Cinemark Holdings, Inc. — Q2 2017 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2017. Cinemark operates movie theatres in the U.S. and Latin America, reporting U.S. and international segments. Unless otherwise noted, financial amounts below are in millions of U.S. dollars. The interim financial statements are unaudited.
Financial performance
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Six months ended June 30, 2017 | Six months ended June 30, 2016 |
|---|---|---|---|---|
| Revenue | $751.2 | $744.4 | $1,530.8 | $1,449.3 |
| Operating income | $98.2 | $105.6 | $229.4 | $220.4 |
| Operating margin | 13.1% | 14.2% | 15.0% | 15.2% |
| Net income | $51.8 | $54.4 | $132.0 | $113.4 |
| Net income attributable to Cinemark | $51.2 | $53.9 | $131.0 | $112.4 |
| Diluted EPS | $0.44 | $0.46 | $1.12 | $0.97 |
| Adjusted EBITDA | $170.7 | $168.4 | $382.6 | $353.0 |
- Q2 revenue increased 0.9%, but operating income and diluted EPS declined. Attendance fell 4.9% to 69.4 million; higher average ticket price and concession revenue per patron partly offset lower attendance.
- First-half revenue rose 5.6%, and Adjusted EBITDA increased 8.4%. Attendance declined 1.2% to 143.7 million; reported international growth benefited from foreign currency movements and local price increases.
- Q2 admissions revenue fell 1.4%, while concession revenue rose 3.4% and other revenue rose 12.4%. For the first half, admissions, concession, and other revenue increased 3.9%, 8.0%, and 12.0%, respectively.
- First-half cash from operating activities was $235.4 million, versus $200.9 million. Investing activities used $209.6 million, chiefly reflecting $182.8 million of capital expenditures and $40.8 million for theatre acquisitions. Financing activities used $82.9 million, including $67.5 million of dividends paid. Cash declined $57.1 million to $504.2 million.
Balance sheet, debt, and liquidity
- At June 30, 2017, cash and cash equivalents were $504.2 million; current assets were $618.4 million and current liabilities were $405.9 million.
- Long-term debt was $1.82 billion, excluding capital lease obligations of approximately $251.9 million. Debt included a $662.4 million variable-rate term loan, $400 million of 5.125% senior notes due 2022, and $755 million of 4.875% senior notes due 2023.
- The company had no revolver borrowings and $100 million of available revolving credit capacity. It reported compliance with debt covenants. The term-loan interest rate averaged approximately 3.2%; a 100-basis-point rate increase would raise annual interest expense by about $6.6 million, based on June 30 debt.
- On June 16, 2017, the credit facility was amended to reduce the term-loan interest rate by 0.25 percentage points and revise certain covenant definitions. Cinemark recorded $0.5 million of debt issuance costs and $0.2 million of related legal expense.
Material changes and management commentary
- Q2 U.S. revenue decreased 1.0%, with attendance down 5.5%; management attributed the decline mainly to a stronger film slate in Q2 2016. New theatres and luxury-lounger conversions partially helped.
- International Q2 revenue increased 6.6% as reported, while constant-currency revenue rose 4.0%. For the first half, international reported revenue rose 14.3%, versus 7.7% in constant currency. Management cited ticket and concession price increases, often driven by local inflation, and lower attendance due to film mix.
- Operating costs and depreciation increased. First-half depreciation and amortization rose to $116.5 million from $101.7 million, primarily due to new theatres and remodels. Asset impairment charges were $4.6 million for the first half, versus $1.9 million; charges related to theatres affected by competition or adverse local market conditions.
- Interest expense fell to $52.9 million for the first half from $55.3 million, reflecting prior debt refinancing and credit-facility rate reductions. The prior-year period included a $13.3 million loss on debt amendments and refinancing, compared with $0.2 million in 2017.
- Management described film-release timing as a source of seasonality and said quarterly results are not necessarily indicative of subsequent periods. It cited expected 2017 releases including Star Wars: The Last Jedi, Justice League, and Thor: Ragnarok, but gave no numerical earnings or revenue guidance.
Outlook, commitments, and risks
- At June 30, the company had signed commitments for 124 domestic screens and 38 international screens. Estimated remaining development capital expenditures were approximately $86.6 million and $15.6 million, respectively. Cinemark expected to fund development through operating cash flow, borrowing, debt issuance, sale-leasebacks, and/or sales of excess real estate; actual spending may change with available opportunities.
- First-half capital expenditures were $182.8 million, compared with $131.5 million a year earlier, including higher spending on existing theatres and remodels. An average of 132 domestic screens were temporarily closed for remodels during the 2017 first half, versus 65 in 2016.
- Key stated risks include film availability and audience demand, competition from other exhibitors and alternative entertainment, foreign currency movements, variable interest rates, and litigation. The company noted continued monitoring of Argentine inflation and currency conditions.
- Antitrust investigations by the U.S. Department of Justice and several state authorities concern film clearances and possible coordination or communications among theatre circuits and joint ventures. Cinemark said it intended to cooperate and could not predict the investigations’ scope or outcome.
- Other disclosed litigation includes a California wage-and-hour matter, for which class and representative-action certification were denied but appealed, and an antitrust/unfair-competition case. The company could not predict the outcomes or potential losses in these cases.
- The filing reported no material changes to previously disclosed risk factors or contractual obligations. Management concluded disclosure controls were effective as of June 30, 2017, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether attendance and film-slate trends improve after Q2, and how much pricing and concession spending can offset lower patronage.
- How much reported international growth reflects underlying constant-currency performance versus exchange rates and inflation-related price increases.
- Returns on the elevated theatre remodel and development spending, including the expected timing and completion costs of committed screens.
- Debt refinancing, interest-rate sensitivity, lease obligations, and the company’s capacity to sustain dividends while funding investment.
- Developments in the antitrust investigations and pending litigation, including any effects not quantified in this filing.
- The eventual effect of adopting revenue-recognition and lease-accounting standards; the company was still evaluating their financial-statement impact.