Cinemark Holdings, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Cinemark operates movie theatres in the U.S. and Latin America. Unless otherwise stated, amounts below are in millions of dollars. Comparisons are with the corresponding 2017 period.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $754.2 | $710.7 | $2,423.3 | $2,241.6 |
| Operating income | $82.7 | $74.2 | $311.6 | $303.6 |
| Operating margin | 11.0% | 10.4% | 12.9% | 13.5% |
| Net income attributable to Cinemark | $50.2 | $38.1 | $194.4 | $169.1 |
| Diluted EPS | $0.43 | $0.33 | $1.66 | $1.45 |
| Adjusted EBITDA | $168.4 | $153.7 | $583.4 | $536.2 |
Revenue rose 6.1% in Q3 and 8.1% year to date. U.S. segment revenue grew 14.0% in Q3 and 15.1% year to date; international revenue fell 14.1% and 11.1%, respectively, as reported, with foreign exchange a significant factor. Q3 consolidated attendance increased 3.7%; year-to-date attendance rose 1.8%.
Reported revenue comparisons are affected by adoption of ASC 606 on January 1, 2018; prior periods were not restated. The accounting change increased other revenue by $25.8 million in Q3 and $86.0 million year to date, partly offset by deferrals of admissions and concession revenue. Thus, reported growth is not solely a measure of underlying operating growth.
Q3 operating margin improved, while the nine-month margin declined. For the nine months, operating income before taxes fell to $254.9 million from $269.0 million, but lower income tax expense supported higher net income. The effective tax rate was 23.4% versus 36.6%; the 2018 period benefited from the lower U.S. corporate tax rate and a $7.1 million benefit from settling Chilean tax audits.
Cash flow, debt and liquidity
- Operating cash flow: $350.1 million for the first nine months, up from $311.7 million.
- Investing cash flow: $352.5 million used, including $246.0 million of theatre capital expenditures and $78.4 million to purchase additional NCM units. Capital expenditures were $262.7 million in the prior-year period.
- Financing cash flow: $144.5 million used, including $112.1 million of dividends paid. Cash declined by $155.8 million to $366.8 million from year-end 2017.
- Debt: $1.812 billion of long-term debt before unamortized discounts and issuance costs; capital lease obligations totaled $254.5 million. Cash less reported debt implies net debt of approximately $1.45 billion, excluding capital leases.
- Available liquidity: $100 million remained available on the revolving credit line, with no revolver borrowings outstanding. Management reported compliance with debt covenants.
- Dividend: $0.32 per share declared in Q3, compared with $0.29 a year earlier. Management said regular quarterly dividends are anticipated, subject to board discretion, cash needs, debt restrictions and other factors.
In March 2018, Cinemark amended its senior secured credit facility, extending the term loan maturity to March 2025 and reducing its interest-rate margin by 0.25 percentage point. The term loan’s average rate was approximately 4.0% at quarter-end. Management estimated that a 100-basis-point rate increase would add approximately $6.5 million to annual interest expense on variable-rate debt.
Material changes, outlook and risks
- U.S. Q3 attendance increased 7.6%, attributed to a stronger film slate and luxury lounger conversions. International attendance declined 2.2%, which management attributed to weaker film appeal; currency movements also reduced reported international revenue and per-patron metrics.
- Management cited price increases, higher concession sales per patron and expanded concession offerings as contributors to U.S. performance. Higher wages, utilities and depreciation, as well as film mix, contributed to cost increases.
- The company had signed development commitments for 126 domestic screens and 100 international screens. Estimated remaining development capital expenditures were approximately $95 million and $50 million, respectively. Management expects to fund development with operating cash flow and financing sources. No specific full-year earnings or revenue guidance is provided.
- Loss on disposal of assets and other increased to $28.7 million for the nine months from $9.5 million, mainly due to theatre-remodel asset retirements and a litigation reserve. The filing does not provide a clear value for that reserve. In a California antitrust case, a jury awarded damages on one claim, subject to trebling; Cinemark intends to appeal. The company also disclosed federal and state antitrust investigations and said it cannot predict their scope or outcome.
- Argentina was treated as a highly inflationary economy beginning July 1, 2018, requiring financial results to be remeasured in U.S. dollars. Foreign currency translation reduced nine-month other comprehensive income by $66.8 million, including $42.6 million related to Brazil and $18.3 million related to Argentina.
- Operating lease accounting changes are scheduled for adoption in Q1 2019. The company expects recognition of right-of-use assets and lease liabilities for operating leases, principally leased theatres and equipment; the filing does not quantify the impact.
Important facts for investors to verify
- How much of reported revenue growth reflects ASC 606 presentation changes versus attendance, pricing and other operating trends.
- The ultimate cost and appeal outcome of the California antitrust verdict, and developments in the government antitrust investigations.
- International performance after separating local-currency operating trends from exchange-rate effects, particularly in Argentina.
- Capital spending against the announced development commitments, and the effect on cash, debt and dividend capacity.
- The eventual balance-sheet and earnings effects of lease-accounting adoption and any remaining provisional tax estimates.