Cinemark Holdings, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unless otherwise stated, amounts below are in U.S. dollars, millions. Cinemark operates movie theatres in the U.S. and Latin America; results are reported in U.S. and international segments.
Financial performance
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Revenue | $646.9 | $757.6 | $1,967.0 | $2,031.0 |
| Operating income | $82.3 | $135.2 | $267.0 | $334.8 |
| Operating margin | 12.7% | 17.8% | 13.6% | 16.5% |
| Net income | $38.5 | $80.7 | $146.4 | $134.6 |
| Net income attributable to Cinemark | $38.1 | $80.0 | $145.3 | $132.9 |
| Diluted EPS | $0.33 | $0.69 | $1.25 | $1.15 |
| Adjusted EBITDA | $141.7 | $190.2 | $439.6 | $484.5 |
Q3 revenue declined 14.6%, while operating income fell 39.1% and attributable net income fell 52.4%. Attendance fell 18.3% overall; weaker film releases were the principal stated factor. Average ticket prices and concession spending per patron rose in both segments, but did not offset fewer moviegoers. International results were additionally affected by the World Cup, the 2013 Mexico theatre sale, and unfavorable currency movements.
For the first nine months, revenue decreased 3.1% and Adjusted EBITDA decreased 9.2%. U.S. revenue grew 1.5%, while international revenue declined 13.4%; international attendance was down 14.2%. Nine-month attributable net income increased 9.4%, helped by the absence of the $72.3 million 2013 early-debt-retirement loss. Interest expense also declined to $85.1 million from $96.5 million following the 2013 refinancing.
Cash flow, balance sheet, and capital
- Cash and liquidity: Cash and equivalents were $546.7 million at September 30, down from $599.9 million at December 31, 2013. Current assets were $667.8 million and current liabilities $319.0 million. The company reported $100 million available on its revolving credit line, with no revolver borrowings outstanding.
- Cash flow, nine months: Operating cash flow was $223.1 million versus $178.5 million. Capital expenditures were $156.2 million versus $159.5 million; operating cash flow less capital expenditures was approximately $67.0 million, compared with $19.0 million. Investing cash use was $156.1 million, substantially below 2013 because the prior-year period included U.S. theatre acquisitions. Financing cash use was $110.0 million, including $86.7 million of dividends paid.
- Debt and leases: Long-term debt, including current maturities, was $1.826 billion; capital lease obligations totaled $215.3 million. Debt plus capital leases was approximately $2.041 billion. The company said it was in compliance with debt covenants. Its senior secured term loan averaged approximately 4.0% interest; $450 million of term-loan exposure was hedged by swaps.
- Dividends and investment: Dividends declared were $0.25 per share in Q3 and $0.75 per share for the nine-month period. Nine-month capital spending included $70.5 million for new theatres and $85.7 million for existing theatres.
Material changes, outlook, and risks
- Q3 weakness reflected a comparatively weaker film slate; management noted the summer and holiday periods are typically important release seasons and quarterly results can vary with film timing and success.
- The international segment faced currency headwinds and the effects of the Mexico divestiture and World Cup. Foreign-currency translation reduced other comprehensive income by $39.1 million for the nine-month period.
- Management reported signed commitments to develop 143 domestic screens and 95 international screens. Estimated remaining development capital expenditures were approximately $92 million and $70 million, respectively. Timing and actual spending remain subject to change; the company expected to fund development from operating cash flow and financing sources.
- No specific earnings or revenue guidance was provided. Management anticipated regular quarterly dividends, subject to board discretion, cash needs, financial condition, prospects, and debt restrictions.
- Q3 impairment charges were $4.5 million, compared with $0.1 million a year earlier; nine-month charges were $5.3 million. The company attributed impairments to theatre-specific competition and adverse market or demographic changes. It also recorded $8.7 million of nine-month losses on asset sales and other items, primarily equipment retirements and lease termination charges.
- Interest-rate sensitivity: the filing estimated that a 100-basis-point increase would add approximately $2.4 million to annual interest expense on $237.8 million of unhedged variable-rate debt. Film performance, attendance, foreign exchange, competition, fixed lease commitments, and substantial debt remain key risks.
- After quarter-end, the Department of Justice filed an antitrust lawsuit on November 3, 2014 seeking to block NCM’s proposed acquisition of Screenvision. Cinemark held approximately 19% of NCM; the filing does not state the eventual outcome.
- The company stated that there were no material changes to previously disclosed legal proceedings or risk factors, and that disclosure controls were effective as of September 30, 2014.
Key facts for investors to verify
- Whether attendance and theatre revenue recover with the subsequent film slate, particularly in international markets.
- Progress, timing, and actual costs of the committed theatre openings and the expected $162 million remaining development spend.
- Debt maturities, interest-rate exposure, covenant compliance, and the availability of the $100 million revolving facility.
- Effects of foreign exchange and the Mexico divestiture on comparable international performance.
- Developments in the DOJ action concerning NCM’s Screenvision transaction and any resulting impact on Cinemark’s NCM investment.
- Sustainability of dividends given capital spending, cash flow, and debt restrictions.