
|
|
does not reflect our capital expenditures, future requirements for capital expenditures or contractual commitments;
|
|
·
|
|
does not reflect changes in, or cash requirements for, our working capital needs;
|
|
·
|
|
does not reflect the significant interest expenses, or the cash requirements necessary to service interest or principal payments, on our debt;
|
|
·
|
|
excludes income tax payments that represent a reduction in cash available to us; and
|
|
·
|
|
does not reflect any cash requirements for the assets being depreciated and amortized that may have to be replaced in the future.
|
Results of Operations—
For the Three Months Ended June 30, 2016 and June 30, 2015
Revenues.
Total revenues decreased 7.0%, or $57,117,000, during the three months ended June 30, 2016 compared to the three months ended June 30, 2015. Admissions revenues decreased 9.8%, or $52,148
,000
during the three months ended June 30, 2016 compared to the three months ended June 30, 2015, primarily due to a 7.1% decrease in attendance and a 2.8% decrease in average ticket price. The decrease in attendance was primarily due to the
under performance
of film product during the current period, partially offset by the acquisition of Starplex Cinemas in December of 2015 and our comfort and convenience theatre renovation initiatives. Total admissions revenues were reduced by rewards redeemed, net of deferrals, of $263,000 and $1,048,000 related to rewards accumulated under AMC Stubs during the three months ended June 30, 2016 and the three months ended June 30, 2015, respectively. The rewards accumulated under AMC Stubs are deferred and recognized in future periods upon redemption or expiration of customer rewards. The decrease in average ticket price was primarily due to a decrease in tickets purchased for IMAX and 3D premium format film product and lower average ticket prices at Starplex Cinemas.
Food and beverage revenues decreased 2.8%, or $6,970,000, during the three months ended June 30, 2016 compared to the three months ended June 30, 2015, primarily due to the decrease in attendance and partially offset by an increase in food and beverage revenues per patron of 4.7%. The increase in food and beverage revenues per patron reflects increased prices effective at the start of the fourth quarter of calendar 2015 and the contribution of our food and beverage strategic initiatives. Total food and beverage revenues were decreased by rewards redeemed, net of deferrals, of $491,000 and $1,216,000 related to rewards accumulated under AMC Stubs during the three months ended June 30, 2016 and the three months ended June 30, 2015, respectively.
Total other theatre revenues increased 5.4%, or $2,001,000 during the three months ended June 30, 2016 compared to the three months ended June 30, 2015, primarily due to increases in income from internet ticket
ing
fees
,
exchange ticket income, and advertising revenues.
Operating costs and expenses.
Operating costs and expenses decreased 2.6%, or $18,548,000 during the three months ended June 30, 2016 compared to the three months ended June 30, 2015. Film exhibition costs decreased 11.0%, or $32,476,000, during the three months ended June 30, 2016 compared to the three months ended June 30, 2015, primarily due to the decrease in admissions revenues and the decrease in film exhibition costs as a percentage of admission revenues. As a percentage of admissions revenues, film exhibition costs were 54.6% for the three months ended June 30, 2016 and 55.4% for the three months ended June 30, 2015 due to an increase in rebates from distributors.
Food and beverage costs decreased 4.8%, or $1,707,000, during the three months ended June 30, 2016 compared to the three months ended June 30, 2015. As a percentage of food and beverage revenues, food and beverage costs were 14.0% for the three months ended June 30, 2016 and 14.3% for the three months ended June 30, 2015 due to increases in retail selling prices
at the start of the fourth quarter of 2015
in excess of cost increases for our food and beverage products. The decrease in food and beverage costs was primarily due to the decrease in food and beverage revenues. 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 26.2% for the three months ended June 30, 2016 as compared to 25.0% for the three months ended June 30, 2015, primarily due to the decrease in revenues, and including increases in repairs and maintenance expense and equipment rentals related to our enhanced food and beverage initiatives. Rent expense increased 6.8%, or $7,797,000 during the three months ended June 30, 2016 compared to the three months ended June 30, 2015, primarily from the increase in the number of theatres operated including the acquisition of Starplex Cinemas, partially offset by declines in percentage rentals based on revenues.
General and Administrative Expense:
Merger, acquisition and transaction costs.
Merger, acquisition and transaction costs were $5,548,000 during the three months ended June 30, 2016 compared to $261,000 during the three months ended June 30, 2015, primarily due to an increase
in legal and professional and consulting costs and increased merger and acquisition activity associated with our proposed Carmike merger and Odeon acquisition.
Other.
Other general and administrative expense increased $2,897,000, during the three months ended June 30, 2016 compared to the three months ended June 30, 2015, due primarily to increases in legal expenses of $1,400,000, development costs of $600,000 and professional and consulting expenses of $600,000.
Depreciation and amortization.
Depreciation and amortization increased 8.8%, or $5,042,000, during the three months ended June 30, 2016 compared to the three months ended June 30, 2015, primarily due to the increase in depreciable assets resulting from capital expenditures of $140,325,000 and $333,423,000 during the six months ended June 30, 2016 and the twelve months ended December 31, 2015, respectively and the acquisition of Starplex Cinemas.
Other Expense (Income):
Other expense (income).
Other expense during the three months ended June 30, 2015 was due to a loss on extinguishment of indebtedness related to the cash tender offer and redemption of the Notes due 2020 of $9,273,000.
Interest expense.
Interest expense for the three months ended June 30, 2016 was consistent with the three months ended June 30, 2015. During the three months ended June 30, 2016 we repaid $25,000,000 of amounts borrowed on our Revolving Credit Facility.
Equity in earnings of non
‑consolidated entities.
Equity in earnings of non-consolidated entities were $11,849,000 for the three months ended June 30, 2016 compared to $9,362,000 for the three months ended June 30, 2015. The increase in equity in earnings of non-consolidated entities of $2,487,000 was primarily due to decreases in losses from Open Road Films of $1,716,000 and increases in earnings from DCIP of $1,696,000 partially offset by decreases in earnings from NCM of $599,000. During the six months ended June 30, 2016, we continued to suspend equity method accounting for our investment in Open Road Films as the investment in Open Road Films had reached our remaining commitment. The cash distributions from non-consolidated entities were $590,000 during the three months ended June 30, 2016, and $1,285,000 during the three months ended June 30, 2015. See Note 3—Investments of the Notes to Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q for further information.
Investment expense (income).
Investment expense was $176,000 for the three months ended June 30, 2016 compared to investment income of $59,000 for the three months ended June 30, 2015.
Income tax provision.
The income tax provision from continuing operations was $16,385,000 for the three months ended June 30, 2016 and $23,350,000 for the three months ended June 30, 2015. See Note 5—Income Taxes of the Notes to Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q for further information.
Net earnings.
Net earnings were $23,967,000 and $43,923,000 during the three months ended June 30, 2016 and June 30, 2015, respectively. Net earnings during the three months ended June 30, 2016 compared to the three months ended June 30, 2015 were negatively impacted by the decrease in attendance and average ticket price, increases in merger, acquisition and transaction costs, depreciation and amortization, rent and general and administrative: other. Net earnings were positively impacted by decreases in other expense, income tax provision and an increase in equity in earnings from non-consolidated entities.
Results of Operations—
For the Six Months Ended June 30, 2016 and June 30, 2015
Revenues.
Total revenues increased 3.8%, or $55,776,000, during the six months ended June 30, 2016 compared to the six months ended June 30, 2015. Admissions revenues increased 1.2%, or $11,732,000 during the six months ended June 30, 2016 compared to the six months ended June 30, 2015, primarily due to a 2.7% increase in attendance partially offset by a 1.4% decrease in average ticket price. The increase in attendance was primarily due to the acquisition of Starplex Cinemas in December of 2015. Total admissions revenues were increased by rewards redeemed, net of deferrals, of $358,000 and were decreased by rewards redeemed, net of deferrals $840,000 related to rewards accumulated under AMC Stubs during the six months ended June 30, 2016 and the six months ended June 30, 2015, respectively. The rewards accumulated under AMC Stubs are deferred and recognized in future periods upon redemption or expiration of customer rewards. The decrease in average ticket price was primarily due to lower average ticket prices at Starplex Cinemas and a decrease in tickets purchased for IMAX premium format film product.
Food and beverage revenues increased 8.1%, or $36,658,000, during the six months ended June 30, 2016 compared to the six months ended June 30, 2015, primarily due to the increase in food and beverage revenues per patron of 5.2% and the increase in attendance. The increase in food and beverage revenues per patron reflects increased prices effective at the start of the fourth quarter of calendar 2015 and the contribution of our food and beverage strategic initiatives. Total food and beverage revenues were increased by rewards redeemed, net of deferrals, of $374,000 and were decreased by rewards redeemed, net of deferrals, of $
1,003,000
related to rewards accumulated under AMC Stubs during the six months ended June 30, 2016 and the six months ended June 30, 2015, respectively.
Total other theatre revenues increased 10.4%, or $6,939,000 during the six months ended June 30, 2016 compared to the six months ended June 30, 2015, primarily due to increases in income from internet ticket
ing
fees
,
advertising revenues
,
and gift card income.
Operating costs and expenses.
Operating costs and expenses increased 5.0%, or $67,147,000, during the six months ended June 30, 2016 compared to the six months ended June 30, 2015. Film exhibition costs increased 1.3%, or $6,790,000, during the six months ended June 30, 2016 compared to the six months ended June 30, 2015, primarily due to the increase in admissions revenues. As a percentage of admissions revenues, film exhibition costs were 54.5% for the six months ended June 30, 2016 and June 30, 2015.
Food and beverage costs increased 5.8%, or $3,750,000, during the six months ended June 30, 2016 compared to the six months ended June 30, 2015. As a percentage of food and beverage revenues, food and beverage costs were 14.0% for the six months ended June 30, 2016 and 14.3% for the six months ended June 30, 2015 due to increases in retail selling prices
at the start of the fourth quarter of 2015
in excess of cost increases for our food and beverage products. The increase in food and beverage costs was primarily due to the increase in food and beverage revenues. Food and beverage gross profit per patron increased 5.6%, and is calculated as food and beverage revenues less food and beverage costs divided by attendance.
As a percentage of revenues, operating expense was 26.3% for the six months ended June 30, 2016 as compared to 26.6% for the six months ended June 30, 2015, primarily due to the increase in revenues, partially offset by increases in repairs and maintenance expenses and equipment rentals related to our enhanced food and beverage initiatives. Rent expense increased 6.2%, or $14,460,000 during the six months ended June 30, 2016 compared to the six months ended June 30, 2015, primarily from the increase in the number of theatres operated including the acquisition of Starplex Cinemas.
General and Administrative Expense:
Merger, acquisition and transaction costs.
Merger, acquisition and transaction costs were $10,152,000 during the six months ended June 30, 2016 compared to $
1,839,000
during the six months ended June 30, 2015,
primarily due to an increase in professional and consulting costs and increased merger and acquisition activity associated with our proposed Carmike merger
and Odeon acquisition
.
Other.
Other general and administrative expense increased $16,472,000, during the six months ended June 30, 2016 compared to the six months ended June 30, 2015, due primarily to the net periodic benefit credit of $18,118,000 related to the termination and settlement of the AMC Postretirement Medical Plan recorded in the prior year and an increase in legal expenses of $3,000,000 partially offset by declines in stock-based compensation expense of $4,374,000 due to an increase in vesting periods compared to the prior year. See Note 9—Employee Benefit Plans of the Notes to Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q for further information regarding the components of net periodic benefit credit, including recognition of the prior service credits and net actuarial gains recorded in accumulated other comprehensive income, curtailment gains, and settlement gains during the six months ended June 30, 2015.
Depreciation and amortization.
Depreciation and amortization increased 6.7%, or $7,695,000, during the six months ended June 30, 2016 compared to the six months ended June 30, 2015, primarily due to the increase in depreciable assets resulting from capital expenditures of $140,325,000 and $
333,423,000
during the six months ended June 30, 2016 and the twelve months ended December 31, 2015, respectively and the acquisition of Starplex Cinemas.
Other Expense (Income):
Other expense (income).
Other expense during the three months ended June 30, 2015 was due to a loss on extinguishment of indebtedness related to the cash tender offer and redemption of the Notes due 2020 of $9,273,000.
Interest expense.
Interest expense decreased 2.5%, or $1,403,000, for the six months ended June 30, 2016 compared to the six months ended June 30, 2015, primarily due to the decrease in interest rates for corporate borrowings partially offset by an increase in aggregate average principal amounts outstanding during the six months ended June 30, 2016. In June 2015, we completed an offering of $600,000,000 principal amount of our Notes due 2025 and extinguished $581,324,000 principal amount of our Notes due 2020. In December 2015, we extinguished the remaining $18,676,000 principal amount of our Notes due 2020, issued additional term loans due 2022 of $125,000,000 under our Senior Secured Credit Agreement and borrowed $75,000,000 on our Revolving Credit Facility. During the six months ended June 30, 2016 we repaid $75,000,000 of amounts borrowed on our Revolving Credit Facility.
Equity in earnings of non
‑consolidated entities.
Equity in earnings of non-consolidated entities were $16,113,000 for the six months ended June 30, 2016 compared to $
10,686,000
for the six months ended June 30, 2015. The increase in equity in earnings of non-consolidated entities of $5,427,000 was primarily due to
improvement in earnings
from NCM of $3,923,000, increases in earnings from DCIP of $2,031,000 and decreases in losses from Open Road Films of $430,000. During the six months ended June 30, 2016, we continued to suspend equity method accounting for our investment in Open Road Films as the investment in Open Road Films had reached our commitment. The cash distributions from non-consolidated entities were $18,271,000 during the six months ended June 30, 2016, and $
15,771,000
during the six months ended June 30, 2015, which includes payments related to the NCM tax receivable agreement recorded in investment income. See Note 3—Investments of the Notes to Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q for further information.
Investment income.
Investment income was $9,778,000 for the six months ended June 30, 2016 compared to investment income of $5,202,000 for the six months ended June 30, 2015. Investment income for the six months ended June 30, 2016 includes payments received of $7,218,000 related to the NCM tax receivable agreement compared to payments received of $5,352,000 during the six months ended June 30, 2015. Investment income for the six months ended June 30, 2016 also includes a $3,008,000 gain on sale of all of our 1,222,780 common shares held in RealD Inc.
Income tax provision.
The income tax provision from continuing operations was $34,475,000 for the six months ended June 30, 2016 and $27,280,000 for the six months ended June 30, 2015. See Note 5—Income Taxes of the Notes to Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q for further information.
Net earnings.
Net earnings were $52,258,000 and $50,061,000 during the six months ended June 30, 2016 and June 30, 2015, respectively. Net earnings during the six months ended June 30, 2016 compared to the six months ended June 30, 2015 were positively impacted by the increase in attendance, food and beverage revenue per patron and average ticket price, the increase in investment income, the decrease in interest expense, and the increase in equity in earnings of
non-consolidated entities. Net earnings were negatively impacted by the decrease in average ticket price, the increase in general and administrative: other, merger acquisition and transaction costs, income tax provision, rent and the increase in depreciation expense.
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 deficit as of June 30, 2016 and December 31, 2015 of $(364,890,000) and $
(297,787,000)
, respectively. Working capital included $170,833,000 and $
221,679,000
of deferred revenues and income as of June 30, 2016 and December 31, 2015, respectively. We have the ability to borrow under our Senior Secured 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, 2016, we had $137,384,000 available for borrowing, net of letters of credit, under our revolving Senior Secured Credit Facility.
We believe that cash generated from operations and existing cash and equivalents and “float” will be sufficient to fund operations, pay dividends and
make
planned capital expenditures currently and for at least the next 12 months and enable us to maintain compliance with covenants related to the Senior Secured Credit Facility, the Notes due 2022, and the Notes due 2025.
As of June 30, 2016, we were in compliance with all financial covenants relating to the Senior Secured Credit Facility, the Notes due 2022, and the Notes due 2025.
Cash Flows from Operating Activities
Cash flows provided by operating activities, as reflected in the Consolidated Statements of Cash Flows, were $133,948,000 and $
192,915,000
during the six months ended June 30, 2016 and June 30, 2015, respectively. The decrease in cash flows provided by operating activities was primarily due to an increase in payments for working capital items partially offset by an increase in landlord contributions.
Cash Flows from Investing Activities
Cash flows used in investing activities, as reflected in the Consolidated Statements of Cash Flows, were $127,998,000 and $
144,260,000
, during the six months ended June 30, 2016 and June 30, 2015, respectively. Cash outflows from investing activities include capital expenditures of $140,325,000 and $
143,757,000
during the six months ended June 30, 2016 and June 30, 2015, respectively. Our capital expenditures primarily consisted of strategic growth initiatives and remodels, capital improvements to existing locations in our theatre circuit, and technology upgrades. We expect that our gross cash outflows for capital expenditures will be approximately $400,000,000 to $420,000,000 for 2016, before giving effect to expected landlord contributions of approximately $120,000,000 to $130,000,000, resulting in a net cash outlay of approximately $280,000,000 to $290,000,000.
During the six months ended June 30, 2016 we received proceeds from the sale of our shares in RealD Inc. of $13,451,000 and proceeds from the sale of
two
Starplex
d
ivestiture
theatre
s of $5,390,000. During the six months ended June 30, 2016 we made capital contributions to Open Road Films of $6,500,000.
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 theatres and, following construction, 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 due to our proposed acquisition activity and future sources of liquidity.
Cash Flows from Financing Activities
Cash flows used in financing activities, as reflected in the Consolidated Statements of Cash Flows, were $123,821,000 and $
87,482,000
during the six months ended June 30, 2016 and June 30, 2015, respectively. Financing activities for the current period consisted of dividend payments and repayments of $75,000,000 related to our revolving Senior Secured Credit Facility and capital and financing lease obligations. On February 25, 2016, our Board of Directors declared a cash dividend in the amount of $0.20 per share of Class A and Class B common stock, payable on March 21, 2016 to stockholders of record on March 7, 2016. On April 27, 2016, our Board of Directors declared a cash dividend in the amount of $0.20 per share of Class A and Class B common stock, payable on June 20, 2016 to stockholders of record on June 6, 2016. We paid dividends and dividend equivalents of $39,442,000 during the six months ended June 30, 2016 and $39,301,000 during the six months ended June 30, 2015.
On June 5, 2015, we issued $600,000,000 aggregate principal amount of its Notes due 2025 and used the net proceeds to pay for the tender offer for the Notes due 2020, plus any accrued and unpaid interest and related transaction fees and expenses. The deferred financing costs paid related to the issuance of the Notes due 2025 were $11,009,000, during the six months ended June 30, 2015. We repaid principal and recorded premium related to approximately 96.9% of the Notes due 2020 during the six months ended June 30, 2015 of $626,114,000, comprised of $581,324,000 principal amount and $44,790,000 recorded premium. See Note 1—Basis of Presentation of the Notes to Consolidated Financial Statements in Item 1 of Part I for further information.
Investment in NCM LLC
We hold an investment of 17.4% in NCM LLC and 200,000 shares of NCM, Inc. accounted for under the equity method as of June 30, 2016. The estimated fair market value of our investment in NCM and NCM, Inc. was approximately $372,495,000, based upon the publically quoted price per share of NCM, Inc. on June 30, 2016 of $15.48 per share. We have little tax basis in these units, therefore the sale of all these units at June 30, 2016 would require us to report taxable income of approximately $454,883,000, including distributions received from NCM LLC that were previously deferred. Our investment in NCM LLC is a source of liquidity for us and we expect that any sales we may make of NCM LLC units would be made in such a manner to most efficiently manage any related tax liability. We have available net operating loss carryforwards which could reduce any related tax liability.
Commitments and Contingencies
We have commitments and contingencies for capital and 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, 2015. Since December 31, 2015, material changes to the commitments and contingencies of the Company outside the ordinary course of business are discussed below.
On July 24, 2016, we, Congress Merger Subsidiary, Inc., our indirect wholly owned subsidiary, and Carmike entered into an amended and restated merger agreement, which amends and restates that certain Agreement and Plan of Merger, dated March 3, 2016, and pursuant to which we will acquire all of the outstanding shares of Carmike for either $33.06 in cash or 1.0819 shares of Class A common stock, at the election of the Carmike stockholders, and subject to a customary proration mechanism to achieve an aggregate consideration mix of 70% cash and 30% in shares of our Class A common stock.
We have entered into a debt financing commitment letter in connection with the amended and restated merger agreement which provides senior secured incremental term loans in an aggregate amount of up to $225,000,000 and a senior subordinated bridge loan in an aggregate amount of up to $300,000,000 to fund the acquisition. There can be no assurance that we will be successful in completing the debt financing on favorable terms as it involves matters outside of our control. The merger is subject to customary closing conditions, including regulatory approval and approval by Carmike’s shareholders.
On July 12, 2016, we entered into a definitive agreement to acquire the equity of Odeon and UCI Cinemas Holdings Limited (“Odeon”) from private equity firm Terra Firma
comprised of £500,000,000 ($661,850,000) for the equity, 75% in cash and 25% in stock consideration, subject to lock-ups, and the payment of approximately £14,000,000 ($18,452,000) in employee incentive costs based on th
e GBP/USD exchange rate of 1.32 on July 12, 2016.
We have entered into a debt financing commitment letter in connection with this
definitive
agreement which provides senior secured incremental term loans in an aggregate amount of up to $525,000,000 and a senior subordinated bridge loan in an aggregate amount of up to $800,000,000 to fund the acquisition. There can be no assurance that we will be successful in completing the debt financing on favorable terms as it involves matters outside of our control. The acquisition is subject to European Commission approval.
Odeon operates 242 theatres and 2,236 screens in 7 countries (UK, Ireland, Italy, Spain, Austria, Portugal, and Germany).
New Accounting Pronouncements
See Note 11—New Accounting Pronouncements of the Notes to our Consolidated Financial Statements in Item 1 of Part I for further information regarding recently issued accounting standards.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to various market risks.
Market risk on variable
‑rate financial instruments.
At June 30, 2016, we maintained a Senior Secured Credit Facility comprised of a $150,000,000 revolving credit facility and $900,000,000 of Senior Secured Term Loans due 2022. The Senior Secured Credit Facility provides for borrowings at a rate equal to an applicable margin plus, at our option, either a base rate or LIBOR, with a minimum base rate of 1.75% and a minimum rate for LIBOR borrowings of 0.75%. The rate in effect at June 30, 2016 for the outstanding Senior Secured Term Loan due 2022 was a LIBOR-based rate of 4.00% 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, 2016, we had no variable-rate borrowings under our revolving credit facility and had an aggregate principal balance of $876,222,000 outstanding under the Senior Secured Term Loan due 2022. A 100 basis point change in market interest rates would have increased or decreased interest expense on the Senior Secured Credit Facility by $4,488,000 during the six months ended June 30, 2016.
Market risk on fixed
‑rate financial instruments.
Included in long-term corporate borrowings at June 30, 2016 were principal amounts of $600,000,000 of our Notes due 2025 and $375,000,000 of our Notes due 2022. Increases in market interest rates would generally cause a decrease in the fair value of the Notes due 2025 and Notes due 2022 and a decrease in market interest rates would generally cause an increase in fair value of the Notes due 2025 and Notes due 2022.
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 controls.
There has been no change in our internal control over financial reporting during our most recent calendar quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.