Cinemark Holdings, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; comparisons are with the corresponding 2011 periods. Cinemark operates movie theatres in the U.S. and Latin America. Unless noted, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Revenue | $649.6 | $620.6 | $1,228.4 | $1,103.7 |
| Operating income | $113.9 | $97.0 | $203.4 | $145.8 |
| Operating margin | 17.5% | 15.6% | 16.6% | 13.2% |
| Net income | $52.1 | $41.0 | $95.0 | $66.3 |
| Net income attributable to Cinemark | $51.6 | $40.4 | $93.7 | $65.4 |
| Diluted EPS | $0.45 | $0.35 | $0.82 | $0.57 |
| Adjusted EBITDA | $157.0 | $149.8 | $297.3 | $252.5 |
- Q2 revenue rose 4.7%; first-half revenue rose 11.3%. Admissions and concession revenues increased in the first half by 10.4% and 13.5%, respectively.
- Q2 attendance increased 4.1% overall: U.S. attendance fell 4.3%, while international attendance rose 20.7%. First-half attendance increased 8.7%, including 5.8% in the U.S. and 13.8% internationally.
- International growth benefited from new theatres, including ten theatres acquired in Argentina in August 2011. U.S. Q2 admissions revenue declined slightly as lower attendance outweighed higher average ticket prices.
- Q2 cost of operations was $535.7 million versus $523.6 million. First-half costs were $1,025.0 million versus $958.0 million. Q2 film rental and advertising costs increased partly because of the blockbuster performance of The Avengers.
Cash flow, liquidity and debt
- First-half operating cash flow was $175.4 million, down from $181.7 million. Investing cash outflow was $107.4 million, including $93.6 million of capital expenditures and $14.1 million for a U.S. theatre acquisition. Financing cash outflow was $61.8 million.
- Cash and cash equivalents were $524.3 million at June 30, 2012, compared with $521.4 million at December 31, 2011. The company reported $627.2 million in current assets and $290.3 million in current liabilities.
- Long-term debt carrying value was $1,566.4 million, including $901.3 million under the term loan, $461.0 million of 8.625% senior notes due 2019, and $200.0 million of 7.375% senior subordinated notes due 2021. Capital lease obligations totaled $139.6 million.
- No revolver borrowings were outstanding; $150.0 million of revolving credit capacity was available. Management said the company was in compliance with its debt agreements and covenants.
- Cash dividends paid in the first half were $48.1 million; dividends declared were $0.21 per share per quarter.
Material changes and management commentary
- First-half earnings improved despite higher operating expenses. Lower depreciation and amortization partly reflected the completion of accelerated depreciation on domestic 35mm projection systems in 2011. Lower impairment charges and asset-sale losses also supported comparisons.
- Interest expense increased to $63.5 million in the first half from $59.1 million, primarily following the 2011 refinancing of term debt with $200 million of 7.375% notes. The 2011 comparison also included a $4.9 million early debt-retirement loss.
- International results face currency exposure: management attributed lower international average ticket prices partly to unfavorable exchange rates. First-half foreign currency translation reduced other comprehensive income by $23.4 million; Q2 translation adjustment was a loss of $39.2 million.
- The CEO retired during the period and Tim Warner became CEO. The filing reports no material changes to previously disclosed risk factors and no material pending legal exposure, based on management’s assessment.
Outlook, risks and contingencies
- The filing provides no quantified full-year revenue or earnings guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Management cited scheduled 2012 releases, including sequels and other anticipated films, but emphasized that attendance depends on the quality and quantity of film releases. Results are seasonal and can vary significantly with film timing and popularity.
- At June 30, the company had commitments for 159 additional domestic screens and 99 international screens. Estimated remaining development capital expenditures were approximately $105 million domestically and $80 million internationally; actual spending may change with opportunities.
- Debt, fixed theatre leases, film performance, competition, foreign exchange movements and interest rates are key exposures. A 100-basis-point increase in market rates was estimated to increase annual interest expense by about $2.8 million. A simultaneous 10% adverse currency move was estimated to reduce international subsidiaries’ aggregate net book value by $49.1 million and net income by $4.9 million.
- The company reported $15.99 million of interest-rate swap liabilities. Routine legal proceedings, including personal injury, employment, landlord-tenant, patent and contract matters, were described as not material in aggregate by management.
Important facts for investors to verify
- Whether attendance and revenue growth persist, particularly internationally, and how film-release performance affects subsequent quarters.
- Delivery and funding of the planned theatre openings and the estimated $185 million of remaining development capital expenditures.
- Debt maturities, borrowing availability, interest-rate exposure and continued compliance with debt covenants.
- Effects of foreign exchange movements, especially in Brazil and other Latin American markets, on reported revenue, earnings and equity.
- Whether capital spending and quarterly dividends remain supportable from operating cash flow; first-half operating cash flow was below the prior-year period.