10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 6, 2020
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One) |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the quarterly period ended | |
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
(Exact name of registrant as specified in its charter)
|
|
|
|
Registrant’s telephone number, including area code: (
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.
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).
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 ☐ |
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol |
Name of each exchange on which registered |
||
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Title of each class of common stock |
|
Number of shares |
Class A common stock |
|
|
AMC ENTERTAINMENT HOLDINGS, INC.
INDEX
Page |
||
3 |
||
3 |
||
Condensed Consolidated Statements of Comprehensive Income (Loss) |
4 |
|
5 |
||
6 |
||
8 |
||
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
46 |
|
75 |
||
76 |
||
78 |
||
78 |
||
78 |
||
78 |
||
78 |
||
79 |
||
82 |
2
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements. (Unaudited)
AMC ENTERTAINMENT HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended |
Six Months Ended |
|||||||||||
(In millions, except share and per share amounts) |
|
June 30, 2020 |
|
June 30, 2019 |
|
June 30, 2020 |
|
June 30, 2019 |
||||
(unaudited) |
(unaudited) |
|||||||||||
Revenues |
||||||||||||
Admissions |
$ |
|
$ |
|
$ |
|
$ |
|
||||
Food and beverage |
|
|
|
|
|
|
|
|
||||
Other theatre |
|
|
|
|
|
|
|
|
||||
Total revenues |
|
|
|
|
||||||||
Operating costs and expenses |
||||||||||||
Film exhibition costs |
|
|
|
|
|
|
||||||
Food and beverage costs |
|
|
|
|
|
|
|
|
||||
Operating expense, excluding depreciation and amortization below |
|
|
|
|
|
|
|
|
||||
Rent |
|
|
|
|
|
|
|
|
||||
General and administrative: |
||||||||||||
Merger, acquisition and other costs |
|
|
|
|
|
|
|
|
||||
Other, excluding depreciation and amortization below |
|
|
|
|
|
|
|
|
||||
Depreciation and amortization |
|
|
|
|
||||||||
Impairment of long-lived assets, indefinite-lived intangible assets and goodwill |
|
— |
|
— |
|
|
|
— |
||||
Operating costs and expenses |
|
|
|
|
|
|
||||||
Operating income (loss) |
( |
|
( |
|
||||||||
Other expense (income): |
||||||||||||
Other expense (income): |
|
( |
|
( |
|
|
|
|
||||
Interest expense: |
||||||||||||
Corporate borrowings |
|
|
|
|
|
|
|
|
||||
Finance lease obligations |
|
|
|
|
|
|
|
|
||||
Non-cash NCM exhibitor services agreement |
|
|
|
|
||||||||
Equity in (earnings) loss of non-consolidated entities |
|
|
|
( |
|
|
|
( |
||||
Investment expense (income) |
|
( |
|
( |
|
|
|
( |
||||
Total other expense, net |
|
|
|
|
|
|
||||||
Earnings (loss) before income taxes |
|
( |
|
|
( |
( |
||||||
Income tax provision (benefit) |
|
( |
|
|
|
|
|
|||||
Net earnings (loss) |
$ |
( |
$ |
|
$ |
( |
$ |
( |
||||
Earnings (loss) per share: |
||||||||||||
Basic |
$ |
( |
$ |
|
$ |
( |
$ |
( |
||||
Diluted |
$ |
( |
$ |
|
$ |
( |
$ |
( |
||||
Average shares outstanding: |
||||||||||||
Basic (in thousands) |
|
|
|
|
||||||||
Diluted (in thousands) |
|
|
|
|
||||||||
See Notes to Condensed Consolidated Financial Statements.
3
AMC ENTERTAINMENT HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Three Months Ended |
Six Months Ended |
|||||||||||
(In millions) |
|
June 30, 2020 |
|
June 30, 2019 |
|
June 30, 2020 |
|
June 30, 2019 |
||||
(unaudited) |
(unaudited) |
|||||||||||
Net earnings (loss) |
$ |
( |
$ |
|
$ |
( |
$ |
( |
||||
Other comprehensive income (loss): |
||||||||||||
Unrealized foreign currency translation adjustments |
|
|
|
( |
|
( |
|
( |
||||
Realized loss on foreign currency transactions reclassified into other expense |
— |
|
— |
|
||||||||
Pension adjustments: |
||||||||||||
Realized net loss reclassified into other expense, net of tax |
|
|
|
|
|
|
|
|
||||
Equity method investee's cash flow hedge: |
||||||||||||
Unrealized net holding loss arising during the period |
|
— |
|
( |
|
— |
|
( |
||||
Other comprehensive income (loss) |
|
|
|
( |
|
( |
|
( |
||||
Total comprehensive income (loss) |
$ |
( |
$ |
|
$ |
( |
$ |
( |
||||
See Notes to Condensed Consolidated Financial Statements.
4
AMC ENTERTAINMENT HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions, except share data) |
|
June 30, 2020 |
|
December 31, 2019 |
|
||
ASSETS |
|||||||
Current assets: |
|||||||
Cash and cash equivalents |
$ |
|
$ |
|
|||
Restricted cash |
|
|
|||||
Receivables, net |
|
|
|
|
|||
Other current assets |
|
|
|
|
|||
Total current assets |
|
|
|
|
|||
Property, net |
|
|
|
|
|||
Operating lease right-of-use assets, net |
|
|
|||||
Intangible assets, net |
|
|
|
|
|||
Goodwill |
|
|
|
|
|||
Deferred tax asset, net |
|
|
|
|
|||
Other long-term assets |
|
|
|
|
|||
Total assets |
$ |
|
$ |
|
|||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|||||||
Current liabilities: |
|||||||
Accounts payable |
$ |
|
$ |
|
|||
Accrued expenses and other liabilities |
|
|
|
|
|||
Deferred revenues and income |
|
|
|
|
|||
Current maturities of corporate borrowings |
|
|
|
|
|||
Current maturities of finance lease liabilities |
|
|
|||||
Current maturities of operating lease liabilities |
|
|
|||||
Total current liabilities |
|
|
|
|
|||
Corporate borrowings |
|
|
|
|
|||
Finance lease liabilities |
|
|
|||||
Operating lease liabilities |
|
|
|||||
Exhibitor services agreement |
|
|
|
|
|||
Deferred tax liability, net |
|
|
|
|
|||
Other long-term liabilities |
|
|
|
|
|||
Total liabilities |
|
|
|
|
|||
Commitments and contingencies |
|||||||
Stockholders’ equity: |
|||||||
Class A common stock ($ |
|
|
|
|
|||
Class B common stock ($ |
|
|
|
|
|||
Additional paid-in capital |
|
|
|
|
|||
Treasury stock ( |
|
( |
|
( |
|||
Accumulated other comprehensive loss |
|
( |
|
( |
|||
Accumulated deficit |
|
( |
|
( |
|||
Total stockholders’ equity (deficit) |
|
( |
|
|
|||
Total liabilities and stockholders’ equity |
$ |
|
$ |
|
|||
See Notes to Condensed Consolidated Financial Statements.
5
AMC ENTERTAINMENT HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended |
||||||
(In millions) |
June 30, 2020 |
June 30, 2019 |
||||
Cash flows from operating activities: |
(unaudited) |
|||||
Net loss |
$ |
( |
$ |
( |
||
Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||
Depreciation and amortization |
|
|
||||
Deferred income taxes |
|
|
||||
Impairment of long-lived assets, indefinite-lived intangible assets and goodwill |
|
— |
||||
Amortization of net discount on corporate borrowings |
|
|
||||
Amortization of deferred charges to interest expense |
|
|
||||
Non-cash portion of stock-based compensation |
|
|
||||
Gain on dispositions |
( |
( |
||||
(Gain) loss on derivative asset and derivative liability |
|
( |
||||
Loss on repayment of indebtedness |
— |
|
||||
Equity in (earnings) loss from non-consolidated entities, net of distributions |
|
( |
||||
Landlord contributions |
|
|
||||
Other non-cash rent |
( |
|
||||
Deferred rent |
( |
( |
||||
Net periodic benefit cost |
|
|
||||
Change in assets and liabilities: |
||||||
Receivables |
|
|
||||
Other assets |
|
|
||||
Accounts payable |
( |
( |
||||
Accrued expenses and other liabilities |
( |
( |
||||
Other, net |
|
( |
||||
Net cash provided by (used in) operating activities |
( |
|
||||
Cash flows from investing activities: |
||||||
Capital expenditures |
( |
( |
||||
Acquisition of theatre assets |
— |
( |
||||
Proceeds from disposition of long-term assets |
|
|
||||
Investments in non-consolidated entities, net |
( |
( |
||||
Other, net |
|
( |
||||
Net cash used in investing activities |
( |
( |
||||
Cash flows from financing activities: |
||||||
Proceeds from issuance of Term Loan due 2026 |
— |
|
||||
Payment of principal Senior Secured Notes due 2023 |
— |
( |
||||
Payment of principal Senior Subordinated Notes due 2022 |
— |
( |
||||
Call premiums paid for Senior Secured Notes due 2023 and Senior Subordinated Notes due 2022 |
— |
( |
||||
Principal payment of Term Loans due 2022 and 2023 |
— |
( |
||||
Proceeds from issuance of First Lien Notes due 2025 |
|
— |
||||
Borrowings (repayments) under revolving credit facilities |
|
( |
||||
Scheduled principal payments under Term Loans |
( |
( |
||||
Principal payments under finance lease obligations |
( |
( |
||||
Cash used to pay for deferred financing costs |
( |
( |
||||
Cash used to pay dividends |
( |
( |
||||
Taxes paid for restricted unit withholdings |
( |
( |
||||
Net cash provided by (used in) financing activities |
|
( |
||||
Effect of exchange rate changes on cash and cash equivalents and restricted cash |
( |
( |
||||
Net increase (decrease) in cash and cash equivalents and restricted cash |
|
( |
||||
6
Cash and cash equivalents and restricted cash at beginning of period |
|
|
||||
Cash and cash equivalents and restricted cash at end of period |
$ |
|
$ |
|
||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
||||||
Cash paid during the period for: |
||||||
Interest (including amounts capitalized of $ |
$ |
|
$ |
|
||
Income taxes received, net |
$ |
( |
$ |
( |
||
Schedule of non-cash activities: |
||||||
Investment in NCM |
$ |
|
$ |
|
||
Construction payables at period end |
$ |
|
$ |
|
See Notes to Condensed Consolidated Financial Statements.
7
AMC ENTERTAINMENT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(Unaudited)
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, 2020, Wanda owned approximately
Temporarily Suspended Operations. As of or before March 17, 2020, the Company temporarily suspended all theatre operations in its U.S. markets and International markets in compliance with local, state, and federal governmental restrictions and recommendations on social gatherings to prevent the spread of COVID-19 and as a precaution to help ensure the health and safety of the Company’s guests and theatre staff. As a result of these temporarily suspended operations, the Company’s revenues and expenses for the three and six months ended June 30, 2020 are significantly lower than the revenues and expenses for the three and six months ended June 30, 2019. The theatre operations in the U.S. markets remained suspended for the entire second quarter of 2020. The Company resumed limited operations in the International markets in early June. As of June 30, 2020, the Company had resumed operations at
Liquidity. In response to the COVID-19 pandemic, the Company has taken and is continuing to take significant steps to preserve cash by eliminating non-essential costs, including reductions to executive compensation and elements of its fixed cost structure:
| ● | Suspended non-essential operating expenditures, including marketing & promotional and travel and entertainment expenses; and where possible, for example: utilities, reduced essential operating expenditures to minimum levels necessary while theatres are closed. |
| ● | Terminated or deferred all non-essential capital expenditures to minimum levels necessary while theatres are closed. |
| ● |
Implemented measures to reduce corporate-level employment costs, including full or partial furloughs of all corporate-level Company employees, including senior executives, with individual work load and salary reductions ranging from |
| ● | All domestic theatre-level crew members have been fully furloughed and theatre-level management has been reduced to the minimum level necessary to begin resumption of operations when permitted. Similar efforts to reduce theatre-level and corporate employment costs are being undertaken internationally consistent with applicable laws across the jurisdictions in which the Company operates. |
| ● | Working with the Company’s landlords, vendors, and other business partners to manage, defer, and/or abate the related rent expenses and operating expenses during the disruptions caused by the COVID-19 pandemic. |
| ● | Introduced an active cash management process, which, among other things, requires senior management approval of all outgoing payments. |
| ● | Since April 24, 2020, the Company has been prohibited from making dividend payments in accordance with the covenant suspension conditions in its Senior Secured Credit Agreement. The Company had also previously |
8
|
elected to decrease the dividend paid in the first quarter of 2020 by $ |
| ● | The Company is prohibited from making purchases under its recently authorized stock repurchase program in accordance with the covenant suspension conditions in its Senior Secured Credit Agreement. |
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act provides opportunities for additional liquidity, loan guarantees, and other government programs to support companies affected by the COVID-19 pandemic and their employees. Based on the Company’s preliminary analysis of the CARES Act, the Company expects to recognize the following benefits:
| ● | Approximately $ |
| ● | Deferral of social security payroll tax matches that would otherwise be required in 2020. |
| ● | Receipt of a payroll tax credit in 2020 for expenses related to paying wages and health benefits to employees who are not working as a result of temporarily suspended operations and reduced receipts associated with COVID-19. |
The Company intends to seek any available potential benefits under the CARES Act, including loans, investments or guarantees, and any other such current or future government programs for which the Company qualifies domestically and internationally, including those described above. The Company cannot predict the manner in which such benefits will be allocated or administered, and the Company cannot assure the reader that it will be able to access such benefits in a timely manner or at all.
The Company believes its cash balance as of June 30, 2020, cash generated from operating activities, the proceeds from the issuance on July 31, 2020 of $
While the Company has used its best estimates based on currently available information, the Company cannot assure the reader that its assumptions used to estimate its liquidity requirements will be correct—including but not limited to attendance, food and beverage revenues, rent relief, cost savings, and capital expenditures—because the Company has never previously experienced a complete cessation of its operations, and as a consequence, its ability to be predictive is uncertain. If the Company does not recommence operations within its estimated timeline, the Company will require additional capital and may also require additional financing if, for example, its operations do not generate the expected revenues or a recurrence of COVID-19 were to cause another suspension of operations. Such additional financing may not be available on favorable terms or at all. Due to these factors, substantial doubt exists about the Company’s ability to continue as a going concern for a reasonable period of time.
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.
9
Principles of Consolidation. The accompanying unaudited condensed consolidated financial statements include the accounts of AMC, 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, 2019. The accompanying condensed consolidated balance sheet as of December 31, 2019, 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
Accumulated other comprehensive loss. The following table presents the change in accumulated other comprehensive loss by component:
Pension and |
|
|||||||||
Foreign |
Other |
|
||||||||
(In millions) |
|
Currency |
|
Benefits |
|
Total |
|
|||
Balance December 31, 2019 |
$ |
( |
$ |
( |
$ |
( |
||||
Other comprehensive loss before reclassifications |
|
( |
|
— |
|
( |
||||
Amounts reclassified from accumulated other comprehensive loss |
|
— |
|
|
|
|
||||
Balance June 30, 2020 |
$ |
( |
$ |
( |
$ |
( |
||||
Accumulated depreciation and amortization. Accumulated depreciation was $
Other expense (income). The following table sets forth the components of other expense (income):
Three Months Ended |
Six Months Ended |
|||||||||||
(In millions) |
June 30, 2020 |
June 30, 2019 |
June 30, 2020 |
June 30, 2019 |
||||||||
Derivative liability fair value adjustment for embedded conversion feature in the Convertible Notes due 2024 |
$ |
— |
$ |
( |
$ |
( |
$ |
( |
||||
Derivative asset fair value adjustment for contingent call option related to the Class B common stock purchase and cancellation agreement |
( |
( |
|
|
||||||||
Credit losses related to contingent lease guarantees |
|
— |
|
— |
||||||||
International governmental assistance due to COVID-19 |
( |
— |
( |
— |
||||||||
Loss on Pound sterling forward contract |
— |
|
— |
|
||||||||
Foreign currency transactions losses |
( |
|
( |
|
||||||||
Non-operating components of net periodic benefit cost |
|
|
|
|
||||||||
Loss on repayment of indebtedness |
— |
|
— |
|
||||||||
Financing fees related to modification of debt agreements |
|
— |
|
— |
||||||||
Other |
( |
( |
( |
|
||||||||
Total other expense (income) |
$ |
( |
$ |
( |
$ |
|
$ |
|
||||
10
Impairments. The following table summarizes the Company’s assets that were impaired:
Three Months Ended |
Six Months Ended |
|||||||||||
June 30, |
June 30, |
June 30, |
June 30, |
|||||||||
(In millions) |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
||||
Impairment of long-lived assets |
$ |
— |
$ |
— |
$ |
|
$ |
— |
||||
Impairment of indefinite-lived intangible assets |
— |
— |
|
— |
||||||||
Impairment of definite-lived intangible assets |
— |
— |
|
— |
||||||||
Impairment of goodwill (1) |
— |
— |
|
— |
||||||||
Investment expense |
— |
— |
|
— |
||||||||
Total impairment loss |
$ |
— |
$ |
— |
$ |
|
$ |
— |
||||
| (1) | See Note 4—Goodwill for information regarding goodwill impairment. |
The Company evaluates definite-lived and indefinite-lived intangible assets for impairment annually or more frequently as specific events or circumstances dictate or changes in circumstances indicate that the carrying amount of the asset group may not be fully recoverable.
During the three and six months ended June 30, 2020, the Company recorded non-cash impairment of long-lived assets of $
At March 31, 2020, the Company performed a quantitative impairment evaluation of its indefinite-lived intangible assets related to the AMC, Odeon and Nordic tradenames. The Company recorded impairment charges of $
Accounting Pronouncements Recently Adopted
Financial Instruments. In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 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 impacts how the Company determines its allowance for estimated uncollectible receivables and also contingent lease guarantees, where 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. ASU 2016-13 was effective for the Company in the first quarter of 2020. The Company recognized the cumulative effect upon adoption of the new standard related to credit losses for contingent lease guarantees of $
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 are no longer required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but are required to disclose the range and weighted average used to develop significant observable inputs for Level 3 fair value measurements. The fair value measurement disclosure requirements of ASU 2018-13 was effective for the Company in the first quarter of 2020. See Note 9—Fair Value Measurements for the required disclosures for Level 3 fair value measurements.
Cloud Computing Arrangement. In August 2018, the FASB issued ASU 2018-15, Intangibles–Goodwill and
11
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 was effective for the Company in the first quarter of 2020. Entities have the option to apply the guidance prospectively to all implementation costs incurred after the date of adoption or retrospectively in accordance with ASC 250-10-45. The Company adopted ASU 2018-15 prospectively and the adoption of ASU 2018-15 did not have a material impact on the Company’s consolidated financial statements and related disclosures.
Accounting Pronouncements Issued Not Yet Adopted
Income Taxes. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to improve consistency and simplify several areas of existing guidance. ASU 2019-12 removes certain exceptions to the general principles related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also clarifies the accounting for transactions that result in a step-up in the tax basis for goodwill. ASU 2019-12 is effective for the Company in the first quarter of 2021. Early adoption is permitted. The Company is currently evaluating the effect that ASU 2019-12 will have on its consolidated financial statements.
NOTE 2—LEASES
The Company leases theatres and equipment under operating and finance leases. The Company typically does not believe that exercise of the renewal options is reasonably certain at the lease commencement 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. Equipment leases primarily consist of digital projectors and food and beverage equipment.
The Company received, or is in process of negotiating, rent concessions provided by the lessors that aided, or will aid, in mitigating the economic effects of COVID-19. These concessions primarily consist of rent abatements and the deferral of rent payments. In instances where there were no substantive changes to the lease terms, i.e., modifications that resulted in total payments of the modified lease being substantially the same or less than the total payments of the existing lease, the Company elected the relief as provided by the FASB staff related to the accounting for certain lease concessions. The Company elected not to account for these concessions as a lease modification, and therefore the Company has remeasured the related lease liability and right of use asset but did not reassess the lease classification or change the discount rate to the current rate in effect upon the remeasurement. The deferred payment amounts have been recorded in the Company’s lease liabilities to reflect the change in the timing of payments. As of June 30, 2020, approximately $
12
The following table reflects the lease costs for the three and six months ended June 30, 2020 and June 30, 2019:
Three Months Ended |
Six Months Ended |
|||||||||||||
Consolidated Statement |
June 30, |
June 30, |
June 30, |
June 30, |
||||||||||
(In millions) |
of Operations |
2020 |
2019 |
2020 |
2019 |
|||||||||
Operating lease cost |
||||||||||||||
Theatre properties |
Rent |
$ |
|
$ |
|
$ |
|
$ |
|
|||||
Theatre properties |
Operating expense |
|
|
|
|
|||||||||
Equipment |
Operating expense |
|
|
|
|
|||||||||
Office and other |
General and administrative: other |
|
|
|
|
|||||||||
Finance lease cost |
||||||||||||||
Amortization of finance lease assets |
Depreciation and amortization |
|
|
|
|
|||||||||
Interest expense on lease liabilities |
Finance lease obligations |
|
|
|
|
|||||||||
Variable lease cost |
||||||||||||||
Theatre properties |
Rent |
|
|
|
|
|||||||||
Equipment |
Operating expense |
( |
|
|
|
|||||||||
Total lease cost |
$ |
|
$ |
|
$ |
|
$ |
|
||||||
Cash flow and supplemental information is presented below:
Six Months Ended |
||||||
(In millions) |
2020 |
2019 |
||||
Cash paid for amounts included in the measurement of lease liabilities: |
||||||
Operating cash flows used in finance leases |
$ |
( |
$ |
( |
||
Operating cash flows used in operating leases |
( |
( |
||||
Financing cash flows used in finance leases |
( |
( |
||||