Cinemark Holdings, Inc. — Q2 2019 Form 10-Q
Business context and reporting period
Motion-picture exhibitor operating in the U.S. and international markets. This unaudited report covers the quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. Figures below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $957.8 | $889.1 | $1,672.5 | $1,669.0 |
| Operating income | $156.1 | $126.7 | $213.4 | $228.9 |
| Net income | $101.9 | $82.5 | $135.1 | $144.6 |
| Net income attributable to Cinemark | $101.0 | $82.1 | $133.7 | $144.2 |
| Diluted EPS | $0.86 | $0.70 | $1.14 | $1.23 |
| Adjusted EBITDA | $244.7 | $221.6 | $397.0 | $415.0 |
- Q2 operating margin was 16.3%, versus 14.2%; net margin was approximately 10.6%, versus 9.3%. First-half operating margin was 12.8%, versus 13.7%; net margin was approximately 8.1%, versus 8.7%.
- Q2 revenue grew 7.7%: admissions rose 2.4%, concessions 13.1%, and other revenue 22.2%. Consolidated attendance increased 5.0%, while average ticket price decreased 2.4%; concession revenue per patron increased 7.7%.
- First-half revenue was nearly flat (+0.2%), but attendance fell 1.7% and admissions revenue declined 4.7%. Concessions increased 5.2% and other revenue 13.5%.
- Cash from operations was $303.6 million in the first half, compared with $279.9 million. Capital expenditures were $115.2 million, versus $162.6 million; operating cash flow less capital expenditures was approximately $188.4 million, versus $117.3 million. Cash increased to $511.4 million from $426.2 million at year-end.
- Long-term debt was $1.806 billion, excluding debt discounts and issuance costs. The company had $649.6 million outstanding on its term loan, no revolver borrowings, and $98.8 million of available revolving capacity. It reported compliance with debt covenants.
- Adoption of lease-accounting standard ASC 842 resulted in $1.429 billion of operating lease right-of-use assets and total lease liabilities of $1.635 billion at June 30. These lease obligations are distinct from reported long-term debt. Current assets were $662.6 million and current liabilities $700.2 million.
Material changes and management commentary
- Q2 earnings improved alongside higher revenue and lower interest expense; however, the first-half decline in operating income, net income, and Adjusted EBITDA reflects weaker overall admissions and higher operating costs.
- U.S. first-half attendance declined 6.7%, which management attributed to the relative appeal of the 2019 film slate. International attendance rose 8.0%; reported international revenue was affected by foreign-exchange movements. Management cited Avengers: Endgame as a major attendance driver and listed releases including The Lion King, Frozen 2, and Star Wars: Episode IX for the balance of 2019. These comments are not quantified earnings guidance.
- Higher wage rates, concession product mix, utilities and other costs pressured expenses. Long-lived asset impairment charges increased to $18.1 million for the first half from $3.4 million, relating to theatres affected by competition and adverse local conditions. Q2 impairment was $12.5 million; prior-year Q2 included $16.9 million of disposal and other losses, primarily asset retirements and a litigation reserve.
- The company planned approximately $152 million in capital expenditures for signed theatre commitments: about $90 million for 126 U.S. screens and $62 million for 109 international screens. It expected to fund development from operating cash flow and financing sources; actual spending could change with opportunities.
Risks, contingencies, and unusual items
- ASC 842 changed lease presentation and affected year-over-year expense comparisons, including facility lease expense and interest expense.
- Variable-rate debt exposes the company to interest-rate changes. Management estimated that a 100-basis-point increase would raise annual interest expense by approximately $2.0 million on variable-rate debt outstanding at June 30. Three swaps hedge part of the term-loan exposure; their reported fair value was a $17.3 million liability.
- Argentina was treated as a highly inflationary economy beginning July 1, 2018. Foreign-exchange movements affected reported international results.
- Material legal matters include an appealed antitrust jury judgment in the Flagship Theatres case and federal and state antitrust investigations concerning film clearances and possible coordination. The company denied wrongdoing and said it could not predict the investigations’ outcome. A wage-statement class settlement was awaiting final court approval. Management considered its potential liability for pending proceedings not material overall, but outcomes remain uncertain.
- The 2018 comparison includes a $7.1 million tax benefit from settlement of Chilean tax audits, contributing to the higher 2019 effective tax rate. The filing states no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether attendance and admissions trends improve, particularly in the U.S., and whether concession spending continues to offset ticket-revenue weakness.
- Cash generation, planned theatre investment, dividend affordability, and the effect of $1.635 billion in lease liabilities alongside $1.806 billion of reported debt.
- Progress and potential financial impact of the Flagship appeal, wage-settlement approval, and federal and state antitrust investigations.
- International results excluding currency effects, especially given Argentina’s highly inflationary classification.
- How lease-accounting adoption and elevated theatre impairments affect future margins and comparability.