Cinemark Holdings, Inc. — Q1 2016 Form 10-Q
Business context and reporting period. The company operates movie theatres in the U.S. and Latin America. This unaudited report covers the three months ended March 31, 2016, compared with the three months ended March 31, 2015. Figures below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $704.9 | $645.4 | +9.2% |
| Operating income | $114.8 | $90.4 | +27.0% |
| Net income attributable to Cinemark | $58.5 | $42.5 | +37.6% |
| Diluted EPS | $0.50 | $0.37 | +$0.13 |
| Adjusted EBITDA | $184.6 | $154.4 | +19.6% |
| Cash provided by operating activities | $67.7 | $25.1 | +$42.6 |
| Capital expenditures | $47.7 | $85.7 | −$38.0 |
- Operating margin was 16.3%, versus 14.0%; net income attributable to Cinemark was approximately 8.3% of revenue. Adjusted EBITDA margin was approximately 26.2%, versus 23.9%.
- Operating cash flow less capital expenditures was approximately $20.0 million, compared with approximately negative $60.6 million in Q1 2015. This simple calculation is not a company-reported free-cash-flow measure.
- Cash and cash equivalents were $583.9 million at March 31, 2016. Current assets were $685.9 million and current liabilities were $389.9 million.
- Long-term debt was approximately $1.84 billion, excluding capital lease obligations; those obligations totaled approximately $225.2 million. The company also had $100 million available on its revolving credit line, with no revolver borrowings outstanding. Management reported compliance with debt agreements and covenants.
- The board declared a quarterly dividend of $0.27 per share, compared with $0.25 a year earlier.
Material changes versus the prior comparable period
- U.S. segment revenue increased 14.8% to $540.7 million; attendance rose 16.7%, while reported U.S. admissions revenue increased 14.1%. U.S. average ticket price rose 6.3% to $7.58, and concession revenue per patron rose 7.3% to $4.13.
- International revenue declined 5.8% as reported, to $164.2 million, reflecting currency effects. In constant currency, international revenue increased 25.8%; attendance increased 16.7%, constant-currency average ticket price rose 7.8%, and concession revenue per patron rose 11.4%.
- Consolidated attendance increased 10.7%, to 72.5 million. Average screen count increased to 5,805 from 5,677.
- Operating income improved as revenue growth exceeded the rise in total operating costs. Film rentals and advertising increased to $232.9 million, and depreciation and amortization increased to $49.3 million, primarily with new and remodeled theatres.
- Cash from operations was higher than the prior-year quarter; the filing attributes the prior-year lower amount primarily to timing of vendor payments. Capital expenditures were lower, including because Q1 2015 included the purchase of the corporate headquarters building.
Outlook, commentary, risks and unusual items
- The filing gives no formal full-year revenue or earnings guidance. Management noted the importance of film release timing and seasonality, with historically stronger periods around summer and the year-end holidays. It cited Q1 strength from the carryover of Star Wars: The Force Awakens and The Revenant, among other releases, and listed expected 2016 releases including Captain America: Civil War, Finding Dory and Rogue One: A Star Wars Story.
- On March 21, Cinemark USA issued $225 million of additional 4.875% senior notes due 2023 and redeemed $200 million of 7.375% senior subordinated notes due 2021. The redemption generated a $13.2 million early-retirement loss, including a $9.7 million make-whole premium, debt-cost write-off and other fees. The refinancing lowered the stated coupon on the refinanced principal, but increased 4.875% notes outstanding.
- Q1 included a $3.7 million gain on the sale of RealD shares; proceeds were approximately $13.5 million, and management said it planned to use them for a term-loan prepayment. The swap used to hedge $100 million of term-loan exposure expired in April 2016. At quarter-end, $677.3 million of debt was variable-rate; a 100-basis-point rate increase was estimated to raise annual interest expense by approximately $6.8 million.
- Management had signed commitments for 117 domestic screens and 53 international screens, with estimated remaining development capital expenditures of approximately $68 million and $33 million, respectively. These plans and spending may change with available opportunities.
- The company faces risks from film popularity and release schedules, competition and alternative entertainment, foreign-exchange movements, interest rates, and theatre development and operating costs. The Department of Justice and several state authorities had issued civil investigative demands concerning film clearances and possible coordination or communications; the company said it intended to cooperate and could not predict the investigations’ scope or outcome.
- A California wage-and-hour putative class action had its class-certification and representative-action requests denied; plaintiffs could appeal, and the company said it could not predict the outcome or potential loss. Other ordinary-course proceedings were described as not material in aggregate. The filing reported no material changes to previously disclosed risk factors.
- The company reclassified certain 2015 projection- and sound-equipment maintenance costs from film rentals and advertising to utilities and other for presentation consistency. It also adopted a consolidation accounting standard with no financial-statement impact; the impact of the new lease standard was still under evaluation.
Important facts for investors to verify
- Whether attendance, ticket pricing and concession spending sustain growth, particularly as the film slate and seasonal comparisons change.
- How much reported international performance continues to differ from constant-currency performance, and the effects of currency volatility in individual markets.
- Debt balances, variable-rate exposure, the intended term-loan prepayment from RealD proceeds, and compliance with covenants and dividend restrictions.
- Actual spending and returns on committed theatre openings and remodels, and whether operating cash flow covers capital needs and dividends.
- Developments in the federal and state antitrust investigations and the potential for appeal or other costs in the employment litigation.
- The impact of the $13.2 million debt-retirement charge and RealD sale gain on comparisons of recurring earnings; the filing’s Adjusted EBITDA is a non-GAAP measure and its presentation was updated to include all cash distributions from equity investees.