Cinemark Holdings, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; filed May 9, 2018. Cinemark operates movie theatres in the U.S. and Latin America and reports U.S. and international segments. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $780.0 | $779.6 | +0.1% |
| Operating income | $102.2 | $131.2 | -22.1% |
| Operating margin | 13.1% | 16.8% | -3.7 percentage points |
| Net income | $62.2 | $80.2 | -22.5% |
| Diluted EPS | $0.53 | $0.68 | -22.1% |
| Adjusted EBITDA | $193.4 | $211.9 | -8.7% |
| Operating cash flow | $83.7 | $150.6 | -44.5% |
- Admissions revenue fell 5.0% to $452.6 million and concession revenue fell 2.4% to $261.8 million. Other revenue rose 88.0% to $65.6 million, substantially reflecting adoption of ASC 606.
- Attendance decreased 7.8% to 68.5 million patrons: down 4.1% in the U.S. and 14.0% internationally. Average ticket price increased 3.1% to $6.61; concession revenue per patron increased 5.8% to $3.82.
- Higher salaries, utilities and other costs, general and administrative expense, and depreciation contributed to lower operating income. Utilities and other costs also increased because ASC 606 changed certain transaction-fee presentation from net to gross.
- Income tax expense was $25.1 million, versus $44.4 million; the effective tax rate declined to 28.8% from 35.6%, benefiting from the lower U.S. federal tax rate.
Cash, liquidity and debt
- Cash and cash equivalents were $474.0 million at March 31, 2018, down from $522.5 million at year-end. Operating cash flow was $83.7 million; investing cash outflow was $78.9 million, including $80.2 million of capital expenditures; financing cash outflow was $53.4 million.
- Long-term debt was approximately $1.816 billion before unamortized discounts and issuance costs. Capital lease obligations were $272.0 million. The $100 million revolving credit facility was undrawn and available.
- On March 29, Cinemark amended its term loan, extending maturity to March 2025, reducing its interest margin by 0.25 percentage points and reducing required real-estate collateral. The amendment generated $1.5 million of reported loss and about $5.0 million of debt issuance costs. The company reported compliance with debt covenants.
- The quarterly dividend declared was $0.32 per share, up from $0.29 a year earlier. Cash dividends paid in the quarter were $37.3 million.
Material changes, outlook and risks
- ASC 606 adoption: Effective January 1, 2018, with a modified retrospective approach; 2017 revenue was not recast. The company recorded a $40.5 million after-tax cumulative adjustment to retained earnings. Adoption affected loyalty-point revenue deferrals, transaction-fee presentation and NCM agreement accounting. It also produced $5.0 million of noncash NCM-related interest expense in the quarter.
- Capital plans: Cinemark estimated remaining development costs of approximately $91 million for 124 committed domestic screens and $37 million for 61 committed international screens. It expected to fund development with operating cash flow and financing sources. No full-year earnings or revenue guidance was provided.
- Management commentary: Management attributed weaker attendance mainly to a less favorable film slate versus Q1 2017. The filing notes that results are seasonal and depend on the timing and quality of film releases; it cited a number of franchise releases scheduled for the rest of 2018.
- Risks and contingencies: The company faces exposure to film performance, competition, foreign exchange and variable interest rates. A 100-basis-point rate increase was estimated to raise annual interest expense by about $6.6 million. Argentina’s peso continued to weaken, and the company said it would monitor inflation and currency conditions. Ongoing matters include wage-and-hour and antitrust litigation, plus federal and state antitrust investigations concerning film clearances and possible coordination; outcomes and potential losses were not predictable.
- Other unusual item: In April 2018, Cinemark and an entity owned by Chairman Lee Roy Mitchell and his wife each invested approximately $20 million for a 50% interest in a family entertainment-center venture. Cinemark will use equity-method accounting.
Important facts for investors to verify
- How much of reported revenue growth and operating performance reflects ASC 606 accounting changes rather than underlying demand, given 2017 was not recast.
- Whether attendance stabilizes, particularly internationally, and how future film releases affect revenue and margins.
- Whether operating cash flow recovers and planned theatre development can be funded while sustaining dividends and managing debt.
- Progress and possible financial impact of the antitrust investigations and litigation, and developments in Argentina’s currency and inflation environment.