Cinemark Holdings, Inc. — Q2 2014 Form 10-Q
Business context and reporting period. The filing covers the three and six months ended June 30, 2014. Cinemark operates movie theatres in the U.S. and Latin America, reporting U.S. and international segments. Results reflect the 2013 Rave theatre acquisition; international comparisons are also affected by the November 2013 sale of the Mexico theatres.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $717.9 million | $725.6 million | $1,320.1 million | $1,273.4 million |
| Operating income | $116.9 million | $134.0 million | $184.7 million | $199.6 million |
| Operating margin | 16.3% | 18.5% | 14.0% | 15.7% |
| Net income | $72.1 million | $20.8 million | $107.8 million | $53.9 million |
| Diluted EPS | $0.62 | $0.18 | $0.93 | $0.46 |
| Adjusted EBITDA | $169.4 million | $178.0 million | $297.9 million | $294.3 million |
| Cash from operations | Not presented quarterly | Not presented quarterly | $159.7 million | $113.5 million |
Six-month capital expenditures were $102.6 million, yielding approximately $57.2 million of operating cash flow less capital expenditures. Cash and cash equivalents were $578.1 million at June 30, 2014, versus $599.9 million at year-end 2013. Current assets were $704.0 million and current liabilities $341.8 million.
Long-term debt was $1.828 billion, excluding capital lease obligations of approximately $215.3 million. Cinemark had $100 million of unused revolving-credit capacity. It reported compliance with debt covenants. A 100-basis-point rise in rates was estimated to increase annual interest expense by approximately $2.4 million on unhedged variable-rate debt.
Material changes versus prior comparable periods
- Q2 revenue fell 1.1%; six-month revenue rose 3.7%. U.S. six-month revenue increased 9.8%, supported by higher attendance and the Rave theatres, while international revenue declined 9.8%, principally reflecting the Mexico divestiture and currency effects.
- Q2 attendance declined 4.0% overall, including a 9.4% international decline; management attributed the U.S. attendance softness partly to fewer blockbuster releases. For the six-month period, attendance increased 0.9% overall, with U.S. growth offsetting international declines.
- Operating income and margin declined in both comparison periods. Q2 Adjusted EBITDA fell 4.9%; six-month Adjusted EBITDA increased 1.2%.
- Net income rose sharply against 2013, which included a $72.3 million loss on early debt retirement. That prior-period charge included a $56.6 million make-whole premium and debt-cost write-offs; it was not repeated in 2014. Interest expense was lower in 2014 following the refinancing from 8.625% notes to 4.875% notes due 2023.
- Operating cash flow increased year over year, partly because the 2013 period included the cash make-whole premium. Investing cash outflow was lower as 2013 included the Rave acquisition.
Outlook, commentary, risks and unusual items
- No formal financial guidance is provided. Management describes results as seasonal and cautions that quarterly results are not necessarily indicative of subsequent periods; performance depends significantly on film-release timing and success.
- At June 30, the company had commitments for 153 additional domestic screens and 77 international screens. Estimated remaining development capital expenditures were approximately $81 million and $58 million, respectively. Management expects to fund development through operating cash flow and potentially borrowing, debt issuance, sale-leasebacks or excess-real-estate sales.
- The board may continue regular quarterly dividends at its discretion, subject to cash needs, financial condition and debt restrictions. Dividends declared were $0.25 per share in Q2 2014, versus $0.21 in Q2 2013.
- Q2 2014 included a $3.3 million loss on asset sales and other, primarily from retiring theatre equipment; Q2 2013 included a $2.8 million gain, primarily from a land sale. Six-month impairment charges were $0.8 million, related to affected theatres, including competitive and local-market changes.
- Foreign exchange exposure affects international results. Cinemark reported a $4.9 million foreign-currency exchange gain for the first six months, compared with a $0.3 million loss in 2013; translation effects also affected other comprehensive income.
- The filing identifies cyberattacks and potential loss of confidential or customer information as a material risk. It also notes the pending NCM agreement to acquire Screenvision for $375 million, subject to regulatory approval and other conditions.
- Management said pending legal proceedings were not material and reported effective disclosure controls, with no material change in internal control over financial reporting during the quarter. Sean Gamble was named CFO effective August 25, 2014.
Important facts for investors to verify
- Whether attendance and box-office trends improve, and how film-release performance affects fixed theatre costs and operating margins.
- How much of U.S. revenue and attendance growth is attributable to Rave acquisition effects versus underlying performance, and the ongoing impact of the Mexico sale and foreign exchange.
- Debt maturities, covenant headroom, variable-rate exposure and the availability of the stated $100 million revolver capacity.
- Timing and actual cost of committed theatre development, alongside dividend cash requirements and operating cash generation.
- Developments in the NCM-Screenvision transaction, cybersecurity protections, and any changes in legal or other contingencies.