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CNK > SEC Filings for CNK > Form 10-Q on 7-May-2012All Recent SEC Filings

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Form 10-Q for CINEMARK HOLDINGS, INC.


7-May-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and related notes and schedules included elsewhere in this report.

We are a leader in the motion picture exhibition industry, with theatres in the U.S., Brazil, Mexico, Argentina, Chile, Colombia, Peru, Ecuador, Honduras, El Salvador, Nicaragua, Costa Rica, Panama and Guatemala. As of March 31, 2012, we managed our business under two reportable operating segments-U.S. markets and international markets. See Note 16 to our condensed consolidated financial statements.

We generate revenues primarily from box office receipts and concession sales with additional revenues from screen advertising sales and other revenue streams, such as vendor marketing promotions and electronic video games located in some of our theatres. Our contracts with NCM have assisted us in expanding our offerings to domestic advertisers and broadening ancillary revenue sources such as digital video monitor advertising, third party branding, and the use of our domestic theatres for alternative entertainment, such as live and pre-recorded sports programs, concert events, the opera, special live documentaries and other cultural events. Films leading the box office during the three months ended March 31, 2012 included The Hunger Games, Dr. Suess' The Lorax, Wrath of the Titans, The Vow, Safe House, 21 Jump Street and Journey 2:
The Mysterious Island, among other films. Our revenues are affected by changes in attendance and average admissions and concession revenues per patron. Attendance is primarily affected by the quality and quantity of films released by motion picture studios. Films currently scheduled for release during the remainder of 2012 include sequels such as Men in Black 3, Madagascar 3: Europe's Most Wanted, Ice Age: Continental Drift, The Dark Knight Rises, The Bourne Legacy and The Twilight Saga: Breaking Dawn Part 2 and highly anticipated original titles such as The Avengers, The Hobbit: An Unexpected Journey, and Life of Pi, among other films.

Film rental costs are variable in nature and fluctuate with our admissions revenues. Film rental costs as a percentage of revenues are generally higher for periods in which more blockbuster films are released. Film rental costs can also vary based on the length of a film's run. Film rental rates are generally negotiated on a film-by-film and theatre-by-theatre basis. Advertising costs, which are expensed as incurred, are primarily fixed at the theatre level as daily movie directories placed in newspapers represent the largest component of advertising costs. The monthly cost of these advertisements is based on, among other things, the size of the directory and the frequency and size of the newspaper's circulation.

Concession supplies expense is variable in nature and fluctuates with our concession revenues. We purchase concession supplies to replace units sold. We negotiate prices for concession supplies directly with concession vendors and manufacturers to obtain volume rates.

Although salaries and wages include a fixed cost component (i.e. the minimum staffing costs to operate a theatre facility during non-peak periods), salaries and wages move in relation to revenues as theatre staffing is adjusted to respond to changes in attendance.

Facility lease expense is primarily a fixed cost at the theatre level as most of our facility leases require a fixed monthly minimum rent payment. Certain of our leases are subject to percentage rent only while others are subject to percentage rent in addition to their fixed monthly rent if a target annual revenue level is achieved. Facility lease expense as a percentage of revenues is also affected by the number of theatres under operating leases, the number of theatres under capital leases and the number of fee-owned theatres.

Utilities and other costs include certain costs that have both fixed and variable components such as utilities, property taxes, janitorial costs, repairs and maintenance and security services.


Table of Contents

Results of Operations

The following table sets forth, for the periods indicated, certain operating
data and the percentage of revenues represented by certain items reflected in
our condensed consolidated statements of income:



                                                           Three Months Ended
                                                                March 31,
     Operating data (in millions):                         2012           2011
     Revenues
     Admissions                                          $   373.8      $  311.7
     Concession                                              179.8         146.7
     Other                                                    25.2          24.7

     Total revenues                                      $   578.8      $  483.1
     Cost of operations
     Film rentals and advertising                            195.4         165.2
     Concession supplies                                      28.5          23.3
     Salaries and wages                                       58.5          50.1
     Facility lease expense                                   68.5          66.4
     Utilities and other                                      66.5          59.8
     General and administrative expenses                      34.1          29.0
     Depreciation and amortization                            36.8          39.1
     Impairment of long-lived assets                           0.2           1.0
     Loss on sale of assets and other                          0.8           0.5

     Total cost of operations                                489.3         434.4

     Operating income                                    $    89.5      $   48.7

     Operating data as a percentage of total revenues:
     Revenues
     Admissions                                               64.6 %        64.5 %
     Concession                                               31.1 %        30.4 %
     Other                                                     4.3 %         5.1 %

     Total revenues                                          100.0 %       100.0 %

     Cost of operations (1)
     Film rentals and advertising                             52.3 %        53.0 %
     Concession supplies                                      15.9 %        15.9 %
     Salaries and wages                                       10.1 %        10.4 %
     Facility lease expense                                   11.8 %        13.7 %
     Utilities and other                                      11.5 %        12.4 %
     General and administrative expenses                       5.9 %         6.0 %
     Depreciation and amortization                             6.4 %         8.1 %
     Impairment of long-lived assets                           0.0 %         0.2 %
     Loss on sale of assets and other                          0.1 %         0.1 %
     Total cost of operations                                 84.5 %        89.9 %
     Operating income                                         15.5 %        10.1 %

     Average screen count (month end average)                5,169         4,941

     Revenues per average screen (dollars)               $ 112,011      $ 97,791

(1) All costs are expressed as a percentage of total revenues, except film rentals and advertising, which are expressed as a percentage of admissions revenues and concession supplies, which are expressed as a percentage of concession revenues.


Table of Contents

Three months ended March 31, 2012 versus March 31, 2011

Revenues. Total revenues increased $95.7 million to $578.8 million for the three months ended March 31, 2012 ("first quarter of 2012") from $483.1 million for the three months ended March 31, 2011 ("first quarter of 2011"), representing a 19.8% increase. The table below, presented by reportable operating segment, summarizes our year-over-year revenue performance and certain key performance indicators that impact our revenues.

                                            U.S. Operating Segment                International Operating Segment                     Consolidated
                                              Three Months Ended                        Three Months Ended                         Three Months Ended
                                                  March 31,                                  March 31,                                  March 31,
                                                                   %                                              %                                     %
                                         2012        2011       Change          2012              2011         Change         2012        2011       Change
Admissions revenues(1)                 $  266.6     $ 213.6        24.8 %    $     107.2       $      98.1         9.3 %     $ 373.8     $ 311.7        19.9 %
Concession revenues(1)                 $  131.3     $ 104.8        25.3 %    $      48.5       $      41.9        15.8 %     $ 179.8     $ 146.7        22.6 %
Other revenues(1)(2)                   $   11.1     $  10.3         7.8 %    $      14.1       $      14.4        (2.1 )%    $  25.2     $  24.7         2.0 %
Total revenues (1)(2)                  $  409.0     $ 328.7        24.4 %    $     169.8       $     154.4        10.0 %     $ 578.8     $ 483.1        19.8 %
Attendance(1)                              39.8        33.4        19.2 %           21.7              20.4         6.4 %        61.5        53.8        14.3 %

(1) Amounts in millions.

(2) U.S. operating segment revenues include eliminations of intercompany transactions with the international operating segment. See Note 16 of our condensed consolidated financial statements.

U.S. The increase in admissions revenues of $53.0 million was attributable to a 19.2% increase in attendance and a 4.7% increase in average ticket price from $6.40 for the first quarter of 2011 to $6.70 for the first quarter of 2012. The increase in concession revenues of $26.5 million was attributable to the 19.2% increase in attendance and a 5.1% increase in concession revenues per patron from $3.14 for the first quarter of 2011 to $3.30 for the first quarter of 2012. The increase in attendance was primarily due to the solid slate of films released during the first quarter of 2012, including the unexpectedly strong performance of The Hunger Games and Dr. Seuss' The Lorax. The increase in average ticket price was primarily due to incremental 3-D and premium pricing and other price increases. The increase in concession revenues per patron was primarily due to incremental sales and price increases.

International. The increase in admissions revenues of $9.1 million was attributable to a 6.4% increase in attendance and a 2.7% increase in average ticket price from $4.81 for the first quarter of 2011 to $4.94 for the first quarter of 2012. The increase in concession revenues of $6.6 million was attributable to the 6.4% increase in attendance and a 9.3% increase in concession revenues per patron from $2.05 for the first quarter of 2011 to $2.24 for the first quarter of 2012. The increase in attendance was due to new theatres, including the ten theatres in Argentina acquired during August 2011. The increase in average ticket price was primarily due to price increases and an increase in the mix of 3-D and premium tickets sold. The increase in concession revenues per patron was primarily due to price increases.

Cost of Operations. The table below summarizes certain of our year-over-year theatre operating costs by reportable operating segment (in millions).

                                                                         International  Operating
                                        U.S. Operating Segment                    Segment                     Consolidated
                                          Three Months Ended                Three Months Ended             Three Months Ended
                                              March  31,                        March  31,                     March  31,
                                        2012              2011            2012              2011            2012          2011
Film rentals and advertising         $     144.1       $     116.2     $      51.3       $      49.0     $    195.4      $ 165.2
Concession supplies                         16.9              12.6            11.6              10.7           28.5         23.3
Salaries and wages                          41.6              37.9            16.9              12.2           58.5         50.1
Facility lease expense                      47.7              45.7            20.8              20.7           68.5         66.4
Utilities and other                         44.3              39.9            22.2              19.9           66.5         59.8

U.S. Film rentals and advertising costs were $144.1 million, or 54.1% of admissions revenues, for the first quarter of 2012 compared to $116.2 million, or 54.4% of admissions revenues, for the first quarter of 2011. The increase in film rentals and advertising costs of $27.9 million was due to the $53.0 million increase in admissions revenues, partially offset by a slight decrease in the film rentals and advertising rate. Concession supplies expense was $16.9 million, or 12.9% of concession revenues, for the first quarter of 2012 compared to $12.6 million, or 12.0% of concession revenues, for the first quarter of 2011. The increase in the concession supplies rate was primarily due to increases in inventory procurement costs.


Table of Contents

Salaries and wages increased to $41.6 million for the first quarter of 2012 from $37.9 million for the first quarter of 2011 primarily due to increased staffing levels to support the 19.2% increase in attendance. Facility lease expense increased to $47.7 million for the first quarter of 2012 from $45.7 million for the first quarter of 2011 primarily due to new theatres and increased percentage rent resulting from the 24.4% increase in total revenues. Utilities and other costs increased to $44.3 million for the first quarter of 2012 from $39.9 million for the first quarter of 2011 primarily due to increased expenses related to digital and 3-D equipment and increased repairs and maintenance expenses.

International. Film rentals and advertising costs were $51.3 million, or 47.9% of admissions revenues, for the first quarter of 2012 compared to $49.0 million, or 49.9% of admissions revenues, for the first quarter of 2011. The decrease in the film rentals and advertising rate was primarily due to the lack of blockbuster films during the first quarter of 2012, as The Hunger Games and Dr. Seuss' The Lorax did not perform as well internationally. Concession supplies expense was $11.6 million, or 23.9% of concession revenues, for the first quarter of 2012 compared to $10.7 million, or 25.5% of concession revenues, for the first quarter of 2011. The decrease in the concession supplies rate was primarily due to the mix of products sold during the first quarter of 2012 compared to 2011 and the impact from concession sales price increases.

Salaries and wages increased to $16.9 million for the first quarter of 2012 from $12.2 million for the first quarter of 2011 primarily due to new theatres, including the ten theatres in Argentina acquired in August 2011, and increased wage rates. Facility lease expense increased to $20.8 million for the first quarter of 2012 from $20.7 million for the first quarter of 2011 primarily due to new theatres, including the ten theatres in Argentina acquired in August 2011, partially offset by decreased percentage rent. Utilities and other costs increased to $22.2 million for the first quarter of 2012 from $19.9 million for the first quarter of 2011 primarily due to new theatres, including the ten theatres in Argentina acquired in August 2011, and increased repairs and maintenance expenses.

General and Administrative Expenses. General and administrative expenses increased to $34.1 million for the first quarter of 2012 from $29.0 million for the first quarter of 2011. The increase was primarily due to increased salaries and incentive compensation expense of approximately $2.0 million, increased share based awards compensation expense of approximately $1.3 million and additional overhead expenses associated with the ten theatres in Argentina acquired in August 2011.

Depreciation and Amortization. Depreciation and amortization expense, including amortization of favorable/unfavorable leases, was $36.8 million during the first quarter of 2012 compared to $39.1 million during the first quarter of 2011. Depreciation and amortization expense for the three months ended March 31, 2011 included approximately $3.5 million related to the accelerated depreciation on the Company's domestic 35-millimeter projection systems that became fully depreciated as of September 30, 2011.

Impairment of Long-Lived Assets. We recorded asset impairment charges on assets held and used of $0.2 million during the first quarter of 2012 compared to $1.0 million during the first quarter of 2011. Impairment charges for the first quarter of 2012 consisted of U.S. and international theatre properties, impacting four of our twenty-four reporting units. Impairment charges for the first quarter of 2011 consisted of U.S. and international theatre properties, impacting nine of our twenty-four reporting units. The long-lived asset impairment charges recorded during each of the periods presented were specific to theatres that were directly and individually impacted by increased competition, adverse changes in market demographics or adverse changes in the development or the conditions of the areas surrounding the theatre. See Note 12 to our condensed consolidated financial statements.

Loss on Sale of Assets and Other. We recorded a loss on sale of assets and other of $0.8 million during the first quarter of 2012 compared to $0.5 million during the first quarter of 2011. The loss recorded during the first quarter of 2012 was primarily a result of theatre remodels and the retirement of certain theatre equipment that was replaced during the period.

Interest Expense. Interest costs incurred, including amortization of debt issue costs, were $32.1 million during the first quarter of 2012 compared to $29.3 million during the first quarter of 2011. The increase was primarily due to the refinancing of the $157.2 million unextended portion of our term loan debt outstanding in June 2011 with $200 million of 7.375% senior subordinated notes due 2021. See Note 4 to our condensed consolidated financial statements for further discussion of our long-term debt.


Table of Contents

Distributions from NCM. We recorded distributions from NCM of $8.0 million during the first quarter of 2012 compared to $9.9 million during the first quarter of 2011, which were in excess of the carrying value of our Tranche 1 investment. See Note 6 to our condensed consolidated financial statements.

Equity in Income of Affiliates. We recorded equity in income of affiliates of $1.8 million during the first quarter of 2012 compared to $2.4 million during the first quarter of 2011. The equity in income of affiliates recorded during the first quarter of 2012 primarily consisted of income of approximately $0.7 million related to our equity investment in NCM (see Note 6 to our condensed consolidated financial statements) and income of approximately $1.1 million related to our equity investment in DCIP (see Note 7 to our condensed consolidated financial statements). The equity in income of affiliates recorded during the first quarter of 2011 primarily included income of approximately $1.7 million related to our equity investment in DCIP and income of approximately $0.9 million related to our equity investment in NCM.

Income Taxes. Income tax expense of $27.9 million was recorded for the first quarter of 2012 compared to $9.0 million for the first quarter of 2011. The effective tax rate was 39.4% for the first quarter of 2012 compared to 26.3% for the first quarter of 2011. Income tax provisions for interim (quarterly) periods are based on estimated annual income tax rates and are adjusted for the effects of significant, infrequent or unusual items (i.e. discrete items) occurring during the interim period. As a result, the interim rate may vary significantly from the normalized annual rate. During the first quarter of 2011, the Company reduced its liabilities for uncertain tax positions due to the settlements and closures of various tax years, which resulted in a tax benefit of approximately $3.6 million that impacted the effective tax rate for the period.

Liquidity and Capital Resources

Operating Activities

We primarily collect our revenues in cash, mainly through box office receipts and the sale of concessions. In addition, a majority of our theatres provide the patron a choice of using a credit card or debit card in place of cash. Because our revenues are received in cash prior to the payment of related expenses, we have an operating "float" and historically have not required traditional working capital financing. Cash provided by operating activities was $97.7 million for the three months ended March 31, 2012 compared to $61.0 million for the three months ended March 31, 2011. The increase in cash provided by operating activities was primarily due to the increased earnings.

Investing Activities

Our investing activities have been principally related to the development and acquisition of theatres. New theatre openings and acquisitions historically have been financed with internally generated cash and by debt financing, including borrowings under our senior secured credit facility. Cash used for investing activities was $61.3 million for the three months ended March 31, 2012 compared to $35.9 million for the three months ended March 31, 2011. The increase in cash used for investing activities was primarily due to the acquisition of a theatre in the U.S. for approximately $14.1 million and an increase in capital expenditures.

Capital expenditures for the three months ended March 31, 2012 and 2011 were as follows (in millions):

                                                New          Existing
         Period                               Theatres       Theatres      Total
         Three Months Ended March 31, 2012   $     18.4     $     28.6     $ 47.0
         Three Months Ended March 31, 2011   $     11.3     $     24.5     $ 35.8

We continue to invest in our U.S. theatre circuit. We acquired one theatre with 16 screens and added one screen to an existing theatre during the three months ended March 31, 2012, bringing our total domestic screen count to 3,895 as of March 31, 2012. At March 31, 2012, we had signed commitments to open four new theatres with 57 screens in domestic markets during the remainder of 2012 and open eight new theatres with 104 screens subsequent to 2012. We estimate the remaining capital expenditures for the development of these 161 domestic screens will be approximately $101.0 million. Actual expenditures for continued theatre development and acquisitions are subject to change based upon the availability of attractive opportunities.


Table of Contents

We also continue to invest in our international theatre circuit. We built two new theatres and 12 screens during the three months ended March 31, 2012, bringing our total international screen count to 1,286 as of March 31, 2012. At March 31, 2012, we had signed commitments to open seven new theatres with 50 screens in international markets during the remainder of 2012 and open four new theatres with 28 screens subsequent to 2012. We estimate the remaining capital expenditures for the development of these 78 international screens will be approximately $81.0 million. Actual expenditures for continued theatre development and acquisitions are subject to change based upon the availability of attractive opportunities.

We plan to fund capital expenditures for our continued development with cash flow from operations, borrowings under our senior secured credit facility, and proceeds from debt issuances, sale leaseback transactions and/or sales of excess real estate.

Financing Activities

Cash used for financing activities was $32.2 million for the three months ended March 31, 2012 compared to $28.7 million for the three months ended March 31, 2011.

We may from time to time, subject to compliance with our debt instruments, purchase our debt securities on the open market depending upon the availability and prices of such securities. Long-term debt consisted of the following as of March 31, 2012 (in millions):

     Cinemark, USA, Inc. term loan                                  $   903.6
     Cinemark USA, Inc. 8 5/8% senior notes due 2019 (1)                460.8
     Cinemark USA, Inc. 7 3/8% senior subordinated notes due 2021       200.0
     Hoyts General Cinema (Argentina) bank loan due 2013                  4.9

     Total long-term debt                                           $ 1,569.3
     Less current portion                                                12.1

     Long-term debt, less current portion                           $ 1,557.2

(1) Includes the $470.0 million aggregate principal amount of the 8.625% senior notes before the original issue discount, which was $9.2 million as of March 31, 2012.

As of March 31, 2012, we had $150.0 million in available borrowing capacity on our revolving credit line.

Cinemark USA, Inc. Senior Secured Credit Facility

On October 5, 2006, in connection with the Century Acquisition, Cinemark USA, Inc. entered into a senior secured credit facility that provided for a $1.12 billion term loan and a $150 million revolving credit line. On March 2, 2010, Cinemark USA, Inc. completed an amendment and extension to the senior secured credit facility to primarily extend the maturities of the facility and make certain other modifications. Approximately $924.4 million of Cinemark USA, Inc.'s then remaining outstanding $1,083.6 million term loan debt was extended from an original maturity date of October 2013 to a maturity date of April 2016. The then remaining term loan debt of $159.2 million that was not extended continued to have a maturity date of October 2013. On June 3, 2011, Cinemark USA, Inc. prepaid the remaining $157.2 million of its unextended term loan debt utilizing a portion of the proceeds from the issuance of the Cinemark USA, Inc. 7.375% senior subordinated notes discussed below. There were no prepayment penalties incurred upon the prepayment of the term loan debt. Subsequent to the prepayment, the quarterly payments due on the term loan are approximately $2.3 million per quarter through March 2016 with the remaining principal amount of approximately $866.6 million due April 30, 2016.

The prepayment did not impact the interest rate applicable to the remaining portion of the term loan debt, which accrues interest at Cinemark USA, Inc.'s option at: (A) the base rate equal to the higher of (1) the prime lending rate as set forth on the British Banking Association Telerate page 5, or (2) the federal funds effective rate from time to time plus 0.50%, plus a 2.25% margin per annum, or (B) a "Eurodollar rate" plus a 3.25% margin per annum.

The prepayment did not impact the interest rates applicable to or the maturity of Cinemark USA, Inc.'s revolving credit line. The maturity date of $73.5 . . .

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