Cinemark Holdings, Inc. — Q2 2011 Form 10-Q
Business context and period. Cinemark operates movie theatres in the U.S. and Latin America, reporting U.S. and international segments. This unaudited filing covers the quarter and six months ended June 30, 2011; amounts below are in millions except per-share data. The company cautions that first-half results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $620.6 | $539.4 | $1,103.7 | $1,056.0 |
| Operating income | $97.0 | $79.7 | $145.8 | $151.5 |
| Operating margin | 15.6% | 14.8% | 13.2% | 14.3% |
| Net income attributable to Cinemark | $40.4 | $39.7 | $65.4 | $74.8 |
| Diluted EPS | $0.35 | $0.35 | $0.57 | $0.67 |
| Adjusted EBITDA | $149.8 | $125.1 | $252.5 | $246.9 |
- Revenue drivers: Q2 revenue rose 15.1%, supported by 9.8% higher attendance and higher ticket and concession spending per patron. Six-month revenue grew 4.5%; international revenue increased 28.7%, while U.S. revenue declined 3.3%, principally reflecting a 4.8% U.S. attendance decrease.
- Costs and margins: Q2 operating margin improved, but first-half operating income and margin fell. First-half general and administrative expense increased to $60.2 from $50.5; depreciation and amortization rose to $79.0 from $69.0. Film rental expense was 54.0% of admissions revenue for the first half, versus 54.9% a year earlier.
- Cash flow and investment: First-half operating cash flow was $182.7, versus $108.1; investing cash outflow was $81.8, versus $55.5, mainly because capital spending rose to $85.3 from $57.0. Cash increased to $550.9 at June 30 from $465.0 at year-end. Cash flow less capital expenditures was approximately $97.4 for the first half.
- Debt and liquidity: Long-term debt carrying value was $1,570.6, compared with $1,532.5 at year-end; capital lease obligations were $137.3. There were no revolver borrowings and $150.0 of revolving capacity available. The company reported compliance with debt covenants and a 4.7-to-1 actual coverage ratio against a 2-to-1 minimum under the notes indenture.
Material changes and notable items
- In June, Cinemark issued $200.0 of 7.375% senior subordinated notes due 2021 and used proceeds primarily to prepay $157.2 of the unextended term loan. The refinancing contributed to a $4.9 early-retirement-of-debt loss and higher interest expense; the remaining term loan was $910.5.
- Q2 included $5.7 of loss on asset sales and other items, including a settlement related to a terminated interest-rate swap, digital projection equipment sold to DCIP, and a Brazil advertising-contract intangible write-off. First-half long-lived asset impairment was $2.6, down from $5.0.
- First-half income tax expense included a $3.6 benefit from settlements and closures of tax years; the comparable 2010 period included an $8.9 benefit. These items affected period comparisons.
- Cinemark bought the remaining 2.6% of Cinemark Chile for $1.4, bringing its ownership to 100%. It also received additional NCM units, increasing its NCM ownership from about 15.3% to 15.8%.
- Capital spending commitments included approximately $84 for 167 planned domestic screens and $85 for 91 international screens. Actual development spending may change.
Outlook, risks and contingencies
- No formal full-year revenue, earnings, or cash-flow guidance is provided. Management identified films expected for release in the remainder of 2011, but results depend materially on film availability and popularity, attendance, ticket pricing, and concession spending. The business is seasonal and quarterly results can vary with release timing.
- Key exposures include competition and theatre-level impairment risk, foreign-currency movements, variable interest rates, and substantial lease, debt-service, and development commitments. The company estimated a 100-basis-point rate increase would add about $3.0 to annual interest expense on unhedged variable-rate debt; a 10% adverse currency move would reduce international subsidiaries’ aggregate net book value by about $53 and net income by about $5, holding other factors constant.
- In July, the company entered a new swap covering approximately $100 of variable-rate debt, effective November 2011, with a fixed pay rate of 1.715%. After quarter-end, the board declared a $0.21-per-share dividend, payable September 1, 2011.
- Management said pending legal proceedings were not expected to be material, individually or in aggregate, and reported no material change to previously disclosed risk factors. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether international growth and Q2 attendance gains persist, and whether U.S. attendance recovers after its first-half decline.
- How the $200.0 note issuance, term-loan repayment, interest costs, and hedges affect ongoing interest expense and debt reduction.
- Whether planned theatre development and associated capital requirements remain on schedule and within estimates.
- The contribution of tax settlements and other unusual items to reported earnings, and the sustainability of operating cash flow and dividends.
- Film slate performance, foreign-exchange movements, lease obligations, and compliance with debt covenants.