Cinemark Holdings, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Cinemark operates movie theatres in the U.S. and Latin America and reports U.S. and international segments. Unless stated otherwise, amounts below are in millions of U.S. dollars.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $714.7 | $780.0 | Down 8.4% |
| Operating income | $57.4 | $102.2 | Down 43.9% |
| Operating margin | 8.0% | 13.1% | Down 5.1 percentage points |
| Net income | $33.2 | $62.2 | Down 46.6% |
| Net income attributable to Cinemark | $32.7 | $62.0 | |
| Diluted EPS | $0.28 | $0.53 | |
| Adjusted EBITDA | $152.3 | $193.4 | Down 21.3% |
| Operating cash flow | $104.3 | $83.7 | |
| Capital expenditures | $57.6 | $80.2 |
Revenue fell primarily with attendance, down 9.1% to 62.3 million patrons. Admissions revenue declined 12.6%; concession revenue declined 4.0%, while concession revenue per patron rose 5.5% to $4.03. Average ticket price decreased 3.9% to $6.35. U.S. revenue declined 7.0%; international revenue declined 12.9% as reported, but increased 7.0% on a constant-currency basis. The filing attributes the U.S. attendance decline to a less appealing film slate than Q1 2018, which included Black Panther.
Operating costs totaled $657.4 million, or 92.0% of revenue, compared with 86.9% a year earlier. Costs pressured margins included salaries and wages, facility lease expense, utilities and other, and impairment charges. Impairment of long-lived assets was $5.6 million versus $0.6 million, relating to theatres affected by competition or adverse local market conditions.
Operating cash flow increased despite lower earnings, primarily due to supplier-payment timing and lease-accounting adoption. Investing cash outflow was $57.5 million and financing cash outflow was $47.9 million; cash decreased $1.0 million to $425.2 million. Operating cash flow less capital expenditures was approximately $46.8 million. The company paid $39.8 million in common dividends, equal to $0.34 per share.
Balance sheet, debt and liquidity
At March 31, 2019, cash was $425.2 million; current assets were $544.5 million and current liabilities were $657.0 million. Long-term debt had a carrying value of $1.808 billion, including a $651.3 million term loan, $400 million of 5.125% notes due 2022, and $755 million of 4.875% notes due 2023. The revolving credit facility had no borrowings and $98.8 million of available capacity. Management stated it was in compliance with debt covenants.
Adoption of lease-accounting standard ASC 842 on January 1, 2019 materially increased reported assets and liabilities: at quarter-end, operating lease right-of-use assets were $1.443 billion and operating lease liabilities were $1.496 billion; finance lease liabilities were $149.2 million. These accounting-recognized lease obligations are in addition to reported debt. The company reported total lease liabilities of $1.645 billion. The new standard also affected expense classifications and comparisons with prior periods.
Outlook, risks and notable items
The filing gives no specific revenue or earnings guidance. Management cited major films scheduled for the remainder of 2019, including Avengers: Endgame, The Lion King, Toy Story 4 and Frozen 2. It planned to fund theatre development and remodeling through operating cash flow, borrowing and potentially debt issuance, sale-leasebacks or real-estate sales. Signed development commitments included 128 domestic screens with estimated spending of about $80 million and 102 international screens with estimated spending of about $59 million.
Key exposures include film popularity and attendance, competition and changing local markets, foreign-currency movements, and variable interest rates. The company reported approximately $201.3 million of variable-rate debt; a 100-basis-point rate increase would raise annual interest expense by approximately $2.0 million. Three interest-rate swaps hedge part of this exposure. Argentina was treated as highly inflationary beginning July 2018.
Legal matters include a proposed settlement, awaiting final court approval, in a California wage-statement class action; an adverse jury award in a California antitrust case that Cinemark intends to appeal; and federal and state antitrust investigations involving film clearances and possible coordination. The company said it could not predict the outcome of the antitrust investigations or the litigation appeal. It recorded reserves for the settlement and jury award; the filing text does not provide a clear value for those reserves here. Management considered pending proceedings not material in aggregate, but outcomes remain uncertain.
Most important facts for investors to verify
- Whether attendance and revenue recover with the 2019 film slate, particularly in the U.S., and whether international constant-currency trends persist.
- How operating margins and Adjusted EBITDA respond to lower attendance, wage and lease costs, and theatre-level impairment risk.
- Liquidity and leverage after considering both $1.808 billion of debt and $1.645 billion of recorded lease liabilities, as well as planned development spending and dividends.
- Developments and potential financial exposure in the California antitrust case, government investigations and wage-statement settlement.
- Effects of foreign exchange and interest rates, including Argentina’s highly inflationary status and the coverage and duration of interest-rate swaps.