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CNK > SEC Filings for CNK > Form 10-Q on 6-Aug-2013All Recent SEC Filings

Show all filings for CINEMARK HOLDINGS, INC.

Form 10-Q for CINEMARK HOLDINGS, INC.


6-Aug-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 June 30, 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 six months ended June 30, 2013 included Iron Man 3, Fast & Furious 6, Man of Steel, Star Trek Into Darkness, Oz: The Great and Powerful, Monsters University, Identity Thief, G.I. Joe: Retaliation, The Croods, The Great Gatsby and World War Z, 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, Despicable Me 2, The Wolverine, Thor: The Dark World, Cloudy with a Chance of Meatballs 2 and highly anticipated original titles such as Ender's Game, Walking with Dinosaurs, Jack Ryan, Monuments Men, The Secret Life of Walter Mitty and Frozen, 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.

Recent Developments

In conjunction with the Rave Acquisition (see Note 6 to the condensed consolidated financial statements), we are required to divest of three theatres pursuant to a Hold Separate Agreement with the Department of Justice. On July 17, 2013, we entered into a definitive agreement to sell these three theatres to Carmike Cinemas, Inc. The transaction, which is subject to approval by the Department of Justice, is expected to close during the third quarter of 2013.


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. On May 29, 2013, we completed the Rave Acquisition, which consisted of 32 theatres with 483 screens. The results of operations for these 32 theatres are reflected as of the date of acquisition.

                                              Three Months Ended                  Six Months Ended
Operating data (in millions):                      June 30,                           June 30,
                                            2013              2012             2013              2012
Revenues
Admissions                                $   464.5         $   418.1        $   813.9         $   791.9
Concession                                    228.7             201.4            401.1             381.2
Other                                          32.4              30.1             58.4              55.3

Total revenues                            $   725.6         $   649.6        $ 1,273.4         $ 1,228.4
Cost of operations
Film rentals and advertising                  257.4             227.3            437.4             422.7
Concession supplies                            37.0              31.8             65.0              60.2
Salaries and wages                             67.1              62.3            125.6             120.8
Facility lease expense                         76.1              71.6            145.7             140.2
Utilities and other                            76.4              69.6            145.1             136.1
General and administrative expenses            40.6              36.0             78.3              70.0
Depreciation and amortization                  38.7              36.3             77.8              73.2
Impairment of long-lived assets                 1.1               0.3              1.9               0.5
(Gain) loss on sale of assets and
other                                          (2.8 )             0.5             (3.1 )             1.3

Total cost of operations                      591.6             535.7          1,073.7           1,025.0

Operating income                          $   134.0         $   113.9        $   199.7         $   203.4

Operating data as a percentage of
total revenues:
Revenues
Admissions                                     64.0 %            64.4 %           63.9 %            64.5 %
Concession                                     31.5 %            31.0 %           31.5 %            31.0 %
Other                                           4.5 %             4.6 %            4.6 %             4.5 %

Total revenues                                100.0 %           100.0 %          100.0 %           100.0 %

Cost of operations (1)
Film rentals and advertising                   55.4 %            54.4 %           53.7 %            53.4 %
Concession supplies                            16.2 %            15.8 %           16.2 %            15.8 %
Salaries and wages                              9.2 %             9.6 %            9.9 %             9.8 %
Facility lease expense                         10.5 %            11.0 %           11.4 %            11.4 %
Utilities and other                            10.5 %            10.7 %           11.4 %            11.1 %
General and administrative expenses             5.6 %             5.5 %            6.1 %             5.7 %
Depreciation and amortization                   5.3 %             5.6 %            6.1 %             6.0 %
Impairment of long-lived assets                 0.2 %             0.0 %            0.2 %             0.0 %
(Gain) loss on sale of assets and
other                                          (0.4 )%            0.1 %           (0.2 )%            0.1 %
Total cost of operations                       81.5 %            82.5 %           84.3 %            83.4 %
Operating income                               18.5 %            17.5 %           15.7 %            16.6 %

Average screen count (month end
average)                                      5,530             5,195            5,409             5,181

Revenues per average screen (dollars)     $ 131,216         $ 125,057        $ 235,422         $ 237,089

(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.


Three months ended June 30, 2013 versus June 30, 2012

Revenues. Total revenues increased $76.0 million to $725.6 million for the three months ended June 30, 2013 ("second quarter of 2013") from $649.6 million for the three months ended June 30, 2012 ("second quarter of 2012"), representing an 11.7% 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
                                                   June 30,                                  June 30,                                   June 30,
                                                                   %                                              %                                     %
                                         2013        2012       Change          2013              2012         Change         2013        2012       Change
Admissions revenues(1)                 $  335.9     $ 287.2        17.0 %    $     128.6       $     130.9        (1.8 )%    $ 464.5     $ 418.1        11.1 %
Concession revenues(1)                 $  164.2     $ 141.8        15.8 %    $      64.5       $      59.6         8.2 %     $ 228.7     $ 201.4        13.6 %
Other revenues(1)(2)                   $   13.6     $  12.2        11.5 %    $      18.8       $      17.9         5.0 %     $  32.4     $  30.1         7.6 %
Total revenues (1)(2)                  $  513.7     $ 441.2        16.4 %    $     211.9       $     208.4         1.7 %     $ 725.6     $ 649.6        11.7 %
Attendance(1)                              46.9        42.0        11.7 %           26.5              26.8        (1.1 )%       73.4        68.8         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 17.0% increase in admissions revenues of $48.7 million was attributable to an 11.7% increase in attendance and a 4.7% increase in average ticket price from $6.84 for the second quarter of 2012 to $7.16 for the second quarter of 2013. The 15.8% increase in concession revenues of $22.4 million was attributable to the 11.7% increase in attendance and a 3.6% increase in concession revenues per patron from $3.38 for the second quarter of 2012 to $3.50 for the second quarter of 2013. The increase in attendance was partly due to the increase in the number of blockbuster films released during the second quarter of 2013 compared to the second quarter of 2012. 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. Our revenues and attendance for the second quarter of 2013 also benefited from the inclusion of the 32 Rave theatres acquired on May 29, 2013 (see Note 6 to the condensed consolidated financial statements).

International. The decrease in admissions revenues of $2.3 million was attributable to a 1.1% decrease in attendance and a 0.6% decrease in average ticket price from $4.88 for the second quarter of 2012 to $4.85 for the second quarter of 2013. The increase in concession revenues of $4.9 million was attributable to a 9.0% increase in concession revenues per patron from $2.23 for the second quarter of 2012 to $2.43 for the second quarter of 2013 partially offset by the 1.1% decrease in attendance. The decrease in average ticket price was primarily due to the unfavorable impact of exchange rates in certain countries in which we operate and the mix of premium product. The increase in concession revenues per patron was primarily due to incremental sales and price increases, partially offset by the unfavorable impact of exchange rates in certain countries in which we operate.

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
                                                   June  30,                              June 30,                            June  30,
                                            2013              2012              2013                    2012              2013          2012
Film rentals and advertising             $     192.7       $     162.7     $          64.7         $          64.6     $    257.4      $ 227.3
Concession supplies                             23.5              18.1                13.5                    13.7           37.0         31.8
Salaries and wages                              47.5              44.3                19.6                    18.0           67.1         62.3
Facility lease expense                          51.8              47.9                24.3                    23.7           76.1         71.6
Utilities and other                             50.7              46.9                25.7                    22.7           76.4         69.6

U.S. Film rentals and advertising costs were $192.7 million, or 57.4% of admissions revenues, for the second quarter of 2013 compared to $162.7 million, or 56.7% of admissions revenues, for the second quarter of 2012. The increase in film rentals and advertising costs of $30.0 million was due to the $48.7 million increase in admissions revenues and an increase in the film rentals and advertising rate. The increase in the film rentals and advertising rate was primarily due to the increase in the number of blockbuster films released during the second quarter of 2013 compared to the second quarter of 2012. Concession supplies expense was $23.5 million, or 14.3% of concession


revenues, for the second quarter of 2013 compared to $18.1 million, or 12.8% of concession revenues, for the second quarter of 2012. The increase in the concession supplies rate was primarily due to increases in inventory procurement costs on certain concession products and the impact of special concession promotions that help drive incremental concession sales.

Salaries and wages increased to $47.5 million for the second quarter of 2013 from $44.3 million for the second quarter of 2012. Facility lease expense increased to $51.8 million for the second quarter of 2013 from $47.9 million for the second quarter of 2012. Utilities and other costs increased to $50.7 million for the second quarter of 2013 from $46.9 million for the second quarter of 2012. All of the above-mentioned theatre operating costs for the second quarter of 2013 increased primarily due to the inclusion of the 32 Rave theatres acquired on May 29, 2013 (see Note 6 to the condensed consolidated financial statements).

International. Film rentals and advertising costs were $64.7 million, or 50.3% of admissions revenues, for the second quarter of 2013 compared to $64.6 million, or 49.4% of admissions revenues, for the second quarter of 2012. Concession supplies expense was $13.5 million, or 20.9% of concession revenues, for the second quarter of 2013 compared to $13.7 million, or 23.0% of concession revenues, for the second quarter of 2012. The decrease in the concession supplies rate is primarily due to concession sales price increases.

Salaries and wages increased to $19.6 million for the second quarter of 2013 from $18.0 million for the second quarter of 2012 primarily due to increased wage rates and new theatres. Facility lease expense increased to $24.3 million for the second quarter of 2013 from $23.7 million for the second quarter of 2012 primarily due to increased common area maintenance expenses and new theatres. Utilities and other costs increased to $25.7 million for the second quarter of 2013 from $22.7 million for the second quarter of 2012 primarily due to new theatres.

General and Administrative Expenses. General and administrative expenses increased to $40.6 million for the second quarter of 2013 from $36.0 million for the second 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 $2.4 million.

Depreciation and Amortization. Depreciation and amortization expense was $38.7 million during the second quarter of 2013 compared to $36.3 million during the second quarter of 2012. The increase was primarily due to new theatres, including the 32 Rave theatres acquired on May 29, 2013.

Impairment of Long-Lived Assets. We recorded asset impairment charges on assets held and used of $1.1 million during the second quarter of 2013 compared to $0.3 million during the second quarter of 2012. Impairment charges for the second quarter of 2013 consisted of U.S. and international theatre properties, impacting eight of our twenty-six reporting units. Impairment charges for the second quarter of 2012 consisted of U.S. and international theatre properties, impacting six 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 $2.8 million during the second quarter of 2013 compared to a loss of $0.5 million during the second quarter of 2012. The gain recorded during the second quarter of 2013 was primarily a result of a gain on sale of a land parcel in the U.S.

Interest Expense. Interest costs incurred, including amortization of debt issue costs, were $34.5 million during the second quarter of 2013 compared to $31.4 million during the second quarter of 2012. The increase was primarily due to the issuance of the 4.875% Senior Notes on May 24, 2013 with the net proceeds not utilized to pay off the former 8.625% Senior Notes until June 24, 2013. See Note 5 to our condensed consolidated financial statements for further discussion of our recent long-term debt activity.

Loss on Early Retirement of Debt. We recorded a loss on early retirement of debt of approximately $72.3 million during the second quarter of 2013 as a result of the redemption of Cinemark USA, Inc.'s 8.625% Senior Notes on June 24, 2013. The loss on early retirement of debt included approximately $56.6 million for a make-whole premium paid and the write-off of approximately $8.0 million in unamortized bond discount and $7.6 million in unamortized debt issue costs and the payment of $0.1 million of other fees.


Distributions from NCM. We recorded distributions from NCM of $1.7 million during the second quarter of 2013 compared to $0.4 million during the second 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 $1.7 million during the second quarter of 2013 compared to $1.0 million during the second quarter of 2012. The equity in income of affiliates recorded during the second quarter of 2013 included income of approximately $1.2 million related to our equity investment in DCIP (see Note 9 to our condensed consolidated financial statements) and income of approximately $0.5 million related to our equity investment in NCM (see Note 8 to our condensed consolidated financial statements). The equity in income of affiliates recorded during the second quarter of 2012 included income of approximately $1.9 million related to our equity investment in DCIP partially offset by a loss of approximately $0.9 million related to our equity investment in NCM.

Income Taxes. Income tax expense of $8.7 million was recorded for the second quarter of 2013 compared to $30.8 million for the second quarter of 2012. The effective tax rate was approximately 29.5% for the second quarter of 2013 compared to 37.2% for the second 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.

Six months ended June 30, 2013 versus June 30, 2012

Revenues. Total revenues increased $45.0 million to $1,273.4 million for the six months ended June 30, 2013 ("the 2013 period") from $1,228.4 million for the six months ended June 30, 2012 ("the 2012 period"), representing a 3.7% 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
                                          Six Months Ended                           Six Months Ended                             Six Months Ended
                                              June 30,                                   June 30,                                     June 30,
                                                              %                                               %                                        %
                                    2013        2012       Change           2013              2012         Change         2013          2012         Change
Admissions revenues (1)           $  570.5     $ 553.8         3.0 %     $     243.4       $     238.1         2.2 %    $   813.9     $   791.9          2.8 %
Concession revenues (1)           $  282.2     $ 273.1         3.3 %     $     118.9       $     108.1        10.0 %    $   401.1     $   381.2          5.2 %
Other revenues (1) (2)            $   24.6     $  23.3         5.6 %     $      33.8       $      32.0         5.6 %    $    58.4     $    55.3          5.6 %
Total revenues (1) (2)            $  877.3     $ 850.2         3.2 %     $     396.1       $     378.2         4.7 %    $ 1,273.4     $ 1,228.4          3.7 %
Attendance (1)                        81.6        81.8        (0.2 )%           49.2              48.5         1.4 %        130.8         130.3          0.4 %

(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 increase in admissions revenues of $16.7 million was primarily attributable to a 3.2% increase in average ticket price from $6.77 for the 2012 period to $6.99 for the 2013 period. The increase in concession revenues of $9.1 million was primarily attributable to a 3.6% increase in concession revenues per patron from $3.34 for the 2012 period to $3.46 for the 2013 period. 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. Our revenues and attendance for the 2013 period also benefited from the inclusion of the 32 Rave theatres acquired on May 29, 2013 (see Note 6 to the condensed consolidated financial statements).

International. The increase in admissions revenues of $5.3 million was attributable to a 1.4% increase in attendance and a 0.8% increase in average ticket price from $4.91 for the 2012 period to $4.95 for the 2013 period. The increase in concession revenues of $10.8 million was attributable to the 1.4% increase in attendance and an 8.5% increase in concession revenues per patron from $2.23 for the 2012 period to $2.42 for the 2013 period. The increase in attendance was primarily due to new theatres. The increase in concession revenues per patron was primarily due to incremental sales and price increases, partially offset by the unfavorable impact of exchange rates in certain countries in which we operate.


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
                                                Six Months Ended                        Six Months Ended                    Six Months Ended
                                                    June 30,                                June 30,                            June 30,
                                             2013              2012               2013                     2012             2013         2012
Film rentals and advertising              $     317.3       $     306.8     $          120.1         $          115.9     $   437.4     $ 422.7
Concession supplies                              39.3              34.9                 25.7                     25.3          65.0        60.2
Salaries and wages                               87.2              85.9                 38.4                     34.9         125.6       120.8
Facility lease expense                           98.7              95.6                 47.0                     44.6         145.7       140.2
Utilities and other                              93.4              91.2                 51.7                     44.9         145.1       136.1

U.S. Film rentals and advertising costs were $317.3 million, or 55.6% of admissions revenues for the 2013 period compared to $306.8 million, or 55.4% of admissions revenues, for the 2012 period. Concession supplies expense was $39.3 million, or 13.9% of concession revenues, for the 2013 period compared to $34.9 million, or 12.8% of concession revenues, for the 2012 period. The increase in the concession supplies rate was primarily due to increased inventory procurement costs on certain concession products and the impact of special . . .

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