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CNK > SEC Filings for CNK > Form 10-Q on 7-May-2013All Recent SEC Filings

Show all filings for CINEMARK HOLDINGS, INC.

Form 10-Q for CINEMARK HOLDINGS, INC.


7-May-2013

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, 2013, we managed our business under two reportable operating segments - U.S. markets and international markets. See Note 18 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, meeting rentals 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, and other special presentations. Our revenues are affected by changes in attendance and concession revenues per patron. Attendance is primarily affected by the quality and quantity of films released by motion picture studios. Films leading the box office during the three months ended March 31, 2013 included Oz: The Great and Powerful, Identity Thief, Silver Linings Playbook, Zero Dark Thirty, G.I. Joe: Retaliation, The Croods and Django Unchained, among other films. Films currently scheduled for release during the remainder of 2013 include sequels such as The Hunger Games: Catching Fire, The Hobbit: The Desolation of Smaug, Iron Man 3, The Hangover 3, Monsters University, Despicable Me 2, Star Trek Into Darkness and Fast & Furious 6 and highly anticipated original titles such as Man of Steel, Oblivion, Pacific Rim, Frozen, Lone Ranger and World War Z, 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.


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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
    Operating data (in millions):                               March 31,
                                                          2013            2012
    Revenues
    Admissions                                          $   349.4       $   373.8
    Concession                                              172.4           179.8
    Other                                                    26.0            25.2

    Total revenues                                      $   547.8       $   578.8
    Cost of operations
    Film rentals and advertising                            180.0           195.4
    Concession supplies                                      28.0            28.5
    Salaries and wages                                       58.5            58.5
    Facility lease expense                                   69.6            68.5
    Utilities and other                                      68.8            66.5
    General and administrative expenses                      37.8            34.1
    Depreciation and amortization                            39.0            36.8
    Impairment of long-lived assets                           0.8             0.2
    (Gain) loss on sale of assets and other                  (0.3 )           0.8

    Total cost of operations                                482.2           489.3

    Operating income                                    $    65.6       $    89.5

    Operating data as a percentage of total revenues:
    Revenues
    Admissions                                               63.8 %          64.6 %
    Concession                                               31.5 %          31.1 %
    Other                                                     4.7 %           4.3 %

    Total revenues                                          100.0 %         100.0 %

    Cost of operations (1)
    Film rentals and advertising                             51.5 %          52.3 %
    Concession supplies                                      16.2 %          15.9 %
    Salaries and wages                                       10.7 %          10.1 %
    Facility lease expense                                   12.7 %          11.8 %
    Utilities and other                                      12.6 %          11.5 %
    General and administrative expenses                       6.9 %           5.9 %
    Depreciation and amortization                             7.1 %           6.4 %
    Impairment of long-lived assets                           0.1 %           0.0 %
    (Gain) loss on sale of assets and other                  (0.1 )%          0.1 %
    Total cost of operations                                 88.0 %          84.5 %
    Operating income                                         12.0 %          15.5 %

    Average screen count (month end average)                5,249           5,169

    Revenues per average screen (dollars)               $ 104,368       $ 112,011

(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.


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Three months ended March 31, 2013 versus March 31, 2012

Revenues. Total revenues decreased $31.0 million to $547.8 million for the three months ended March 31, 2013 ("first quarter of 2013") from $578.8 million for the three months ended March 31, 2012 ("first quarter of 2012"), representing a 5.4% decrease. 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,
                                                                  %                                               %                                    %
                                        2013        2012       Change           2013              2012         Change        2013        2012       Change
Admissions revenues(1)                 $ 234.6     $ 266.6       (12.0 )%    $     114.8       $     107.2         7.1 %    $ 349.4     $ 373.8        (6.5 )%
Concession revenues(1)                 $ 118.0     $ 131.3       (10.1 )%    $      54.4       $      48.5        12.2 %    $ 172.4     $ 179.8        (4.1 )%
Other revenues(1)(2)                   $  11.0     $  11.1        (0.9 )%    $      15.0       $      14.1         6.4 %    $  26.0     $  25.2         3.2 %
Total revenues (1)(2)                  $ 363.6     $ 409.0       (11.1 )%    $     184.2       $     169.8         8.5 %    $ 547.8     $ 578.8        (5.4 )%
Attendance(1)                             34.7        39.8       (12.8 )%           22.7              21.7         4.6 %       57.4        61.5        (6.7 )%

(1) Amounts in millions.

(2) U.S. operating segment revenues include eliminations of intercompany transactions with the international operating segment. See Note 18 of our condensed consolidated financial statements.

U.S. The decrease in admissions revenues of $32.0 million was attributable to a 12.8% decrease in attendance partially offset by a 0.9% increase in average ticket price from $6.70 for the first quarter of 2012 to $6.76 for the first quarter of 2013. The decrease in concession revenues of $13.3 million was attributable to the 12.8% decrease in attendance partially offset by a 3.0% increase in concession revenues per patron from $3.30 for the first quarter of 2012 to $3.40 for the first quarter of 2013. The decrease in attendance was primarily due to fewer blockbuster films released during the first quarter of 2013 compared to the films released during the first quarter of 2012, which included The Hunger Games and Dr. Seuss' The Lorax. The increase in concession revenues per patron was primarily due to incremental sales and price increases.

International. The increase in admissions revenues of $7.6 million was attributable to a 4.6% increase in attendance and a 2.4% increase in average ticket price from $4.94 for the first quarter of 2012 to $5.06 for the first quarter of 2013. The increase in concession revenues of $5.9 million was attributable to the 4.6% increase in attendance and a 7.1% increase in concession revenues per patron from $2.24 for the first quarter of 2012 to $2.40 for the first quarter of 2013. The increase in attendance was primarily due to new theatres. The increase in average ticket price was primarily due to price increases. The increase in concession revenues per patron was primarily due to incremental sales and price increases.

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

                                            U.S. Operating Segment             International Operating Segment              Consolidated
                                              Three Months Ended                     Three Months Ended                  Three Months Ended
                                                  March  31,                              March 31,                          March  31,
                                            2013              2012              2013                    2012              2013          2012
Film rentals and advertising             $     124.6       $     144.1     $          55.4         $          51.3     $    180.0      $ 195.4
Concession supplies                             15.8              16.9                12.2                    11.6           28.0         28.5
Salaries and wages                              39.7              41.6                18.8                    16.9           58.5         58.5
Facility lease expense                          46.9              47.7                22.7                    20.8           69.6         68.5
Utilities and other                             42.8              44.3                26.0                    22.2           68.8         66.5

U.S. Film rentals and advertising costs were $124.6 million, or 53.1% of admissions revenues, for the first quarter of 2013 compared to $144.1 million, or 54.1% of admissions revenues, for the first quarter of 2012. The decrease in film rentals and advertising costs of $19.5 million was due to the $32.0 million decrease in admissions revenues and a decrease in the film rentals and advertising rate. The decrease in the film rentals and advertising rate was primarily due to fewer blockbuster films released during the first quarter of 2013 compared to the first quarter of 2012. Concession supplies expense was $15.8 million, or 13.4% of concession revenues, for the first quarter of 2013 compared to $16.9 million, or 12.9% of concession revenues, for the first quarter of 2012. The increase in the concession supplies rate was primarily due to increases in inventory procurement costs.


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Salaries and wages decreased to $39.7 million for the first quarter of 2013 from $41.6 million for the first quarter of 2012 primarily due to decreased staffing levels related to the 12.8% decrease in attendance. Facility lease expense decreased to $46.9 million for the first quarter of 2013 from $47.7 million for the first quarter of 2012 primarily due to a decrease in percentage rent expense. Utilities and other costs decreased to $42.8 million for the first quarter of 2013 from $44.3 million for the first quarter of 2012 primarily due to decreases in utility costs, property taxes and 3D equipment rental fees, partially offset by increased security expenses.

International. Film rentals and advertising costs were $55.4 million, or 48.3% of admissions revenues, for the first quarter of 2013 compared to $51.3 million, or 47.9% of admissions revenues, for the first quarter of 2012. Concession supplies expense was $12.2 million, or 22.4% of concession revenues, for the first quarter of 2013 compared to $11.6 million, or 23.9% of concession revenues, for the first quarter of 2012. The decrease in the concession supplies rate is due to the mix of products sold during the first quarter of 2013 compared to the first quarter of 2012 and the impact of concession price increases.

Salaries and wages increased to $18.8 million for the first quarter of 2013 from $16.9 million for the first quarter of 2012 primarily due to increased wage rates and new theatres. Facility lease expense increased to $22.7 million for the first quarter of 2013 from $20.8 million for the first quarter of 2012 primarily due to increased percentage rent expense. Utilities and other costs increased to $26.0 million for the first quarter of 2013 from $22.2 million for the first quarter of 2012 primarily due to increased property taxes and travel expenses.

General and Administrative Expenses. General and administrative expenses increased to $37.8 million for the first quarter of 2013 from $34.1 million for the first quarter of 2012. The increase was primarily due to increased salaries and incentive compensation expense of approximately $1.8 million and increased professional fees of approximately $1.5 million, which was primarily related to the Rave Acquisition (see Note 6 to the condensed consolidated financial statements.)

Depreciation and Amortization. Depreciation and amortization expense was $39.0 million during the first quarter of 2013 compared to $36.8 million during the first quarter of 2012. The increase was primarily due to new theatres.

Impairment of Long-Lived Assets. We recorded asset impairment charges on assets held and used of $0.8 million during the first quarter of 2013 compared to $0.2 million during the first quarter of 2012. Impairment charges for the first quarter of 2013 consisted of U.S. and international theatre properties, impacting three of our twenty-four reporting units. Impairment charges for the first quarter of 2012 consisted of U.S. and international theatre properties, impacting four 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 14 to our condensed consolidated financial statements.

(Gain) Loss on Sale of Assets and Other. We recorded a gain on sale of assets and other of $0.3 million during the first quarter of 2013 compared to a loss of $0.8 million during the first quarter of 2012.

Interest Expense. Interest costs incurred, including amortization of debt issue costs, were $32.6 million during the first quarter of 2013 compared to $32.1 million during the first quarter of 2012. The increase was primarily due to the issuance of senior notes in December of 2012 partially offset by the lower senior secured credit facility level and the expiration of two interest rate swap agreements. See Note 5 to our condensed consolidated financial statements for further discussion of our recent long-term debt activity.

Distributions from NCM. We recorded distributions from NCM of $6.1 million during the first quarter of 2013 compared to $8.0 million during the first quarter of 2012, which were in excess of the carrying value of our Tranche 1 investment. See Note 8 to our condensed consolidated financial statements.

Equity in Income of Affiliates. We recorded equity in income of affiliates of $2.4 million during the first quarter of 2013 compared to $1.8 million during the first quarter of 2012. The equity in income of affiliates recorded during the first quarter of 2013 primarily consisted of income of approximately $1.5 million related to our equity investment in DCIP (see Note 9 to our condensed consolidated financial statements) and income of approximately $0.9 million related


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to our equity investment in NCM (see Note 8 to our condensed consolidated financial statements). The equity in income of affiliates recorded during the first quarter of 2012 primarily consisted of income of approximately $1.1 million related to our equity investment in DCIP and income of approximately $0.7 million related to our equity investment in NCM.

Income Taxes. Income tax expense of $10.6 million was recorded for the first quarter of 2013 compared to $27.9 million for the first quarter of 2012. The effective tax rate was approximately 24.3% for the first quarter of 2013 compared to 39.4% for the first quarter of 2012. 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. The effective tax rate for the three months ended March 31, 2013 reflects the impact of items related to our Mexico subsidiaries.

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 $42.6 million for the three months ended March 31, 2013 compared to $97.7 million for the three months ended March 31, 2012. The decrease in cash provided by operating activities was primarily due to a higher level of accounts payable and accrued expense payments made during the three months ended March 31, 2013 compared to the three months ended March 31, 2012. Revenues generated during the latter part of 2012 were significantly higher than the latter part of 2011, resulting in higher levels of accounts payable and accrued expenses at December 31, 2012 compared to December 31, 2011.

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 $31.2 million for the three months ended March 31, 2013 compared to $61.3 million for the three months ended March 31, 2012. The decrease in cash used for investing activities was primarily due to the acquisition of a theatre in the U.S. in the first quarter of 2012 for approximately $14.1 million and decreased capital expenditures.

Capital expenditures for the three months ended March 31, 2013 and 2012 were as follows (in millions):

                                                New          Existing
         Period                               Theatres       Theatres      Total
         Three Months Ended March 31, 2013   $     15.9     $     21.0     $ 36.9
         Three Months Ended March 31, 2012   $     18.4     $     28.6     $ 47.0

During November 2012, we entered into an asset purchase agreement with Rave Real Property Holdco, LLC and certain of its subsidiaries, Rave Cinemas, LLC and RC Processing, LLC (collectively "Rave"), pursuant to which we will acquire 32 theatres with 483 screens located in 12 states. The estimated purchase price is approximately $240.0 million. The purchase price, the amount of which is subject to certain closing date adjustments, will consist of cash consideration and the assumption of certain liabilities. The transaction is expected to close during the second quarter of 2013, subject to the satisfaction of customary closing conditions for transactions of this type, including Department of Justice or Federal Trade Commission antitrust approval. We plan to use existing cash to fund the Rave acquisition.

We continue to invest in our U.S. theatre circuit, which consisted of 3,916 screens at March 31, 2013. At March 31, 2013, we had signed commitments to open ten new theatres with 119 screens in domestic markets during the remainder of 2013 and open six new theatres with 74 screens subsequent to 2013. We estimate the remaining capital expenditures for the development of these 193 domestic screens will be approximately $119 million. Actual expenditures for continued theatre development and acquisitions are subject to change based upon the availability of attractive opportunities.


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We also continue to invest in our international theatre circuit. We built two new theatres and 19 screens during the three months ended March 31, 2013, bringing our total international screen count to 1,343 as of March 31, 2013. At March 31, 2013, we had signed commitments to open 12 new theatres with 76 screens in international markets during the remainder of 2013 and open three new theatres with 23 screens subsequent to 2013. We estimate the remaining capital expenditures for the development of these 99 international screens will be approximately $88 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 $29.1 million for the three months ended March 31, 2013 compared to $32.2 million for the three months ended March 31, 2012.

We, at the discretion of the board of directors and subject to applicable law, anticipate paying regular quarterly dividends on our common stock. The amount, if any, of the dividends to be paid in the future will depend upon our then available cash, anticipated cash needs, overall financial condition, loan agreement restrictions as discussed below, future prospects for earnings and cash flows, as well as other relevant factors.

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, 2013 (in millions):

     Cinemark, USA, Inc. term loan                                  $   698.3
     Cinemark USA, Inc. 8.625% senior notes due 2019 (1)                461.7
     Cinemark USA, Inc. 5.125% senior subordinated notes due 2022       400.0
     Cinemark USA, Inc. 7.375% senior subordinated notes due 2021       200.0
     Hoyts General Cinema (Argentina) bank loan due 2013                  1.8

     Total long-term debt                                           $ 1,761.8
     Less current portion                                                 8.8

     Long-term debt, less current portion                           $ 1,753.0

(1) Includes the $470.0 million aggregate principal amount of the 8.625% senior notes before the original issue discount, which was $8.3 million as of March 31, 2013.

As of March 31, 2013, we had $100.0 million in available borrowing capacity on our revolving credit line.

Amended Senior Secured Credit Facility

On December 18, 2012, Cinemark USA, Inc. amended and restated its senior secured credit facility to include a seven year $700.0 million term loan and a five year $100.0 million revolving credit line, referred to herein as the Amended Senior Secured Credit Facility. The proceeds from the Amended Senior Secured Credit Facility, combined with a portion of the proceeds from the 5.125% Senior Notes discussed below, were used to refinance Cinemark USA, Inc.'s former senior secured credit facility. The term loan under the Amended Senior Secured Credit Facility matures in December 2019. The revolving credit line matures in December 2017. Quarterly principal payments in the amount of $1.75 million are due on the term loan through September 2019 with the remaining principal of $652.8 million due on December 18, 2019.

Interest on the term loan accrues 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 margin of 2.0% per annum, or (B) a "eurodollar rate" plus a margin of 3.0% per annum. Interest on the revolving credit line accrues, at Cinemark USA, Inc.'s option, at: (A) a base rate equal to the higher of (1) the prime lending rate as set forth on the British Banking . . .

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