Cinemark Holdings, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed February 23, 2018. Cinemark operated 533 theatres and 5,959 screens across the U.S. and 15 Latin American countries. Approximately 277 million guests attended. The company reports U.S. and international segments.
Financial and operating performance
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Revenue | $2,991.5 million | $2,918.8 million | +2.5% |
| Operating income | $392.3 million | $422.9 million | -7.2% |
| Operating margin | 13.1% | 14.5% | -1.4 percentage points |
| Net income attributable to Cinemark | $264.2 million | $255.1 million | +3.6% |
| Diluted EPS | $2.26 | $2.19 | +$0.07 |
| Operating cash flow | $528.5 million | $451.8 million | +$76.6 million |
| Capital expenditures | $380.9 million | $326.9 million | +$53.9 million |
| Adjusted EBITDA | $723.8 million | $706.1 million | +2.5% |
Admissions revenue was essentially flat at $1,795.0 million (+0.3%); concession revenue increased 4.9% to $1,038.8 million, and other revenue rose 13.1% to $157.8 million. Worldwide attendance fell 3.6% to 277.0 million, while average ticket price rose 4.0% to $6.48 and concession revenue per patron increased 8.7% to $3.75. Concessions represented approximately 35% of revenue.
Operating performance weakened despite revenue growth: salaries and wages rose 8.8% to $354.5 million, depreciation and amortization increased to $237.5 million from $209.1 million, and impairment charges rose to $15.1 million from $2.8 million. FY 2017 included a $44.9 million noncash tax benefit from U.S. tax reform. The reported effective tax rate was 23.0%, versus 28.8% in 2016; management estimated a mid-to-high 20% effective tax rate for 2018.
Fourth quarter: Revenue was $750.0 million versus $700.9 million in Q4 2016; operating income was $88.7 million versus $84.8 million; net income attributable to Cinemark was $95.1 million versus $77.0 million; and diluted EPS was $0.82 versus $0.66.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $522.5 million at year-end, down from $561.2 million. Current assets were $657.6 million and current liabilities $468.9 million.
- Total debt was $1,817.3 million, including $659.5 million of variable-rate term debt; $7.1 million was due within one year. The company had $100 million available on its revolving credit line and no revolver borrowings. Management stated it was in compliance with debt covenants.
- Debt interest expense was $105.9 million. Management estimated that a 100-basis-point increase in market rates would add approximately $6.6 million to annual interest expense.
- Additional fixed obligations included $1,747.5 million of operating lease commitments and $276.7 million of capital lease obligations. Total disclosed contractual obligations were $4,554.5 million.
- Cash used for investing activities was $410.5 million, including $380.9 million in capital expenditures and $41.0 million for theatre acquisitions. Cash used for financing activities was $157.5 million, primarily reflecting dividends.
- Annual dividends declared increased to $1.16 per share in 2017 from $1.08 in 2016. In February 2018, the board approved an approximately 10% increase to an annualized $1.28 per share; the Q4 2017 dividend was $0.32 per share.
Material changes, outlook and risks
- U.S. revenue grew 0.2%, but attendance fell 4.5%, reflecting a weaker film slate than in 2016. Higher ticket prices and concession spending per patron partly offset lower attendance. International revenue rose 9.7% as reported, but international attendance declined 1.9%; currency movements and local inflation affected reported results.
- Management emphasized investment in theatre upgrades and guest experience. FY 2017 included eight new theatres built and three theatres acquired; signed development commitments covered 197 additional screens over the next three years. Estimated remaining construction spending was approximately $139 million for the committed screens.
- No specific consolidated revenue or earnings guidance was provided. Management identified the expected 2018 film slate, theatre development and continued investment in recliners, premium-format screens, food and beverage, and other guest offerings as business drivers.
- Key business risks include dependence on film availability and performance, seasonal and attendance variability, competition from other exhibitors and home entertainment, and further shortening of theatrical release windows. International operations add exposure to currency changes, inflation, economic and political conditions, and regulation.
- Significant leases and debt obligations may constrain cash available for capital spending, acquisitions and dividends. Other risks include labor and wage costs, technology changes, cybersecurity, impairment of theatre assets, and the ability to maintain access to financing.
- Legal matters include a California wage-and-hour action and a California theatre antitrust dispute; Cinemark said it could not predict outcomes or potential losses. The company also received federal and state antitrust investigative demands concerning film clearances and possible coordination; it said it would cooperate and could not predict the investigations’ scope or outcome.
- Tax reform generated a provisional $44.9 million noncash benefit; the company said its analysis could change during the measurement period ending December 22, 2018. The NCM investment’s estimated fair value was $191.2 million, below its $200.6 million carrying value; Cinemark did not record impairment, but noted continued declines could lead to a charge.
- ASC 606 adoption in 2018 was expected to change certain revenue and expense classifications and produce a cumulative retained-earnings adjustment of no more than $55 million, without a material effect on results or cash flows. Lease-accounting changes were scheduled for adoption in 2019 and expected to add right-of-use assets and lease liabilities.
Most important facts for investors to verify
- Whether attendance stabilizes and ticket-price and concession-per-patron gains can offset weaker attendance.
- How recurring operating margins and cash generation compare with reported net income, which benefited from the one-time tax item.
- The company’s capacity to fund elevated maintenance and growth capital expenditures while meeting debt, lease and dividend commitments.
- Exposure to variable interest rates, foreign exchange movements and economic conditions in Latin America.
- Developments in the antitrust investigations and pending litigation, along with any resulting financial or operating effects.
- Actual outcomes of the provisional tax-reform accounting and the estimated effects of ASC 606 and forthcoming lease accounting.