Cinemark Holdings, Inc. — Q2 2015 Form 10-Q
Business context and period: The company operates movie theatres in the U.S. and Latin America, generating most revenue from admissions and concessions. This filing covers the quarter and six months ended June 30, 2015; comparisons are with the same 2014 periods. Financial amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $799.9 | $717.9 | $1,445.3 | $1,320.1 |
| Operating income | $134.5 | $116.9 | $224.9 | $184.7 |
| Net income | $70.9 | $72.1 | $113.8 | $107.8 |
| Net income attributable to Cinemark | $70.3 | $71.7 | $112.8 | $107.2 |
| Diluted EPS | $0.61 | $0.62 | $0.97 | $0.93 |
| Adjusted EBITDA | $193.5 | $169.4 | $340.6 | $297.9 |
- Growth and margins: Q2 revenue grew 11.4% and operating income grew 15.1%; operating margin improved to 16.8% from 16.3%. For the first half, revenue rose 9.5%, operating income rose 21.8%, and operating margin increased to 15.6% from 14.0%. First-half Adjusted EBITDA increased 14.3%.
- Revenue drivers: Q2 attendance increased 8.8% overall. U.S. admissions revenue rose 12.2%, reflecting 5.4% attendance growth and a 6.5% increase in average ticket price. International attendance grew 15.4%, but average ticket price fell 8.7%, primarily due to unfavorable currency movements. Concession revenue grew 14.6% overall.
- Costs and taxes: Film rentals and advertising increased to 56.7% of revenue in Q2 from 54.7% (calculated against admissions revenue in the filing); stronger box-office films contributed to higher film rental rates. Q2 income tax expense rose to $42.8 million from $24.1 million, and the effective rate increased to 37.6% from 25.0%. The filing attributes the prior-year rate partly to items related to Mexican subsidiaries. Higher taxes more than offset Q2 operating-income growth, contributing to lower net income.
- Cash flow and liquidity: First-half operating cash flow was $180.8 million, versus $159.7 million a year earlier. Investing cash outflow was $155.2 million, including $155.7 million of capital expenditures; financing cash outflow was $79.1 million. Cash declined $62.6 million from year-end to $576.3 million. Current assets were $714.3 million and current liabilities $419.1 million.
- Debt: Long-term debt carrying value was $1,819.5 million, versus $1,823.0 million at year-end; capital lease obligations totaled about $219.4 million. The company had $100 million available on its revolving credit line and no revolver borrowings. In May 2015, the $700 million term-loan facility maturity was extended from December 2019 to May 2022; the amendment generated $0.9 million of expense and approximately $6.9 million in debt issuance costs. The company reported compliance with debt covenants.
- Capital returns and investment: Dividends declared were $0.25 per share in each quarter, or $0.50 for the first half. The company spent $26.3 million on its Plano headquarters within first-half capital expenditures. It estimated approximately $136 million of remaining development capital expenditures for 234 committed domestic and international screens.
Material changes, outlook and risks
- Q2 operating performance benefited from a strong film slate, including Jurassic World, Avengers: Age of Ultron and Furious 7, higher attendance, ticket-price increases, and premium-format sales. The company cited films scheduled for the remainder of 2015, including Star Wars: The Force Awakens and Hunger Games: Mockingjay Part II, but provided no quantitative earnings or revenue guidance.
- International results remain exposed to currency movements: first-half foreign-currency translation reduced other comprehensive income by $46.0 million, and unfavorable exchange rates pressured international ticket prices and reported results.
- First-half long-lived asset impairment charges were $4.3 million, compared with $0.8 million in 2014, involving U.S. theatres and related intangible assets. The company cited increased competition and adverse local market or demographic conditions. Q2 loss on asset sales and other was $5.8 million, including lease termination costs and asset retirements related to remodels and closures.
- NCM made no excess cash distribution in Q2 2015, following expenses related to termination of its proposed Screenvision merger. First-half NCM distributions were $8.5 million, down from $10.7 million.
- The company disclosed a putative California employee wage-and-hour class action, which it is defending; no class had been certified and no loss reserve was recorded. It also received federal and state antitrust investigative demands concerning film clearances and possible coordination or communications with other theatre circuits and joint ventures; it said it would cooperate and could not predict the outcome.
- Key operating uncertainties include film-release timing and popularity, seasonality, competition and alternative entertainment, foreign exchange, variable interest rates, and theatre operating costs. Management noted that quarterly results are not necessarily indicative of subsequent periods.
Important facts for investors to verify
- Whether attendance, ticket pricing and concession spending remain strong, and how film-rental rates affect margins.
- Whether international currency pressure persists and how it affects reported revenue, earnings and equity.
- Cash generation relative to planned theatre and other capital expenditures, dividends and debt service.
- Debt maturity, interest-rate exposure after the term-loan extension, and continued covenant compliance.
- Developments in the antitrust inquiries, the employee litigation, and theatre impairment or closure activity.
- Actual performance of the announced 2015 film slate and the company’s committed theatre-development program; the filing gives no formal financial guidance.