Cinemark Holdings, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; compared with the three months ended March 31, 2016. Cinemark operates movie theatres in the U.S. and Latin America. Unless noted otherwise, amounts below are in U.S. dollars and millions.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $779.6 | $704.9 | +10.6% |
| Operating income | $131.2 | $114.8 | +14.3% |
| Operating margin | 16.8% | 16.3% | +0.5 percentage points |
| Net income attributable to Cinemark | $79.7 | $58.5 | +36.2% |
| Diluted EPS | $0.68 | $0.50 | +36.0% |
| Adjusted EBITDA | $211.9 | $184.6 | +14.7% |
| Cash from operating activities | $150.6 | $67.7 | +$82.9 |
| Capital expenditures | $91.2 | $47.7 | +$43.4 |
- Admissions revenue was $476.5 million (+9.3%); concession revenue was $268.2 million (+12.8%); other revenue was $34.9 million (+11.5%). Attendance rose 2.5% to 74.3 million, average ticket price increased 6.7% to $6.41, and concession revenue per patron increased 10.1% to $3.61.
- International revenue increased 23.0% as reported and 12.0% in constant currency; attendance declined 0.7%. U.S. revenue increased 6.8%, with attendance up 4.5%. Constant-currency figures are non-GAAP measures.
- Cash and cash equivalents were $584.3 million at March 31, versus $561.2 million at year-end 2016. Current assets were $707.9 million and current liabilities $439.5 million, or a current ratio of approximately 1.61.
- Gross debt principal was $1.823 billion, including $663.8 million of variable-rate term-loan borrowings. Capital lease obligations totaled $251.8 million. The company had no revolver borrowings and $100 million of available capacity. It reported compliance with its debt covenants.
- Dividends declared were $0.29 per common share, versus $0.27 in Q1 2016. Cash dividends paid were $33.8 million.
Material changes and drivers
- Revenue growth reflected stronger U.S. attendance, new theatres and luxury-lounger conversions, as well as higher ticket prices and concession spending. Management cited a strong Q1 film slate.
- Operating margin improved despite higher operating costs. U.S. film rental and advertising costs fell as a share of admissions revenue, which management attributed to the film mix. Higher concession-supply costs, payroll, rent, utilities and depreciation partly offset the improvement.
- Interest expense declined to $26.4 million from $28.1 million, reflecting the prior-year refinancing and lower term-loan rates. Q1 2016 included a $13.2 million loss on early debt retirement; there was no such charge in Q1 2017.
- Operating cash flow increased substantially, partly due to higher net income and the timing of vendor payments. Investing cash outflow rose to $87.6 million from $49.3 million, chiefly alongside higher theatre capital spending. A simple operating-cash-flow less capital-expenditures measure was $59.4 million, versus $20.0 million.
Outlook, risks and unusual items
- The filing provides no formal revenue or earnings guidance. Management described planned theatre development and remodeling: remaining estimated capital spending was approximately $86.1 million for 125 committed domestic screens and $16.2 million for 44 international screens. Projects and spending may change with available opportunities; planned funding sources include operating cash flow, borrowings, debt issuance, sale-leasebacks and excess real-estate sales.
- Management cautioned that results are seasonal and depend on film-release timing; a quarter is not necessarily indicative of subsequent periods. It identified major franchise releases scheduled for the remainder of 2017, without quantifying their expected financial impact.
- Antitrust inquiries by the U.S. Department of Justice and state authorities concern film clearances and possible coordination or communications with other theatre circuits and joint ventures. Cinemark said it intends to cooperate and cannot predict the scope, duration or outcome. The filing also discusses wage-and-hour and antitrust litigation; outcomes and potential losses were not estimable for the highlighted cases.
- A 100-basis-point increase in market rates would increase annual interest expense by approximately $6.6 million, based on variable-rate debt outstanding at quarter-end. The company also monitors Argentine inflation and currency movements; the filing notes ongoing peso devaluation.
- Cinemark received 1.49 million additional NCM common units, recorded at an estimated $18.4 million fair value with an offset to deferred revenue to be recognized over the remaining approximately 19-year advertising services agreement. This was a noncash transaction.
- Long-lived asset impairment was $0.3 million, associated with theatres affected by competition or adverse local conditions. Management reported no Q1 events indicating potential goodwill or indefinite-lived tradename impairment.
- The company adopted updated share-based compensation guidance effective January 1, 2017. It was evaluating the effects of upcoming revenue-recognition and lease-accounting standards; the filing does not provide quantified impact estimates.
Most important facts for investors to verify
- Whether revenue and attendance trends persist, particularly in international markets, and how much reported growth reflects local pricing, inflation and currency translation.
- Whether higher theatre investment and remodeling generate returns sufficient to support the committed expansion and capital spending plans.
- Debt maturities, variable-rate exposure, the revolving credit facility’s December 2017 maturity, and covenant restrictions relevant to dividends and investment.
- Developments in federal and state antitrust investigations and the disclosed litigation, for which the company could not estimate outcomes or potential losses.
- The effects of film-release seasonality, foreign exchange and inflation, and the eventual accounting impact of new revenue and lease standards.