Cinemark Holdings, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Cinemark operates movie theatres in the U.S. and Latin America. Amounts below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $768.6 | $700.1 | $2,217.8 | $2,145.4 |
| Operating income | $117.8 | $99.1 | $338.2 | $324.1 |
| Net income | $66.1 | $46.7 | $179.5 | $160.5 |
| Net income attributable to Cinemark | $65.7 | $46.3 | $178.1 | $159.1 |
| Diluted EPS | $0.56 | $0.40 | $1.53 | $1.37 |
| Adjusted EBITDA | $184.9 | $159.1 | $537.9 | $508.0 |
- Revenue increased 9.8% in Q3 and 3.4% year to date. Q3 operating margin was approximately 15.3%, versus 14.2%; net margin was approximately 8.6%, versus 6.7%. For the nine-month periods, operating margin was approximately 15.2% versus 15.1%, and net margin approximately 8.1% versus 7.5%.
- Q3 attendance rose 7.3% to 76.2 million. U.S. attendance increased 9.6%; international attendance increased 3.7%. Higher U.S. ticket prices and concession spending per patron also supported revenue. For the nine months, reported international revenue declined, while constant-currency international revenue grew 15.6%.
- Nine-month operating cash flow was $278.3, compared with $226.3. Capital expenditures were $230.3, implying approximately $47.9 of operating cash flow after capital expenditures. Investing activities used $230.5; financing activities used $111.3.
- Cash was $527.1 at September 30, down from $588.5 at year-end 2015. Current assets were $626.9 and current liabilities $347.2 (current ratio approximately 1.8).
- Long-term debt, before debt discounts and issuance costs, was $1,824.4; capital lease obligations were an additional $228.6. The company had $100.0 available on its revolving credit line and no revolver borrowings. It reported compliance with debt covenants.
- Nine-month dividends declared were $0.81 per share; Q3 declared dividend was $0.27 per share.
Changes and notable items
- Q3 growth reflected a stronger film slate, new theatres, U.S. pricing and concession gains. Nine-month U.S. revenue rose 6.5%; international revenue fell 5.0% as reported but increased 15.6% in constant currency, highlighting foreign-exchange effects.
- Film rentals and advertising costs increased with admissions, and depreciation rose due to new theatres and remodels. Nine-month general and administrative expense declined to $109.2 from $116.3; impairment charges declined to $2.3 from $5.0.
- In March, Cinemark issued $225 of 4.875% notes due 2023 and redeemed $200 of 7.375% subordinated notes due 2021. The nine-month results include a $13.3 loss on debt amendments and refinancing, including a $9.4 make-whole premium. The term-loan rate was reduced by 0.25% in June.
- Nine-month loss on sale of assets and other was $11.0, including theatre asset retirements; this included a $3.7 gain on the RealD share sale. Q3 included a $6.9 loss in this line, primarily related to remodel-related asset retirements, partly offset by a land-sale gain.
- Comparative expense classifications were reworked: certain projection and sound equipment maintenance costs moved from film rentals and advertising to utilities and other. Adjusted EBITDA presentation was also changed to include certain investee cash distributions, with comparative periods recast.
Outlook, risks and contingencies
- The filing gives no formal quantitative earnings or revenue guidance. Management cited planned releases for the remainder of 2016 and noted results are seasonal and depend significantly on the timing and success of films.
- At September 30, signed commitments covered 142 domestic screens with estimated remaining capital expenditures of approximately $87, and 65 international screens with estimated remaining capital expenditures of approximately $31. Funding was expected from operating cash flow, credit-facility borrowings and potential debt issuance, sale-leasebacks or real-estate sales.
- Key exposures include film attendance and release timing, competition and theatre-level impairment, foreign currency movements, variable interest rates, and fixed lease and capital requirements. A 100-basis-point increase in rates was estimated to increase annual interest expense by approximately $6.6.
- The company is responding to federal and state antitrust investigative demands concerning film clearances and possible coordination or communications; it said it intended to cooperate and could not predict the scope or outcome. In a California wage-and-hour putative class action, class and representative-action certification were denied, but the plaintiff appealed; the company could not estimate the outcome or potential loss.
- An international payroll tax reserve related to an ongoing labor audit contributed to higher nine-month international salaries and wages. Management stated that other pending ordinary-course proceedings were not expected to be material, while noting uncertainty around specified litigation and investigations.
Important facts for investors to verify
- Whether attendance, ticket pricing and concession spending remain strong, particularly as film releases change seasonally.
- How currency movements affect international reported results relative to constant-currency growth.
- Execution and funding of the committed theatre openings and remodel program, and resulting returns on capital.
- Debt-service capacity, floating-rate exposure, dividend sustainability and compliance with financing restrictions.
- Developments in the antitrust investigations, wage litigation appeal and international labor audit.
- The effect of the expense reclassification and revised Adjusted EBITDA definition when comparing periods or assessing performance.