Cinemark Holdings, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Cinemark operates movie theatres in the U.S. and Latin America, reporting U.S. and international segments. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $744.4 | $799.9 | $1,449.3 | $1,445.3 |
| Operating income | $105.6 | $134.5 | $220.4 | $224.9 |
| Net income | $54.4 | $70.9 | $113.4 | $113.8 |
| Diluted EPS | $0.46 | $0.61 | $0.97 | $0.97 |
| Adjusted EBITDA | $168.4 | $194.5 | $353.0 | $348.9 |
- Q2 revenue fell 6.9%, operating income 21.5%, and net income 23.3% year over year. Six-month revenue was nearly flat, while operating income and net income edged lower.
- Q2 operating margin was 14.2%, versus 16.8% a year earlier; first-half operating margin was 15.2%, versus 15.6%. Adjusted EBITDA margin was approximately 22.6% in Q2 (24.3% prior year) and 24.4% for the first half (24.1% prior year).
- Q2 attendance declined 4.8% overall, including a 7.1% U.S. decline. For the first half, attendance increased 2.3% overall, led by 7.4% international growth; U.S. attendance declined 0.6%.
- For the first half, U.S. revenue rose 3.6%, while international revenue declined 8.8% as reported but increased 15.9% at constant currency. Currency translation materially affected reported international results.
Cash, debt and liquidity
- First-half operating cash flow was $200.9, compared with $180.8 in 2015. Capital expenditures were $131.5, versus $155.7; cash used in investing activities was $133.6. Cash and equivalents ended June at $583.6, down from $588.5 at year-end 2015.
- At June 30, long-term debt was approximately $1,824.4 before unamortized discounts and issuance costs; capital lease obligations totaled approximately $232.3. Current assets were $699.2 and current liabilities $426.3.
- The company had $100.0 of available revolving-credit capacity and no revolver borrowings. It reported compliance with debt covenants. A 100-basis-point rate increase was estimated to add approximately $6.6 to annual interest expense on variable-rate debt.
- Cinemark issued $225.0 of 4.875% notes due 2023 and redeemed $200.0 of 7.375% notes. The refinancing generated a $13.3 first-half loss, including a make-whole premium, fees and write-off of debt costs. It also prepaid $13.5 on its term loan and amended the facility to reduce the term-loan interest margin by 0.25 percentage points.
- Dividends paid in the first half were $62.7; dividends declared were $0.27 per share for Q2, up from $0.25 in Q2 2015.
Changes, outlook and risks
- Management attributed Q2’s U.S. attendance decline to comparison with the record-setting Q2 2015 film slate. Lower attendance reduced admissions revenue; higher concession spending per patron partly offset the decline. First-half growth in U.S. ticket price and concession revenue per patron supported revenue.
- Costs were affected by new theatres, remodels and wage increases. Depreciation and amortization rose to $52.4 in Q2 and $101.7 for the first half. First-half impairment charges were $1.9, primarily related to theatres facing competition or adverse local conditions.
- Q2 2016 scheduled films cited by management included Star Trek Beyond, Jason Bourne, Suicide Squad and Rogue One: A Star Wars Story. The filing provides no numerical full-year earnings or revenue guidance; management cautions that results are seasonal and film-release dependent.
- At quarter-end, commitments covered 108 new domestic screens with estimated remaining development costs of $66.0 and 70 international screens with estimated costs of $39.0. Planned spending remains subject to changes in development opportunities and is expected to be funded through operating cash flow, borrowings and other financing sources.
- Legal matters include federal and state antitrust investigations concerning film clearances and possible coordination; the company says it intends to cooperate and cannot predict the investigations’ outcome. In a California wage-and-hour case, the court denied class certification and a representative-action determination; plaintiffs may appeal. The company also noted a payroll-tax reserve associated with an ongoing international labor audit.
- Other notable items: a $3.7 gain on the sale of RealD shares was partly reflected in first-half results; foreign-currency translation contributed $38.7 of other comprehensive income for the first half. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification priorities
- Check whether attendance and box-office trends improve against the Q2 2015 record-film comparison, and whether the remaining-2016 film slate supports recovery.
- Assess international performance on both reported and constant-currency bases, including exposure to foreign exchange and local inflation.
- Review debt-service and refinancing economics, variable-rate exposure, lease obligations, covenant headroom and the sustainability of dividends alongside planned capital spending.
- Monitor the antitrust investigations, potential appeal in the California case, and outcomes of the international labor audit.
- Reconcile Adjusted EBITDA to GAAP results and note that Cinemark changed its Adjusted EBITDA presentation to include certain cash distributions from equity investees, recasting prior periods for comparison.