Cinemark Holdings, Inc. — Q1 2014 Form 10-Q
Business context and period: The company operates movie theatres in the U.S. and Latin America. This unaudited report covers the three months ended March 31, 2014, compared with Q1 2013; balance-sheet changes are compared with December 31, 2013. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $602.3 | $547.8 | +9.9% |
| Operating income | $67.9 | $65.6 | +3.4% |
| Operating margin | 11.3% | 12.0% | Down 0.7 percentage points |
| Net income | $35.7 | $33.1 | +8.0% |
| Net income attributable to Cinemark | $35.4 | $32.6 | +8.7% |
| Diluted EPS | $0.31 | $0.28 | +$0.03 |
| Adjusted EBITDA | $128.6 | $116.3 | +10.6% |
| Operating cash flow | $61.9 | $42.6 | +$19.3 |
| Capital expenditures | $52.8 | $36.9 | +$15.9 |
Admissions revenue rose 9.0% and concession revenue rose 11.9%. Attendance increased 7.1% to 61.5 million; revenue per average screen was $107,839, up from $104,368. Film rentals and advertising increased to 52.7% of admissions revenue from 51.5%; total costs of operations rose to 88.7% of revenue from 88.0%.
Liquidity, debt and cash flow
- Cash and cash equivalents were $562.7 at March 31, down $37.2 from year-end. Current assets were $680.3 and current liabilities were $353.3.
- Long-term debt carrying value was $1,830.3, including a $691.2 term loan and $1,130.0 of senior and senior subordinated notes; capital lease obligations totaled $217.9. No revolver borrowings were outstanding, with $100.0 available.
- Operating cash flow of $61.9 less capital expenditures of $52.8 implies approximately $9.1 of cash flow after capital expenditures, before financing and other investing items. Cash used in investing was $53.7; cash used in financing was $41.4.
- The company paid $28.8 in dividends, and declared dividends were $0.25 per share versus $0.21 in Q1 2013. The filing says it anticipates regular quarterly dividends, subject to board discretion, cash needs, debt restrictions and other factors.
- Management reported compliance with debt agreements and covenants. The $450.0 of term debt covered by swaps is hedged through 2015 or 2016; a 100-basis-point rate increase on the remaining variable-rate debt was estimated to raise annual interest expense by about $2.4.
Material changes and drivers
- U.S. revenue increased 21.6% and attendance 17.0%, benefiting from the Rave theatres acquired in May 2013, as well as strong film attendance. U.S. average ticket price rose 3.0% and concession revenue per patron rose 5.3%.
- International revenue declined 13.0% and attendance declined 7.9%, primarily reflecting the November 2013 sale of the Mexico theatres and unfavorable currency movements. International average ticket price fell 7.1% and concession revenue per patron fell 5.4%.
- Despite higher sales, operating margin narrowed: film rentals and advertising costs rose with admissions and a heavier weighting of top films; theatre operating costs also increased. The company attributed higher depreciation and lease costs in part to new and acquired theatres.
- Interest expense fell to $28.5 from $32.6, primarily after refinancing 8.625% notes with 4.875% notes in 2013. Income tax expense rose to $20.9 from $10.6; the effective rate was 36.9% versus 24.3%, with the prior-year rate affected by Mexico-related items.
- Foreign currency translation reduced other comprehensive income by $9.2, compared with a $1.6 gain in Q1 2013; this is not included in net income.
Outlook, risks and contingencies
- The filing provides no numerical full-year revenue, earnings or cash-flow guidance. Management notes that results are seasonal and depend on the timing and success of film releases; quarterly results are not necessarily indicative of future periods.
- At quarter-end, the company had commitments to develop 152 domestic screens and 87 international screens. Estimated remaining development capital expenditures were approximately $84 and $63, respectively; actual spending and development plans may change.
- Key risks cited include film slate and attendance variability, competition from other exhibitors and alternative entertainment, foreign exchange exposure, interest-rate changes, theatre-level competition and costs, and legal proceedings. Management said pending legal matters were not expected to be material and reported no material changes to previously disclosed risk factors.
- Q1 included a $2.8 loss on asset sales and other, primarily related to theatre asset replacements, versus a $0.3 gain in Q1 2013; long-lived asset impairment was $0.4 versus $0.8. The filing reports no goodwill impairment indicators during the quarter.
- As a subsequent event, NCM announced on May 5, 2014 an agreement to acquire Screenvision for $375, subject to regulatory approval and other closing conditions.
Important facts for investors to verify
- How much of U.S. revenue and attendance growth reflects the Rave acquisition versus comparable-theatre performance and film demand.
- Whether international attendance, pricing and reported results stabilize as currency effects and the Mexico divestiture comparisons evolve.
- Whether cost growth—particularly film rentals, leases, staffing and capital spending—continues to pressure operating margins.
- The expected returns, timing and funding of the planned theatre development, alongside the company’s substantial debt, lease obligations and dividend policy.
- The potential financial and strategic implications for Cinemark of NCM’s proposed Screenvision acquisition; the filing does not quantify its impact on Cinemark.