Cinemark Holdings, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Cinemark operates movie theatres in the U.S. and Latin America. Unless stated otherwise, financial amounts below are in millions of U.S. dollars.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $710.7 | $768.6 | $2,241.6 | $2,217.8 |
| Operating income | $74.2 | $117.8 | $303.6 | $338.2 |
| Net income | $38.5 | $66.1 | $170.5 | $179.5 |
| Net income attributable to Cinemark | $38.1 | $65.7 | $169.1 | $178.1 |
| Diluted EPS | $0.33 | $0.56 | $1.45 | $1.53 |
| Adjusted EBITDA | $153.7 | $184.9 | $536.2 | $537.9 |
- Q3 revenue fell 7.5%, operating income fell 37.0%, and net income fell 41.7% year over year. Operating margin was 10.4%, down from 15.3%.
- Nine-month revenue rose 1.1%, while operating income declined 10.2% and net income declined 5.0%. Operating margin was 13.5%, versus 15.2%.
- Q3 attendance declined 11.7% to 67.3 million; average ticket price increased 1.8% to $6.32, and concession revenue per patron rose 7.0% to $3.67. For the nine months, attendance fell 4.8%, while ticket price and concession revenue per patron rose 4.1% and 8.5%, respectively.
- By segment, Q3 U.S. revenue fell 10.3%, while international revenue was nearly flat as reported and rose 2.6% in constant currency. For nine months, U.S. revenue fell 1.6%; international revenue rose 9.2% as reported and 5.9% in constant currency.
- Nine-month cash from operations was $311.4 million, compared with $278.3 million. Investing used $290.1 million, including $262.7 million of capital expenditures; financing used $114.2 million. Cash declined $91.8 million to $469.4 million. Operating cash flow less capital expenditures was approximately $48.7 million.
- At September 30, cash was $469.4 million and current assets were $590.3 million versus current liabilities of $392.7 million. Long-term debt was $1.820 billion, and capital lease obligations totaled $276.9 million. Cash less reported long-term debt was approximately negative $1.351 billion, excluding capital leases.
- Interest expense was $79.2 million for nine months, down from $82.0 million. The term loan’s average rate was 3.3%; $660.9 million was variable-rate debt. A 100-basis-point rate increase would add approximately $6.6 million to annual interest expense.
Material changes and drivers
- Management attributed the Q3 attendance decline to a weaker film slate than in 2016, partially offset by new theatres and luxury lounger conversions. Higher ticket prices and concession spending per patron partly cushioned lower attendance.
- Nine-month international revenue growth reflected higher local-currency ticket and concession spending per patron, price increases driven largely by local inflation, new theatres, and increased advertising and promotional revenue. Attendance declined in both segments.
- Nine-month operating costs rose faster than revenue, including higher salaries, lease expense, utilities, depreciation and impairment. Depreciation and amortization increased to $174.5 million from $155.9 million; impairment charges increased to $9.6 million from $2.3 million.
- Capital spending increased to $262.7 million from $230.3 million, primarily due to theatre remodels and acquisitions. The company acquired one U.S. and two Brazilian theatres during the period.
- The June 2017 credit-facility amendment reduced the term-loan rate by 0.25 percentage point. Together with earlier amendments, the company said its term-loan rate had been reduced by 100 basis points in aggregate.
Outlook, risks and other notable items
- The filing provides no quantified full-year earnings or revenue guidance. Management noted film-release timing makes results seasonal and quarterly performance is not necessarily indicative of subsequent periods. It cited planned late-2017 releases including Star Wars: The Last Jedi, Jumanji: Welcome to the Jungle and Coco.
- At quarter-end, Cinemark had $100 million available on its revolving credit line, with no balance drawn; the facility was due to mature in December 2017. Management reported compliance with debt covenants. It anticipated regular quarterly dividends subject to board discretion, available cash, debt restrictions and other factors; $0.29 per share was declared for Q3.
- Management estimated approximately $85 million of remaining capital spending for 116 planned domestic screens and $20 million for 40 international screens. Funding was expected from operating cash flow and potentially borrowings, debt issuance, sale-leasebacks or excess-property sales.
- Material legal exposures include a putative California wage-and-hour class/PAGA case, an antitrust and unfair-competition case, and U.S. Department of Justice and state antitrust investigations concerning film clearances and possible coordination. The company said it could not predict outcomes or potential losses for the identified litigation and investigations.
- The company is monitoring Argentine inflation and peso devaluation; it said the cumulative inflation threshold for highly inflationary accounting had not definitively been reached. Foreign-exchange movements also affect reported international results.
- Adoption of the new revenue standard was planned for Q1 2018. Management expected changes involving the NCM exhibitor services agreement, loyalty programs and stored-value-card breakage; the agreement’s significant financing component was expected to increase reported other revenue with an offsetting increase in interest expense. Lease accounting changes were planned for Q1 2019 and expected to add right-of-use assets and lease liabilities.
Key facts for investors to verify
- Whether attendance and U.S. box-office performance recover after the weaker Q3 film slate, and how pricing and concession spending affect margins.
- The status and renewal or replacement of the revolving credit facility due December 2017, along with leverage, covenant headroom and debt-service requirements.
- Returns and cash-flow timing from planned theatre construction, acquisitions and luxury-lounger/concession remodels, given elevated capital spending.
- Developments, potential costs and outcomes in the antitrust investigations and material litigation.
- The eventual financial effects of revenue- and lease-accounting standard adoption, and foreign-exchange and inflation exposure in international markets.