Cinemark Holdings, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; filed May 7, 2015. Cinemark operates movie theatres in the U.S. and Latin America, reporting U.S. and international segments. Dollar amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $645.4 | $602.3 | +7.2% |
| Operating income | $90.4 | $67.9 | +33.3% |
| Operating margin | 14.0% | 11.3% | +2.7 percentage points |
| Net income | $42.9 | $35.7 | +20.2% |
| Net income attributable to Cinemark | $42.5 | $35.4 | +20.0% |
| Diluted EPS | $0.37 | $0.31 | +19.4% |
| Adjusted EBITDA | $147.1 | $128.6 | +14.4% |
| Cash from operating activities | $25.1 | $61.9 | Down $36.8 |
| Capital expenditures | $85.7 | $52.8 | Up $32.9 |
Revenue growth reflected higher attendance (up 6.5% overall) and concession revenue (up 11.1%); admissions revenue rose 5.2%. U.S. revenue increased 6.6% and international revenue 8.8%. International attendance grew 14.8%, but average ticket price fell 7.0%, partly from foreign-exchange effects. Adjusted EBITDA margin was approximately 22.8%, versus 21.3% a year earlier.
Operating cash flow was lower mainly because of the timing of vendor payments for prior-quarter goods and services. Investing activities used $86.7 million, including $85.7 million of capital expenditures and $2.7 million for a theatre acquisition in Brazil. Financing activities used $37.1 million, including $28.9 million of dividends paid. Cash and cash equivalents fell to $532.8 million from $638.9 million at year-end.
At March 31, total long-term debt was $1.821 billion, including $684.3 million outstanding on the term loan; capital lease obligations totaled approximately $212.6 million. Cinemark had no revolving-credit borrowings and $100 million of available capacity. Current assets were $628.8 million and current liabilities $351.6 million. The company reported compliance with debt covenants. Quarterly dividends declared were $0.25 per share, unchanged from Q1 2014.
Material changes and notable items
- Operating income improved as revenue growth and lower general and administrative costs more than offset higher film rental, labor, and depreciation costs. Film rentals and advertising increased to 53.8% of revenue from 52.7%; higher film rental rates reflected the concentration of successful films and increased presentation costs.
- Foreign currency exchange changed from a $3.1 million gain in Q1 2014 to an $8.2 million loss in Q1 2015, primarily on intercompany balances. Currency translation generated a $46.7 million other comprehensive loss, contributing to a $44.8 million total other comprehensive loss.
- Q1 2015 capital expenditures included approximately $26.3 million to purchase the Plano headquarters building. Capital expenditures rose sharply in the U.S. segment, while international spending declined year over year.
- A $1.4 million gain on asset sales and other items, versus a $2.8 million loss in Q1 2014, was primarily associated with lease amendments that reduced certain capital lease liabilities. Long-lived asset impairment was $0.8 million, compared with $0.4 million.
- Cinemark received additional National CineMedia units valued at $15.4 million, recorded with deferred revenue to be recognized over the remaining approximately 21-year Exhibitor Services Agreement.
Outlook, risks and contingencies
The filing provides no formal revenue or earnings guidance. Management described films scheduled for wide release during the rest of 2015, including Furious 7, Star Wars: The Force Awakens, and Avengers: Age of Ultron. Results depend on film release timing and performance; the company notes that theatrical revenues are seasonal and quarterly results are not necessarily indicative of future periods.
At quarter-end, Cinemark had commitments to develop 138 domestic screens and 96 international screens, with estimated remaining development expenditures of approximately $85 million and $63 million, respectively. Management expects to fund capital spending through operating cash flow, credit-facility borrowings, debt issuance, sale-leasebacks, and/or real-estate sales. These plans are subject to change.
After quarter-end, the company was in the process of amending its senior secured credit facility to extend the $700 million term loan maturity from 2019 to 2022. The proposed terms retain the existing interest terms, require quarterly principal payments through March 2022, and leave $635.25 million due in May 2022. The filing describes this as in process, not completed.
Risks highlighted include film popularity and release schedules, competition and alternative entertainment, foreign-exchange movements, interest-rate exposure, and theatre-specific competition or adverse local conditions. A 100-basis-point increase in market rates was estimated to increase annual interest expense by approximately $2.3 million on unhedged variable-rate debt. A putative California wage-and-hour class and representative action remained in discovery; no class was certified, no reserve was recorded, and the company said it could not predict the outcome or potential loss, while believing exposure was not material. Management reported no material changes to previously disclosed risk factors or legal proceedings.
Important facts for investors to verify
- Whether the proposed term-loan maturity extension was completed and its final terms.
- Whether operating cash flow recovers from the timing-related Q1 decline as capital expenditures and theatre development continue.
- How attendance, ticket pricing, concession spending, film costs, and the 2015 release slate affect margins in subsequent quarters.
- The effects of foreign-exchange movements on international results, intercompany balances, and accumulated other comprehensive loss.
- Debt, lease obligations, covenant headroom, dividend capacity, and the funding plan for committed theatre projects.
- Developments in the California litigation and any changes to the company’s assessment of potential exposure.